9/9/08 (Lehman done? GSE's burnt! UAUA panic selling!)

Traders,

The market and traders are still trying to fully digest what does it mean that the US government has taken over Freddie and Fannie – the market initially rallied hard at the opening, but the NDX went from +30 to -5, INDU saw huge intra-day volatility, same was true for the other indices. Investors and the market didn’t know what to make of this bad news – a bailout means resolve, but is resolve always good news?

The dollar saw a huge rally, but the Treasury yields got crushed. Yesterday was a clear sign that everyone was trading – buying everything, treasuries, stocks, etc. It was certainly not orderly, focused, or for that matter make any sense, rhyme, or reason. Yes, I also heard the occasional talking head saying “the worst is behind us”. Please – that is getting old. The reality is debt is debt, loss is loss, and at the end of the day shifting it from the public sector to the government doesn’t mean it is gone – it means we are printing MORE money to cover those losses – and printing money that out paces treasury issuance or selling of hard assets means inflation. We might be in a state of bliss today – but we just saw the biggest injection of hidden volatility this government, fiat currency, and market has seen in decades. You can bet that the liabilities now since they are on the government books, will no longer be considered liabilities and we may never see them again surface in a budget. Debt wiped clean by the wraith of the printing press.

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Oil volatility

Oil rallies because of Hurricane Ike heading into the gulf, only to sell off the next day as OPEC says supplies are sufficient to meet demand and it may look like they may NOT defend oil prices ABOVE $100 – meaning oil has room to fall to $100? That is the current market reaction. Ike is also looking less dangerous to the oil sector in the US, which has also brought a sigh of relief.

Many have also stated that oil will probably fall into the election – but who knows what that actually means – of course in every election conspiracies abound. For now continue to expect more volatility in oil.

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Lehman still scrambling

Lehman needs to raise money and is now trying to sell its asset-management unit to cover more mortgage related write downs. The problem is that IS Lehman - pretty much the core value of any investment bank is it fund-management – this is a big part of its brains and decision making as to investments. Selling that turns Lehman into a simple brokerage firm and they are really not even in the brokerage business. Bloomberg points out Lehman’s market capitalization of $11.2 billion is almost equal to the value of its assets-management (including Nueberger Berman). Take that out and what is the real value of Lehman? Unlike Morgan and Merrill – Lehman doesn’t really have a retail brokerage arm to pick up the slack. It’s asset-management unit based on cash it manages is worth $8 billion – that leaves a little left and certainly no revenue from that asset-management division if that is sold.

Why would Lehman think of selling their core business – because it NEEDS money – I guess things are not working out in Korea and yeah a big write-down is coming down the river.

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Freddie and Fannie stick a fork in it.

The government took over, obviously Paulson and the Fed got a good look at their books and said – they can’t keep going. However, Paulson and FHFA Director Lockhart just said a month ago that they were “adequately capitalized”, Barney Frank and Chris Dodd made similar claims and lead the charge to have Freddie and Fannie bailout the housing mess. So what really changed? Nothing….

Freddie and Fannie play the same game the our government plays – it’s called “OFF” balance sheet accounting. When you stop including liabilities on your balance sheet (because you reliable it) everything looks fine. Clinton DID balance the budget, but he had help, what many people don’t know is that in 1993 Social Security, Medicare, and several other programs labeled “Trust Funds” were no longer included in the budget and moved to “OFF” balance sheet accounting – of course you would have a surplus if you don’t include them as liabilities. Freddie and Fannie have similar accounting practices. So if you LOOK at their balance sheets it SEEMS that they have enough capital – that is the problem.

Fannie had $47 billion of regulator capital on the balance sheet, over $9 billion of what is required. Freddie had $37 billion, over $2.5 billion of FHFA requirements. However, two things happened – Congress allowed them to extend their leverage and their balance sheets really didn’t jive with performing and non-performing assets. If a loan is performing is it a liability? It is sort of like that question, when a PRIME borrower fails to pay his mortgage is he STILL prime? It’s labels and not math that continues to create issue.

Needless to say the stocks are both trading below a dollar and got hit yesterday. The problem is now swept under the government rug – but the debt, liabilities, the costs STILL invisibly remain.

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United Airlines Bankrupt? WebCrawler create panic selling!

Talk about a big mistake, an old bankruptcy story is recycled and panic ensues. Panic in the pre-market sent the stock from $12 to $4 – other airlines started to see pressure in the pre-market as well. The news story surfaced in a Florida paper owned by the New York Times, however they are blaming Google, since Google’s web-crawler recycled a 2002 Chicago Tribune Story as if current and the Story then made the front page of the Florida papers website. Of course some analyst saw the headline and of course the wheels are set into motion.

This brings question as to these automatic news filters by Google and other search engines. Who is really at fault? Google for recycling the news story as their technology thought it was relevant? The Florida paper’s website for putting the old story on their web page? I am sure there will be many questions.

Wonder if those people that sold stock at $4 is going to be able to get back there money? No one MADE them sell their stock – I am sure someone is going to take some heat.

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Futures pre-market

The futures are seeing a small gain at the opening – but it looks to be a non event. Arb traders are probably sideline as the euphoria subsides.

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Support / Resistance

Well it looks like we hit some resistances while other indices failed yesterday to gain ground.

INDU 11275 / 11500 (Well we got right there and stopped. We could go higher – but I am not sure how much more covering and euphoria will continue to drive this market.)

NDX 1750 / 1800 (This index closed down on the day after a opening in the futures that saw a 40 point rally in the pre-market. Talk about volatility. You only had to look at AAPL’s action yesterday to see volatility.)

SPX 1250 / 1275 (Hmmm – buy or sell or stay neutral. This is about Gamma – does 1250 hold – who knows. Don’t put hard delta on the lines when this kind of action is in the cards.)

RUT 700 (720-740) 760 (We are right in the middle of the narrower band – but if 720 or 740 doesn’t hold the move to the outside band is there. Expect volatility to load back up in this index.)

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Conclusion

Freddie and Fannie are now nationalized, we have to some extent a new socialized home mortgage program – funded by the government with $5 trillion in liabilities (and growing) and $100s of billions of new capital injections to keep them going. I heard someone make a funny response, “When does the DMV take over home mortgage applications?”. It will be up to the next president as to what to do with this pig – break it up and sell it off – or create a new socialized home mortgage program again funded by tax payers?

No the worst is NOT behind us – expect more volatility through 2008!