10/1/08 (Ship of Fools?)

Traders,

(Again - sorry no funny pictures - when this market calms down and I have time - I will get back to posting them.)

The market rallies back and there is no bailout, yet? As you can see the market is moving not on fundamental reality, but rather optimistic hope and fear. Also remember that there is a short ban on over 800 stocks. It is also interesting to note while the VIX did back off, the skew (in many cases) went higher. Part of the skew issue is that you cannot short many issues - which has pushed up the OTM premium.

The Senate's version of the bailout package is being voted on today - it is unclear how well that will be received by the members - there are some distinct differences, but remains the same is that $700 billion blank check, which still has many shaking their heads. No doubt the Senator's have also received many letters, emails, and phone calls from their citizens to NOT pass this plan.

There was an interesting story I saw yesterday, it stated that Congress members (prior to the vote) were swamped by citizens requesting to Vote DOWN the bill, but after the market fell, many citizens then blamed them for not passing the bill (you can't have it both ways). I wonder NOW how they feel after the market made a huge rally yesterday - the market will make volatile whipsaws with or without this bill being passed, no doubt it will not SOLVE the problem - just move SOME toxic paper over to the government books.

A good friend of mine shared a rather funny yet interesting response to the failed vote - in a funny way he squarely hits the nail on the head, enjoy:

"In fact every single seat in the house is up for reelection in 37 days. No one wants to commit to anything this close to an election. No one wants feed their next opponent's campaign ad with a vote. So everyone says how important it is but no one wants their name on it. I call it the Iraq War effect. If McCain and Obama hadn't gone in for nothing but a photo op last week this would be over by now. I also think this is standard procedure in the House, but this is the first time anyone's paid attn in quite a while. By the time it's passed it'll have some provision for a needle exchange program in South Philly and quarter percent tax break to airlines just so everyone can latch on to it in some meaningless way."

I had recently remembered the movie NETWORK, if you haven't seen this fantastic satire - go rent it NOW! Here is a great scene from the film - a sad reality - you be the judge: http://www.youtube.com/watch?v=RzSj1yNZdY8&feature=related


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Senate's Version

The Senate is prepared to vote for their version of the Paulson $700 billion Bailout Plan. In their version they want to increase insured deposits to $250,000 from $100,000 (this would put terrific pressure on FDIC which is very close to going to the Treasury already for more funds). Also attached to the legislation is an extension of 2 years to the tax breaks, to assure citizens that their taxes will NOT be raised to pay for this (possibly failing) plan. While I support keeping taxes low - this will have a double edge sword as now the Fed and Treasury (if passing this plan) will HAVE to sell more treasuries and/or more assets to off-set the additional spending of $700 billion, we hope Foreign Money will come to the rescue - I doubt it. What has NOT been solved - is the $700 billion. The plan still gives Paulson pretty much no oversight as to how he wishes to spend the money - it clearly gives one man a blank check of $700 billion to spend how he sees fit.

So really the plan, just like the Congress Plan, is about having faith, that ONE man can solve everything with $700 billion. Now Paulson, no doubt a smart guy, has been wrong - first stated the housing market was isolated to sub-prime and a few banks, then the SIV Superfund bailout another failure, supporting the increase leverage of Fannie and Freddie (another failure), giving him a "Bazooka" which he said he would not have to use, but did. Bailing out Bear, AIG, Fannie, Freddie. Increasing the short-term treasury auctions (which went negative the first time ever), the list is long. Additionally - $700 billion (he knows) is not enough - what happens when the next trillion dollar trench of debt hits (cause it will) - does he get more? He has already (with the Fed) spent over $500 billion - which has done nothing to keep this credit crisis from increasing. Then at the end of the day - he sells his plan through FEAR - if we do nothing the world will come to an end. He really doesn't know that - but everyone is buying it. Sure some companies will fail, sure some banks will go under - but isn't that the point of having bankruptcy laws and also allows investors to take risk by purchasing shares. Maybe if we let some companies fail we could find the bottom faster and know which companies can stand on their own strong balance sheets and which cannot.

Will the Senate's version pass? It could have a better chance - simply because there are fewer Senators which can be singled out and pressured more easily then Congress.

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GE looking weak in the pre-market

GE stock is getting hit in the pre-market with a one-two punch - their manufacturing is expected to slow again going into end of year, combined with their financial sector getting caught up in the credit squeeze as money becomes harder (more expensive) to borrow in the short-term. GE is big and has many vertical markets, but while their manufacturing division took up slack from failing advertising as well as the financial sector slow down, based on the weaken dollar - it is now seeing a slow down. Expectations are for more lay-offs. Expect to see pressure on the stock.

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Citigroup getting the squeeze


While many cry for more regulations, it's not really the regulation - but the interpretation of regulations that can create havoc. Citigroup is getting squeezed as SEC and Financial Accounting Standards Board is seeking "clarification" on accounting standards. This could seriously revalue their book and not for the better. Citi has already pony up $42 billion in possible losses of Wachovia's balance sheet (which is already in serious question - based on their mark-to-market accounting). Citi will not be the only one, B of A with now a huge book from Countrywide's questionably marked assets, and JP Morgan with their Bear Stearns (debt obligations). The consolidation of banks is massive with now three banks (Citi, BofA, and JP Morgan) with a massive portion of the nations deposits (I would guess a 1/3rd). That also brings huge concerns as these banks are getting bigger and expanding their debt as well.

If these accounting rules are revisited for more "clarifications" even the slightest change could bring HUGE reported losses going forward. Remember - it's still mark-to-market (or as Buffet says mark-to-myth).

Citi is unchanged in the pre-market, but expect some pressure in the banking sector today and watch this story unfold.

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Futures Pre-market

The futures are getting a good smack going into the opening - some of it is a concern for Banking (see Citi story) and also GE looking weak - some can be also related to a re-load into shorting futures (a proxy for stock). It is going to be hard for Arb traders to buy futures going into the opening to short the basket - because of the short ban - so expect to see spreads going into the opening.

After the short ban - I am coming to the conclusion that the Arb trading cash/future basket probably decreases volatility - just think about how tight that spread gets during the trading session. Now it's all over the place. It is a interesting observation.

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Support / Resistance

An optimistic rally of hope or closing out short future positions for the quarter end mark? Who knows - but a good market up in this quarter is a needed dream.

INDU 10,500 / 11,000 (We blasted back through 10,500 with no problems - as if the bailout passed. Or was it something else? At this point expect more volatility - not less. This is a traders dream and investor nightmare.)

NDX 1500 / 1600 (Who knows - Google saw some weird action after the close in a order/exchange f'up where it traded a penny. Of course it was some exchange technology problem (probably costing someone some big money) - but is it a Omen of things to come - Google trading a penny? I don't believe in Omen's myself - but seeing that stock trade a penny (even if it was bogus) is still a little unnerving.)

SPX 1100 / 1200 (Again - talking about a wide volatility band - who knows. Expect some more jerking around.)

RUT 660 (680) 700 (The only index to hold its previous lows has been the RUT - this is a key broad market indicator to show flow - if 660 holds we can expect panic has not set in yet (if it ever does).)

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Conclusion

It's the Senate's turn - who knows but as much as Obama and McCain hate each other (it would seem) they are both on the same side for this bill. It's funny to see them pointing fingers at each other and at the same time both vote FOR this bill. It's rather stupid - I could see the mudslinging if one supported the bill and the other didn't - but they are both pleading with their party members to vote for it. Rather silly - two pigs slinging mud at each other - yet they are both covered in the same shit.

At this point it reminds me of that Zappa album cover - "Ship Arriving Too Late to Save a Drowning Witch." - Are we to late? Well this is sure a RE-active and not a PRO-active Congress. $700 billion is not going to clear the decks and I think that Ship that is trying to save the Drowning Witch doesn't have a Captain, but rather a Committee of fools. Which brings me to another song title, "Ship of Fools".

I will leave you with the lyrics:

Went to see the captain, strangest I could find,
Laid my proposition down, laid it on the line.
I wont slave for beggars pay, likewise gold and jewels,
But I would slave to learn the way to sink your ship of fools.

Ship of fools on a cruel sea, ship of fools sail away from me.
It was later than I thought when I first believed you,
Now I cannot share your laughter, ship of fools.

Saw your first ship sink and drown, from rockin of the boat,
And all that could not sink or swim was just left there to float.
I wont leave you drifting down, but woh it makes me wild,
With thirty years upon my head to have you call me child.

Ship of fools on a cruel sea, ship of fools sail away from me.
It was later than I thought when I first believed you,
Now I cannot share your laughter, ship of fools.

The bottles stand as empty, as they were filled before.
Time there was and plenty, but from that cup no more.
Though I could not caution all, I still might warn a few:
Dont lend your hand to raise no flag atop no ship of fools.

Ship of fools on a cruel sea, ship of fools sail away from me.
It was later than I thought, when I first believed you,
Now I cannot share your laughter, ship of fools.

It was later than I thought when I first believed you,
Now I cannot share your laughter, ship of fools.