10/3/08 (Earmarks! Wells Fargo? Short Ban Expands!)

Traders,


With the short ban in place the market continued to sell off yesterday. We dropped back to those very lows (new support levels) that we hit earlier. The question is do we hold at these levels? There is really nothing below these levels to offer us any certainty.

As soon as the Senate bill passed, stories of the 400+ page bill started hitting the street about the MASSIVE amount of earmarks (and pork) that was in that bill. The big problem (for us citizens) is that these Senators can add in these earmarks without their names attached to them. Because of anonymity and the difficult to sift through the bill to find the earmarks and then match them to the Senator that added it - these - dare I say Bastards - tack this crap on (regardless if you support it or not) to this important bill.

Some journalist did the heavy lifting for us to point out the earmarks and pork, unfortunately most reports don't associate a name to the introduction of the crap. The crap I am referring too:

Film and Television Productions (Sec. 502)

Wooden Arrows designed for use by children (Sec. 503)

6 page package of earmarks for litigants in the 1989 Exxon Valdez incident,
Alaska (Sec. 504)

Tax earmark “extenders” in the bailout bill. - Virgin Island and Puerto Rican
Rum (Section 308)

American Samoa (Sec. 309)

Mine Rescue Teams (Sec. 310)

Mine Safety Equipment (Sec. 311)

Domestic Production Activities in Puerto Rico (Sec. 312)

Indian Tribes (Sec. 314, 315)

Railroads (Sec. 316)

Auto Racing Tracks (317)

District of Columbia (Sec. 322)

Wool Research (Sec. 325)

_________________________________________________
Wachovia’s got a new uncle?

Citi that bid low for Wachovia including a side deal with the Fed to take on some of the toxic paper, when all of a sudden Wells swoops in and makes a huge bid without the Fed's help. First last ask some questions: Did Citi shoot low because of their own balance sheet issues? Was their initial bid low because the paper was really that toxic? Why did Wells Fargo bid high for the whole enchilada? Are they just taking a shot to move into the global big leagues by increasing their size?

Of course there are some items we need to add to this equation: Bailout package, regardless of WHO buys Wachovia if/when the bailout passes - the banks will be able to dump the toxic paper into the new Taxpayer Bailout Inflation Slush Fund of Toxic Waste. That would surely clear the decks and make any acquisition of a bank fairly worth entertaining. Second, suspending accounting rules that makes this toxic paper so toxic. For ALL the screaming and demanding of more regulations and stiffer regulation - they now want to suspend the very accounting rules that bring this toxic paper to the surface? Are you kidding me. These suspended rules will just bury the problems. So while this will make Wells balance sheet look better and also makes Wachovia more attractive - it's really just rearranging deck chairs on the Titanic. Sure the decks look may look nice and neat, but come on are we all really that dumb? it would seem so. Mark-to-Myth is a big part of the problem (no price discovery)- the accounting rules at the very least using this brings some of the problems to the surface (maybe not enough). But suspending these accounting rules changes the Mark-to-Myth to Mark-to-Clash of the Titans!

Didn't Citi have a deal in place (sign contract) and will they respond. Even though Wells Fargo is not getting Fed backing - you can bet they the Fed and other agencies were involved in the deal and will certainly do anything to get it to pass quickly - in light of the current economic situation.

Good news - well for me who opposes this bailout bill - this deal (without the fed's help) might bring some Congress members to the light showing that the market can eat its own problems. Could we see them vote the bill down because of this Wachovia deal? I hope it does create some pressure.

Wachovia up in the pre-market trading in the mid $6 range - which is obvious during a takeover.

Citi is down in the premarket (-$3) which doesn't really make sense if they don't have to come up with money to buy Wachovia and are no longer in the deal (unless there is some other concerns we don't know about - maybe Citi couldn't afford the deal and it was rather their balance sheet and not Wachovia's that ended their bid).

Wells Fargo is up in the pre-market (+$2) which doesn't make sense since they are footing the bill.

Then again - with the Short Ban still in place - the Arb traders (takeover arb) is going to create some volatility in the spreads - so don't expect them to be inline.


_________________________________________________
Jobless Rate 6.1%

Payrolls fell by 159,000 (more than anticipated). Economist had forecast a drop of 105k avg (ranges from 60k to 156k). The sinking labor market is also putting the squeeze on the credit markets and sending confidence into the toilet, clearly pissing off voters who are looking for someone to blame (all fingers are pointing at Bush) and therefore it is most certainly giving a boost to Obama (real "Change" or just not Bush?).

One thing for sure is that the possibility of a rate cut at the next FOMC meeting is increasing (based on Fed Fund Futures).

Think about the following for a second:

We are in a very volatile economic landscape.

1. Congress is about to vote on the Bailout Package.
2. The Short Ban supposedly has lifted the pressure from the market from falling - but it hasn't - it is suppose to be lifted after the vote.
3. The FOMC is meeting and will probably cut rates.

All this before the election at the beginning of November. I can't think of a more volatile time in the market ever!

____________________________________________________
Short Ban Expansion

First it was those BAD NAKED SHORT SELLERS - the media got on board and everyone pointed fingers at the Naked Short Sellers. It was THEIR fault for the market going down creating all these problems. (I had several people write me to even TELL me it was their fault and try to argue the point when they didn't even understand how short selling worked - they just believed what they were being spoon feed by the media and the politicians.) So we banned short selling in 19 financial stocks - but they still fell (even after those Bad Naked Short Sellers were kicked to the curb. Note - there was no one prosecuted for Naked Short selling "without a locate" because there is very little of that going on to begin with.)

Then if it wasn't the Naked Short Sellers - then it HAD TO BE all types of Short Selling. So 800 stocks were added to a list. These stocks you could NOT SHORT (for any reason). They enforced it - one of our traders was exercised on a put (only 100 shares) within minutes the clearing firm was on the phone after the opening - forcing us to cover. It was enforced with threats from the President "We will prosecute to the full extent of the law for anyone disobeying this emergency order!" - but the market still went down.

Then they added some more stocks 10 more, 20 more, 30 more, 50 more to the ban list - but the market STILL fell. Nothing they could do was keeping the market from falling.
The ban was suppose to be lifted on Oct 2nd, but that was pushed out until after the Bailout passes (if it passes).

Financial futures have been used recently as a proxy for shorting (or hedging positions).

This morning the list has been extended to over 1200 issues.

The government and it's agency's are changing the rules daily to keep the market from falling - but nothing is helping. Bans, Threats, Fines, etc - changing daily to keep the market from falling.

Handcuffing the market more and more from functioning - is also creating problems in the credit market. Convertible Arbitrage - where companies sell bonds to raise money requires the ability to short stocks to off-set the bond risk. Initially that increased the squeeze to the credit markets as firms could not take down the convertible bonds because they had no way to off-set the risk. Some restrictions have been lifted on convertible arbitrage and their ability to short - but not even close to enough.

So what happens when all these bans are lifted. If the market is getting hit now - what do you think it will look like when the bans are lifted?

If all this intervention by the government doesn't work - what next? Ban selling of any kind (including long stock positions)? We can only BUY stocks?

CORRECTION:

Initially, I had mentioned that Single-Stock futures would be restricted from short-selling. I came to this conclusion from a bulletin that was issued this morning, in which I assumed that it would be banned. I was corrected by the Managing Director of OneChicago as well as our clearing firm that the CFTC has not restricted or has taken any action to that nature.

More information can be found at www.onechicago.com

Sorry for any confusion this may have caused.

Below was the bulletin in which I made that assumption.

Recent SEC and FSA regulations targeting short sale practices for US and UK stocks, particularly financial services stocks, may have important consequences for your trading and investment strategies. In overview, the rules act as follows:

(1) restricts short selling in approximately 1200 US securities, mostly from the financial services sector
(2) restricts short selling in approximately 250 UK and other international financial services securities
(3) imposes restrictions on options/futures strategies which are economically similar to short sales in the restricted stocks

_____________________________________________________
Futures Pre-market

Initially the futures were up, then they got hit, and then are rallying again. The Wells news, jobless news, the Congress Vote, FOMC rate cut expectations, etc - is injecting MORE volatility into the market. Arb traders are further pushed to the sideline as the Short Ban is extended and expanded. Expect more volatility.

__________________________________________________
Support / Resistance

We are at those very lows we hit in that previous massive sell off day. Those recent previous lows have created a "supposed" support area - the question is do we hold, rally, or break down. There is really nothing today - but the Congress vote that could spur the market up or down.

INDU 10,300-10,500 / 11,000 (We are right there, just below the 10,500 level. The range is a little sloppy simple because of volatility - but if we can't hold above the 10,300-10,500 range well.... Today it's about the Congress if they can get the gaggle together to even vote.)

NDX 1500 / 1600 (We are RIGHT THERE - there is nothing below the 1500 level to give us any idea of support. The futures are up a little - but who knows at this point.)

SPX 1100 / 1150 (The 1150 pivot point has now become resistance, we are right above that drop off area of 1100. )

RUT 640 (660) 680 (We broke the recent support of 660 and are even at the March low of 640 - this is danger area as the broader index which has been less volatile and stronger than the narrow based indices is now right at the edge like the ones above. 640 is KEY.)

___________________________________________________
Conclusion

Yesterday was another dose of reality - things suck! Government intervention, short ban, bailout plans, changing the accounting rules, is turning into an EPIC JOKE. We are just postponing the deleveraging that MUST be done.

The VP debate was on last night (as you know I am not a Republican or Democrat) - I like Joe Biden, and don't have an opinion about Palin (just don't know much about her). However, as I listen to NPR (like I do every morning on the way to work) - I said to myself - I really HOPE that NPR can remain FAIR, but as I told myself that I knew in my head that it would be the Obama praise / McCain blows reporting that has been the status quo since the race has started. So as I tuned in to the NPR review of the VP debate - my heart sank as it again turned into the blasting and finding fault with Palin and giving Biden a free pass. As much as O'Reilly is a right-wing-shout-down-bias-show, he does make one valid point - NPR, NBC, CNN are as left and liberal as he is right! Please - can someone point me to ONE media outlet that is NOT bias? There doesn't seem to be one network or printed media outlet that doesn't report the FACTS without bias. I will still listen to NPR and even donate to supporting my local NPR station, but it makes me sick to hear the never ending bias reporting. PBS is the same - which fully sucks. There are a few out there that USE to give a fair shake and not even give their own party a free pass. I use to watch Chris Mathews (a open Democrat) and have seen him (in the past) slam Democrats - what happened to Hard Ball? It's now Soft Ball! So if anyone out there knows of any FAIR journalistic reporting please point me in that direction. Until then I will read the Economist, FT, and flip between FOX and MSNBC to get both very slanted sides.