Now that twelve banks have disappeared, who are the winners. Its obviously the banks who didn't get involved in option ARM loans on derivative securities. The easiest way to determine the best financials is figure out which ones are up ytd. So in no particular order:
Winners: BBT, WFC, JPM, PNC, and USB.
Losers: Anyone that no longer exists, C, BAC.
C purchased Wachovia's assets after it became the latest bank to approach insolvency. But C will be on the hook for the first $42 billion in losses from Wachovia's loan portfolio. The sad thing is Wachovia purchased Golden West Financial's loan portfolio and did not know what they were doing when expanding the ARM portfolio through leverage.
BAC as we explained overpaid for MER and will find out how much they overpaid when they go through MER's "Level 3 Nonassets".
Note that Warren Buffett has positions in BBT and WFC for his BRK/A portfolio. As if one believes Buffett will let the market tarnish his reputation. Recently Buffett has been making favored deals to GS ($5 billion) and GE ($3 billion) giving them much needed capital in exchange for 10% private secured bonds along with convertible warrants ($115 for GS, $22.25 for GE) into common stock.
He believes he's getting the "best of the industry" companies at fireside prices. I really don't know what to believe.
We do know that today, the trading is range bound, hardly anyone willing to go long or short with tonight's vote on the bailout bill by the U.S. Senate. The risk/reward is insufficient for me to take a position today, although that could change, if the averages decisively break one way or another. From the Buffett standpoint, he would prefer a yes vote to justify the $8 billion he has handed over from his Berkshire shareholders.
We also heard the SEC is planning to extend the ban of short selling 950 "financials" until the end of October and for possibly reimplementation of the uptick rule. Obviously a lot of rules changing in an attempt to prevent the financial system or the markets from imploding.
Wednesday, October 1, 2008
One year's volatility in two business days and Sept 29 Dow -777
Catching up on the past two weeks:
Back on Thur, Sep 18, around 2:30p EST, the Dow was down about 170 points when rumors floated that the SEC was going to ban naked short selling on financials. The SKF which was at 152 dropped like a stone over the final ninety minutes closing at 112. On Fri, Sep 19, the SEC banned naked short selling for 799 companies. The opening bell saw big 4%-7% spikes higher as short sellers were forced to cover on of all days, options expiration. Although the gap up was faded, most of the shorts trading on shoestring margin accounts got clocked anywhere from 10-20% down.
Over the weekend, the Federal Reserve "put a gun to BAC's head" where BAC massively overpaid a 40% premium to buyout Merrill Lynch at $28/share. The buyout, a 100% stock transaction, temporarily gave long stock holders a reprieve from selling.
Also over the weekend, the last two independent investment banks, GS and MS, asked to be restructured as bank holding companies as GS had dropped to $97 from a high over $240, and MS to $22. This restructuring allowed both access to the FED discount window credit lines and pretty much guaranteed that the "greed is good" profits of the 80s and 90s would be no more.
Secretary of the Treasury Henry Paulson then proposed what is considered the most arrogant 3-page bill to Congress requesting $700 billion to "shoreup the U.S. financial system". One clause of this bailout was that Paulson would have complete decision making over which assets he would purchase and at what prices. All his decisions would NOT be reviewable by any judicial court. In other words, "crown him Emperor Palpatine". The House of Representatives later in the week asked Bernanke and Paulson to speak at the House Banking Committee asking why Americans should give them 1/4 of the federal budget in one swoop and explain why six months ago that on record, they stated "the subprime crisis would have only a small impact on the U.S. financial system, and that the system is fine".
After the close on Sep 24, the Proshares ETF funds posted their capital gains distributions to all its funds, unannounced, noting that it would payout on Sep 30. This had the effect of capping the gains if the markets went in the ETF's direction and also because of the "no short" rule, pretty much made any ETF with a big distribution (SDS and SSO) difficult to trade. So even if the markets moved in your direction, you wouldn't get the full % move in the ETF.
On, Sep 25, Washington Mutual became the 12th US Bank to seek FDIC protection and only a shotgun marriage with JPM (purchasing the deposits and buildings for $1.9 billion saved the uninsured depositors over $100k from a quick writedown to hell). The stock had dropped into the single digits and was in the $2 range due to $17 billion in withdrawals from account holders who correctly feared that WM was insolvent and did not have the credit lines to support a bad loan portfolio.
Over the past weekend, the House of Representatives worked over the weekend, to craft the bailout bill and fortunately to a stunned Wall Street, On Mon, Sep 29, the bill was REJECTED by a 228-206 vote with one voter unassigned. The Dow dropped -777 points, its largest single day drop. On Monday, Sep 30, being the day hedge funds can accept withdrawals from customers, and last day of quarter for window dressing, the Dow recovered 481 points. The Senate is expected to vote on a revised bailout bill including a provision to raise the FDIC protection to $250k per account.
Personally, after getting crushed on Sep 19, we were able to take advantage of Sep 29, and luckily cashed the whole thing out. So now we're 100% cash and thankful for being barely in the black. As I mentioned to others, I want to see how it plays out for a day or two, and maybe I can probe my way back to a position. Essentially, I have two months to make money as I do not intend to take any trades in December to enjoy the holidays.
YTD +.3%
Back on Thur, Sep 18, around 2:30p EST, the Dow was down about 170 points when rumors floated that the SEC was going to ban naked short selling on financials. The SKF which was at 152 dropped like a stone over the final ninety minutes closing at 112. On Fri, Sep 19, the SEC banned naked short selling for 799 companies. The opening bell saw big 4%-7% spikes higher as short sellers were forced to cover on of all days, options expiration. Although the gap up was faded, most of the shorts trading on shoestring margin accounts got clocked anywhere from 10-20% down.
Over the weekend, the Federal Reserve "put a gun to BAC's head" where BAC massively overpaid a 40% premium to buyout Merrill Lynch at $28/share. The buyout, a 100% stock transaction, temporarily gave long stock holders a reprieve from selling.
Also over the weekend, the last two independent investment banks, GS and MS, asked to be restructured as bank holding companies as GS had dropped to $97 from a high over $240, and MS to $22. This restructuring allowed both access to the FED discount window credit lines and pretty much guaranteed that the "greed is good" profits of the 80s and 90s would be no more.
Secretary of the Treasury Henry Paulson then proposed what is considered the most arrogant 3-page bill to Congress requesting $700 billion to "shoreup the U.S. financial system". One clause of this bailout was that Paulson would have complete decision making over which assets he would purchase and at what prices. All his decisions would NOT be reviewable by any judicial court. In other words, "crown him Emperor Palpatine". The House of Representatives later in the week asked Bernanke and Paulson to speak at the House Banking Committee asking why Americans should give them 1/4 of the federal budget in one swoop and explain why six months ago that on record, they stated "the subprime crisis would have only a small impact on the U.S. financial system, and that the system is fine".
After the close on Sep 24, the Proshares ETF funds posted their capital gains distributions to all its funds, unannounced, noting that it would payout on Sep 30. This had the effect of capping the gains if the markets went in the ETF's direction and also because of the "no short" rule, pretty much made any ETF with a big distribution (SDS and SSO) difficult to trade. So even if the markets moved in your direction, you wouldn't get the full % move in the ETF.
On, Sep 25, Washington Mutual became the 12th US Bank to seek FDIC protection and only a shotgun marriage with JPM (purchasing the deposits and buildings for $1.9 billion saved the uninsured depositors over $100k from a quick writedown to hell). The stock had dropped into the single digits and was in the $2 range due to $17 billion in withdrawals from account holders who correctly feared that WM was insolvent and did not have the credit lines to support a bad loan portfolio.
Over the past weekend, the House of Representatives worked over the weekend, to craft the bailout bill and fortunately to a stunned Wall Street, On Mon, Sep 29, the bill was REJECTED by a 228-206 vote with one voter unassigned. The Dow dropped -777 points, its largest single day drop. On Monday, Sep 30, being the day hedge funds can accept withdrawals from customers, and last day of quarter for window dressing, the Dow recovered 481 points. The Senate is expected to vote on a revised bailout bill including a provision to raise the FDIC protection to $250k per account.
Personally, after getting crushed on Sep 19, we were able to take advantage of Sep 29, and luckily cashed the whole thing out. So now we're 100% cash and thankful for being barely in the black. As I mentioned to others, I want to see how it plays out for a day or two, and maybe I can probe my way back to a position. Essentially, I have two months to make money as I do not intend to take any trades in December to enjoy the holidays.
YTD +.3%
Wednesday, September 17, 2008
FOMC yesterday, the false 148 pt rise Tue, becomes a 449 point drop today
One of the characteristics of successful traders such as Wally, Dana, and Callie is they rarely trade on FOMC decision days. Unless they have a significant edge they can turn into profit, its usually wise to watch the reaction after the actual FOMC announcement since the following day will be the real move.
Ironically, that 90 min reaction on Tue was somewhat crippling personally but as luck would have it I wasn't near a computer otherwise my jaw would have dropped. Fortunately, today, the real reaction to the federal government taking a 79.9% stake in Dow component AIG in exchange for an $80 billion loan was negative and allowed me to sell my second 1/6 of a position. So essentially today's gains and yesterday's losses were netted out.
The T2108 indicator is now below 20, or 15.40. So at some point in the next three weeks, historically there will be some type of countertrend upmove. It could start tomorrow, or it could take 15 business days.
Rather than get semantic on how history plays out, I'm looking at both longs and shorts as flip trades. We're hoping to leg out of our current short before the market decides to pull the mother of all reversals should it occur.
Callie mentioned UT as the next likely bank to go poof. I thinking WM is probably next, but likely goes into conservatorship. In any case, we're both probably betting someone files for some type of help this weekend and the Federal Reserve will once again on a Sunday bail some other pathetic financial. But this time, the reaction on the following Monday could end up being a catalyst to cover one's shorts so we need to really to watch those charts in the final hour late Friday to possibly give a tell on whether I should be more proactive in locking profits.
YTD +5.11%
Ironically, that 90 min reaction on Tue was somewhat crippling personally but as luck would have it I wasn't near a computer otherwise my jaw would have dropped. Fortunately, today, the real reaction to the federal government taking a 79.9% stake in Dow component AIG in exchange for an $80 billion loan was negative and allowed me to sell my second 1/6 of a position. So essentially today's gains and yesterday's losses were netted out.
The T2108 indicator is now below 20, or 15.40. So at some point in the next three weeks, historically there will be some type of countertrend upmove. It could start tomorrow, or it could take 15 business days.
Rather than get semantic on how history plays out, I'm looking at both longs and shorts as flip trades. We're hoping to leg out of our current short before the market decides to pull the mother of all reversals should it occur.
Callie mentioned UT as the next likely bank to go poof. I thinking WM is probably next, but likely goes into conservatorship. In any case, we're both probably betting someone files for some type of help this weekend and the Federal Reserve will once again on a Sunday bail some other pathetic financial. But this time, the reaction on the following Monday could end up being a catalyst to cover one's shorts so we need to really to watch those charts in the final hour late Friday to possibly give a tell on whether I should be more proactive in locking profits.
YTD +5.11%
Monday, September 15, 2008
Martin Zweig, $100k cash max, 504 point down day in Dow, Risk Management
While the rest of the world suffers, its the daytraders and the few swingtraders that made money today. Fortunately, we got lucky and went back to and old style trading method from almost 20 years ago learned from Wall Street Week's Martin Zweig, and the payoff got me back into the black ytd. This is only the 3rd day in 2008 where I'm on the positive side of the ledger. Although I sold 1/6th of a position today, that still leaves 5/6 exposed, and any unexpected government intervention such as tomorrow's FOMC meeting could turn that profit back into a loss.
The Tradestation T2108 indicator dropped to 21.3 after the Dow recorded its sixth worst point loss in history. Historically, a reading below 20 puts the odds in favor of a countertrend rally but the timing could be as early as three weeks from a potential bottom. As mentioned earlier, the drop was likely caused by the closure of some of LEH's positions in the markets, as the company filed for bankruptcy this weekend after both the federal government and BAC said no way to investing or acquiring their Level 3 junk.
Assuming that LEH had at least $40 billion in positions covering all types of instruments, the market makers aren't simply going to throw the whole thing out at once, but they aren't being discreet about unloading at unfavorable bids. While most of the indexes dropped 3%, financials via the XLF ETF down 9.7%, energy and materials dropped 9% as the plurality of LEH's portfolio shows they doubled down in the summer hoping to ride out the financial downturn and lost. Unfortunately having to sell their winning energy and materials positions is exacerbating a 33% pullback from the 52 week highs in these sectors.
Originally, we had planned to sell over five separate days, just as it took six days to acquire the position through probe trades. But the market does NOT care what I think. There may come a time when you will be forced to close the full position at a moment's notice in order to prevent the previous profit from turning into a loss.
While I have one of the smaller accounts when compared to my daytrading colleagues, one thing we share is the dilemma of occassionally holding over 100k in cash. Similar to an FDIC bank account, I don't want to have over 100k in cash for more than one day in the 1/100 chance my broker decides to go poof. While my account would be covered up to 500k (if I had 500k), they only insure up to 100k in cash. Therefore, I am somewhat forced to keep about half of my net worth invested in something (whether long or short) at all times. I am always looking to find the potential turn or when the current trend could potentially reverse. Notice that today's action, KO was the only Dow component that was up today (up .25). If I think there's a potential for a trend reversal, I want to pay attention to what could be the new leaders. Forget the reasons about why something is behaving that way. The price chart is all you need to be aware of.
For those interested in the ultrashorts, the EFU (interesting ticker symbol), and the SDS show nice uptrending lines.
I am reminded by others that risk management is the difference that separates those who can survive all kinds of markets. Understanding when and when not to use margin. Many of the daytraders I interact with, understand that margin is a temporary tool to augment gains. You will NOT ever see any of them carry a position overnight with a margin risk that threatens them with a potential margin call. They are proficient at what they do because they balance: a maximum trading position versus, reserve cash for future trades, and understanding the cost of margin loans. There are few trades that pay 8-9% consistently in a short timeframe unless you are churning 30% plus profits annually before taxes and broker commissions. Let the big institutions play with the high margin money. Trading is hard enough as is and having to profit a set amount every period to cover interest on a margin loan is unnecessary stress for the inexperienced trader.
The Tradestation T2108 indicator dropped to 21.3 after the Dow recorded its sixth worst point loss in history. Historically, a reading below 20 puts the odds in favor of a countertrend rally but the timing could be as early as three weeks from a potential bottom. As mentioned earlier, the drop was likely caused by the closure of some of LEH's positions in the markets, as the company filed for bankruptcy this weekend after both the federal government and BAC said no way to investing or acquiring their Level 3 junk.
Assuming that LEH had at least $40 billion in positions covering all types of instruments, the market makers aren't simply going to throw the whole thing out at once, but they aren't being discreet about unloading at unfavorable bids. While most of the indexes dropped 3%, financials via the XLF ETF down 9.7%, energy and materials dropped 9% as the plurality of LEH's portfolio shows they doubled down in the summer hoping to ride out the financial downturn and lost. Unfortunately having to sell their winning energy and materials positions is exacerbating a 33% pullback from the 52 week highs in these sectors.
Originally, we had planned to sell over five separate days, just as it took six days to acquire the position through probe trades. But the market does NOT care what I think. There may come a time when you will be forced to close the full position at a moment's notice in order to prevent the previous profit from turning into a loss.
While I have one of the smaller accounts when compared to my daytrading colleagues, one thing we share is the dilemma of occassionally holding over 100k in cash. Similar to an FDIC bank account, I don't want to have over 100k in cash for more than one day in the 1/100 chance my broker decides to go poof. While my account would be covered up to 500k (if I had 500k), they only insure up to 100k in cash. Therefore, I am somewhat forced to keep about half of my net worth invested in something (whether long or short) at all times. I am always looking to find the potential turn or when the current trend could potentially reverse. Notice that today's action, KO was the only Dow component that was up today (up .25). If I think there's a potential for a trend reversal, I want to pay attention to what could be the new leaders. Forget the reasons about why something is behaving that way. The price chart is all you need to be aware of.
For those interested in the ultrashorts, the EFU (interesting ticker symbol), and the SDS show nice uptrending lines.
I am reminded by others that risk management is the difference that separates those who can survive all kinds of markets. Understanding when and when not to use margin. Many of the daytraders I interact with, understand that margin is a temporary tool to augment gains. You will NOT ever see any of them carry a position overnight with a margin risk that threatens them with a potential margin call. They are proficient at what they do because they balance: a maximum trading position versus, reserve cash for future trades, and understanding the cost of margin loans. There are few trades that pay 8-9% consistently in a short timeframe unless you are churning 30% plus profits annually before taxes and broker commissions. Let the big institutions play with the high margin money. Trading is hard enough as is and having to profit a set amount every period to cover interest on a margin loan is unnecessary stress for the inexperienced trader.
LEH files bankruptcy, AIG is next, MER stupidly saved by BAC
Premarket futures looking to gap down -3% at the opening bell with LEH going bk. With Hurricane Ike causing an expected $18 billion in damage to the Gulf Coast, take a guess how much AIG will have to eat given their own balance sheet is a mess of Level 3 Assets. In the words of the National Weather Service from four days ago, those who ignore Jim Rogers and casy's opinions "face certain death". Well LEH is today's casualty, so unless some other idiot such as BAC comes to rescue AIG, they are next.
Rumors have it that the Federal Reserve put a shotgun to BAC's head to make them save MER since anyone with common sense knows MER would have dropped to below $4 without BAC's intervention. After all if BAC was stupid enough to overpay $15 for CFC, they're stupid enough to overpay for MER.
With LEH's bankruptcy, the unwinding of LEH's positions will take place. The questions to ask are: 1) what could reverse the "sell" psychology? and 2) Could the Federal Reserve throw a surprise rate cut tomorrow or next Sunday before the bell?
Instead of worrying about the CNBC pundits or media chatterbugs, turn off the television and look at your playbook. You should have already written down how you will handle your positions given all scenarios. You can worry about why something moved a certain way AFTER you are out of the position; but until then, you should focus on your price charts, your technical charts, and what your signals tell you to do.
Rumors have it that the Federal Reserve put a shotgun to BAC's head to make them save MER since anyone with common sense knows MER would have dropped to below $4 without BAC's intervention. After all if BAC was stupid enough to overpay $15 for CFC, they're stupid enough to overpay for MER.
With LEH's bankruptcy, the unwinding of LEH's positions will take place. The questions to ask are: 1) what could reverse the "sell" psychology? and 2) Could the Federal Reserve throw a surprise rate cut tomorrow or next Sunday before the bell?
Instead of worrying about the CNBC pundits or media chatterbugs, turn off the television and look at your playbook. You should have already written down how you will handle your positions given all scenarios. You can worry about why something moved a certain way AFTER you are out of the position; but until then, you should focus on your price charts, your technical charts, and what your signals tell you to do.
Friday, September 12, 2008
"Get out or FACE CERTAIN DEATH" National Weather Service advisory regarding Hurricane Ike, The Evil Team of Rounders, and the Evil Patrick Green.
Our prayers go out to those in the path of Hurricane Ike.
On another note, residing out here, I've met many honorable people. But consequently, I've met many evil people such as a softball team called Rounders that competes in the Huntington Beach City Men's League. Last night, their catcher almost caused serious injury to two of our star players, and had the bravado to march over to our dugout by himself after the nearmishap and justify why he was in the right. So your analogy is if I decide to break every fiber of your body in the next game, I have the right to justify that to the rest of your team right.
Boys, this is a rec league where 1st place gets you a $15 t-shirt. No one will be awarded a $100 million contract to play in Major League Baseball. If you want to play that way with your dishonest and dangerous tactics, your team will face certain death the next time any of your members pulls a stunt like that against us. You started the war. You have a choice. Either be the better team or we will terminate all of you.
At some point, I will turnover my most wanted list to one of my colleagues. Most wanted as in, every person who has ever slighted me in my lifetime. The most recent douchebag is this 28- year old named Patrick Green from San Diego who conveniently convinced a Wednesday social group of 26 people whom I used to practice softball with, to have two people who never played softball as captains and then rig it to where I was picked last. I have never been picked last in anything in my entire life until that day. And if they seriously think they are superior to my skills in an even up contest, they are deluding themselves if they think they could survive in any city league. Nevertheless, another one on the hit list.
On another note, residing out here, I've met many honorable people. But consequently, I've met many evil people such as a softball team called Rounders that competes in the Huntington Beach City Men's League. Last night, their catcher almost caused serious injury to two of our star players, and had the bravado to march over to our dugout by himself after the nearmishap and justify why he was in the right. So your analogy is if I decide to break every fiber of your body in the next game, I have the right to justify that to the rest of your team right.
Boys, this is a rec league where 1st place gets you a $15 t-shirt. No one will be awarded a $100 million contract to play in Major League Baseball. If you want to play that way with your dishonest and dangerous tactics, your team will face certain death the next time any of your members pulls a stunt like that against us. You started the war. You have a choice. Either be the better team or we will terminate all of you.
At some point, I will turnover my most wanted list to one of my colleagues. Most wanted as in, every person who has ever slighted me in my lifetime. The most recent douchebag is this 28- year old named Patrick Green from San Diego who conveniently convinced a Wednesday social group of 26 people whom I used to practice softball with, to have two people who never played softball as captains and then rig it to where I was picked last. I have never been picked last in anything in my entire life until that day. And if they seriously think they are superior to my skills in an even up contest, they are deluding themselves if they think they could survive in any city league. Nevertheless, another one on the hit list.
Tuesday, September 9, 2008
LEH is next to be toast
Seems a rumor floating about that LEH looking like the next BSC as its stock price is down 40% today. The put options activity for Sep and Oct would seem to support that traders expect LEH to be toast.
Since the government already used their ammo on Fannie/Freddie, does anyone really believe they're going to step up and help LEH.
I say no. But the only way to know is to bet against the financials, or the S&P, or stay in cash.
Since the government already used their ammo on Fannie/Freddie, does anyone really believe they're going to step up and help LEH.
I say no. But the only way to know is to bet against the financials, or the S&P, or stay in cash.
Subscribe to:
Comments (Atom)