Investment Capitalist

Week of September 16

WED:

Overnight thoughts: If Morgan is considering a takeover, then Morgan is in trouble. And as LEH showed, the downward spiral is viscous. It has to fall. Think about it. All financial counterparties to MS are looking to eliminate risk as fast as possible. Whether MS is well capitalized or not is irrelevant. If MS realizes the cash leaving the door is going to run out, they will enter BK before it does, as did LEH. And also like LEH, they will move their most powerful assets to shelter them from the BK. In a buyout, Barclay’s President walked away from negotiations over price, which were supposed to be in the range of book value about 10 days before LEH filed. Instead, they got the best assets for a song while “creditors” were left holding the bag and are now trying to sort it out through the courts. Who are the creditors?

Hedge funds that Prime with LEH. These are entitities that are highly sensitive to leverage ratios being adjusted. If hedge funds are locked out from selling assets in a market that is spiralling down, what do they do? Pay $8 for a Goldman January ’09 $40 Put? And $1 for a Goldman January ’09 $10 Put?

These are assets that are locked up! They will be trapped because no other PB will deal with them knowing they have assets at LEH. Anyone associated with LEH, and is a party to the BK as a creditor, is toxic (at least from a hedge fund’s perspective).

MS has a very large prime brokerage operation, and they are a MNC, thus, there are assets being transferred out by the minute. So MS is in trouble. They had to present it to the press as an unsolicited inquiry from WB that required MS to “consider it”. WB is also in trouble. What happened to BAC when they took over MER? MER gapped but closed that gap fast and hard. BAC tanked. WB is around $10.

Is WB in trouble as well? Can they do it? Perhaps WFC is a more likely suitor. Perhaps WFC swallows both and gets the east coast footprint it always wanted in regional banking as well as M&A, Advisory, Asset Mgmt., Prime Brokerage, retail wealth mgmt….all of a sudden, a downhome western grown good old fashioned American industrial newcomer (19th century) becomes a global powerhouse for a song? And all the while the multi-trillion dollar debt destruction in progress plays itself out, as it always should. Guess what? All that petro-wealth is suddenly destroyed. Money market funds are trading below par. Super-senior debts collateralized 110% are worthless. Each entity was levered to the $300 billion range and/or at a ratio of 30:1. Just BSC, LEH, AIG, FNM and FRE alone add up to almost $2 trillion! holy shit. Preferred stock in GSE’s are toilet paper. Preferred stock in every bank is in a free-fall spiral. This is massive debt destruction. This is why the USD has entered a long-term bull market. It’s called debt destruction. George Walker, GWB’s cousin, is “Head of Investment Mgmt.” at Lehman. This is the same cartel that shorted airline stocks, created and destroyed Enron, spent our way out of a recession via Keynesian dogma (war), and now, they join the same cemetary that holds Enron, Arthur Anderson, World Com, Bear Sterns, etc..etc

Morgan is not just “toast”. It must go. Just like all the others, MS and perhaps even others as well?

Why didn’t the Fed lower rates when it knows it should go to zero right now on the Fed Funds, at least technically? Because doing a surprise intraday cut during the market crash will have significant psychological effect, and likely require less intervention and liquidity than actually taking rates to zero. Just like JPM walking onto the NYSE floor during the ’29 crash, expect an intraday surprise rate cut if the following factors are not recalibrated quickly:

From the FT:

The yield on three-month Treasury bills traded as low as 0.02 per
cent and the so-called TED spread, or difference between three-month
Libor and the yield on the three-month Treasury bill, reached a record
3.04 per cent. The last time it reached 3 per cent was after the stock
market fall of October 1987.

A swap tracking the expected difference between the Fed funds rate and three-month Libor for the
next three months exploded to 166 basis points.

It opened at 121bp in London on Wednesday, up from 116bp late in New York on Tuesday.

The demand for owning Treasuries in effect stalled the government repurchase or repo market, where institutions borrow cash by pledging notes and bonds as collateral.

Traders said demand had overwhelmed supply. While a holder of Treasuries could lend them out in
exchange for cash at rates near zero per cent, risk aversion was
paramount.

Scott Skyrm, senior vice-president at Newedge, a repo broker, said: “All the US Treasuries are gone from the market.”

The storm in the repo and interbank markets ruptured the interest rate swap market.

The
two-year swap spread, which reflects the credit quality of banks in the
Libor market and is the difference between Treasury and money market
collateral, surged to an all-time record above 130 basis points. In
March, the spread hit a record 110bp.

European repo rates were
also at highs as banks again showed reluctance to exchange cash for
anything except German bunds, with the spread between three-month
European repo rates and expected overnight lending rates rising further.

The BBA statement added: “This is particularly reflected in the US
Dollar because of the well-known worldwide shortage of this currency.”

Bankers said the demand for dollars in Europe was greater than at any
time since April with the premium to swap euros into dollars rising to
70 basis points, more than 40bp above levels at the end of last week.

UBS:”There is a big demand for dollars and cash in general. We are also
hearing that banks are charging some investment grade corporates 13 per
cent for overnight money, compared with about 6 per cent last week.”

TRADES:

Short Morgan, Goldman and any Investment Bank that is not a money center bank.

CRM: Look at 45-day 15min chart for reverse H&S pattern or possible daily flag (vol) for downside continuation.
UNG setting up a possible island bottom and has triggered d-SAR buy signal.
UNP: Wide ranging day above 200-day SMA.
V: Approaching 60, T/L at 58.
WB: Gapping up. Fade gap and reverse strategy.
WM: Climax volume. Stock float is turning over at secondary t/l.
AAPL: Multiple support convergence from Wkly chart. Could have a huge short-term bounce.
AMR: $10.88 great low-risk buy level.
CAL: Level is $16.50
DAL: Inside day. MASSIVE support convergence underneath. See daily.
ABK: Short set up is critical. Below all t/l’s.
Trading pre-market not worth it. Too thin. Risk of derailing entire game plan too high.
AMZN: Gap closed finally.
APA: HOLDING LONG TERM UPTREND LINE PERFECTLY.  This is a measured move to ~135-140.
BTU: Look at weekly chart for trade set up.
BIDU:  Testing 250 critical support. Look to short 270. Range is 250-270.
CME:  See weekly for pennant consolidation. Could resolve in either direction, but likely down.
CNX: Critical technical recovery off of multiple support convergence. See weekly.
CSX: 52 level.
FSYS:  Watch 43.

ENER: Bear flag

Solar stocks are working on s/t 2x bottom. CSIQ

The market is definitely displaying extreme emotions and uncertainty. Two days this week of almost 500 point drops in the Dow. Only similarity was when Asian problems in ’97 and Russia in ’98. The market is definitely near at least a short-term bottom, if not a longer term reversal. However, downside momentum is very strong when stocks make lows. On upside moves, the first wave of buying is short covering unless there is evidence of breadth. On Wed., the rally in the afternoon died but the move was significant before it stopped. This was a lot of short covering. Big gap in GS and WB on Thursday. If you are going to fade, wait for the open and wait for the stock to turn.

TUESDAY:

Post-Market:

This is definitely a day for me to extract everything temporal I can possibly gain to somewhat offset the incredibly unnecessary reminder of why one must stick to one’s rules; those rules are custom built over the years for you. Therefore, if there is ever any conflict between your rules and other external signals you are picking up on, it is crucial to take the personal rule every single time.

The only positive outcome to having been whipsawed during the market bottom, was feeling like the final pillar was set in place for a refined and tuned short-term trading approach. So with that said, forget your P&L around 10:30am, you were having your 2nd best day of the month, not your best. This is where you slip all of a sudden, almost as if you drop your guards and decide it’s time to go for the jugular. Realize, you just did go for the jugular and you killed your prey! The size of the kill is unrelated to what you think you should be at. It is what it is. Next time you go for a kill, you will press harder at that moment.

It’s not unusual for you to be having $25,000 mornings every morning this week!

But this covers you until the period entering lunch. You really must get up and walk away, to give yourself a moment to realize that the momentum is likely 99% gone and volatility algo’s are taking over the ranges, causing them to compress until momentum returns. There will be exaggerated mean reversion trades during this period of more compressed volatility, but nonetheless it is all reversion based trading.

Ok, so what’s the rule I broke here?

My trading consists of a few crucial intraday objectives (C.I.O.).

A)    In the first and most crucial piece of the 3 play morning attack, the time between 9:40am to 10:45am, I need to have a hard time stop. Mid-Morning journal entry immediately following close of last position..” Only options here:

If in a trade at 10:45, “close only”. At 11am, should be flat, even if it’s for 5 minutes.
Step back and understand why and how the outcome is what it is. In some market environments, where volatility is at an extreme, you will set highwater marks consistently.

Until 11:30, go over your entire book of stocks using MC. This is to gain perspective of the top-down macro theme driving the action, which will give you clues about where the afternoon plays will be. Write these down.
From 11:30 to 12:30, there is one last push of momentum, which will generally lack conviction as traders are still at their stations and eager for lunch.
B)    The second C.I.O. is to observe and annotate what the expected ranges may be during lunch, or even snipe for stealth breakouts caused by execution algo’s or just sloppy execution by an assistant trader during lunch. Generally, almost a majority of the time, your annotations will read “unlikely to find tradable ranges, likelihood of getting hacked up and bent around the noise: HIGH. Still difficult action and highly skittish, non-directional. Fade type strategies will prevail

1. If there is no external catalyst later, such as Fed announcement, option expiration, etc.., then shift into range scalping for high probability “singles” using minimal size only to gauge market responsiveness to anticipated short term movements. Perhaps shift into a sub 1 minute intraday chart and play the short-term 5min moving averages or k./d. channels.
2. Catch up on market reading, blogs, advisory services, news wires (for potential catalyst plays later in the day)
3. Leave the building for a walk if you have time. Try to do some deep breathing. Get rid of any nervous energy.
4. Set up alerts and orders for afternoon game plan. Write the stocks and levels.

C)    The next real tradable time zone is 2:15 to 3:55. Likely that opening action will return and/or range extremes will be revisited. Observe market retracement levels for key indices and stocks and write this down. It will give you an instant data point reflecting underlying breadth of any trends.

 The market’s second open is between 2:00 and 2:15. Treat the 2nd open no differently than from the first open at 9:30am.If you are up by a minimum of $2500, deploy additional capital for high probability afternoon set-ups. Size should be aggressive but only on selective trades. If you are going to pull the trigger from a high powered rifle, then make sure the shot is a kill. There will be multiple kills on a day like Tuesday where your mid-morning journal entry would read “market feels like it is bottoming.”

This entry was posted on Wednesday, September 17th, 2008 at 6:39 pm and is filed under Bearish Looks, Financial Sector, Hedge Funds, Trade Ideas, Trading Discipline. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.