Dick Alford told The IRA: “The structure as described in the press is nothing more than the Fed, FDIC and Treasury providing some asset managers with calls on the upside–max loss equal to 3% of assets? When was the Fed or the FDIC authorized to sell or give away call options? I suppose that they will try to sell this as a non-recourse loan, but it isn’t. It is an option… The investors would in effect be left with sub-market financing and ownership of much of the upside potential. The implied rates of return to the private side are staggering, especially given the absence of any downside risk.”

Perhaps the market is thinking ahead? Wow, really?  Let’s agree that subprime losses have peaked and are now in the rear-view mirror. That leaves residential losses, which are expected to peak this year. And next in line we have the real king of the jungle: commercial paper, which should see loss rates peak in 2010. In the case of the latter, if the administration can get this economy moving and credit markets open, perhaps these losses could be refinanced and pushed forward in the hopes that the economy will improve. Otherwise, this party is just getting started.

Just for fun, this is a great excerpt of Congresswoman Waters confronting Secretary Geithner in a deeply unfair match of intellectual wits:

Aside from the macro backdrop that may or may not be causing a pending market correction, there are several trades popping up on my proprietary models on both sides of the market. So there are NO excuses to be purely directional when you’re proclaimed to be a market neutral Long/Short trader.

On the macro front, I’m generally in-line with the coordinated re-inflation of global economies via the debasing of their respective currencies. Therefore, I’m bullish long-term on things like Oil, definitely Gold, Dry and Wet Bulk Carrier fleets, Railway stocks, and Silver (perhaps more than Gold). But I’m not bullish on base metals that go into manufacturing, such as copper, aluminum, steel, etc… There’s WAY TOO MUCH production capacity or acquisition debt added at or near the top of the credit bubble, and the adjustment, although already taking place, is going to be a painful one and has a ways to go. If you want to be truly market neutral here, you would be long the producers, oil futures, gold futures, and silver futures, while short the Steel producers, copper, and base metal producers in general.

SHORT TRADES

ADI: Has moved way above all of its major averages on consistently declining volume: negative divergence #1. Money Flow turned down on Friday’s new high: negative divergence #2. Momentum Oscillator failed to make a new high relative to the new high made in early December ahead of this consolidation: negative divergence #3. The Secondary Trendline is around $34 while the 10-period daily EMA is at $31. So there are actually two ways to play this: If there is a fall in the market early in the week, pick up a small lot near the $31 level and use the 10-period as your stop. The other way is to short the stock as it approaches the $34 level.

ATHR: This telco play is directly on its all-time highs, which haven’t been broken since November after a series of six tests. This is the seventh (lucky number perhaps)? The only odd thing about my model on this is that it shows money flow collapsing while the stock has been rising for the past several sessions. That could be a false signal due to holiday trading, but it’s worth keeping in mind. On the other hand, all momentum indicators have turned up sharply. I never buy stocks after they’ve rallied several sessions, so a pullback to $30 should be followed by one more attempt at a new high at least. I don’t think we’ll see a break above $35 on this move, so there’s no rush, and if the stock does break above $35, I’d be a seller, legging into my short position and not a buyer, with the intention of covering my short position at or near $35. $30-$31 is a great entry on this stock.

CRM: Although I rarely suggest stepping in front-of a runaway train (i.e. bull market), Salesforce.com appears ready for an extremely short term pullback, ideal for the daytrader. The prior breakout high was 67.72, which directly coincides with the 10d-EMA. But remember, this stock is in a bull market, so when it’s time to close out that short, consider reversing and going long instead of just patting yourself on the back. The actual trade here is on the long side, but the MACD, Doji, and declining volume create three powerful negative divergences.

LONG TRADES

AMZN: Going into the Christmas season, Amazon’s channel checks were bringing back some unbelievable results. In other words, their sales went through the roof. Now we won’t know the extent of the returns they’ll face, but historically, Amazon has been one of those stocks that doesn’t react to the “item returns” line item in their following quarter. The 10p-EMA just crossed the 24p-EMA on Wed. Don’t let the declining volume on Friday fool you, with what appears to the “technician” as a Doji. This is classic chart painting for those that follow technical analysis like it’s their dogma. Friday was a ghost town on Wall Street, so one could have pretty much done whatever they wanted in terms of end-of-day chart painting. That’s why I don’t put too much weight into Technical Analysis as a valid tool in understanding market theory, especially when it comes to the markets’ micro-structure. If anything, it must be used within a much larger plethora of quantitative tools. With regards to Amazon, the stock spent the past 2 months consolidating the move from $92 to $125. Above $140 it’s a potential buy, using the 10p-EMA as your stop.

BCS: As I said before, I’m not a huge fan of Technical Analysis, but that doesn’t mean I’m not going to make myself an expert at it. It’s just another tool in my arsenal. Barclays bank, if it hits $15, will have corrected 40% since its’ October highs. Remember, this is the ADR so it’s thin. Not a daytrading stock at all! I think $15 is a low-risk entry point, perhaps risking $0.70 to make about $3 to $5.

BRCM: Something tells me this stock wants to test $35-$36. For a long position, use the 10d-EMA, leg into your long position, and leg out as it approaches the whole number.

CEO: Something of an anomaly in China, with a P/E of 16 and an EPS $9.57 per share, their 5-year growth rate is phenomenal but their most recent numbers aren’t all that great, but which oil producer didn’t suffer this past year? The anomalies lie in their TTM growth rate of almost 56% while their debt to cover ratio is 2.6 with their peer group being closer to 1.26! I wish American companies were run as tight as CNOOC. Their costs of revenues have shrunk while their income has stayed relatively flat in spite of the dramatic collapse in oil prices. As a long-term position, I would start building a line around the 155-157 level and hold it until at least $200. However, during that time, you should always trade around your core position to lock in Alpha. Here are some ratios for CEO:

CP: Watch the $55 level. Having closed $.25 below it, I’m fairly certain it will bust through $55 in order to clear out the stops resting there, then will fall back down below to nail the ensuing protective stops established on the prior buy through $55. Nonetheless, the stock is in a powerful long-term uptrend which will prevail for the foreseeable future, if not the next several years. For short-term traders, the $55 level will provide for rapid trading on both sides, for the long-term swing/position trader, wait to see what happens. These stocks don’t move like tech stocks, although last year a few did. I actually look at this stock, and the sector, as a growth sector. So for them to have low double digit P/E’s and paying out dividends makes this a solid play, especially with the macro backdrop I mentioned. Lastly, as the Great Sage of Omaha likes to say: “Does it generate cash that ends up in their bank accounts? If it does, I’d like to take a look at the stock”.

CSX: Another railroad breaking into new 52-wk highs. Everything looks good here except the fact that the market broke above the 52-wk high on the day after Christmas, which means a lot of stops were just cleared out and the next step is likely down before ultimately resuming its uptrend. So if you’re a daytrader, feel free to trade the short side and then reverse. All you others out there, keep an eye here and go long when you see the whites of their eyes.

CYOU: Remember this Chinese stock went public May of this year. Once the majority of lock-ups expired, insiders cashed out, as expected. Now, 28-30 has become a major accumulation zone and the stock appears ready to break out. Yes we were on Christmas schedule last week, but the Chinese are communists. First upside target is $40

DRE: Duke Realty bottomed around $12 in March and after regressing back to the $10 level where it should have been if there weren’t a liquidity crisis, the stock seems to be poised for an extended up move. All my models have triggered on this one, which is rare and actually makes me a tad more cautious rather than feeling like I should go all-in. However, the stock has had 7 green sticks in a row, so be patient and buy it on a test or break below $12 and keep legging into the trade until $11.

EQIX: This is the trend followers dream stock. Every single metric is growing at an impressive pace, and the company is throwing off cash by the truck-load, and almost all of it is being plowed right back into the business. Obviously, the stock has the benefit of every single moving average below it, with the most consistent being the 10d-EMA (as always). Since $100 is a whole number which has yet to be tested following the recent break above that level, I’d like to buy it around $100, legging into my position as always.

ESLR: Another potential high flier when it gets wings is Evergreen Solar. The chart below shows a very sensitive and potentially explosive move. However, although I put the odds in the favor of an upside breakout, there is a chance there will be a quick spike down to shake out all the weak hands, so be careful and watch.

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Equity Long/Short Market Neutral traders will have an edge in this market over Momentum traders waiting for an expansion in the VIX.

For example, convertible bonds are the “paper of last resort,” and the airlines are desperate for cash (when aren’t they?). So it’s not a surprise Continental is in the market to raise some expensive capital and a $200 million deal (if the green shoe is exercised) is nothing serious. But the devil’s in the details.

I think the coupon is going to float around 4.5%, literally a 25% premium on a five-year maturity. The bonds at this issue price are a clear advantage over the common and set up an ideal trade, again at the issue price. I keep emphasizing this because the hedgies will be buying up the offering and shorting the stock to capture the premium so the spread should narrow really fast.

My bet is that most, if not all of this offering is going to the hedge funds. A few back of the napkin calculations, and after the offering, it’s quite possible that up to 60% to 65% of the common will be short.

Since the deal is for $200 million (including the $30 million green shoe), with a 25% conversion premium, this means about $184 million of stock will be controlled by the bonds. Around $120 million of stock will need to be sold short to hedge the deal. This means somewhere in the neighborhood of 7.5 million shares.

With this in mind, the sell-off in the stock should continue. So hit the rallies and hit them hard. The sell-off began with the deal’s announcement but it’s not over. I wouldn’t expect it to settle in much higher than $13.50 or $14. Perhaps even closer to $12 on an overshoot. In fact, if the common does overshoot through $13 and then through $12, look for a dead cat bounce trade of a couple quick points.

I’ll do some research over the weekend and post some more ideas. I know I haven’t updated the blog recently but I think the weather in New York is going to give me an excuse to stay in and write more often than before. It is absolutely, insanely, unbearably cold here.

MW

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All of a sudden, showing strength for the past several weeks and clamoring to exit the TARP and government meddling has resulted in a mandatory stock sale by these same banks. So JPM, AXP and any bank wishing to exit the TARP, must prepare to dilute their current shareholders. That dilution is rather severe, but the devil’s in the details.

The ownership of the nation’s most important companies is being quasi-socialized, by transferring ownership to the “public” via the hands of the institutions, those same banks handling the government’s massive new injection of liquidity. The institutional buyers will include a larger and larger chunk of pension dollars. These pension funds, like CALPERS, are buying these share distributions hand over fist, along with many nationally strategic banks and corporations. They’ve figured out the only way to ensure continuity in the nation’s retirement support system: to become direct shareholders. Voila, you’ve got socialization right before your very eyes.

But it’s not really some ignorant version of Canadian or French socialism. This is capitalist socialism, not socialist capitalism. Huge difference. And it’s Jumbo size, in the true American spirit. This young nation of 235 years was able to follow Keynesian demands to offset a depression in terms of output. When a country with a growing economy like China slips, or has to burp from indigestion, the entire planet will feel the shock. Whether that was an intentional tap on the breaks via controlled devaluing of the Yuan is beside the point. Although that’s exactly what it was, there’s another issue. The financial crisis triggered by China’s Great Burp of 2008 resulted in the American Recovery and Reinvestment Act of 2009. And TARP, and PIPP, etc…

In the States, the capital structure of those banks handling this influx of funds is ballooning to unimaginable heights. This is a mandatory inflation of their balance sheets. This is the Fed and the Treasury forcing the new supply of dollars onto their hands to buy the shares of the companies now about to have an equity offering.

The Federal Reserve is now the largest bank with a balance sheet that went from $6 Billion to $1.3 trillion in about 6 months. For their governments, including the UK, France, Canada and now Venezuela, Bolivia, perhaps soon Ecuador, China (obviously), own the actual companies, or portions thereof. And therein you have it ladies and gentlemen: This is American Capitalism adapting to compete with Chinese Capitalism, where the state’s role not only yields the companies an advantage, but also provides the government with national security. For China, that security is in the form of owning sources of raw materials. For the United States, and Western Capitalism, security comes via the almighty US Dollar (for now). And funny how all major global commodities are priced in US Dollars. When there was a massive dollar shortage last year, it was resolved via bi-lateral lending facilities with the G-20 Central Banks and the Federal Reserve.  National security through state supported champions of global commerce. The need to cross borders, currencies, regulatory frameworks, governmental oversight, etc…, is another matter.

This full scale conversion to Chinese Capitalism around the globe is both the cause and effect of the Financial Crisis of 2008. But everywhere you look, on the tags, it says “Made in The United States”.

What the heck is going on? Have corporate bond investors lost their minds or could this be a short squeeze? More importantly to me, is there a play here on the equity side? Logic (and institutional schooling) would suggest buying the bonds and selling the stock short as a hedge against insolvency. But if you haven’t noticed already, logic and old-school rules no longer apply.

Subordinated paper has a strangely attractive risk/reward profile to pure-play equity traders. But to us Global Macro folk, the issue is quite obvious. In a bankruptcy, sub-note holders get wiped out. As the bankruptcies of WaMu and Chrysler have shown us, the rules no longer apply when taxpayer money is being used for a bailout. However, let’s assume the bank’s credit profile improves. Because we’re talking commercial paper, the upside is limited to par. Most of the weaker banks have sub notes trading at $50-$70 (i.e. vs. $100 par, upside is capped at 50%.). If the upside is a maximum of 50% while the downside is total loss, I’d argue that buyers of these notes are smoking something,

Why not buy the common where the upside is unlimited while the downside is 100% in names like FITB, KEY, RF, HBAN, etc…?

Now, what defines “systemically important”? KeyCorp and Fifth Third have $98 billion and $119 billion in assets, respectively. Just before being seized by regulators, WaMu had $310 billion in assets. Nonetheless, WaMu’s sub note holders were wiped out without even a toaster or coffee mug to show for their investment. Now, do you still think KEY and FITB will be “saved” by regulators in the event of insolvency and subsequent FDIC seizure? If you do, pass the doobie.

So, is the trade to short the paper and buy the common, or short the common and buy the paper? Or more perversely, buy the paper and the common and hedge with a CDS. Now you’re talking.

Oh, and did anyone even notice the government’s announcement on Friday that they were walking away from the Legacy Loans Program portion of the PPIP? What does that mean? In simple terms, the government has decided it has no desire to provide any form of capital relief for bad loans on bank books. But to add insult to injury, the government has also decreed that banks can’t sell these assets at “market-clearing” prices because they will become insolvent simultaneously. Duh! Hello? Didn’t we see this play out already with the downward spiral of Lehman and Bear? Does anyone still remember Long-Term Capital?

Game Plan - Market following “yields”. Watch 5 and 10y yields. Technician’s waiting for “right shoulder” will be left behind. Watch for start of retracement to test long-term support and confirm recent bottoms, but maintain bullish view until reversals are in.

Campaign - Most “Doji’s” negated. Dow INDU target 8940-9000. 8350 support.  DJINET trg= 90. Energy and Commodities breaking out. Nasdaq at 200dEM (1740) and fighting. Support = 1675

Buy MR at mrkt and accum.
KBW breaking out!
AB / RJF accum core breaking out
SDTH core China stock. Accum at market.
SMI 100% potential.
SPRD short squeeze.
PMI short squeeze
GROW: Accum core
UYG, FAS, IAI: Add to long bskt

SNDA: short

Naz: 1775 ceiling. 200d=1740. Breakout is 1774-1776. 1675 Support.
Inside sigma channel: 1715 – 1775 – 1840

BKX: Bank Index approaching Fib. convergence and 200d EMA. Resistance Range: 45.40 – 45.80 (200d=44).  This suggests a blow-off top in the next 1 or 2 trading days.

CRB Index: Confirmed reversal with 1st target of 258-263 (8%)

DJUSFN: Approaching major resistance with heavy upside momentum. Other indices have broken through similar levels. Ideally, pullback to 205 to confirm uptrend.
200d= 237.  T/L= 240.  Fib=234

DJUSHB: Nice correction to buy into.

Defense Index (DFX): At 200d EMA. Broke above trendline on Friday. Could be a short sector this week.

BTK: Biotech Index might make a run to 740 if the broad market continues to rally. It is lagging so far but March lows way above Nov. lows. So market may be “catching up” to this group. 660 heavy overhead resistance here.

DJUSAF: Showing resilience. Continuation rally after breaking and closing above 200d EMA. Turns consolidation into flag type. Looking for 485 (12%). Is this a proxy on global economic rebound?

DJUSAT: Auto parts makers closing above key resistance and 200d. Look for continuation rally to indicate market’s bullishness.

DJUSCA: Casino index consolidating above 200d. Watch for breakdown as possible indication broad rally may be over. Break below 260 sets up potential short trades in the group.

Limit Orders:
LFC=56 or >57.50, FMCN=7.305 or >7.95, CYOU= 29.35, ADI=20.25, BRCM=18.05, HIMX=2.50, NVDA=9.10, PLXT=2.85, SIMO=3 or >3.70, ACTS=1.80-1.88, AMCN= 5.75, CHL=46.50,CTRP= 30, GSH=23.50, JASO=3.55, MR=24.30, NPD=5.15, STP=14, XING=1.80,MBI=5.75

CHINA:
CPSL= new leg up about to begin, CHINA= 2x bottom monitor for entry around 1.35, ASIA=About to breakout >18.50, CBAK= 3day cons. >200dEMA go long and strong, CPBY=a.m. earnings, EFUT=closing gap 7.75-8.50 unreal growth rates, HMIN= about to breakout. Gotta be long prior to move., SIRF=2.85
SIMO trying to breakout
SVA: monitor closely

FINANCIAL:
ABK=trgt 3.50 buy possible gap down on earnings, BK=30L, ICE= monitor for another leg higher, JPM= 45 trgt, NYX= 30trgt, ORI= 15trgt, RF= buy on wkness,

Disclosure: Author actively trades the above stocks. These are NOT investment recommendations, nor should any of the above be construed as investment advice. The above are excerpts from the authors trading journal. Do your own research and consult a professional if you are not one yourself.

Professional traders proprietary traders investors market makers hedge funds macro investors quant traders quantitative analysts hedge fund managers china stocks chinese stock ideas financial stock trades trading financial stocks proprietary trading prop trader prop trading prop traders investment analysis

I will be doing a more in-depth analysis of the quantitative and technical data for each bank on this list, with the resulting trade ideas to be published soon thereafter. If any reader feels I left out a bank that has a compelling reason to be on the list, please let me know.

Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. On Monday Christina Romer, chair of the White House Council of Economic Advisers, said: “The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be.” (emphasis mine)

Jean-Claude Juncker, chair of the “eurogroup” of ministers, said: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.”

But European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more. The US Treasury declined to comment on their remarks on Monday.

A new European Union policy paper, due to be approved by finance ministers today, calls the prospects of a return to economic growth next year “highly uncertain”.

Ouch. I do recall hearing this over the audio squawk during market hours, and the market went into a sharp sell-off. These days, that’s more likely to be a bear raid during a vulnerable moment in the tape. Either way, a professional trader should not forget to pay attention to these minor details.

After the powerful bear market rally of the prior two days, gold and bonds are both being bid higher. The Yen is starting to rally. Asian stocks couldn’t pick up on strength in US equities. Market breadth is deteriorating. Watch out below…

JPM- Top name. Target size is 3 boats. Work hard for it. Confirmed/Qualified 12 count.
Assume all insiders have been massive buyers over prior several weeks at unheard of prices. This is where crowd psychology starts to shift, and the beginning of the momentum shift is always the toughest AND most profitable. FOCUS…FOCUS…FOCUS…

MS- #2 in sector. Amazing accumulation all day long.

If SKF < $149 then 134, 127, 123.50. If enough stock not in inventory, look at FAZ short (non-threshold stock)

Homebuilders at lower end of this base. I see this group as a leader over next several quarters. Perfect pscyhology trade: CTX, LEN

OIH/ERX/USO/UNG- Confirmed 9 count with nice looking stick. Entire energy complex poised to readjust for some recovery of demand. Spread between WTI and Brent closing, indicating a market in less distress. Will there be too large of a gap? Note, nat.gas stocks deeply depressed and heavily shorted (CHK, CNX,

FAS/BGU- Wow, this is a first. A confirmed AND qualified 9 count reversal in a triple LONG ETF. Load the boat.

UYG- Red flag on Dow Jones US Fin’l Index. Today was an inside day to Tuesday’s massacre on huge volume. Action should be in commodity and infrastructure stocks; use financials to balance Long/Short book.

BAC- 10 count, unqualified but VERY close. Anticipate qualification if possible.

CME- What a powerful rally all day. Very impressive and shows enormous velocity. Much energy still remains in this rally. Manage Thurs. gap and ride back to $225.

CRM/VMW- Expect big upside gap, but certainly confirmed pivot. Would like to catch some of this move to $35/$26.

JBL- Nice pivot. Back to $8. Also: MRVL, MBI

WYNN- Unqualified 9 count. Watch.

CAT- This could be final pivot I was waiting for. This is the “infrastructure” general.
X- Perfect base built on $30. To $38 first stop.
AKS- Excellent oppty. to pick up under $10. Last call before this ship sails…
ACI- Similar base at $16. Good for pivot reversal to $20. Huge positive divergence in Money Flow during last break to new lows in November.
AGU- Same set-up as ACI.

Look, all correlations are still at 1, so why spread out across so many names when we can just take a massive position in one of these? See if there’s any edge gained from building portfolio versus acute concentration in a few names.

Airlines downgraded on a day like this? What does this remind you of? Back in the days when big boys would downgrade in the face of a rally as large institutional clients have unfinished accumulations in the pipeline at specific price zones. This is cash money to the firms, they need these orders filled or it will decimate their month-end post-trade reporting. Most of the pain taken by American anyway. Others sold off from arbitrage traders.

AAI- Buy this already and stop looking at it. This is silly. Get long and strong.

Got to watch solars. This is their line in the sand where this rally should take off. Positive wires on solar and Obama today and should likely continue.