Deal on Bailout?

Markets rebounded more than half way back from yesterday's disaster on light volume in the DJIA and average volume in the SP500 and NQ100 futures. Even if yesterday's action turns out to be an exhaustion bottom, traders may have to endure another head fake death dive. Another attempt is being made to pump up the bailout bill with Senate leaders claiming all will end well, while some members of the House say not so fast. Deal or no deal will be the focus for the balance of the week leading up to the unemployment data on Friday.

Agreement

We would all like to know the demographic and socioeconomic make-up of the outraged voters pounding on the door of their congressman. Boomers no doubt, but let's look to where we can agree with the today's no votes.
Willingness to take their chances against the dire predictions of economic catastrophe, I like. Saying no to a group of insider, it is who you blow, transactional trading market bullies is fine by me.
Having to jump to a time table without all the information, no one likes.

Political, treasury, and Fed leadership failed to explain the four question about the material makeup of the troubled financial obligations;
what are they?
where are they?
how much will they cost?
what is the market?
Being able to answer those questions may get the deal done.
"Trust me" will not work.

Bailouch

Markets took a broadside early from generally bearish attitudes towards the future of financial institutions as well as thoughts the bailout vote would be close. Well it turned out to be not so close as the Republicans failed to generate enough votes to guarantee passage. There was talk Speaker Pelosi was responsible for alienating Republicans with a pre-vote rant but ultimately the responsibility was the Republicans and their ability to prove they could endorse their presidential candidate's slogan of "country first." It continues to be a party of few ideas, unable to articulate exactly anything beyond flag waving and calls for lower taxes. The Republicans would have more credibility if they actually were advocating a demand for direct main street intervention, payments to business or troubled mortgage holders, but they end up appearing morally outraged without a practical idea.

Now what? It will have to play out as the pros talk about another re-vote or as some new approach. The markets will thrash and perform the price discovery dance.

Bailout Blues

Markets are heavy but off their lows after first hour of big board trading. House Republicans are working the angst for all it is worth since this is the first time they can powerfully separate themselves from a president they believe has failed them on the policies of conservative economics. Not sure where that leaves the rest of the nation, but this is a group somewhat outside rational thought and are most likely to pursue any course they find politically self rewarding. The markets would not be amused with a down vote on the bailout bill and may find a wave of liquidation selling by those who have waited for some relief before cashing out.

Bailout Agreement

Agreement has been reached in Congress on the bailout bill and it is hoped to be voted on as soon as Monday evening. Markets will sort through the viability of the bill passing and the other shoes that are dropping around the rest of the US economy. The rationalizations for supporting the bailout has been to avoid a possible total meltdown of the lending capabilities of the national if not international economies. Some have reasoned such dire consequences speak to a world market that is now flat and cautious about growth, thus leaving world stock markets with some upside but a bunch of sideways action. We shall see, but the bears may have run out of news for a time.

Let It Burn

Those chanting 'let it burn' may in an odd way be right, but who wants to travel down that road to find out. Most believe it is safer to bailout the pathetic titans and deal with the devil you know. But there is no mistaking that people are pissed off at Wall Street and the Treasury Secretary, who is from Wall Street, who played apart in creating the credit crisis, and now has the audacity to ask for $700 billion for bailout deals and then have all the actions exempt from judicial review. A Secretary who is a part of an administration which has provided so little intelligent thought, from an idiotic war, to the 2004 SEC ruling to allow the big 5 to leverage up to 40 to 1 , from the previous limit of 11 to 1. Now the big 5 are gone in one way or another. It is amazing the political race is as close as it is but the rank and file are there to pull the chain. Now we know which chain they are pulling.

In Between

Markets find themselves in between good news and bad news as traders try to find a sleeping position which will allow them some comfort in what will probably be another attempt to solve a major financial problem before Asia opens on Sunday night US. The political polarization this country suffers from shows up just about everywhere and now Wall Street is in a version of Meet the Puritans. This is the same group Pres. Clinton had to deal with but only without the sex. The consensus seems to be that a solution will be worked out but these guys are as weird as the bankers are stupid, so anything is possible.

Spinning

Bailout legislation is about complete according to news reports. The end of quarter action next week could bring some interesting twists and volatility which may or may not be an indicator as to the direction of the fourth quarter. Spinning out of the turns will remain the daily action for now as markets will begin to look beyond the bailout.

Smoked Bull

As some resistance grows towards the bailout plan, there is some positioning and pricing going on in the DJIA, SP500, and NQ100. While the overall market does not want to get ahead of itself before the vote on intervention, some pros do not want to miss a potential rally shot. It is thought by some that it will be unlikely to have another federal infusion of this magnitude in a trading lifetime and ultimately it will play well for a great many stocks. Warren Buffett's Goldman purchase is mostly about making money but the PR of it does cause other traders to think about their own timing.

Those actively banging it out these days, this is as tough as trading gets. All is in front of you, choppy trade quickly consumed by a move on breaking news in a direction to be quickly reversed. And since the bears have now played every doomsday card, the action from here will either confirm or leave an opening for smoked bulls.

Waiting For Whatever

Well, if the market will not stabilize until the passage of the bailout package, then the longs may have some down to endure. It is clear that Congress has some reservations about a request coming from an administration which does not have an attractive record when it comes to correctly interpreting pertinent information. What is more concerning for the market may be that, whether or not the bill is passed, how much de-leveraging will continue to appear in the form of selling in the stock markets. If in fact stocks, at current levels, are in essence cheap and are being subsidized in price under the proposed federal bailout, then a major pricing rally is about to begin. If however there is a significant readjustment occurring in values which must match up with falling real estate values, then exactly where the bottom may be vexing.

The bailout is such a large target as not to be missed by the participants who price or attempt to establish a value area for a given traded contract, stock, or option. So far, the price action has been horrible. Markets many times, not always, reflect their closing price action. Many traders make a living on closes. This market does not close like a bull, yet. Last Thursday and Friday had the makings of that type of action but that has faded. This market cannot sit here at these lower levels much longer without becoming a bear raid victim.

Confidence Game

Moderate down volume yesterday for the SP500 and NQ100, while the DJIA put in a pathetic
low volume break. Everyone waiting to see if once the bailout bill is passed, whether or not the market will hold. Bernanke and Paulson pleading for quick passage but they seem not sure of the immediate outcome. A dismal close into new lows this week would definitely cast a dark shadow over this fall's trading. But more than enough has been done to help the financial industry, now the rest is a confidence game.

Leverage Lost

As stock markets start the week they will begin to see the execution of various strategies conceived from brain storming sessions among industry leaders and their traders over the last few days in reaction to the new rules and limits for the markets. The trading industry which leveraged itself to new heights over the last eight years in order to increase profit margins will now have to adjust to a world of shrinking leverage ratios and the eventual overall flattening of volatility. Many hedge fund's models are now useless and will be under pressure to raise funds if they do not have risk sensitive strategies with high returns. Good luck.

In the long run, this large intervention will act much like large farm subsidies behave on commodity prices, it will support stock prices, especially those of well run companies, and it will flatten volatility. The peaks and valleys of stock prices will have long distances between them.

Machine Heads North

Kicking the bull when he is down has resulted in an unprecedented attack on the bears in order to protect the asset classes. The stupid down mentioned in a previous post had become a fear spiral, knocking out the legs of any confidence in the markets which is essential for the orderly daily conduct of business, bull or bear. Measures being taken by the Fed, Treasury, and Congress will certainly be overkill but that is the game played when constituents are to be pleased. There will be a tremendous amount of scrambling and sorting through stock values from these low levels which will lead to buy and or cover first and ask about value later as a result of this historic intervention by the G.

Interventions

Central Bank or Banks injections of liquidity a stimulant for the bull in early trade. All efforts to stem the tide of share losses have failed to this point and the market will believe the tide has turned when they see a string of major upside days with high volume.

Down Pays

Markets continue under pressure the morning after the Fed's intervention of AIG. Lack of leadership among any sector has the early action testing the lows for the move to see if there is another leg lower. Various attempts to limit downside action such as restrictions on naked short selling will be supposedly enforced by the SEC.

Down still pays at the trading operations of the world and until repeated downside attempts are repelled this will not change.

No Fed Cut

Fed chose not to give in on a rate reduction as they finally put some reason into the mix which to this point has been driven by downsiders in every hope to ride the train lower. Panic Inc. is the trade fad among an industry known for capitalizing on what pays, such as sub-prime. Without down, a good portion of the easy opportunities will disappear as the market will have to short cover, price, and figure out what values are available.

Cable Business News

Battles are everywhere in the stock indexes with a bear assault being waged on the value of the financial industry. The goofy cable business coverage may have to start hoping to catch someone jumping out of a window to increase their ratings since no one will be watching them much if the markets keep going down. These markets were stupid up for years with the same TV commentators telling everyone about the shortage of stock in the world and how low interest rates presented economies with little resistance. Now the same morons are in hysterics and helping to foster stupid down with a nothing will help view of every troubled industry. Some one slap these idiots.

The great business class of Wall Street and their voting supporters have created a piece of work, while unfortunate, is totally manageable. So now, whether we like it or not, we are a part of the swings of world markets and are going to have to price and speculate on the value of a piles of debts and assets with a huge trading machine created as a result of the evolution of financial connectivity. It is interesting that the same TV talent whose insight into the financial bungling of several large brokerage firms and their troubled counterparts have provided little insight into the sheer size of the world economy and what a small percentage of world wealth is actually represented in these unfortunate events. Re-price and move on.

Markets and Dead Rats

The DJIA, SP500, and NQ100 fought all week against the negative reflexes of the deafening news cycle of impending doom for LEH and others infected with the mortgage blight. As of this posting, the Fed and Treasury are meeting with the leaders of Wall Street to find a solution to LEH before the Asian markets open Sunday U.S. time. Apparently FET, (Fed and Treasury), have told the banking and brokerage mongols they need to figure this thing out amongst themselves without the guarantees given in the Bear Stearns deal. This will not stop the finance boys from trying to squeeze another trade out of the FET, but it does seem to be a motivator considering they all in some way are sharing the same rope.

Current market conditions are tough for all types of traders and there are even some mixed reports about the success of the current trading cult culture vehicle, high frequency trading. High frequency has become in it's own life cycle a refuge of the talentless and those unable to calculate risk. Plus, the additional advantage of the transactional boost made possible because of monopolies held by clearing entities such as the CME Group which are able to charge exorbitantly high fees and commissions for services that cost virtually nothing to facilitate. While those costs to trade charged to large volume operations are mere pennies per trade, the profit margin and resulting volume racing has provided massive revenue to the CME Group where more than 75% of income goes to the bottom line. This added volume has done nothing to help the price discovery process but has certainly exacerbated the daily price swings.

For those of us with a successful track records of designing low frequency and high alpha programs, there is a trading perspective which allows a bit more clarity to the overall trading environment. Just as the current hurricane forecasts have been more media hype than devastating reality, so the play on investors fears have been an opportunity for money center banks, hedge funds, and other players to position themselves into the nation's pockets as they bargain from an insiders position.

There is an old response on the trading floor when reacting to another trader's bid or offer when a market is made to another trader; 'I'd rather eat a dead rat!' The FET should make these insiders eat some dead rat and let the markets move on.

Dressing Up or Down

Indexes fighting to leave the consolidation behind after a Monday rally/reversal and a Thursday break/reversal. The fate of LEH and other financial stock concerns probably not as much of a factor in the market as the cable business shows present but traders have to deal with all the elements playing in the markets. Index prices would look much better with strong buying on the closes over several sessions, something they have been unable to do for some time.

Bear Play

Indexes feeding on the known negatives facing the financials especially LEH. This is a bear play that feeds on itself and where the money is being made by professionals in the market. Upside relief has faded on each recent attempt so the end of the spiral lower will come from a downside reversal on record volume.

Indexes Today

Slippery slope these days as markets cannot extend rallies. Indexes begin today with little new information but are sure to once again fly around in an extended range. Key areas to attain are the same as previous post. Rational to sell down at these levels still tough.

Key Areas For DJIA, SP500, NQ100

DJIA, SP500, and NQ100 all struggling to follow up on yesterdays action. While volume is less than yesterday, the markets need to get through some key areas on the upside to prevail. The DJIA needs to close over 11632, the SP500 over 1271.5, and the NQ100, the weakest link needs to climb over yesterday's high of 1815.25.

Underwriting Freddie and Fannie

The issue regarding the G's underwriting of all of Fannie and Freddie is too simple. Housing is where 'everyman' lives and to stand by and let the trade vultures create a run on the assets because of a perception there is nothing that can be done is ludicrous. Those who talk about the 'moral hazard' created by government bale outs are the same people who believe there are truly free markets and the Cubs can actually win the World Series. Forget it. We all live in the same house although it may be a smaller house these days. Wall Street always get confused about the difference between free markets and the freedom to make markets. The former is what you talk about when you wave the flag and vote the straight business line. The latter leads to massive losses as a result of faulty trade strategies and you need the G to rescue you.

Intervention Rally

The G has stepped in to guarantee the paper of Freddie and Fannie whatever the cost. While expected if the two mortgage giants could not stabilize, the action along with the other previous interventions amount to financial underwriting without peer. It will create a bizarre spread between the housing market, which will clearly begin recovery now, and interest rates, which will undoubtedly begin a rate climb for a variety of stimulative reasons primarily as overall demand for capital will climb in a environment where restrictive qualifications matter.

As to what this intervention means for stocks will be told by the trading action this week. The professionals are short especially in tech where a value play has created perceived downside opportunities in anything acting better than the rest of the market. More importantly, like all market traders, they do what is working and down has been working better than up. So if this market is turning, the brain function to turn down to up will bring more than a hefty rally, it will bring back the bull.

Motivational Selling

Indexes defending the lower part of the range this morning with a slightly but not totally unanticipated bearish unemployment number. Goldman cutting Merrill to a sell and other financial stock headaches keep a spin on the downside. No one is riding to the rescue so far as causalities now appear to be coming to those who bought the first break in debt and stocks. Bill Gross of PIMCO cries for more intervention as he lugs large positions of bad paper he figured would have been completely covered by the G by now. He and others are caught in a value play where main street is finding professional trade desks more than willing to sacrifice the brokerage side of the industry to the downside profits and potential bargains of much lower market prices. Whether the bears can deliver new lows will require a new set of tank treads as now the technical price values have reached levels where motivational short side reasoning gets tougher.

Negatives

Action continues to be bad as of mid session today. Bill Gross's comments about the potential "financial tsunami" if the Fed does not take on more of the bad paper is certainly the kind of data stimulating negative sentiment. The Republican Convention last night did not inspire any great hope that either Pres or VP can pass an economics class regardless of how the VP delivers a speech. The indexes are extremely oversold but are nervous about tomorrow's employment data.

Tech Is Wrecking

Indexes cannot get out of their own way given the action yesterday and so far today. Tech is heavy and dragging the others along with weak price action. The overall action is in danger of setting the table for a real run to the lows as election data also adds to the prospects of a Democratic victory in November. Historically the Democrats have managed the economy much better the Republicans but the professionals on the hedge side would not be disappointed in any scare that would enable bargain hunting later this fall.

Rally/More Data

Early strength today trying to establish the lower levels as tested support. NQ100 still needs to lead the other indexes higher and will have to have a couple of big days to get there from here. Volume should pick-up now that September has arrived but would a disappointment to the bulls if it does not. Obviously a big week for data so all bull-side evidence would go a long way in putting the lows behind.