Now that Fan-Fred has been put to sleep, we must now assess the impact upon the stock market. Futures begin trading at 6pm eastern time, but until then lets looks for clues in recent action:
Last week, there was a “flight to quality” as money fled stocks and poured into treasuries. That ended at 11:30am Friday. If you look at an intra-day chart of the 10-year treasury note, you will see a dramatic reversal. And that was the same moment that the stock market reversed. So, it looks like somebody big new something about the Fan-Fred deal at that time.
So, Phase 1 of the Fan-Fred short-squeeze rally began at 11:30am on Friday, and then accelerated during Phase 2 in the after-market when the Wall Street Journal broke the news. Of course, many traders didn’t realize what was happening during the day Friday, and weren’t paying attention after the close, so it stands to reason that there should be more short-squeezing to come.
In fact, on “Fast Money” after the close Friday, Karen Finerman, who is short banks, looked like she wanted to vomit. All the other traders who are short banks and homebuilders probably feel the same way. I would expect many traders to take long positions in the futures today to try and hedge their positions. So that would be Phase 3 of the squeeze, and Phase 4 would be after the open Monday morning when the short positions get barfed up.
How long will the rally last? The short answer is: not long. We are in a vicious global recession that is still intensifying. Many big funds are breathing a sigh of relief right now that they will be able to unload a lot of stock into this rally. Do you think that they are buying Paulson’s new catch phrase: “turning the corner on housing?” I don’t.
The end of the July-August bear-market rally had nothing to do with housing. It was Dell saying that global IT spending was grinding to halt that broke the rally. In case you don’t know, IT spending is a crucial economic category that was able to cause the 2000-2002 recession all by itself. Now, this new disaster is being added to the current real-estate disaster. And it ain’t going away just because some deck chairs were rearranged in Washington.
The big crack came on the first trading day of September. Once the big funds finished their month-end window dressing, they pulled their bids and the market went into free fall. At the same time that was happening, the price of oil was actually plunging as Hurricane Gustav approached the Gulf of Mexico.
As the energy sector was blowing up, other stocks fell also proving to traders that falling oil prices would no longer be a support for the stock market.
As the rush for the exits intensified, energy hedge funds saw the jobs report looming ahead on Friday. They knew they needed to be out before it hit, so the big crash occurred on Thursday.
This perfect storm of textbook bear-market action induced the flight to quality and money rushed into treasuries. That made it look like there was a financial panic going on, when in reality it was just a rush for the exits before the jobs report hit.
The surface-appearance of a financial panic caused Bill Gross to wet his pants, announce a buyer’s strike of Fan-Fred paper, and triggered the big bailout today.
In “Ho Hum, Another Bad Jobs Report,” Jim Cramer pooh-poohed the jobs report, and even tried to paint it as a postive because he thinks it gives the Fed cover to cut rates! Crazy!
Cramer also thinks that the hedge funds are done selling. That they had to get it all done before the fifth business day of the month to meet redemptions. So, his position is that it was just a little selling squall in hedge-fund land. That is simply denial.
When the first jobs-bomb blew up the March-to-May bear-market rally on June 6th, it took almost a month for the market to fall to the March low. This time, the drop from the rally highs around 1300 to the July low only took four days! This bear-market rally has been much weaker than the last one, and I don’t think that this Fan-Fred deal can revive it.
As the global economy continues to slow, the news flow will continue to be bad – even in housing and banking. Credit will remain tight, house prices will continue to fall, foreclosures will continue to increase, jobs will continue to be lost, etc. As hard as bulls-in-denial like Jim Cramer look for “the turn,” it will not be found.
The market hit a deep oversold level Friday morning, so a relief rally was likely in the cards anyway. However, I don’t believe that the market will rally as hard as it did off of the July low, the last time Hank Paulson saved the world. The crack came so quick last week that there wasn’t enough time for excessive short interest to build up. So, there is less fuel for this rally.
The financials and homebuilders may rally hard since the Fan-Fred deal affects them directly, but tech and energy? I don’t think so.
SPY closed Friday in the after-market session at $125.85, so we should expect the market to gap up to the bear-market rally breakdown level of 1265. Such a back-test of the breakdown level is not unusual. However, after the gap-up, additional short-covering should begin.
Could the market reach 1300? Perhaps, however by time it gets there it would be very overbought and due for a correction. In the mean time, more bad news is likely to hit, and I would look at such an event as a marvelous short-side entry point to ride down the rest of this bear.
While I believe that the big funds will sell this rally, they are smart traders, and I expect that they would hold back until the short-covering panic reached full-flower before leaning into it. They will likely use recent support areas to scale-in their selling: 1260, 1280, 1300.
And it’s not like the rally won’t have any headwinds. The euro (FXE) rallied after hours on Friday, and the dollar (UUP) fell. Now that the Treasury will be buying up huge amounts of bad paper, just like the Fed, overseas money may want to think twice about remaining in the USA. Also, a cessation of dividend payments on Fan-Fred preferred shares might trigger a wave of bank failures since many banks hold huge mounds of them and rely upon the dividends for a large chunk of income. Things could get exciting for the FDIC.
I have some QQQQ October puts. I will not be barfing them up. I have lots of cash, and I consider myself lucky to have another chance to deploy it short.
Note: For in-depth coverage of the Fan-Fred deal, Barry Ritholtz is on the case.
Note: If oil falls again as Hurricane Ike enters the Gulf of Mexico, be alert for another round of bloodletting in the energy sector.
whoa awesome writeup
“The financials and homebuilders may rally hard since the Fan-Fred deal affects them directly”
I hope so. Will go all-in SKF!!!
Good recap,
along the lines of more bad news, anyone know what is the collateral
damage to banks from the worthless preferreds, or do the banks
have these on book at book instead of market value so there will be
no recogititon of the losses
i want to know what about lehman saga are they dead again?
This is not good news for me. I’m short oil and shipping. The dollar will tank and markets will rally.
On vacation, not covering. I’m short till VIX hits 35 in October.
Treasury also extending credit to Federal Home Loan Banks.
Good luck gents, this will get very interesting and probably pretty nasty.
Matt, great analysis. this is exactly why i did not have much short exposure and why i was buying UYG and XLF calls. its too bad i sold out of both positions at 230 on Friday. After this announcement, i suspect a transaction will be announced with Lehman as well. there could be a very violent rally in the financials. i completely agree that this will be another pristine opportunity to sell short. i will be going short around 1300 on the s&p unless something tells me the bull has more steam in it. now, we have to figure out if this rally will be as strong as the bear stearns rally. good point about the level of short interest in the mkt. i will prob get back into my long financial positions as this squeeze will likely occur for at least a few days, however, if you look at a chart of the xlf over the last week or so, you will see that there was a lot of short covering or buying interest. i wonder how much more these shares will run?
Matt, watch yourself…. Goldman is out with a note late friday saying they don’t see evidence of a slowdown in china, it was just a note of caution to those who believe china is slowing to mid single digit growth rates. I will cover my shorts in commodities and tech and take profits in anything i’m long, I will ride out my core holdings and remain a light participant in all these markets. this thing could explode higher and not look back for 100 s&p points over the next week. just be careful with holding on to short positions as they can get away from you and make you have to take a loss bigger than any trader wants to take.
Tim/all…I’m having trouble understanding why the market should go up at all on this news of the govt backstopping fan/fred…
Tim, you muse about 100 s&p points, sheesh, that is 7 or 8 percent. Is the market that irrational ?
thanks…
Matt – Awesome writeup. I’m in the same boat – cash rich, and waiting for 1260, 80, 1300.
After – Every other govt. intervention has been met with positively, for whatever reason.
Holy shit!!! The futures are exploding. Luckily I’m 100% in cash since Friday. I will short like hell.
Dressguard, what are the future’s values right now?
Around +2% in Dow , Nasdaq, S&p 500.
is that 2% from the close or 2% from the afterhours #’s from Friday?
BTW.. what site do you go to to get futures values?
ino.com is one site
Futures trading is separate from the ‘normal’ trading . I can give you the precise numbers as of 6:09:
Dow: +1.9%
Nasdaq: +2.2%
S&P: +2.4%
I’m not using any site. It’s a terminal app I’m using.
With a slight delay you can just use Yahoo!
http://finance.yahoo.com/indices?e=futures
Looks like I’m in big trouble. I’m still short the S&P as well as financials via SKF.
Any advice out there on trading strategies?
There is some sort of internet problem here in Miami. AT&T doesn’t work at all, and my back-up ISP is running at a snail’s pace. I won’t be able to accomplish much when it takes 5-10 minutes to load a page.
Hey guys,
Busy weekend, huh?
So regular and preferred stockholders lose their dividend and take first loss. Bad news for them. Banks own preferred, right?
GSE bonds are explicitly guaranteed. This will lower the rates of GSE debt. This will basically lower everybody’s else’s lending rates as well (or increase margins if banks hold rates steady).
GSE’s will buy the MBS’s that they issued, but not MBS issued by others.
Am I missing anything?
http://quotes.ino.com/exchanges/futboard/current/
The opening gap will be filled – later or sooner… For spy and skf (36 bln writedowns handed out to the banks this weekend in exchange for better margins on credits they don’t want to hand-out as long as home prices decline. Uups, did that reverse today as well?)
Interesting times
Banks own a ton of the preferred of FRE/FNM but the treasury is going to cover their losses also. It is a bailout of ALL banks not just FRE/FNM. They are shoving all the worthless paper onto taxpayers.
Futures http://money.cnn.com/data/premarket/
Does Bill Gross run this country???
Jack,
It doesn’t look like preferred stock is covered. S&P seems to agree.
http://www.marketwatch.com/news/story/sp-cuts-freddie-fannie-stock/story.aspx?guid=%7B19B91193%2DAF4D%2D4A6A%2D8AEA%2DE8B4CBD51187%7D&dist=TNMostRead
What are you basing your opinion on?
Thanks
http://www.bloomberg.com/apps/news?pid=20601087&sid=aox5vlQmB32U&refer=home
Jack,
Quoting from the article you noted (4th paragraph):
The takeover is “unambiguously bad” for preferred shareholders who, along with holders of common stock, “will in all likelihood be wiped out,” Gimme Credit LLC analyst Kathleen Shanley said today in a statement. “The government opted not to sweeten the pill for bank holders of preferred stock,” in a move “likely to set a precedent for any future rescue transactions,” Shanley said.
Nikkei up 1.2 pct after Fannie, Freddie bailout
3% gold up oil up. hmm very very weird but we are in weird times
Nikkie up 2.6%
Excellent Matt.
WaMu CEO ousted
http://www.marketwatch.com/news/story/washington-mutual-forces-ceo-out–/story.aspx?guid={6121A591-2954-4A69-961C-022568F5EB4D}&dist=hplatest
K,
The US Govt will take any GSE losses past the shareholders:
more US debt ->
weaker USD ->
higher inflation ->
higher commodities ->
Here’s what I find really interesting: does anybody remember what started this rally on July 15?
GSE bailout
So are we rallying again on basically the same news?
U do you homework and come up with good ideas. The process starts to take shape in way u expected, THEN FCKIN HANK. This is the second time in three months that this COMMUNIST prick has screwed me. How can I trade in a market that pretends to be FREE when it is in fact controlled by the GOV.
Geez Topper maybe the dow will go up an addtional 350 points now
BPD- amen
: 10 regional banks with exposure to Freddie Mac and Fannie Mae preferred stock
Note: % represents holdings of FNM/FRE as a percentage of total tangible capital.
- Gateway Financial GBTS (34%)
- Midwest Banc MBHI (32%)
- Westamerica Bancorporation WABC (16%)
- Farmers Capital FFKT (14%)
- Sovereign Bancorp SOV (13%)
- Flushing Financial FFIC (12%)
- Valley National Bancorp VLY (10%)
- Pulaski Financial PULB (10%)
- Columbia Banking COLB (8%)
- Astoria Financial AF (7%)
K, LM and PZN also own a shitload.
i got that off a site which i now lost track off amont my countless tabs on freddie and fannie news.
dow up 263 at the moment. i would think we gap up and work on the way down as sales reports come out.
K which sales reports are you referring to?
Looks like a 6-8% rally in the indices before sanity returns
We may get a rally, but the bailout will be seen by foreign agency debt holders as an alarming sign of the state of the US economy. They get a bailout, but this is no more than the implied government guarantee they confidently expected; that it is necessary is a flashing red light.
This buys the financial system some time, but merely by shifting the cost onto the taxpayer, most of whom are also homeowners, and have nothing more to give. While this may hold forth the promise of lowered interest rates, the longer-term effect will be the opposite, as foreign buyers will question America’s creditworthiness. It’s perverse to see this as good for the US economy.
BPD: I’m with you on this one. Jumped on some SKF on Friday (I have a knack for timing)…that is getting dumped first thing in the morning. Going with some SPY calls to hopefully cancel out some of the loss.
I’m in, “Fool me once, shame on you. Fool me twice shame on me” (or is it, “can’t get fooled again”?) territory.
Here’s what struck me…we just had an unelected official more-or-less double our national debt without any sort of vote or debate. I especially liked the part where he said the next president and his guys can take care of this. I realize he wasn’t the grand orchestrator of this mess, but it pretty much seals his fate in history as being the biggest chicken shit cop-out in the world. This made my local news about ten minutes in and was a 20 second story. I have lost a lot of faith in the last year since I started trading…maybe I’ll have some good stories for the grand kids in the upcoming years.
PS – first post, but I’ve been following the blog for several months now. Excellent work and great comments.
I never thought I got another chance to buy SKF below $100. As it seems this day has come now.
Kailash,
well said… Here’s a fitting comment from an European banker: “The US Government must clearly think we are idiots … this could be case of 3% up but week down 10%”
As a sidenote in March OFHEO stated that F&F accounting now reflects reality so that they can lower capital requirements. And now they come back and figure that the capital statement is overly optimistic…
Another world-wide dumb ass rally initiated by the socialist American government!!! LOL
SKF down 10% in premarket ($100.60). Are the stupid ruling the world??? LOL
Gold only up 2.20 now. I’m surprised…On the other hand, why ever get surprised by these mkts ? argh. Maybe there are opportunities then, buy gold, add to shorts…wonder how low the VIX will get ? vix calls anyone ? too early, need coffee !
one day you boyz will see the light in the midst of all the darkness, the economy was not improving in early spring of 2003 but bombs away gave the all clear and sparked a rally that buried the bears…. 2004 looked like a roll-over, but out of nowhere… a post election relief rally buried the bears once again, things looked good until feb 05 when slowdown and worries of capital equipment order, US Auto’s came up, by September”recession was around the corner” not the case! 6 months later in late April early may gold collapsed and emerging markets sold off hard, techs made 2 year lows, the hedge fund i worked for was 200% short going into july of 2006…. housing market was starting to show signs of weakness. one of the greatest runs in the bull market developed in sept of 06 through jan 07 all of it through bad headlines, the party ended in june 07 when spreads blew out in credit markets, a couple months of the earliest of shorts getting squeezed led way to a major repricing of risk. over a year later…. not much seems good in the economy (but the economy never seems “good”) reality is its a matter of time, 6 months or a year from now, who knows… but bears always hang around too long
Sorry Pooch I was mistaken on the date. i was really sleepy last night. I guess nothing will stop the rally then lol
My DSL is working again, but I haven’t been able to analyze anything yet.
Go for it, Matt!!!
I hate being right and then getting screwed for it.
Nonetheless, this isn’t an easy-layup for the bulls. We may have already reached the day’s high. Wait and see, I guess.
The TRIN hit 6 at the open, and is still above 3. Somebody’s dumping a lot of stock onto this pop.
I wonder if this is one of those sell the news events…
Matt Q’s are up only ,28 thought they would be up around a buck today all though early yet this does look encouraging
Ameritrade site is down. You likin’ that Pooch?
wait for the mkt to pull back to key support areas and pull the trigger in increments on the buy side. anything with high short interest or financials will rally the entire week.
Matt,
If you start a ‘Monday Trading’ thread please let us know.
Folks,
The markets are going to close DOWN today. Book it!
QQQQ and SMH bringing up the rear, or perhaps leading the flop. Remember what I was saying on Friday about tech being the weakest sector?
We might as well keep this thread going for today.
Q’s briefly in the red…wow
This is like watching a freight train cross a creaky wooden bridge. It should make it, but…
Treasury rates spiked on the open and started dropping.
VIX dropped on the open and started rising
Crash, I’m on atrade and I’m still up.
Lehman now down.
What the hell does ‘red’ mean? You sound like Bush with his terror threat level coloring book.
How do we find a list of banks with their exposure to FNM and FRE stock? Those banks must be shorted.
Meredith Whitney lowered her estimates for Goldman, Lehman and Merrill.
Hey, what’s that? Everything is supposed to be fine now…
@crash: K listed them earlier – just scroll up
Paul,
Thanks much. I have 2 separate accounts at Ameritrade and tried to open each account in separate windows. I closed 1 down and the other is fine.
Thanks Yerk, K.
I’m trying to place orders everywhere. I’m a little out of control.
Headline in the Norwegian papers (market up 3.6%) is “Confidence in US may collapse”. China has been buying reams of agency debt and will now think twice. The bailout is a historic event that will have cascading effects for years.
Yerk,
Do you have links to the Whitney dowgrade(s)?
XLE and XLB are still the weak players. QQQQ is wobbling, too.
The VIX hasn’t changed much relative to today’s open, but I think there may be one more push up on SPY to get it oversold on the hourly. It is holding the 50 MA, 5 day MA, and R2 as support so far.
XLF and XHB I understand, since systematic risk has been greatly reduced at the least.
How does this help the consumer and retailers? I’m trying to figure that out, so I would appreciate other opinions on this.
sure: http://www.reuters.com/article/marketsNews/idESBNG12645820080908?rpc=44
The big boys will profit from the weekend. Lots of smokescreens to pour some billions into their pockets whilst playing valuation games with F&F. The smaller banks will suffer – lost their share value and are not in the insider game of a socialist banking system.
Matt:
I have the same TRIN numbers….they must be a mistake with the market surging upwards. Could they be correct?
Letting F&F fail is tantamount to defaulting on the national debt; the administration didn’t have a choice. Precisely for this reason it’s nothing but bad news.
Paul F,
Nothing has changed. Housing and earnings estimates are still a mess. The move today is a gift for the bears.
Personally, I have purchased a few PUTs and have a bunch of orders in the queue at lower levels in case the market moves higher, like its doing now.
WaMu getting crushed
Jim,
The TRIN makes sense. This is what happens when large funds “distribute” into a rally.
Also, the market is not actually surging. It has been drifting lower since the open. I believe the surge ended in the futures around 2:30am.
Matt
This reminds me of last Tuesday: huge opening and the bulls never saw the bus. I’m hoping for a replay.
I had to switch computers this morning and copy over my trading software. So, I didn’t make any trades until about an hour after the open. So far, I have bought a large slug of SDS, and added to my QQQQ puts. I will be holding those for a while.
Lord…look at the S&P fade
RUMOR THAT UAL HAS FILE FOR BANKRUPTCY CAUSED THE BIG DROP
filed
Well, a big gap up and now the Boyz let it drop. Bear Bait or Bull Trap. Looks like many are adding shorts. I also sold all my longs during the gap up and I’m watching the battle. The shorts are adding and this could help the bulls and add fuel to the fire if they can hold the line.
Staying flat for now…
Good luck to all and I’m ready for a trade when a can see a better edge.
NASDAQ come to Daddy
Qs looking weak. AAPLsauce anyone?
S&P is up, but so is the VIX….
Robo,
I agree: Bear Bait or Bull Trap. We’ll be moving this week
The market appears to be giving up the ghost.
However, I believe the bulls will prevail today for the simple reason if the markets close negative, it will be a huge psychological blow to the bulls, and it will be seen that the PPT can no longer “come to the rescue” as successfully as it has in the past. They are hurting already, however iwth the action of the Naz today.
Will be buying the dips very short term, but getting short at Matts levels later on.
Technically, the bailout constitutes a default. “Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default.”
Paul,
Yep, just luck being long today at the open. Closed my longs out as quick as I could, but I’m not ready to short this just yet. The crooks will try and get money from the Bulls and the Bears before they are done with the Fanny – Freddie news. It’s the biggest and best casino I have every played in and I don’t even have to leave home. It is looking like the biggest gap and crap I have ever seen, but anything can happen by the close.
I do have some long positions in my 401k’s.
SPX and XLF appear to be fading fast while XHB, XLP and XLY are holding their ground. But all this rescue does is ground an orderly market, not fix the default and foreclosure mess in Housing. Once that dawns do you guys get another shorting opportunity perhaps ? Ditto for different reasons on XLP and XLY – fantasies about consumer spending recovery. If rescuing Frannie don’t fix the markets….e.g. the “fade”….then what makes anybody think that consumer spending will recover ?
The Q’s are solidly below their July low, and may be paying a visit to their March low soon. The VXN is up almost triple the VIX.
Kailash,
is this validated? So are they going to bailout the CDS-market as well??
I always assumed that preventing the default-clause from happening would be one of the prime goals of this operation.
btw I’m expecting that they invent some level3ish non-sense to prevent the banks from taking losses on the f&f stocks.
Anyone have any explanation why the euro is down vs the dollar (FXE)?
From someone in on the 11am call”
More color on the 11 am CDS call. People are raising some interesting questions such as what will be deliverable and how to determine which one defaulted first (which is potentially relevant to tranche trades). No answers on this. Clearly they are at the very early stages of analyzing this.
Interestingly, today is also the Event Determination Date for Tembec so ISDA and the dealers are busy busy busy.
They were writing CDSs on senior debt, sub debt, and preferred. (FWIW they will be doing separate auctions for each of the senior and sub debt, no auction probable for preferred).
I was surprised that conservatorship constituted a bankruptcy credit event. I had not read the CDS definitions carefully enough, but, lo, it is in there. My guess is that the actions will settle with a fairly high price and whoever said earlier that this may be bad for some buyers of protection may be right
If the S&P fills its gap, it will be doing so while still overbought short-term. I’m thinking that a potential bounce from the gap would be weak.
“Shares of United Airlines lost nearly all their value Monday morning when a false rumor swept financial markets that the struggling carrier had filed for bankruptcy protection.”
Huge rally in the buck today.
Why the treasury taking on huge aditional liablilities should be considered buck bullish is beyond me.
I think the market (Dow) will stay positive to keep the fear at bay of a major selloff due to weakness on this “good news”. Maybe 11, 340, that magical bear market marker they have been pointing out the last month.
I will be adding SDS at 1,260 initially if it backs off from it although 1,264 is my preferred entry. But may not get back to either the way things aregoing.
Would one of you folks who are long this market (in any fashion) tell me why please?
@Crash: To make money!!!