TARP's Ever Changing Rules Create Market Confusion

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (November 17th):

...[A]s repeatedly noted in these missives following the Bear Stearns (BSC) bailout, a similar series of hastily conceived reactive, rather than thoughtfully conceived proactive, “plans” have been enacted only to subsequently find that they should have been constructed better. That happened again last week as Treasury Secretary Hank Paulson abandoned the Treasury’s plan/scheme to buy toxic assets under the original TARP legislation in lieu of “capital injections.”

Ladies and gentlemen, this is a stunning reversal by “stammerin’ Hank,” who made “toxic asset” purchases the centerpiece of the $700 billion Troubled Asset Relief Program [TARP]. His switch-and-bait tactics caused “howls” from Congress about how ANYONE can be rational when the “powers that be” change the rules of the game at whim?!

Change the rules indeed, for eliminating the short-sale “uptick rule” was one of the dumbest decisions I have seen in 38 years in this business. Of course it would not have been so bad if “they” would have strictly enforced the no “naked shorts” provision; but alas, for while there was much lip-service paid to this dirty little secret of Wall Street, not much has been done to correct it. Adding insult to injury, overnight “they” eliminated the ability of participants to sell-short nearly 800 different companies’ shares, some of which were NOT even financials; and then there was the $140 billion tax break for financials that “they” snuck by under the TARP legislation.

Adding to the manipulative environment was the billions of dollars worth of pork-barrel spending, as well as “earmarks,” which also missed the radar screen. Or how about this game changer – according to The Wall Street Journal, “The New York Stock Exchange has begun allowing floor traders known as specialists to place orders for 30 minutes after the market closes in an unprecedented effort to deal with the wild swings in stock prices that have been occurring in the last minutes of trading.” Blatantly, this “game changer” is designed to manipulate stocks to show higher closing prices. No wonder the volatility has increased as participants are uncertain what “rules of the game” will show up tomorrow.

The ever changing rules have left retail investors disgusted, and liquidating positions, the hedge funds have been eviscerated, having lost half of their assets and likely to lose more, the mutual funds are getting net redemption, which leaves the buyers of last resort only those folks with “permanent capital,” namely pension funds and Warren Buffett.

No wonder the volatility is legend; and, last week was no exception as we lost 660 points over the first three sessions of the week, rallied 552 points on Thursday in what looked like a one-day upside reversal, only to give much of Thursday’s triumph back in Friday’s last hour of trading where the senior index shed 449 points in just 45 minutes. While much of the final hour machinations were attributed to rumors that Congress was not going to bail out Detroit, the late-day dive was pretty disconcerting.

Still, we are sticking with the view that October 10th represented the capitulation price lows when of the 3130 stocks that traded on the NYSE, an unbelievable 2901 of them made new yearly lows combined with 16-to-1 downside over upside volume. We also opined that the psychological lows were made on October 24th. That said, we have never given up on a full downside retest of the October 10th lows, which is why we have tended to use a hedging strategy for trading and investment positions. As often stated, in downside retests 60% of the time the previous lows hold; the 40% of the time they don’t stocks go lower, but not by much.

Obviously, we thought that was the case last Thursday when the S&P 500 (SPX/873.29) breeched its October 10th intraday low of 839.80 and went lower, but not by much. Reinforcing that view was the fact that the DJIA (8497.31) did NOT breech its respective October 10th intraday low of 7882.51, setting-up the potential for a huge downside non-confirmation. Moreover, of the 3268 stocks that traded on the NYSE, only 776 of them made new yearly lows in Thursday’s session. Interestingly, the DJIA/SPX’s pricing action since October 10th has traced out a spread triple-bottom in the charts.

Often a strong move “up” from a third downside test, like we saw last Thursday, tends to develop into a strong rally as participants are caught in a “bear trap.” Stockcharts.com defines “bear trap” as, “A situation that occurs when prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal, thus ‘trapping’ the bears that acted on the signal with losses. A bear trap is another form of whipsaw.” Hopefully, that is what we experienced last week. This week should resolve that question.

Disclosure: None

Comments

[axelrod608:]

I stopped trading the financials after the government stepped in and distorted all the careful analysis that I paid experts for, thus losing a lot of money. It was as though the government was taking tax dollars and using them to steal from me and other investors who base their trades on concrete information.

Now, every time I even hear a hint that the government is looking at a company or a sector, I pull my investment money out because I know others - insiders - will make the money because they get the info first.

Over the years I've made a bundle shorting and buying puts on GM. Now, I wouldn't put a penny of my money there because I know the government will eventually do something to radically alter the circumstances and make the stock pop or drop, and I KNOW insiders will make a ton of money whileoutsiders will get handed their lunch.

Government meddling in the markets is inherently unfair to individual traders.

2008 Nov 18 10:54 AM

[allenj:]

The SEC are criminally negligent, bumbling fools. Besides being responsible for the uptick rule repeal and inaction on naked shorting/rumor mongering, they are responsible for Mark-to-Armageddon accounting and the rating agencies. What a joke.

2008 Nov 20 03:08 AM