Options Trader: Tuesday Outlook

Oh I love the smell of pullback in the morning.

We can blame UBS (UBS) for this one as Europe came back from a holiday weekend to find it already cut in half. UBS may not have been cut enough as the bank lost the $11Bn XOM found last week. Now we know what spurred last week’s coordinated Fed and ECB liquidity moves which I predicted on Friday. Like I always tell members, it’s not paranoia when they really are all conspiring to hide something!

On Friday I said: "No matter what, we are going to cover into the weekend, something is still wrong as the Fed just coordinated with the ECB to boost liquidity with our Fed boosting term loan availability for US banks to $150Bn (up 50%). That’s a lot of money to toss into the pot for no reason so I’m a little concerned that we’ll find out why on Monday morning, possibly another BSC-type blow up." This kept us well protected yesterday and puts us in great position for this morning’s drop.

We’ll see how far down this takes us and watch our levels (see last Night’s Big Chart review) but I’m encouraged that BlackRock (BLK) is immediately stepping in to grab $15Bn of UBS’s mortgage assets (a 33% discount on Alt-A and sub-prime loans) as the firm axes 1/2 of their investment banking staff. "We clearly see investors coming to the market, which we view in itself as some strong support for current price and valuation levels," UBS Chief Executive Marcel Rohner told a conference call. UBS says they will NOT be seeking fresh capital. At the end of March, the bank held $15.65 billion in subprime securities, roughly half of the year-end level. Alt-A securities were trimmed to $17.1 billion from $26.67 billion, and commercial real estate to $6.33 billion from $7.78 billion. A spokesman for UBS declined to update the figures to account for the BlackRock deal.

Fannie Mae (FNM) was no help on this side of the pond, losing $2.57 per $28 share vs. $0.81 expected by the 15 analysts who are paid to follow this company for a living. One could say it’s a big improvement over the Q4 loss of $3.80 per $35 share in January, but the $27Bn company (and falling) says they need to raise $6Bn and is cutting their dividend by 28%, so a test of $25 would be kind.

Bernanke has firmly joined my camp, along with Barney Frank of course, and is attempting to push the administration to giving aid directly to homeowners. In his speech at Columbia last night, Ben said: "When the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender.” He even had a scary Power Point presentation!

Frank has already put up a bill that would allow a borrower or loan servicer of an eligible loan to arrange a new loan with an FHA-approved lender, who would determine the size of a loan that the borrower could reasonably repay. If the current lender or mortgage holder agreed to a write-down of the debt to that level, the new FHA-lender will pay off the reduced loan and the government would effectively insure repayment. Our President, of course, is adamantly against helping people and has already threatened a veto. Without a way to extend homeowners the same ability to "write-down" loans as the administration is gleefully allowing the banks to do at will, then American families will continue to lose 7,000 homes a day to foreclosure. I guess they are simply just not "too big to fail."

More little people unlikely to be helped by Bush (who only managed to scrape together $700M last week to help out the 2Bn people on the planet who are starving to death as fuel costs and his oil for fuel program have doubled the cost of basic foods since last year) are the people of Myanmar, with 22,000 now declared dead from the cyclone. Why should we care? Because Myanmar’s number one export was rice, which is already spiraling out of control.

The Nikkei was closed again this morning and the rest of the Asian markets were pretty flat. Airline stocks took a nosedive in Hong Kong and Shanghai sold off as oil hit $120, causing everyone to worry about corporate profits. Deutsche Bank (DB) is not worried and is moving ahead with plans to take over 18 floors of the Hong Kong International Commerce Center, a move that will give them room to double their head count there. So the banks are still betting heavily on the Asian boom never ending - and we know how good they are at timing the markets!

Speaking of firms with questionable timing - Goldman Sachs (GS), the same guys who advised clients to BUYBUYBUY housing at the 2006 top, are still herding their sheep into oil. This week (as they have been hammering this for a month) analyst Arjun Murti (the "Super Spike" hero of 2005) has put out a report stating: "The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.” To be fair to Mr. Murti, this actual statement is nowhere near as definitive as Criminal Narrators Boosting Crude are making is sound, but it’s Tuesday so it must be time to pump oil as they pulled this exact same nonsense last week and we’ll be shorting oil again because we’ve seen this movie before.

Europe is off about a point on the combination of record oil prices and record bank losses with UBS off 6% this morning. Swiss Re (SWCEY.PK) also took a big sub-prime hit and warned of more to come, and the UK service sector ground to a halt with their version of the ISM at 50.4 with the business component at 45.1, the lowest level in 5 years. This is good for US as it means the BOE has a reason to cut and that Europe is as screwed up as we are. Our plan for the year is simply for US markets to suck LESS than Europe and Asia - so far so good!

We got good news for our NYSE Euronext (NYX) holdings as they came in better than expected and we are rewarded for risking them naked in the LTP (NOW we cover with the $70s!). I’ll do an earnings report this evening and kudos to FilmFan on his excellent Apple Manifesto (AAPL), a clear illustration of why this is one of our core holdings. I’m not expecting much out of the markets if oil doesn’t break, and we have the big ECB meeting on Thursday as the dollar hovers at 73 but can’t break the critical 73.5 mark it needs to get back to 76, which is what we need to send oil back to the low $100s.

Let’s be careful out there!

Comments

[tom1234]

it is not --IF-- BUT how far passed $300.00 per share is aapl going

[benisanidiot]

crude oil prices are being manipulated ... and the bloody authorities are not doing anything about it

how do you explain this constant run-up and the underlying volumes and big trades, and all the suspicious going-ons?

see below:

atimes.com/atimes/Glob......

news.yahoo.com/s/ap/20...

[Philip Davis]

I wish those links came out. Try using tinyurl.com to create a small link.