Options Trader: Friday Outlook

Now the SEC bans short selling in the financials!

This is, of course, fantastic for the sector and the markets will fly but let’s keep in mind that a large part of that is due to the fact that it is now illegal to make money on a stock going down.  That means we can’t trust the upward movement we’re seeing - it doesn’t mean we can’t enjoy it, just that we can’t trust it . Rather than have a nice, slow turnaround in the financial sector based on improving fundamentals (and even those are coming courtesy of the largest government intervention in the history of the markets) and a restoration of trust, we have a short squeeze rally that’s going to to give us 10 days in which 799 financial stocks can only be bought, then sold at a profit.  I think we may get a pretty good idea of max values much sooner than that when the buyers have enough, but what a ride it’s likely to be and what a catastrophe we may be leading up to when the rule change expires on October 2nd.

Barry Ritholz, admittedly a bear himself, is beyond livid and has a right to be.  He says the US will suffer a loss of market integrity, this is blatant market manipulation aimed to influence the elections in what is now Banana Republic USA, and that this massive surge will create a huge "air pocket" that will lead us to a much larger crash.  

Trader mike had a quote from Mac, who was just a little more angry than Barry:

After hearing that the SEC has decided to ban short selling I have really hit my limit. It doesn’t matter anymore. Nothing matters in this market. I might as well throw my computer out the window, along with my charting software. The government has completely taken over our stock market, and if you thought the volatility and manipulation was bad before, just wait for what you are about to see. I guess we haven’t just converted to socialism, but instead have moved all the way to a communist government. Way to go guys! Keep up the great work!  Honestly, this type of action makes me just want to take all of my money out of my account and just not play this game any longer. It is so rigged it is unbelievable.

I have been giving similar rants on the other side for months as I was blaming the short sellers/hyenas for wrecking the financials and causing the crisis in the first place so it all evens out in the end, I suppose (although not for those of us who were blown out at the forced bottom) but what the government is doing now is just as wrong as what the hyenas have been doing all year and it’s too little, too late for people who lost their life savings and jobs as BSC, LEH, FRE, FNM, AIG and many others were allowed to die before GS’s stock fell below $100 and finally spurred Paulson to take some action.  And what is that action?  Taking all the bad debts off the books of GS and company and sticking the taxpayers with the bill.  This is truly insane, people, enjoy the rally but at what price victory?

Markets are marching on to victorious days all over the world, led, of course, by stunning gains in the financial sector (what’s left of it).  The Nikkei jumped 431 points (3.8%) but that was nothing compared to the 9.6%, 1,695-point run in the Hang Seng - even more than we were expecting from our observation of the FXI yesterday as they had a very strong finish.  Almost ever stock on the Shanghai Stock Exchange went 10% limit up and the index averaged up 9.46% for the day.  All three of the banks we mentioned in yesterday’s morning post gained 10% and in Hong Kong, where there are no such limits, China Construction Bank surged 15.7%, ICBC rose 16.2% and Bank of China picked up 16.7%.

Over in Europe, the FTSE had one mother of a short squeeze this morning and that index hit the 5% rule at the bell and is tapping at the 7.5% line (5,250) ahead of the US open.  The DAX hit the 5% rule at lunchtime and the  CAC is also through 5%, up about 6.5% at 7:30 am.  Even Russia is flying with the MICEX up 25.4% after the markets were suspended for 2 days, a move that turns out to have been pretty smart by the Russian government.  The RSX is an ETF that tracks the Russian market and has suffered a precipitous drop, they are a risky play but even the pre-market gains today will barely get them to 50% off the highs of 59.  European Central banks put another $90Bn into money markets today, lots of fuel for the market fire.

We’ll see if we can beat that over here in the US as the hits just keep on coming and NOW (7:30) the US government rolls out a plan to guarantee money market funds.  Now it’s Barry’s turn to become a conspiracy theorist as he points to what may have been a bear raid staged on our financials based in London and Dubai and that a possible explanation of these rule changes is to turn the tables on what he thinks may have been an act of financial terrorism aimed at the US in the past few weeks.

Of course GS, MS and JPM will be coming out of this as huge winners, those are great long-term plays as are the banks like C and BAC.  The XLF index should have quite a ways to go up while the KBE is likely to gap up so fast it won’t be worth playing.  KIE (insurance) will be slow to recover and may be playable for a long-term recovery while PGF is a preferred financial ETF that should have room to run.  SMH (Semis) can still be played as a dark-horse for a long-term recovery, this is an index that has been pushed way down and may outperform the QQQQs on the way back up.

I’m very concerned about oil rising.  None of the governments $1Tn spending spree this week has gone to the actual homeowners who are unable to pay their mortgages and it would be a terrible time for oil and food inflation to put an attiditional squeeze on the homeowners.  Gold is falling sharply and that’s a good sign but oil is back over $100 pre-market and we can only hope it doesn’t stick.

Our pals at WM look to be a big winner and AIG is back up at $4 ahead of the bell.  WM may be the best bank to play as there are multiple bidders now circling and the government guarantees make their assets all the more appealing.  WB is up 100% off yesterday’s low and Citi (C) may set a record for biggest single day gain in market share for a US corporation if GE (GE) doesn’t beat them to it.  BofA (BAC) will also be in the running on that game and it’s going to be one hell of a finish on this options expiration day.

Comments

[junkyarddog:]

These are crazy times, even worse than those of South America in the 80's. Remember their inflation of over 2,000% a year? Back there their goverment exausted all intervention options; all possible interventionists ideas ever written in all economic encyclopedias of the world. Of course, nothing worked for them, even changing their currency name several times AND declaring martial laws to freeze prices! What worked for them, starting in the 90’s (specifically Brazil)? It’s simple: their government stopped spending and printing money.

These are indeed scary and desperate times. All because of greed, out of control spending, and addiction to gambling (derivatives anyone?).

Thanks again for writing your articles free of charge to us, and shedding some light amidst such insane times.

2008 Sep 19 10:05 AM

[Wefwef:]

Elaine Meinel Supkins' financial illustrations really are top notch! I'm a huge fan.

2008 Sep 19 10:21 AM

[pdd:]

Even Russia is flying with the MICEX up 25.4% after the markets were suspended for 2 days, a move that turns out to have been pretty smart by the Russian government.

WHAT A A--HOLE STATEMENT.

2008 Sep 19 10:54 AM

[icandoitdon:]

" I have been giving similar rants on the other side for months as I was blaming the short sellers/hyenas for wrecking the financials and causing the crisis in the first place."

how ignorant.

2008 Sep 19 11:11 AM

[ihturs:]

Phil,
Haven't read the details of this RTC plan.... but to me its looking like Enron model... move the losses to another special purpose vehicle's (SPV) balance sheet. That way the banks look better. I hope for $1 movement from Banks bad debts to this new vehicle.... they will destrip the bank of its assets (in some shape....). It cannot be free lunch at the expense of the taxpayers.

2008 Sep 19 11:17 AM

[blackbody:]

I've always felt that pre-condition for market melt down was a frenzied market melt up. I think we are seeing that market melt up today (did you zion hit $131?). If banning short sales would prop up the market, then Chinese market would not ever go down. However we have seen a melt down in Chinese market. I suspect, without the buyers of last resort, either the FED and treasury have to buy the market or there will be a melt down of biblical proportion in not too distant future.

2008 Sep 19 11:55 AM

[Stez:]

Ther will be a ban on short selling till January or beyond.
There is no way they will allow it to come back in October.

Putting all the bad debt on the taxpayer is a fantastic way to help China
gain financial pre-eminance even if their economy is more dodgy than the US.

The only thing one can say is that when JP Morgan went on his huge buying spree and the short sellers were nobbled financial stability was regained.

The best trade in this case is to short that result occurring again But now I can't.

2008 Sep 19 12:44 PM

[icandoitdon:]

the ban applies to financial stocks only...not nonfinancials. this ban on short sales could last a long time. at the earliest it will be lifted only after goldman and morgan stanley fina merger partners. but if the market continues to decline after the dust on this bailout plan settles, look for a ban on short sales of all stocks.

take nothing for granted. they have proven that they will do anything...anything...... bail out wall street from it's own greed and stupidity.

2008 Sep 19 08:35 PM

[David Lentz:]

The thing that is most worrisome is that the powers-that-be are seemingly running helter-skelter, pulling one scheme after another out of ... in order to deal with the crisis of the moment.

I suspect that a lot of these "fixes" are simply triggering the next crisis.

In the end, we will be unable to avoid the consequences of decades of fraud and abuse, mainly in the mortgage markets, but also in the broker-dealer community, the banks, and who knows where else.

I suspect that the bottom lies ahead. There is no value in this market, only chaos.

2008 Sep 20 11:20 AM

[OKMONEY:]

As we used to say in the infantry in Viet Nam: " It don't mean nothin". There will be good times and bad times in the market. The trick is to stay alive to trade another day. I resent being forced to be a "day trader" [ have nothing against day traders], but how else can I preserve my capital without a constant watch on Washington.

2008 Sep 20 02:02 PM

[34CD77:]

I read with great interest many of these comments, some are by frenzied investors, some by knowlegable investors.
The above comment in Phillips interesting piece about the short sale rule that makes it illegal to make money when stocks go down. The old fashioned way was to sell the stock. When sellers out number buyers, the stock goes down. Then buy it back. Short selling the way it used to be before the extreme amount of cash was paid by the hedge funds to have the up-tick rule done away with. That added to the SEC that refused to make these same groups borrow stock to short , before shorting. Here is my picture. HF A says to HF B ,lets short the hell out of LEH today starting at 2:30. HF A and HF B each short 1MM shares at 2:30. They don't own it nor did they borrow it. !0-15 days later or sooner they buy it back. That is phantom stock. Of corse the reality is that when the public sees it , they panic and the shock goes lower. Each days this is done over and over again. ie LEH 40 to 3 .
The SEC is at fault. They must be replaced.
And in parting, for the government to perhaps spend 500B now is peanuts compared to what the total cost would have been if they hadn't!

2008 Sep 20 06:52 PM

[jim collins:]

Zion hitting 110 was a misprint. Had to be.

2008 Sep 20 06:58 PM

[jim collins:]

Philip Thanks as always for your insight. You have your haters as always but as my girl Christine says "haters make me famous".

2008 Sep 20 06:59 PM

[34CD77:]

Come on guys and Phillip. To say that it is illegal to make money on a stock going down is rediculous. Sell it and buy it back in the future. Or you are speaking about HF1 and HF2 saying" Lets short at 2:30 1MM shares each. They don't own it or they haven't bothered to borrow it since the SEC doesn"t enforce the rules. This isn't "making money when the stock goes down" this is shear driving the price down. Of course the big money paid whom ever in Washington to do away with the up-tick rule. When are the hedge funds going to have some rules.
Its time.

2008 Sep 20 07:03 PM

[icandoitdon:]

34CD77:

i don't want to put words in your mouth but i infer from your stated views that you think LEH BSC, AIG, and perhaps CFC and WM, were fundamentally sound businesses, driven to bankruptcy (or near bankruptcy) by hedge fund shorting. if you believe this you must also believe that the u.s. government has been suckered by a bunch of hedge funds, since they're needlessly spending $1trillion or so to bail out these sound business. call me stupid but thats pretty hard to swallow.

shorting is not the root of the problem here. the problem is overleveraged investment banks and bad credit. shorts forced the issue to the surface sooner than investors or the government wanted to recognize it.

2008 Sep 20 11:15 PM

[User 145883:]

Taxpayers own stocks, to the tune of 100,000,000 million Americans are invested in the market. Use your friggin heads. The govt had to intervene. Ya think a taxpayer is different than an individual who own stocks? Gimme a break, people.

2008 Sep 22 03:08 PM