Caution

Vix Update

All Hands On Deck

What the Fed, the Treasury and the Obama Administration have attempted is to bridle the bucking bronco that has become our capital markets. Although the markets have been under pressure as of late - it has been a direct result of premeditated ambiguity by various government officials towards the savage beast herself.

Now mind you this type of intervention could not work in most market conditions - i.e this fall. There was far too much selling pressure to be overcome by information and rhetoric. It was man verses nature and we all know who wins that battle. Where we are currently sitting is in the doldrums of the storm. The ship is in tatters, the crew is demoralized and looking for answers and leadership. Mass psychology now becomes either the crews downfall or secret weapon to survival. It is up to their captain to suspend the aroma of certain death and inspire a path towards safety. They just need to believe in the option of survival.

Let's see if Geithner can earn our respect and lead us to safer waters. I still believe this is an engineered test of the November lows. Time is of the essence to many businesses models from annuity to insurance companies and I believe the Treasury felt compelled to "induce" a weaker market in the short term to allow for a healthier market in the long term. No sustainable returns would be possible without a test of the markets lows from November.

I am drinking the cool-aid on deck with the belief that the world is not going to hell in a handbasket. From my perspective, and ironically - there are far to many idiots on that side of the fence right now.

The Bulls Last Stand

Bottom Forming

BKX Update

12:00 For those who may have missed out on the low - we will in all likelihood retest those levels later in the day (post 3 PM). Tomorrow things should improve dramatically.

3:00 Looks like the retest was during the 2 PM trading hour.

Which Side Of The Mouth To Believe?

From the Financial Times today -

Bank nationalisation gains ground with Republicans

By Edward Luce and Krishna Guha
Published: February 17 2009 19:44 | Last updated: February 18 2009 01:07

Long regarded in the US as a folly of Europeans, nationalisation is gaining rapid acceptance among Washington opinion-formers – and not just with Alan Greenspan, former Federal Reserve chairman. Perhaps stranger still, many of those talking about nationalising banks are Republicans.

Lindsey Graham, the Republican senator for South Carolina, says that many of his colleagues, including John McCain, the defeated presidential candidate, agree with his view that nationalisation of some banks should be “on the table”.

Mr Graham says that people across the US accept his argument that it is untenable to keep throwing good money after bad into institutions such as Citigroup and Bank of America, which now have a lower net value than the amount of public funds they have received.

“You should not get caught up on a word [nationalisation],” he told the Financial Times in an interview. “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks [without gaining public control]. That’s what the Japanese did.”

Barack Obama, the president, who has tried to avoid panicking lawmakers and markets by entertaining the idea, has moved more towards what he calls the “Swedish model” – an approach backed strongly by Mr Graham. In the early 1990s Sweden nationalised its banking sector then auctioned banks having cleaned up balance sheets. “In limited circumstances the Swedish model makes sense for the US,” says Mr Graham.

Mr Obama last weekend made clear he was leaning more towards the Swedish model than to the piecemeal approach taken in Japan, which many would argue is the direction US public policy appears to be heading.

“They [the Japanese] sort of papered things over,” Mr Obama said. “They never really bit the bullet . . . and so you never got credit flowing the way it should have, and the bad assets in their system just corroded the economy for a long period of time.”

I would be weary of rhetoric and public discourse by government officials here. They may be setting the bear trap for the market on options expiration. This reminds me of September 2007 when Fed officials said one thing and sprang the trap on options expiration with "surprise" action. The market catapulted to new highs a few weeks later. Of course new highs are off the table - but I haven't given up on S&P 1000 before fresh lows.

From all angles this week smells like the scenario I have been expecting for some time. The administration holds a few powerful cards. Don't expect them to roll over and fall on their sword. Geithner knows how to play the market's game of bluff, empty rhetoric, ambiguity and trap doors. Too much depends on market stability here to deliver nationalization or tangible hints at it during a technically fragile trading environment. It would reintroduce systemic risk to the system at precisely the wrong time. Remember Lehman Brothers? Perhaps a few hundred points higher on the S&P would give the market cover to digest these enormous tasks- but not now - not during the retest. I do believe it would significantly reduce systemic risk in the long term - just not at this critical level of support.

Remember last week Obama had this to say about nationalization.

Obama: Nationalization "Wouldn't Make Sense"
By Zachary Roth - February 10, 2009, 6:57PM
In the wake of Tim Geithner's speech this morning, laying out the Treasury's plan, such as it is, for Bailout 3.0, most smart observers have concluded that the Obama administration has at least left the door open for a possible nationalization of failed banks at some point, if it decides circumstances warrant that step.

But in an interview with ABC News' Nighline, set to air tonight, the president seemed to all but rule out that idea. He told ABC:
[Sweden"] took over the banks, nationalized them, got rid of the bad assets, resold the banks and a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem -- Sweden had like five banks," he said, laughing. "We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

I think the last comment is closer to the truth for now. We shall see.

BKX Update

I believe we are making our way through another washout low in the financials. I would be a buyer of them after tomorrows open. I am expecting the BKX to fall by another 7 to 10% between then and now.

11:45 - Those looking for a daytrade with considerable meat may consider the FAZ around 57.50. I expect it to take off post 12:30 and go parabolic into the close. TIGHT STOPS ARE A MUST!

12:35 - Can't even take my own advice - sold at 58.85 for a modest gain. Can't trust this market on the short side. Too many things could blow that trade apart.

War Is Hell

For the last few weeks I have been feeling like a young infantry soldier that realizes only through the grizzly sights and acts of battle that the war so eager to be fought was far too horrific to witness, let alone desire. And just like in war there are far too many casualties to justify any semblance of righteousness for finding yourself on the "winning" side. Trust me, we will all pay reparations for this. There are statues of irony and sorrow in so many places that it is hard to imagine things ever resembling the normalcy many of us took for granted. I know things will improve and it will simply take the great revolver of time - but I am impatient. I am impatient in hearing those that feel the need to be righteous and lecture the oblivious, the ignorant or even the choir. I am impatient in those that feel the need to self-promote even in the face of such national and world crisis. I am impatient with human nature and all our inherent shortcomings. I am impatient with myself and all the irony of circumstance. But most of all I am impatient with the process - in realizing we have only started our collective journey down this broken road to our uncertain tomorrow.

"Cadets of the graduating class - Boys, I’ve been where you are now and I know just how you feel. It’s entirely natural that there should beat in the breast of every one of you a hope and desire that some day you can use the skill you have acquired here.

Suppress it! You don’t know the horrible aspects of war. I’ve been through two wars and I know. I’ve seen cities and homes in ashes. I’ve seen thousands of men lying on the ground, their dead faces looking up at the skies. I tell you, war is hell!" - General William Tecumseh Sherman addressing the graduating class of the Michigan Military Academy - 19 June 1879

FAZ Intraday Update

Bought @ 47 sold at 48.65. Didn't want to get caught in a "Breaking News" rip.

FAS Update

11:45 - I would exit here if you have been long. This could break below 7.40 in the coming hours.

Dow Theory Non-Confirmation

Since the inception of this bear market in October of 2007 the Dow Industrial Transportation Index has been one of the primary leading indicators for traders.

That fact still rings true - except it appears to be flashing a preliminary buy signal.

Since January the Transports have signaled a Dow Theory Non-Confirmation - meaning the Transports have made a new low, but the overall index has yet to confirm. The longer this signal transpires without confirmation, the more bullish it is for the markets. These are typically signals that indicate the markets are getting ready to change script and traders should prepare accordingly. Today the Transports flipped bullish in the P&F chart. Granted the P&F charts have been flipping all over the place in the past few months, but the Transports have primarily remained in a bearish posture - until today. There are some big ifs here - but if the Transports start galloping and the banks find a bid, you just may see some light in this otherwise damp and dark tunnel.

Stop Whining!

Man can you hear the whining around the trading pits tonight.

"Damn Obama sticking his nose in the markets. Socialism! How am I suppose to trade when they intervene every month!"

If you didn't see this coming or weren't prepared for a 3:30 news flash on a technical break day - you shouldn't be trading. Do you remember the Geithner announcement in November when we were sitting at the 2002 low? We aren't the only ones who read the charts. They know exactly where things stand and frankly they hold some serious cards at this point. Between the repeal of the uptick rule, the purposely ambiguous bank rescue plan to changes in mark-to-market accounting - get ready for some more whipsaw and stop your whining. There's no crying in baseball.

Perhaps these information catalysts will only have fleeting effects in supporting the markets - or perhaps they will turn the tide favorably away from these rocky shoals. At these levels with so much riding on the precarious technical framework of the market - you have to be prepared for it. Remember most technicians and elliot wave theorists were flabbergasted with the bull market that sprang from the 2002 lows. Greed seeps into bulls and bears alike and never discriminates.

Buy Financials?

I realize this is redundant charting since these two trading vehicles are inversely correlated - but for those that don't get it - here it is.

Tight stops are a must! These things can run away VERY very fast.

I like what I am seeing in the VIX and the YEN for a bounce. Tread carefully.

Precarious

It appears it just breached to the upside. Be careful for a snapback.

1:45 - I would sell it here at 47.20 if you picked it up below 45. It should come back to the lows by the close.

Obama's Telling Posture?

Here is a little verbiage from Obama last night on Nightline.

Obama: Nationalization "Wouldn't Make Sense"
By Zachary Roth - February 10, 2009, 6:57PM
In the wake of Tim Geithner's speech this morning, laying out the Treasury's plan, such as it is, for Bailout 3.0, most smart observers have concluded that the Obama administration has at least left the door open for a possible nationalization of failed banks at some point, if it decides circumstances warrant that step.

But in an interview with ABC News' Nighline, set to air tonight, the president seemed to all but rule out that idea. He told ABC:
[Sweden"] took over the banks, nationalized them, got rid of the bad assets, resold the banks and a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem -- Sweden had like five banks," he said, laughing. "We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the, the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.
True, Obama, like Geithner, has always seemed skeptical of nationalization. But his answer to ABC would appear to go further than he yet has in declaring that he'll avoid adopting any version of that approach.

Of course, things might look different once we get done with these "stress tests," and find out how many major banks are truly insolvent. But as of now, the president seems dead set against even short term nationalization.

At this point, with the Republic in ruins - take the hard road, it will lead to another term. His problem is in the Senate and the House and people like Dodd.

Poll shows Rell rates, Dodd down

BY PAUL HUGHES REPUBLICAN-AMERICAN

HARTFORD — New Quinnipiac University polls show a growing distrust of Sen. Christopher J. Dodd but soaring popularity for Gov. M. Jodi Rell.

The poll reported that 54 percent of state voters aren't satisfied with Dodd's explanation of sweetheart loans he got from a failed mortgage lender. Worse, 51 percent of voters aren't inclined to vote to re-elect Dodd should the Democratic senator choose to run next year.

"The numbers are bad news for Senator Dodd. He is in real trouble. Clearly, he is vulnerable," said Douglas Schwartz, director of the Quinnipiac University poll.

Republicans in Connecticut and Washington, D.C. also see vulnerability and sense Dodd's time may be up after 28 years in the U.S. Senate.

Christopher Healy, state chairman of the Republican Party, declared that new Quinnipiac poll shows Dodd is on "life support."

A spokesman said Dodd is preparing for a vigorous re-election campaign. The senator continues to enjoy strong support among Democrats in this Democrat-leaning state.

Dodd doesn't appear to have helped himself concerning controversial allegations that he received special rates from Countrywide Financial Corp. when he refinanced two home loans in 2003.

Schwartz said Dodd's poll numbers have been steadily sliding since the mortgage controversy broke last June. The senator's job approval rating dropped 10 percentage points in the last year to 41 percent in the Quinnipiac poll and his disapproval rating increased 20 percentage points.

Healy said several Republicans are considering challenging Dodd and some others have been mentioned as possible candidates.

Meanwhile, the Quinnipiac poll suggests Rell has ideally positioned herself politically a little more than 18 months before the next election for governor. She isn't saying what her election plans are yet, but Healy said he expects Rell will seek a second full term in 2010.

Rell received an approval rating of 75 percent one week after she delivered a grim budget message to lawmakers. Even Democrats approve of their Republican governor, 67 percent to 26 percent.

Welcome to trading and investing through Washington. The center of the capital universe has moved a few hundred miles south of NYC. God help us all.

Geithner's Telling Posture

Just a quick note - I think they are strongly considering a quasi nationalization plan sometime in the near future. Geithner provided very little details with the expected bank rescue plan. I believe the "stress test" component Geithner was talking about is the opening to the nationalization coup. Their mistake was in scheduling the rollout of that plan with the parallel track of the stimulus. First get the stimulus through - then get medieval on the banking system. They need Congress to get the stimulus through. Many senators and especially moderate Democrats and Republicans would be quite alarmed if some of their biggest business constituents in their respective districts were suddenly nationalized overnight. I think it could be coming though.

What If?

I realize this squares 180 degrees from what I posted a few days back - But hey, this is just my stream of consciousness - If I didn't wrestle with these broad macro concepts, where would that leave me?...Probably significantly richer and much better rested! I really am a behavioral economists trapped inside a trader. The jury is still out if they are on the same page...

Getting back to things - When would a broad based and bold bank nationalization plan be politically capable? When would it not be political suicide? Perhaps tomorrow?

In the last few days the Republicans in both the Senate and the House have been building and setting the traps for their next elections. Speeches and press conferences with allegations that the "Obama" stimulus plan will be the death blow to the economy are being made with great fervor and repetition. Let's face it, the Republicans hold really shitty cards. Cards so hollow they could easily cause the party to go bust in the next House elections. In the mean time their best alternative is card trickery and illusion. Their hope is that the economy in four years will still be as stagnant and perilous as it is today and they can point their finger all the way back to Obama's first days and say, "Ah ha! There's where it came off the rails - it was his liberal stimulus plan!" You can already hear it all over the conservative radio dial.

The reality is a broad and powerful bank nationalization plan would have the greatest chance at delivering another term for the president in four years. Although it would be INCREDIBLY contentious in the near term with VERY powerful people left out in the cold and stripped of their investments - the banks would be restored to solvency much quicker than the slow bleed we have been experiencing. And although Obama and much of the Democrats had very little to do with this financial tsunami - in two and four years the economy will most likely still be in dire straits if a piecemeal solution is delivered as the antidote. All the Republicans would need to do is cash in their phony chips for redemption. 

I have been shocked in the past month as to how far the BKX has fallen even with all of the Fed and Treasury interventions. Perhaps the charts were expressing that in January when the BKX fell completely out of bed - yet the overall market held its resolve. We shall see in the coming days. 

I'll leave you with this clip from Martin Wolf, chief economics commentator for The Financial Times. He thinks the administration would be too scarred to take the right medicine. I think he makes a descent case as to why they could choose it. It's radical - but in the long run the broad populist would have the greatest immediate benefit. The people who brought Obama to the White House would have their cure and many of the financial elite would be castrated and humbled. http://finance.yahoo.com/tech-ticker/article/172116/Part-II%3A-U.S.-Too-%22Politically-Frightened%22-to-Admit-Truth-About-Banks%2C-FTs-Wolf-Says

BKX Bull Trap?

This will resolve itself tomorrow.

BKX Intraday Update - Feb 5

NATIONALIZATION! NATIONALIZATION!

RUN FOR YOUR LIVES!!!!!!

It's anyones guess as to how far "they" (Obama) are going to let this fall. A Monday morning capitulation with a stampede rally would be textbook. This market has yet to capitulate on a Monday morning - It would be nice to see one.

1:50 - Well it appears the suspension of the mark-to-market accounting rules rumor has been swirling around this afternoon. The administration may be using that rumor to keep things from totally unraveling like they were this morning until they have all the details worked out. I would suspect that if we don't hear anything tangible soon - the market will give back most of the gains.

At this point the administration holds all the cards and is in the perfect spot to have a "controlled" test of the lows with a powerful countertrend rally. Remember it was the introduction of Geithner as Treasury Secretary in November that pulled the market out of the death spiral it was in.

Traders have a bad habit with complaining about market manipulation - but it is a fact of life in trading. It's best to be prepared for it, especially when it is being telegraphed from all sides.

As Tom Hanks says, "There's no crying in baseball!".

BKX Intraday Update

From what I am seeing, traders may get an opportunity to go long the financials sometime in the next two days. Between now and then expect more downside with another waterfall bottom.

Step Inside The Casino

In these precarious and financially desolate times, if you happen to have some money lying under the couch cushion or between the car seats - you may want to buy bank stocks rather than that lotto ticket or pull of the slot machine. The hysteria over a possible bank nationalization plan is reaching its fever pitch. The crescendo always hits before the scene change. The idea that the overall market would benefit from the complete dilution of common equity holders in the banking sector is delusional at best - and in many cases, if you look under the hood of the grim messenger relaying these tales - they are only being fashioned to propagate their own positions, either in the market or in the media.

I am willing to wager that the mark-to-market accounting rules will be amended by the end of next week. You will also most likely see some other game changing initiatives to recapitalize the banks and to secure the market. Should these changes take place, that sucking sound we have been hearing for the last six months will be replaced with a sonic boom and a mad rush to buy the stock market. The rally may be fleeting, but then again it may be the start of something else.

I realize our economy and dependency on the markets is vastly different than Japan in the early 90's, but we should at least acknowledge at this point in the crisis that Japan avoided a Depression! Sure it was tough, heck it's still tough for them - but they avoided an even worst scenario. If we strictly stick to dogma things will inevitably get much worse. We need not cut off our noses to spite our face.