Gualberto Diaz

With earnings season in full swing, we got some movers today.  Markets are down on AAPL, AXP, and WB earnings this morning.  All disappointing.  This could potentially end the bounce we had going.  We shall see.  I’ve been meaning to post some more, hopefully I can later today.

Keep an eye on the financials, as they will lead the market one way or the other.  With Apple and Google missing, we could see tech start to sell off.  We’ll see what we do from here.

The market has been rallying hard over the last two days.  It seems to be keeping upward momentum even with MSFT and GOOG missing on earnings yesterday.  IBM and HON beat on earnings and are trading higher before the 9:30 open.

There has been a short covering rally in financials as Christopher Cox came out a few days ago and put a short squeeze in the financials.  I’ll write about this more later.

Options expire today, so expect some volatility today.

Market’s down alot this morning.  There was some heavy selling in the financials going into the close yesterday.  Retail sales and PPI come out at 8:30, and business inventories come out at 10.

Stocks that will be in play today will be all the financials, as there is alot of uncertainty surrounding them.  Today should be a crazy day, so play it safe and play some defense.

Really quick, because I’m running late, but as expected, the government has come out with a bailout of Fannie Mae and Freddie Mac.  This has led to a pop in the futures and a possible short term tradeable bottom.  We’ll see how this turns out.

The Times is reporting that the US Treasury is considering a rescue of Fannie Mae and Freddie Mac. Under the terms, the Treasury would inject $15 billion into the companies, greatly diluting shareholder equity. As of Friday’s close, Freddie’s and Fannie’s market caps were $5 billion and $10 billion.

If there is a plan in the works, I expect it to get announced sometime tonight, before the Asian markets open. That is the way they handled the Bear Stearns fiasco in March. Be careful though, there are no sources in the article, so it could just be all rumor

Yesterday was a great day. Sometimes you don’t know when days like that are coming around. Sometimes you can tell. On Thursday night, my roomates asked me to go out drinking, but I declined because I had a feeling something could happen to the market on Friday. I know that when I’m hungover I don’t trade as well, and I didn’t want to sacrifice the day for a few drinks with friends that I see all the time.

Well when I woke up Friday morning, and I saw Fannie and Freddie down another 50% in the pre-market, I knew staying in the night before would pay off. What led me to believe that Friday could be a great trading day? In fact, by Wednesday I was already licking my chops for Friday. Well first of all, there was a breakdown of the SPY below the March lows. That alone has created more volatility as big money battles to send price action one way or the other. Second, was the increased volatility in LEH, FNM, and FRE. You’re talking about 20% plus moves up and down intraday. There were various experts talking about these institutions being insolvent, leading to panic. That’s when I knew there was the possibility of a significant downmove going into the close on Friday.

The Fed stepped in and made comments regarding the GSE’s Friday afternoon that sent the market sharply higher. The increased volatility and that upmove definitely made my day much better going into the close. If the Fed didn’t step in with an announcement, we could have seen the markets close at the lows instead of a reversal. Either way is great for me.

Indymac, the largest independent mortgage provider, failed last night. They specialized in Alt-A, not subprime. This is pretty significant news, as the argument for the Bulls has been, “Everything is rosy except for subprime.” Add to that, the fact that the Fed has denied talking to Fannie or Freddie about opening the discount window, and we have a great Monday morning lineup already. This can add more uncertainty to the financials next week. We’ll see how the market reacts to it, but regardless, I know to get my rest this weekend because I know next week can be as crazy as this week. And as a trader, there’s nothing more that I can ask for.

Indymac failed last night. Their focus was on Alt-A mortgages, not subprime. This is significant news here. Once again, we see evidence that credit problems are not just contained to subprime. Wachovia and Washington Mutual are under stress as well. You cannot go bargain hunting in the financials at a time like this. Until financials regain their credibility, you can’t buy based on faith. Equity investors have no idea what these mortgages are worth, and until the market stabilizes you will be risking too much. Book values are worthless. You can’t buy based on historical levels of low book value ratios because equity is being lost at such a fast pace. Don’t believe me? Take a look at MBIA, Ambac, Countrywide, Bear Sterans, and Lehman Brothers jsut to name a few. People thought they were bargain hunting a few months ago. Just off the top of my head, all these stocks are down at least 50%. In a time like this, you MUST be able to preserve capital.

Companies will continue to dilute shareholder equity in order to save themselves. You can count on that. We are not done here. The VIX didn’t get over 29 yesterday. We could have one more spike down before we put in a temporary bottom. I’m not sure how the market will react to Indymac failing. The Fed came to the defense of Freddie Mac and Fannie Mae and prevented a Friday meltdown. I would prefer we get a bounce from here to give me the opportunity to load up on my short positions. The next downwave could be vicious. Panic has not set in yet.

The market got slapped in the face overnight.  Fannie and Freddie are down a lot over insolvency concerns.  Crude is trading near all time highs.  XLF is trading below 19.  This morning may be setting up for a huge down day in the market.

Some stocks I’m going to be keeping my eye on:  WB, LEH, FNM, FRE, SLM, KEY, BAC, and MER.

Good luck trading today.

Didn’t realize this wasn’t posted this morning:

Futures are up this morning, as Walmart has raised guidance, and Dow Chemical announced a buyout.  yesterday afternoon we had a pretty heavy selloff starting a little before 3PM.  That’s twice now within the last 6 trading sessions that the market has rallied strong and then given back all of its gains the next session.

WB remains weak.  Yesterday’s upgrade by Merrill provided a great opportunity to short the stock above 16.  I was no able to capitalize on it.  It’s now trading at 13, and looks like it’s heading lower.

XLF is testing the low from a few days ago.  If it breaks 19, we could see the market go lower.

After market update:
XLF defended the 19 pretty well, although it was breached for a moment. I sold my LEH puts into today’s weakness. I’m going to look for a pop back up to the 24 level to re-enter the position, with a lower strike, farther out. WB found some support at 13. FRE and FNM have definitely been movers this week, and I would look for any pop in price to short these stocks through puts.

Market was a little rough today. The selloff in the afternoon provided for some easy trading, but I found the morning to be a little rough. Tomorrow could be a pretty volatile day, especially going into the close. I personally would like to see a pop in prices, and perhaps a small rally so that I can re-establish all my short positions.

Earnings season has started with Alcoa reporting last night.  The market had a nice rally into the close, with financials leading the way.  At 10:30, crude inventories come out, which could be a market mover.

One thing to keep in mind this earnings season is how the market reacts to earnings.  We’re in an oversold condition, so any good news could spark a pretty strong rally.  See how the market reacts to bad news.  In March, stocks were no longer going lower in reaction to bad news, and we got a 3 month rally from the lows.

On the other side, this is the most I’ve heard/ read about the market being oversold and to be ready for the bounce.  I’ll put up a post later about the S&P and earnings multiples, and how we’re still valued at a high P/E even though the market has sold off 20%.