Things You Would Never Have Said Eight Days Ago

Things you couldn't imagine saying eight days ago:

"Thank god for financials and homebuilders - without them my portfolio would be a disaster!"

For all those who think shorting is easy, ask the fellas who stuck around too long in Ultrashort Financials (SKF).

Five weeks of gains erased in 5 days. Even within the day yesterday this position went from $150 to $120! Talk about an intraday reversal - a terrible start in financials, followed by a day long rally.

Remember, the SEC has banned naked short selling in 19 major financial firms. I did not write about this last week because frankly it makes one who follows the market for years quite peeved. (to be judicious). Technically naked short selling should be banned, period (from all securities) but it's been allowed on a wink wink basis. Why? Because the same 19 financial firms have trading desks (and clients) that have used it to great benefit for years on end. Only now when their stocks have been targeted have all the King's Horses (and Men) found an issue with it. It's such a corrosive system I don't want to even get into it because I'll create a 10,000-word entry. When the foxes guarding the henhouse get the guns aimed at them, they run to mother (nanny state) and ask for help. Being the large political donors they are, mommy is happy to oblige.

Anyhow, that is neither here or there - this is a ban lasting until July 29th and seeing how great it has worked (already) in the financials just on the "threat" (last week), it would not be surprising to see it extended for another 30 days. We shall see. Why this rule has not been extended to all stocks is beyond me, but I guess we need to let these 19 firms continue to make money naked shorting the heck out of defenseless small cap firms.

So where we stand now is that the S&P 1275 level we've been pointing to is now here. This was a long-term support level that broke down in the recent thrashing of the market, so we'll see if this previous support level has turned into resistance or if the market can rally right through it.

The major banking indexes, after a tremendous move up have also now rallied to a key resistance level - they poked their head over late today.

While it is tempting to begin building the Ultrashort Financials in scale here, we have seen how being off just by a few days in Ultra Financial (UYG) can cost a lot of dough in the near term.

So I'm still sticking to a Friday timetable for really beginning to layer in this position (the "rotational rallies" of January and March lasted from 6-15 days and Friday would be day 9) but if we see SKF back in the $110s tomorrow? (50% fall off in just over a week!) we might start throwing layers in. And start to draw out of (sell) its inverse, Ultra Financials (UYG). Any rally led by worst of breed is not one to be trusted, as those who bought these stocks off their huge oversold bounces in late January and March can attest to. The thesis "then" was the 2nd half 2008 recovery and the thesis "now" will be "gas is going to $3.40 and the consumer will be back in full force".

Remember, for stocks to rally for a few days/weeks/even months - thesis does not have to be correct - it only requires enough billions/trillions of pooled capital to believe it and move stocks in the right direction. The open question, unknowable, is how long this "perception" remains before the inevitable return to reality.

And to close out our backwards world, Washington Mutual (WM) just reported a loss of $3.34 instead of analysts' projected $1.05, and  the stock was way up on the great news.

This has continued to be a wacky time for our fund - up 3% yesterday in a flat market and gave it all back today in an up market. No sense. No rhyme. No reason. Just traders flowing from one sector to another. You simply have to suspend all logic at this moment or the market will send you to the insane asylum right quick. Our "barbell" approach (owning a few of the things we have zero belief in to counterbalance things we do believe in) is finally paying off - but that side of the barbell is so minor, it is not helping us much; just creating a few offsets to some big losses in the global growth names.

Disclosure: Long Ultrashort Financial, Ultra Financial in fund; no personal position

Comments

[fatcat]

Good article,thanks..

[adbutler007]

Great comments, dude. Watch for the BKX to rally to its 200DMA at 82 as its level of greatest resistance, and watch for the SPX to rally to its 50DMA at 1310. Fannie and Freddie's inventory of foreclosed properties, mirrored in even greater proportion by U.S. mortgage banks (who have extended delinquency guidelines to reduce quarterly writedowns) is growing by leaps and bounds, and prices paid on sale are dropping precipitously. Remember that REOs and foreclosure sale values do not need to drop very much to wreak havoc on bank and agency capital, as they are leveraged 20-60:1.

[MCLamb]

As if it isn't bad enough to selectively enforce what are essentially securities anti-counterfeiting laws, an exemption is being pushed through to legalize the criminal activity that market markers engage in.

www.bloomberg.com/apps...

[The DarkKnight 77]

Great article, I think your points are very valid!

[debtacid]

I suspect that this is just the Mother of all Wall Street Pump and Dump scams to make the massive Fannie/Freddie bailout more appealing to those idiots in Congress. Once Wall Street has the tax payer on the hook, they will let it collapse again...

[buyitcheap]

I agree, but what a ride...

[bbzz24]

well it is not exactly naked short selling that we saw but politicians decided to call it so to interfere with the market. it was in fact naked only between trade date and settlement when the stock was officially borrowed and sold. otherwise it would be illegal.
now the mushbrains in sec under political influence have put a hand brake on short selling: you gotta first complete the borrowing of the stock and then short sell it. matter of semantics but makes all technical trading impossible and overheats the telephones of the securities lending desks which may lead to hours gap between your order being placed and executed. this is a no sell on down tick type of rule.

[hidilip1975]

Gud article.Do keep posting regularly

[lex]

Great stuff....i feel for you.....my portfolio is experiencing the same thing..........all started when oil crapped out for no reason last week....maybe James Symons up to his old tricks...

[JimmyLathrop]

You may have seen my poorly timed article on July 14th touting SKF. I really had no idea that the government was going to sink all of that money into Fannie Mae and Freddie Mac so as not to displease their overseas masters, excuse me, investors.

However, the one thing that we all need to consider is that although the domestic economy is in a slump, there is nothing Paulson, Bush, Congress or the financial industry lobby can do about overseas markets. Even with major administration figures giving the "all clear" sign on a daily basis and knee-jerk reactions from Congress, a downturn or volatility in foreign markets (i.e. investors unwilling to buy these wacky securities the IBs keep coming up with) could send the shares tumbling down again until the lobbyists are mobilized and the money spout is turned on.

Eventually, the Fed will have to raise interest rates to fight inflation. Two Fed Governors came to last months meeting with inflation as their priority. Cronyism aside, the lower purchasing power of the dollar will be an issue in the fall and once the rates rise, banks aren't going to be able to use the Fed Fund window to boost their stocks anymore.

I picked up 50 shares at 118. I'm putting my money where my mouth is.

[Dirtt]

"You simply have to suspend all logic at this moment or the market will send you to the insane asylum right quick"

This is how I felt in October 2007 when a great deal of the reporting this year should have started back then. But the engineered bottom is creeping closer and closer to the election. Who knows?

As the Games begin in China these 'games' may curtail as the rush to take capital gains taxes away from Pelosi and Gore becomes one of the final unspoken truths in 2008.

[Wez]

Sold my UYG and am picking up SRS. Not sure where financials go from here, but I'm pretty sure CRE is F'ed.

[ShannonH]

Probably the closest I will have ever come to making a killing on options, but the timing has been so incredibly hard even when the movement and duration were perfectly called. WB moving +40% in the last 45 minutes after such horrendous results?! Painful.

[ShannonH]

BTW, can the popularity of the ETFs such as SKF and UYG be adding to the volatility - that is, as big money is shifting from short to long, are firms taking advantage of the arbitrage opportunities and moving the prices underlying securities, causing more interest in going long?

[carey_jim]

Congratulations on the kind of restraint I could never manage.

Do you think WM presented us with a selling opportunity this morning?

If I owned some WM shares when the market opened I could have sold them for a profit.

WM only lost about 15% of its value in the first half an hour of trading. There must have been some good news for that to happen.

[AmesTiedeman]

This rally in the banks is a fake as that rolex on the homeless man.

[User 152589]

Erick D.T.

My first impression of the SEC's head's testimony before the senate last week was that he had no concern for nor intenion of protecting any sector of the market from 'naked' short selling except his friends in the financial arena. Junior gold and other precious metal and mining stocks are being mercilessly 'carpet bombed' by ruthless short sellers, minutes before markets close each day, with impunity!
The apparent objective of these tactics is the forcing down of the
stock's price of these companies and subsequent 'panic-selling' by frightened investors unaware of these behind the scenes stealth
activities! Of course the result of these acts can threaten the stabilty of a company (particulary small caps whose capital resources are limited, but also large cap stocks one of which was affected in this way by a CNBC commentator who confessed on a Street.com interview to doing this very thing himself when he was manager of a hedge fund in which he had upwards of 25 million dollars at his disposal with which he knocked down the stock price
of several large cap companies! (See financial sense.com archives) This has been going on for years in the markets, now when suddenly the spector of short selling financial stocks occurs, on the
scene appear the three stooges of American Government (I won't
mention them by name!). These three pigeons have been chosen
to dutifully camouflage the well orchestrated rape and pillage of the average hard working investors money.

They should (all three of them) be summarily executed!
Amen.