Tuesday 23 September 2008

Banking dead were rising from their graves and financial stock zombies were seen stumbling through the trading day with the disjointed, uncertain gait of trauma victims being forced to take a long march when they would rather take a nice ride on a gurney.It all began a day before when in reaction to the prospect of nothing less than a total collapse of the world's financial system (triggered by the imminent implosion of teetering AIG, ( http://www.nytimes.com/)) the brightest minds in the nation pulled together and, in an inspiring bipartisan show, boldly ordered increased supplies of chewing gum, Bondo, and duct tape. The SEC, in their escalating and poignantly quixotic battle with the laws of Gravity, Logic, and Physics, released a vastly expanded version of July's "No Crappy Bank Left Behind Act" (NCBLB). In a historic move, Chairman Christopher Cox issued a papal ban on short selling, an edict which ranks alongside Pope Gregory's defense of a flat earth. 799 financial stocks in various stages of health ranging from organ donor to the sniffles were swooped beyond the reach of short sellers: naked, casual, or formally dressed. The crisis was postponed until the week of October 2nd, and markets around the world rejoiced. With this 11th hour pardon from the governor, a legion of bionically enhanced pigs, destined to become bacon bits the day before, was now unleashed on the market. Within hours, birdwatchers and air traffic controllers reported sightings of enormous flying porkers all along the eastern seaboard. WB, WM, FNM, FRE, MER, BAC were lifted into the stratosphere on a fast moving current of hot air issuing directly from Washington D.C. Not everyone was on board. Cynics stated that this move by the SEC signals a desperate SOS (“Save Our Stocks”) and that the rescue could cost a not insignificant $1 Trillion (USD) ( http://www.independent.co.uk/..). The budget minded were similarly spooked when the Treasury announced the special sale of a brain-busting $174 billion in treasuries, to be completed within the week (http://online.wsj.com/article/..) and inflation-sensitive investors, aka ‘crazy gold bugs', continued to snap up the yellow metal, bought MREs, and investigated underground bunkers in Canada beyond the inevitable taxation which will be needed to pay for this. We on Trader's Asylum, however, preferred to maintain a more positive and open mind considering the profits we made the last time the SEC battled the laws of physics. On it's Friday debut, however, NCBLB II (Return of the Dung) , seemed less well received than its predecessor. Like every sequel, we probably know how this one is going to end, having seen the first one. Oh it's true, shorters covered pre-market and financial stocks were up between 50-100%, but at the opening bell, investors and shorters alike took their windfall profits and immediately fled the scene of the crime. Trading seemed disconcertingly lackluster to those who expected a massive short covering rally and treasury mandated fireworks. Could be that despite the cheerleading and hosannas on the media, doubts about the patient's prognosis remained? It seemed buyers ventured back with all the enthusiasm of someone being forced to dance with a pair of six guns pointed at his feet. The situation improved somewhat into the close, but stocks failed to revisit their opening highs. The sense we had, watching the level 2s for our watch list: XLF, SKF, AIG, FNM, FRE, UYG, was that Market appeared frozen, and some speculated perhaps some of the gum intended to patch the gash in the hull of the distressed S.S. Wall Street had fallen into the gears of the market instead.
Harvey, my trading partner, bored with hanging up on cold callers trying to sell him distressed banking divisions, decided to join the party with an array of AIG calls, figuring that AIG was the guest of honor for whom this particular charade had been thrown anyway (much as the Humidorian Reaction of mid-July was thrown for the benefit of Fannie and Freddie and their urgent need to raise capital). However, although AIL JU (AIG $7.50 October calls) made a lovely little run from a low of .13c to .52 at the close, there was hardly the same joie de vivre and verve seen in July after the first round of shorting restrictions.
I guess I can't blame Mr. Market for being a less than enthusiastic participant in the bold new plan. After all, he's being treated to the delightful prospect of a luge ride without brakes (and, considering the state of AIG, MBI, and ABK, probably without insurance as well). It's important also to note that this past week's demise of LEH, near death experience of MER, and mauling of MS and GS may have eliminated or subdued the very market makers who made the market liquid in the first place. However, it's nothing a little WD-40 won't fix; and fresh supplies are already on their way. Entirely left out of Friday's brave new rally was monoline insurer and multi-car collision victim Ambac (ABK), whose shares plummeted 41% ( http://www.forbes.com/f..) to a low of $3.87, presumably without the assistance of any shorters. This swan dive no doubt left message board faithful stunned and proved that gravity was still able to extend its awesome reach even into the would-be sanctuary created by the SEC. We wondered if ABK's unpatriotic dip into the red might inspire an even more drastic response. “What's next,” Harvey asked, "a ban on selling altogether? Is the color red to be outlawed during October, leap years and months which end with “r”? Why not just replace today's dismal screens with re-runs from 1985, 1996, and 1999, happier market feeds from years when Dow 10,000 was a ‘good thing', just as TV stations re-run old programming during technical difficulties.” Perhaps, I offered, "Don't Worry, Be Happy" could run on a loop when retail investors log into their Ameritrade or E-trade accounts, and “Happy Days are Here Again” required for all commercial brokerage on-hold music. The SEC, with one bold stroke, has eliminated shorters, but has also prevented hedging in the options market, thus clogging an important risk transfer mechanism used by major institutions ( http://globaleconomicanalysis.blogspot.com/..). But never mind, voters who have never even considered shorting let alone buying an option a day in their lives are comforted and elated. The wicked witch is safely tucked under a house, and the problem is solved. Never mind that short selling, a strategy introduced in 1600s Holland, managed to survive the French Revolution, 2 World Wars, and the Great Depression, has proven necessary for 400 years. Never mind that the air pockets created by its elimination will only magnify a later plunge ( http://globaleconomicanalysis.blogspot.com/..). All that matters is that the collapse has been postponed, preferably until after the circus of the election has left town. Until October 2nd, shorting has gone from being a tool available to ordinary investors, to a crime as heinous as jaywalking, egging a church or attempting to poison one's mother in law. I'm told that those who even consider the left-hand path of going short or daring to mention the vulnerable naked state of the Emperor and his top U.S. investment banks could end up on a watch list of subversives with an agenda to make a profit. Last week's crisis will henceforth be known as "the recent unpleasantness" or the "war of shorter aggression." By divine decree, all banks are now well-loved, well capitalized, and above average. Saying or writing otherwise might get you labeled as a dangerous Financial Terrorist. ( http://www.cnbc.com/..) I can only presume we will soon receive alerts to seal up our trading stations with plastic wrap and duct tape. Upon hearing Thursday's news, Harvey briefly considered giving up trading and going back to mucking out stables, where at least one knows one is dealing with horse manure and can dress appropriately. He's decided, however, that perhaps the situation can be mined for the high comedy value instead, and suggested a season of Survivor based in the canyons of Wall Street, a show where former CEOs and Managing Directors are forced to eat worms in order to avoid having to pay back last year's bonuses.
But in closing, at the risk of seeing depressingly dull and pedestrian, I must wonder why, instead of draconian new measures, the SEC does not simply restore the “uptick rule” ( http://en.wikipedia.org/wiki/Uptick_rule ), instituted in the 1930's after the last time the bad boys of Wall Street managed to wreck the playroom? But alas, perhaps that is too simple and elegant a solution, and painfully bland and obvious no matter how effective. It's like avoiding the use of arithmetic to determine whether a buyer is qualified to buy a house, instead relying on convoluted models and expensive metrics. So, like it or not, they'll bring on the complex, the fallacious, the the muti-chef chewing gum solutions, and I'll go back to buying gold, which kept climbing on Friday as a large sector of investors remained unconvinced by Project SOB (“Save Our Banks"). But you gotta feel sorry for Ben Bernanke, inheritor of a ticking time bomb and now faced with the unenviable job of having to choose between permitting an immediate and total financial breakdown and advocating solutions which will lead to higher taxes, diminished lifestyle, and a prolonged recession with no guarantee of a cure. With this in mind, savvy traders should keep those steel umbrellas near at hand to protect themselves from the scat from all those flying pigs.

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