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Monday, September 22, 2008

Paulson Bailout: The ABSOLUTE ASPHYXIATION of Taxpayers



The 'disgusting super spike' of Friday merely takes equities back to where they were prior Friday... for an 'unchanged week'.

SPX is now at significant resistance around the 1262 area and bumping up against a declining 50 day EMA (red line).

Expect prices to consolidate between 1210 and 1262, before plunging to new lows…

Perhaps most interesting of all is the fact that volume was LESS on Friday than it was on Thursday.

Banning short selling is a cheap shot and does nothing to alter the fundamentals of individual companies and the broader economy. This ‘short covering’ rally will end and CANNOT be the foundation for a new BULL MARKET. Gaming the market does not work in the long run…

The Paulson bailout package is absolutely insane and has been covered in great detail across the Blogosphere (see links below). I doubt very much that this package would lay the foundation for a new BULL MARKET because the losses are being socialized via the taxpayer. This AUTOMATICALLY translates into a massive tax burden going forward. During the greatest credit and real estate bubble ever, the U.S. was also running some of the largest deficits in history. Now an economy in free fall coupled with the largest bailouts in history cannot lead to anything but the ABSOLUTE ASPHYXIATION of both INDIVIDUAL and CORPORATE taxpayers in the NEAR FUTURE.

You would almost certainly be insane to go long equities for anything other than a quick trade.

On a more personal note, I got blown out of most of my shorts Thursday afternoon as my stops kicked off. I had spent the whole week scaling out as profit targets were hit. The gap up on Friday (I've actually never seen a 'lock limit' UP before), only caught me holding vastly reduced positions. I immediately slammed short everything I could on the cash open. I easily got short equities via the futures (ES). I tried everything I could think of to get short my favourite financials... I tried shorting individual cash equities on every platform/account I have. They all failed to execute (most messages timed out with 'failed to locate shares'). I bought inverse ETF such as SKF. I didn't touch puts because the liquidity isn't there (nasty spreads) and the (implied) volatility is insane, making them too expensive.

If you don't' here from me in the future, its probably because I'm sitting in a cage on a beautiful beach somewhere in Guantanamo Bay Cuba...

"You are a financial terrorist! Admit it!"

Bailout Posts:
Calculated Risk:
Krugman: Cash for Trash
Paulson Plan: Will it Work?
What We Should Get for $700 Billion
Bailout Eligibility Expanded to Foreign Institutions
NY Times Makes a Funny
Some Thoughts on the Bailout

Financial Armageddon:
More Questions than Answers
The Source for Insights
Pooh-Poohed OptimismTrader Mike on Financial Armageddon
Be Careful What You Wish For

Humble Student of the Markets:
Relief Rally But No Convincing Bottom

Immobilienblasen:
Hussman “Why On Earth Would Congress Put The U.S. Public Behind the Bondholders?”

MarketTicker:
The Mother of All Frauds
Welcome to the USSA

Mike Morgan Behind Enemy Lines
Henry Paulson – Fraud or Gross Negligence

Mish’s Global Economic Trend Analysis:
Open Letter to Congress on the $700 Billion Paulson Bailout Plan
Lies from Paulson Keep Stacking Up: What You Can Do About It
Bush Administration Seeks “Dictatorial Power”
Weep for the United States of America
US Taxpayer: A Giant Dumspter for Illiquid Assets

Naked Capitalism:
Update to Bailout Bill Fracas
Why You Should Hate the Treasury Bailout Proposal
New Bailout Proposal Costs Estimated at $500 Billion to $1 Trillion

Short Selling Ban Posts:
Daily Options Report:
SKF Riff
The SEC to the Rescue

6 comments:

Anonymous said...

Ben,

Great blog. I'm not as much a chart guy as you but one tool I've been using is tracking this market using the 73-74 bear market as a template. In this scenario, the S&P could get back to 1300 or so and still not change the primary bear market trend.

fajensen said...

Now that shorts are banned how does one hedge writing put options?

Assuming that no one writes naked put's then how are institutional investors supposed to buy shares!?

Ben Bittrolff said...

fajensen,

An exception was snuck in late friday (I believe) giving option market making desks an exemption...

Anonymous said...

Spreads on all options were wacky on Friday due to put-call parity.

I had gone all cash on Wednesday and then, seeing the artificial pump starting at 1pm EDT on Thursday, picked up a few BAC 32.5 calls expiring the following day as my only position. BAC opened Friday at 39.5 so min value for the calls should've been 7. I saw 4 bid and 6 ask at the open and managed a sale at 5. I think they closed around 3.5 or 4. Spreads were blown out all day, though. Friday was crazy.

-Mike J

steve said...

Ben,

May I recommend TBT as an available and nicely tracking short for TLT? I got long in size last week during the flight to quality (HAHA) around $58, and haven't looked back.

SKF is broken without new share creation. Several of the other Proshares inverses are not tracking their primary index ETFs either. I'm into SDP and it's up barely more than half as much as XLU is down. It's been lagging all day. SCC, SRS all look a bit screwy as well.

I've got a challenge to 1/2 of your recent shorting thesis: Now that the true scale of the bailout is becoming comprehended, isn't it too risky to be long SMN, DUG and so forth? In fact, if the dollar crash trade really gets going, at some point stocks broadly will turn up -- after all, in local currency terms the Zimbabwe market is having a great year.

I'm not making a literal argument about US = Zimbabwe, but the principle involved is the same, no?

Thank for sharing your (awesomely) great work with us

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