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Wednesday, April 30, 2008

Slowly Building Shorts

The Bulltards tagged 1400. The falling 200 day EMA is nearby, ready to provide resistance. The SPX is now overbought on the daily timeframe (Slow STO). Volume has shriveled up, not exactly inspiring much confidence in the the rally to date. A drop to Support around 1370 is highly probable. The 1320 - 1330 area would be the next area of interest.

Volatility (VIX) has fallen to what amounts to COMPLACENCY levels in this credit crisis environment. Although technical analysis isn’t nearly as relevant on the VIX, this 20 area does appear to be an area of support.

Fannie Mae (FNM) has bounced from $18 to $35. Since then FNM has made a series of lower highs, $35, $32, $30, on declining volume. I have been shorting above $30 and have been taking some profits around $25. (I'm using puts to limit my downside risk.) I have my full position again and am looking for a break below $25 this time around. March New Home sales and Case Schiller Home Prices all showed an ACCELERATION of real estate mess.

Same goes for Freddie Mac (FRE). FRE bounced from $16 to about $34. Since then FRE has made a series of lower highs on declining volume. I have been shorting above $27 area using puts. I am now fully short again and looking for a break below the $22 area.

FNM and FRE are pretty much doomed. While they may eventually be bailed out or nationalized, the common shareholder will get ANNIHILATED.

FNM and FRE make me angry:
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

Goldman Sachs (GS) is happily expanding its Level 3 assets...

Yesterday I began legging into my short position. Using puts, I intend to build a short position over the course of the week. I expect the declining 200 day EMA and the $190 area to provide resistance. GS is sufficiently overbought (Slow STO) to warrant some profit taking into the $170 - $175 area in the short term.

I did the same for Lehman Brothers (LEH). I expect the $50 area and the 50 day EMA to provide resistance. LEH is no longer oversold and the same problems, namely expanding Level 3 assets, remain. I expect an initial move into the $38 - $40 area.

I did the same with Merril Lynch (MER) and Morgan Stanely (MS) for the same reasons.

That puts me short GS, LEH, MER and MS after a nice run into a credit crunch that has not abated at all. I like it. I like it a lot. These names are exposed to a ridiculous amount of risk that they cannot get off their bloated balance sheets, while SIMULTANEOUSLY facing a worsening business environment as deals dry up for them.

Citigroup (C) raised $3 billion yesterday. Common shareholders continue to get diluted. This should come as no surprise to anybody. I recently wrote that things would get worse at ShittyGroup before they could get better in: Citigroup Earnings, Downgrades and LIBOR

Late last week I began nibbling at various short positions. I should be happily short by the end of the week or early next week just in time for the next leg down.

Read these recent headlines. You don’t even have to read the articles to get in the right ‘mood’. This stuff isn’t just a temporary blip. This is real and the long run consequences aren’t going to be pretty.

Bernanke May Have to Do More to Ease Jump in Bank Funding Costs
CDOs Face Downgrades as Losses Prompt Fitch Overhaul (Update1)
More Subprime, Alt-A Mortgages May Head `Underwater' (Update1)
Rate Cut Would `Do More Damage Than Good,' Gross Says (Update2)
Deutsche Bank Says It Had First Loss in Five Years (Update3)
Countrywide Reports $893 Million Loss From Bad Loans (Update3)
GMAC Posts $589 Million Loss on Home Lending Woes (Update1)
S&P/Case-Shiller U.S. Home-Price Index Fell 12.7% (Update2)
KB Home's Broad Says Home Prices May Drop Another 20% (Update2)
Fed's Eurodollar Rates Suggests Dollar Libor May Stabilize
U.S. Home Vacancies Rise to Record on Foreclosures (Update3)
Wolfensohn `Pessimistic' as Financial Losses Rise (Update1)
Goldman, Morgan Hit Level 3 Jackpot.
Taleb Outsells Greenspan as Black Swan Gives Worst Turbulence

Getting long risky assets, such as equities, now and betting on a ‘second half recovery’ before the recession has really even started is border line retarded.


Ben Bittrolff said...

Just after I posted this morning, I saw this:

Fannie and Freddie: Short To Zero?

I happen to agree.

scott said...

i like the charts you post. i don't keep a close eye on the technical picture surrounding the financials, consequently i find your charts and comments to be a valuable input into my daily readings.

Anonymous said...

Great analysis. Thanks.

Anonymous said...

I happen to agree as well. I wonder how long it will take for freddie and fannie to fall

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