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Thursday, May 22, 2008

Bear Wedge Breaks, Goldman, Lehman, Merril, Morgan: Cut to SELL

UPDATE 1-Analyst Bove cuts Goldman, Lehman, Merrill to 'sell': “The ratings for Goldman Sachs Group Inc (GS.N: Quote, Profile, Research), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) and Merrill Lynch & Co (MER.N: Quote, Profile, Research) were cut to "sell" from "neutral" by analyst Richard Bove, who said the largest U.S. investment banks may perform poorly this summer.

Bove, an analyst at Ladenburg Thalmann & Co, also cut his 2008 earnings forecasts for the banks, as well as that of Morgan Stanley (MS.N: Quote, Profile, Research), which he still rates "neutral."

The downgrades reflect expectations that brokerage stocks "will do poorly this summer for three reasons... weak earnings, clouded secular outlooks, and the seasonal weakness that seems to impact these issues," the analyst wrote.

Bove was one of the first banking analysts to recommend selling financial stocks as credit market problems began nearly a year ago. On July 18, Bove recommended selling shares of Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research), Goldman, Lehman, Merrill and Morgan Stanley, saying the financial system was growing at a pace that could not be sustained by economic growth.”

In my post Slowly Building Shorts I argued that Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS) were at key technical resistance levels and that it was time to get short. I also presented some fundamental arguments for these short positions as well… that all revolved around EXPANDING Level 3 assets. A list of firms and their Level 3 assets can be found in Bulltrap: ABCP, and Level 3 Bombs.

The trade has been quite profitable. I intend to really lighten up these names and may even exit them entirely. The plan is to re-enter them SHORT on the next short covering bounce.

I also played Fannie Mae (FNM) and Freddie Mac (FRE) from the short side. This was far less lucrative as neither have yet really broken down. They will crack… eventually.

FNM and FRE make me angry:
Fannie Mae and UBS Miss, Bankruptcy Filings Up Big Time
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

In the same post I first presented the case for a Bear Wedge in the S&P 500. I was a little early in calling Cracks In The Bear Wedge. Yesterday prices finally broke DOWN and OUT. But not before giving me some heat and going all the way to 1440. (Damn close to stopping me out across the board.)

I’m not the only one to notice the breakout: Motor up… Power Down (Macro Man)

In Gravestone Doji And Cool Correlations: Volatility, Yen I use Volatility (VIX) and the Yen as both leading and confirming indicators. The first Gravestone Doji was followed by a second before the final break occurred. Since then, both the VIX and the Yen are behaving the way they should. This confirms that this down leg in equities is sustainable.


Anonymous said...

so you think the down leg is sustainable, but you re waiting for a rebound to actually build shorts?

Anonymous said...

FNM and FRE make me angry:...

How do you feel about Bill Gross saying he's buying mortgage debt because he believes the government will indemnify him against any loss?

Ben Bittrolff said...

"so you think the down leg is sustainable, but you re waiting for a rebound to actually build shorts?"

I covered my shorts in individual names like GS, MS, MER, and LEH because they might be ready to bounce.

The down leg that looks sustainable was in reference to the S&P 500.

Ben Bittrolff said...


Bill Gross is probably right. The gov't will at least TRY to indemnify him. I just don't think it will work. This is too big even for the gov't.

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