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Friday, June 6, 2008

Unemployment Rate Jumps, (Possibly) Saves Bears

It’s still early but it looks like the Bears were saved by the largest jump in the unemployment rate since 1986... from 5.1% to 5.5%.

  • The U.S. lost jobs in May for a fifth month.
  • Payrolls fell by 49,000, a smaller decline than forecast, after a 28,000 drop in April that was more than initially reported.
  • The unemployment rate increased to 5.5 percent from 5 percent, the biggest jump since February 1986, signaling the world's largest economy is stalling.
  • Payrolls shrank by 324,000 workers in the first five months of the year.
  • The number of Americans receiving jobless benefits surpassed 3.1 million in May for the first time in four years, indicating employees that are being let go are having a more difficult time finding new jobs.
  • Consumer confidence last month sank to the lowest level in more than 15 years as the employment outlook deteriorated, according to a report from the Conference Board, a New York research group.

U.S. Payrolls Fell 49,000 in May, Jobless Rate Jumps to 5.5%: “The U.S. lost jobs in May for a fifth month and the unemployment rate rose by the most in more than two decades, signaling the world's largest economy is stalling.

Payrolls fell by 49,000, a smaller decline than forecast, after a 28,000 drop in April that was more than initially reported, the Labor Department said today in Washington. The jobless rate increased to 5.5 percent from 5 percent, the biggest jump since February 1986.”

The S&P 500 came off quickly pre-market on the news from an overnight high of 1411. Today is an absolutely critical day for the Bears. A close anywhere above 1400 would make it damn near impossible to maintain a Bearish posture in these markets.

Anybody else notice that oil went from $122 to $132 in two days? A 8% move in two days, done with such ease, will likely to result in a move to new record highs… and equities managed to stay bid.

Crazy. Just crazy.

Thursday, June 5, 2008

The Bank and Mortgage Index: Nothing But Trouble

The Bank Index (BKX, candles) has spent three consecutive days below the key support area of $75.00. While some kind of bounce into the $77.00 area is certainly possible, BKX should accelerate downwards now that a good number of banks are on deathwatch...

With MBIA and Ambac likely to give up the ghost now too, it is plausible that a few imprudent banks will get whacked for not having properly valued their now useless hedges with these firms.

The Mortgage Index (MFX) continues to tease critical support and looks set to break. Should MBIA and Ambac finally lose their ridiculous debt ratings, expect to see a negative reaction in Fannie Mae (FNM) and Freddie Mac (FRE). This would put the smack-down on MFX as FNM and FRE each carry a 10% weight in the index.

When the S&P500 (SPX, grey, area) rallied to 1440 both BKX and MFX underperformed massively. Now that that both are set to break down, expect the SPX to continue to follow thru on the downside as well.

The pressure of the declining 200, 50 and 20 day EMA's (green, red, blue lines) on the SPX is immense.

The Bulltards are likely to fail here.

Wednesday, June 4, 2008

Dennis Gartman, Short Oil

Dennis Gartman is somebody who’s insight I greatly respect:

Gartman Tells CNBC He's `Short' Crude Oil, `Long' Natural Gas: “Dennis Gartman, economist and editor of the Gartman Letter, told CNBC he's "short" crude oil against a natural gas investing position.

“I've been in and out of oil for a long time,” he told the financial news channel. “The only oil position that I have on right now, I'm short crude oil and I'm long natural gas. That's been a wonderful trade.”

Gartman also said he doesn't have a net outright position in crude oil because he's “too afraid of it.”

“Things that move 4 percent, I don't want anything to do with,” he said.”

Being a financial ninja I do trade crude short outright. However, I do prefer to avoid heart attacks and stains in my pants whenever possible. Therefore, when I trade crude from the short side I do it using options. This allows me to avoid that Black Swan event that I just know is stalking me personally…

Guys like Mahmoud Ahmadinejad and Hugo Chavez have a nasty habit of spawning political Black Swans and oil just happens to be a political animal at these prices.

I’ve been shorting oil from $133 (after the pre-market spike to $135 that didn’t ‘stick’) using $130 and $125 strikes. I have a core position around which a trade.

Oil is in a bubble. Believe it. I’m not going to argue about Peak Oil. It really doesn’t matter. Parabolic prices are not sustainable. Period. End of story.

I’ve posted on parabolic moves many times…

Related Posts:
Oil Crisis and the Blame Game
From Bubble To Bubble, More Hidden Losses
Parabolic Commodities: The End is in Sight
Life After Things Go Parabolic, This Bounce Too Will End
When The Momos Go Parabolic
Dammit, Why Won’t You Learn?

In Oil Crisis and the Blame Game I argued that: “Maybe we can hammer out a top around here somewhere... Money has been flowing into inverse energy ETFs (DUG for example), indicating that money is for the first time attempting to call a top. Oil and Gas shares have fallen even as oil blew through $130 and immediately tagged $135.

Big energy companies, such as Exxon Mobile (XOM) failed to sustain new highs even as oil rallied hard. Something is up. Pop, and drop. XOM broke resistance and then immediately FAILED. Hmmm...”

Since then crude has indeed come off.

WSJ: Following The Tracks of The Bear

TheFinancialNinja made it into WSJ´s Marketbeat. (Hat tip jmf)

Tuesday, June 3, 2008

Can't Resist Apple, Way Too Juicy, Way Too Ripe (UPDATE1)

This is an update on the post Can’t Resist Apple: Way Too Ripe, Way Too Juicy.

Talk about shorting AAPL always offends a surprising number of people. (It’s a great company with great products but don’t you dare fall in love with the stock.)

So the first short attempt worked out. I started buying July $180 Puts as prices continued to move from $180 straight up to $190 and change. I traded around my core position by buying additional puts in regular intervals on the days AAPL was up and sold them back off on the days AAPL was down.

$170 is the Bull trendline from the lows of $115. I did not expect AAPL to break that on the first attempt, especially without a catalyst (some kind of Bearish news). So when AAPL finally pushed down to $170 and failed, I sold off the last of my puts.

Analysts came in and upgraded AAPL. The bounce was fast and furious, jamming AAPL back up to $190. But momentum has seriously started to fade and the uptrend is now in danger of being violated. I like the chart so much I bought Jan 09 puts at $180 and $170. That position is now on auto pilot.

While I trade the charts, I do keep the fundamentals in mind. I don’t get into the details too much, but just enough to be facing the right way on a broad macro level.

Ok. So, you’re house price is falling so fast you still can’t believe it and your mortgage is about to reset to a rate that ‘tastes like vomit’. You’re worried about your job security, despite the fact it costs you so much now just to drive to work that going in for a half day isn’t even worth it. You now deeply regret buying the SUV you don’t actually own, because you’ve traded your previous cars in so frequently that the lease payments on this one almost equal your pre-reset mortgage payments. How likely are you to be both willing and able to load up on shiny, expensive consumer discretionary items with big monthly costs such as the Apple iPhone?

Which is more probable, a surprise to the upside in a stock priced to perfection in a deteriorating economy or a surprise to the downside?

Monday, June 2, 2008

Lehman Put Open Interest: Just Like Bear Stearns

In my post Slowly Building Shorts I wrote: "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."

Unfortunately I covered my position at my original target of $38 - $40 and have missed this last swipe down. LEH has now broken all support and could quickly and easily spiral out of control...

The open interest in LEH puts is absolutely massive, especially at strikes that would only pay off if LEH completely imploded (a la Bear Stearns). Either some idiots are going to be out a lot of money come June, July and October... or LEH implodes before then...

The open interest is absolutely massive and can only pay off if LEH collapses. Most of the open interest is at sub $35 levels... a level that LEH has now breached. A lot of the puts at the 'bankruptcy' strikes (say anything below $15) also expires in June. So either the put buyers or LEH are quickly running out of time.

Morgan Stanley, Merrill, Lehman Ratings Cut by S&P (Update3): " Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. declined in New York trading after Standard & Poor's lowered credit ratings for the investment banks, saying they may have to book more writedowns on devalued assets.

Morgan Stanley, the second-biggest U.S. securities firm by market value, was cut one level to A+ from AA-, S&P said today in a report. Merrill Lynch, the third-biggest, was also cut one level to A from A+, as was Lehman Brothers, the fourth-biggest. Goldman Sachs Group Inc., the largest of the group, was affirmed at AA-. The outlook on all four New York-based companies remains negative, S&P said.

The downgrades may make it harder for the banks to sell derivatives such as credit-default swaps that are tied to bonds or loans, said Brad Hintz, an analyst at Sanford C. Bernstein in New York. Single-A rated firms are less desirable as trading counterparties for fixed-income derivatives that extend longer than five years, he said."

I say, about time on them there downgrades. I would also like to refer you back to my list of companies with the largest pile of Level 3 assets: Bulltrap: ABCP and Level 3 Bombs.

Yes, just like Bear Stearns, Lehman could implode literally overnight. Enough people think so to have sunk a good deal of money into puts. Open interest has absolutely ballooned. Mind you, the same thing occurred with Bear Stearns options just prior to their implosion. At the time I wrote Bear Stearns is Dead, Lehman is Probably Next.

Will Lehman implode? I don't know. I can't tell... I just don't have enough information. The rumors continue to make their rounds and traders are definitely nervous.

Financial Ninja Favs: May

In case you missed them, here are YOUR favorite Financial Ninja posts for the month of May:

1) Really Scary Fed Charts: MAY, False Alarm?
2) Bulltrap: ABCP and Level 3 Bombs
3) LIBOR Liars: UBS, HSBC, Royal Bank of Scotland (Update1)
4) MBIA Reports Scary Earnings: NEGATIVE Revenues
5) This Bear Market Rally is Over: EURIBOR Rises Again

As varied as all these posts might seem, they are all very closely related. Basically the debt fueled real estate bubble has burst and the Fed under Ben ‘Helicopter’ Bernanke is desperately trying to manage the fallout with new and innovative credit facilities.

In Really Scary Fed Charts: MAY, False Alarm? you can really see just how massive the credit bubble was and just how desperate the situation is for the entire financial system is.

The situation is so dire that financial institutions of the highest standing have resorted to creative accounting (or at least more so than usual) in an attempt to hide and postpone their losses long enough prevent a total collapse. In Bulltrap: ABCP and Level 3 Bombs I list the greatest offenders of mark-to-make-belief.

As if that wasn’t enough, these same institutions were caught red handed lying about their cost of funds in ) LIBOR Liars: UBS, HSBC, Royal Bank of Scotland. This has resulted in the dislocation of LIBOR, off of which $150 trillion of financial products are priced. The clowns over at the British Bankers’ Association decided NOT to fix how LIBOR was calculated. (Libor Status Quo May Spurt Market ‘Dislocations,’ Alternatives)

In the meantime MBIA continues to die a slow painful death but the ratings agencies just won’t pull the trigger… despite having had their credibility shredded numerous times. First Moody’s gets caught sending out fake ratings in CIFG, MBI, ABK and Moody’s: The Computer’s Made Us Do It and then Moody’s admits that one of their very own units, Moody’s Analytics, would have rated the monolines worse than junk in Ambac MBIA: Junk Rating Caa1.

This lack of transparency has naturally resulted in a lack of trust among financial institutions. Since most of them are dirty, they’ve inferred that the rest of them must be as well. LIBOR and EURIBOR have spiked as a result.

Despite all this, the S&P 500 and equities in general all rallied to within 10% of their record highs. I was a little early, calling a top around 1420. Prices made it to 1440 before being soundly rejected in This Bear Market Rally is Over: EURIBOR Rises Again.

Obviously none of the real financial problems have been solved despite a flurry of rate cuts and the creation of massive liquidity facilities. Hope for a quick solution and a quick recovery should be wearing thing just about now...

The rest of this year probably isn’t going to be very pretty for risky assets as the underlying economic data continues to deteriorate the world over.