DowGasms

by Larry Levin

Something odd happened today - each time I turned the channel from one financial station to the other, I thought I was watching a salacious XXX movie. I kept hearing, "Oh Yes!...OH GOD, OH YES! That's the stuff 'Big Ben'...you know how I like it. Oh my GOD!!" Was I was hearing an audio replay of Mr. Spitzer's liaisons with his high priced call-girls? Nope. Shortly thereafter I realized the on-air hosts were experiencing multiple DowGasms.

Yes sir, multiple DowGasms were had by all today when the Federal Reserve once again stepped in to stop the stock market's fall. Free market? With failure of Wall Street to come up with its own remedy to its own mess, the Federal Reserve said it would loan as much as $200 billion in securities in a bid to fix the market...and I mean "fix" the market, as in boxing decisions.

Although Wall Street made the bed, it doesn't have to lie in it for very long. The Fed went on to say that it won't stop providing liquidity and cutting rates until all of Wall Street's bankers are off of the bread line and swimming in caviar again. The Dow closed up 416-points this afternoon. Free market? Soon, all will be right in lower Manhattan again: "Thanks for parking the new Bentley Leon . Will you accept this new Rolex as a tip?"

It"s pretty clear where "Big Ben" (oh, la-la) has drawn the line in the sand: 11,634 in the Dow and 1262.00 in the S&P. When the markets first reached these levels, Big Ben (ohhhhh, yes...Ben) made a surprise 75-bases point rate cut, followed by 50-bps more just days later. These massive rate cuts, as well as other "injections"...liquidity injections...haven't helped much. What happens if more bad news hits the tape and the aforementioned levels are breached? I honestly believe the Fed may actually buy all of the bad debt and simply call a "do over." Free market?

Crude oil traded $109.72-barrel today thanks in large part to "Big Ben" and his dollar policy, which is apparently for the U.S. currency to be used as Kleenex and toilet paper.

The Fed announced yet another new lending program this morning that allows participants in the bond markets to swap their mortgage-backed securities (MBS) that they can't currently sell for highly liquid Treasurys that they can sell. The new plan injects another $200 billion into the system and allows the central bank to lend Treasurys for 28-days instead of the previous overnight period.

Now Wall Street is stuck with a balance sheet full of junk...MBS...that are losing value as housing prices fall. Because of the now lower value of homes and MBS, assets are much lower which conflicts with reserve requirements. These silly reserve requirements are apparently keeping these banks from making new loans, as the rules prevent it. So the Fed has, in effect, changed the rules for 28-days by allowing these banks to exchange their self-inflicted junk for Treasuries (cash).

Ummm, isn't this (avoiding the rules) the sort of thing that directly led to the CDO's that were sold to Wall Street, pension funds, insurance companies, etc? By "securitizing" and selling the loans, banks didn't have to keep them on their balance sheet and were therefore able to originate a loan to anyone who could fog a mirror. However, some banks were left holding the bad loans when the game ended, and are now in possession of said junk on their balance sheets. So the beat goes on.

So what happens when the 28-day "junk-for-cash" exchange period ends? The housing market better have turned around in a massive way, sufficient enough to be setting new highs for home prices. Anyone care to bet that that won't happen in 28-days? What then? The banks receive their junk again while keeping a little profit it had made in the interim.

The Fed will have to keep playing this shell-game for 28-day periods (why not 280-day periods?) until housing turns up. If so, the Fed has effectively bought the junk from Wall Street without actually buying it. Free market? What about credit card debt? What about auto debt?

What's hilarious is how this is being defended. When today's TV hosts caught their breath between DowGasms, they reminded us that "only AAA" debt will be used in these swaps. AAAhhahahahahahha, oh mercy that's a good one. We already know what a joke the AAA status is of this junk.

Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

Consider this, none of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43% of the underlying mortgages are delinquent!

Sticking to the rules would strip at least $120 billion in bonds of their AAA status. AAA debt fell as low as 61-cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26-cents, according to Credit Suisse Group. And since we can't allow "too many" banks to lose "too much" money...the Fed swoops in to save the self-anointed high priests of finance. Free market?

And who ultimately pays? YOU DO in the form of a devaluing US dollar and higher inflation.

With such a great reaction by the market today, Big Ben must be receiving many messages: "Hey big boy, voulez vous coucher avec moi?"

Real Time Trading Signals*for

Trade Date: 3/11/08

E-Mini S&P Trades*
(before fees and commissions):

1) B/away buy @ 8:35am at 1304.75 = +1.00 & -3.00

2) Engf sell @ 9:35am at 1299.75 = +4.00 (1 lot)

3) OTF sell @ 10:00am at 1300.50 = +6.50 (1 lot)

4) FT sell @ 10:25am at 1295.75 = -1.25 (1 lot)

5) FT sell @ 11:15am at 1293.00 = -1.50 (1 lot) (big SP only traded 1294!!)

6) PP sell @ 11:55am at 1290.00 = -1.75 (1 lot)

7) FT buy @ 12:45pm at 1294.50 = +.75 (1 lot)

8) Momo buy @ 2:35pm at 1311.00 = +1.00 (1 lot)

9) Engf buy @ 2:50pm at 1315.00 = +1.25 & +2.00...+9.00 points

E-Mini Russell Trades*
(before fees and commissions):

1) Buy @ 9:32am at 662.9 = -1.1 & -1.1

2) Sell @ 11:55am at 655.0 = b/e & b/e

3) Buy @ 12:09pm at 654.9 = +1.3 & +2.1

4) Buy @ 12:41pm at 658.7 = +.5 (1 lot)

5) Buy @ 2:40pm at 670.5 = -1.3 (1 lot)

6) Buy @ 2:42pm at 669.3 = +.4 (1 lot )...+$80


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