Another Slow Day

by Larry Levin

Although there was a little action at the open today, the majority of the day was a real snoozer. The June S&P barely had an 11-point range; and the vast majority of today"s action traded within a 4.50-point range.

The early "action" was a sliding market led by the financials. This early slide may have been sparked by Ben Bernanke himself, the very man supporting the market by turning junk CDOs into gold via the Fed's balance sheet. So what gives? Regarding his efforts to spin yarn into gold and Wall Street now in love with him Bernanke said, "These are welcome signs, of course, but at this stage conditions in financial markets are still far from normal." He went on to say, "Spreads of term dollar Libor over comparable-maturity overnight index swap rates have receded some from their recent peaks but remain abnormally high."

The following comment, however, was my favorite..."Spreads of term dollar Libor over comparable-maturity overnight index swap rates have receded some from their recent peaks but remain abnormally high. Ultimately, market participants themselves must address the fundamental sources of financial strains, through deleveraging, raising new capital, and improving risk management, and this process is likely to take some time."

The market participants must address the problem themselves? There's no chance of that folks. The moral hazard is now just too rampant. The Street loves government intervention, and will demand more, until the crisis eventually abates. Then, of course, it will be demanding "free markets" - and no intervention.

Why would the market fix itself when the Fed just offered banks additional funding? Earlier this month, the U.S. central bank announced an increase, to $75 billion from $50 billion, in the amounts auctioned to eligible depository institutions under the TAF. Moreover, Bernanke said the Fed would increase the amount of cash that it provides financial markets under its biweekly Term Auction Facility if this much is "warranted by financial developments".

In trimming her estimates for four investment firms, Oppenheimer & Co. analyst Meredith Whitney wrote that the banking giants face an outlook "far more bleak than that reflected in the market." Ms. Whitnety was the first to warn about Citigroup's problems and that it would slash its dividend, even though Citigroup itself denied it. Soon thereafter, Citigroup slashed the dividend.

Since the rest of the analysts on the Street were and still are playing nice, never wanting to rock the boat, she was initially looked at as a crackpot - but no more. In today's statement Ms. Whitney said banks face a new problem: Many have yet to fully digest the temporary gains they earned as prices for credit-default swaps rose in the first quarter but subsequently lost when prices fell in the second quarter.

The write-downs may have only been the first phase of a substantial repositioning effort, Whitney said, adding that this makes investments in the larger brokerages dicey at best. Each of these brokerages will now face losses as the market resets the value of such swaps, she said.

"We believe the high-margin structured products will not return in any material form this year and that will create serious revenue replacement issues," Whitney wrote. "Given that backdrop and the recent run-up, we find it hard to argue for higher stock prices and remain cautious."

Will she be right again?

Real Time Trading Signals*for

Trade Date: 5/13/08

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

1) VA buy @ 8:35am at 1405.25 = -1.75 (1 lot)

2) PP buy @ 9:50am at 1398.75 = -1.00 (1 lot)

3) OTF sell @ 10:40am at 1400.50 = -2.00 & -2.00

4) FT buy @ 11:40am at 1401.00 = -.50 & -.50

5) Engf buy @ 1:00pm at 1403.50 = b/e (1 lot)

6) OTF buy @ 1:40pm at 1402.25 = +3.50 (1 lot)

7) Algorithm trades (7)...combined total...-0.25

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

1) VA buy @ 8:35am at 1405.25 = -1.75 (1 lot)

2) PP buy @ 9:50am at 1398.75 = -1.00 (1 lot)

3) OTF sell @ 10:40am at 1400.50 = -2.00 & -2.00

4) FT buy @ 11:40am at 1401.00 = -.50 & -.50

5) Engf buy @ 1:00pm at 1403.50 = b/e (1 lot)

6) OTF buy @ 1:40pm at 1402.25 = +3.50 (1 lot)

7) Algorithm trades (7)…combined total...-0.25


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