Brokerage Downgrades

by Larry Levin

Today was all about downgrades and financials in general. The financial meltdown started in Europe with a British lender admitting to mortgage problems and then accelerated when Standard & Poor's downgraded several large banks. British lender Bradford & Bingley PLC warned of a major profit fall due to mortgage lending losses. Stop me if you've heard this one before...and the major profit warning caused a sell off of the entire financial sector. Some are questioning if the worst is indeed over. It also raised concerns that this firm, as well as many others would have to raise more capital to boost its balance sheet, which depresses the value of current shareholders.

Later, the ISM and construction spending reports were released: both negative. Although they were "better than expected," they couldn't buoy the market today. Perhaps the fact that a "prices paid" component of the ISM report (read: inflation) was much higher than expected.

As the mortgage mess rolls on, Wachovia Corp. ousted its chief executive officer. Not to be outdone, Washington Mutual ousted its Chairman. Both of these actions led to more fears that these banks will need to raise more capital, or are at least on shaky ground.

However, today's real coupe-de-grace came from this afternoon's downgrades of Lehman Brothers, Morgan Stanley, and Merrill Lynch among others, by Standard & Poor's. The rating agency also said it may downgrade Wachovia Corp while it revised outlooks to negative on Bank of America Corp and JPMorgan Chase. The outlook indicates the likely direction of the rating over the next two years.

"The negative actions reflect prospects of continued weakness in he investment banking business and the potential for more write-offs, though not of the magnitude of those of the past few quarters," an S&P analyst, said in a statement.

This news hit the tape about 11:30am CST which caused the S&P to plummet to 1377.70. Did the Bradford & Bingley news actually cause the large early sell-off from the open? Why no, it did not. To be sure it helped, but the real reason was the S&P downgrades of the major investments firms mentioned above.

Whoa, "what gives" you must be thinking? Were the downgrades announced at 11:30am CST or at least 3-hours earlier -- before the open? Well, the answer is BOTH. As you must surely know by now, Standard & Poor's is in bed with Wall Street. S&P pays its bills via Wall Street clientele, so a little "quid pro quo" occurred this morning when, as reported by Charlie Gasparino on CNBC, S&P warned these firms that it was going to announce the downgrades early this afternoon on the East Coast.

So what happened was the "tip," or "inside information" if you like, was used to short the market before and at the open. Remember, this information wasn't given to Saint Mary's School for the Blind; it was given to Wall Street's biggest INVESTMENT BANKS,
causing the market to plunge at the open. Said another way, S&P called these major banks and said, "Blue Horseshoe loves Anacot Steel!"

Question: Did anyone call YOU before the open to tell YOU there was going to be a major announcement regarding investment bank downgrades in the early afternoon?

No? Hmm, I didn't think so.

Question: Do you think the SEC will investigate this, regardless if S&P normally warns the downgradees of their pending doom, because of the huge market move and these firms potential to short that news? Do you really think this information was kept from being passed along to their trading desks to umm, ah-hem, mitigate their coming stock sell-offs?

Answers: No, and hell no. Ah yes, there is the stock market...and there is the real stock market/Wall Street.

Real Time Trading Signals*for

Trade Date: 6/2/08

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

1) B/away sell @ 8:35am at 1395.00 = +3.00 (1 lot)

2) OTF sell @ 10:00am at 1387.25 = +1.00 (1 lot)

3) OTF sell @ 12:30pm at 1380.75 = +1.00 & -1.00

4) OTF buy @ 1:40pm at 1380.75 = +1.00 (1 lot)

5) Algorithm trades (3)...combined total...+9.50

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


1) None of the ER trades were filled today.



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