Extreme Volatility

by Larry Levin

After a decent open this morning the market ran into resistance. For two-hours after the open, the market traded in a small range but then it changed - the market suddenly dropped like a rock. From the bottom a mirror image took place: after two hours of a small range, the S&P 500 suddenly exploded. When the dust settled, the indices had all closed lower.

The volatility started when San Francisco Federal Reserve President Janet Yellen said in a speech the financial markets remained fragile, and that it will take time for conditions to improve. My expectation is that market functioning will improve markedly by 2009, she said. But things could get worse before they get better. She also said that by historical standards current interest rates are very low and therefore rate hikes in the near future should not come as a surprise to anyone.

These comments crushed the stock price of both Freddie Mac (FRE) and Fannie Mae (FNM). Freddie Mac shares plunged $2.59 (17.9%) to $11.91 today after sinking to a 52-year low of $10.28 earlier in the session. Fannie Mae shares tumbled $3.04 (16.2%) to $15.74 after hitting an annual low of $14.65.

The Financial Accounting Standards Board has proposed a change to accounting rules that would require financial services firms move off-balance sheet securitizations to their balance sheets. Securitizations -- the sale of bonds backed by pools of loans like CDOs -- are one of Fannie Mae and Freddie Mac's primary sources of generating new revenue. If FNM and FRE had to add portions of their securitizations business back on to their balance sheets, Fannie Mae would need to raise $46 billion in cash to meet capital requirements, while Freddie Mac would need to raise $29 billion. This helped drive their share prices lower.

Since these are quasi-governmental agencies, you can bet that they will be exempt from silly accounting rules.

Merck & Co. was also hammered -4.8% today after a downgrade by UBS. And the financials weighed on the indices as they were once again crushed.

Real Time Trading Signals*for

Trade Date: 7/3/08

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

1) VA buy @ 8:40am at 1271.00 = b/e (1 lot)

2) 80% sell @ 9:20am at 1270.75 = b/e & -1.75

3) VA buy @ 9:45am at 1271.00 = b/e & -1.75

4) FT sell @ 2:15pm at 1252.00 = b/e (1 lot)

5) Algorithm trades (1)...combined total...-5.25


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

1) Buy @ 9:43am at 666.2 = -.4 (1 lot)...-$40


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