Sell-Off

by Larry Levin

Stocks fell for the first time in four days led by the financials, or American International Group (AIG) to be specific, on fears that its losses will widen and that credit write-downs will keep rattling the financial system in general. However, the volume was extremely low, which certainly aided in the size of the loss. The Dow closed down -2.08%.

Before we opened this morning the financials were dealing with a Friday hangover of sorts: another bank closure. Columbian Bank, with $752 million in assets and $622 million in total deposits, was shuttered by the Kansas state bank commissioner's office and the Federal Deposit Insurance Corp., on Aug. 22. The FDIC's problem bank list grew by 18% in the first quarter to 90 banks with combined assets of $26.3 billion.

AIG tumbled 5.5% after Credit Suisse Group said the company may lose another $2.41 billion this quarter on mortgage-related write-downs. Washington Mutual Inc. and Huntington Bancshares Inc. each dropped more than 4% after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year. Lehman Brothers also fell 6.7% on concern that last week's savior, a Korean bank, will reconsider LEH as its damsel to be saved. The Korean bank is apparently looking for a damsel with fewer warts and other issues.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related write-downs and the global economic slowdown will curb profits at technology and industrial companies. Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to very optimistic consensus expectations, Abhijit Chakrabortti wrote in a note to clients dated yesterday.

So the market had a lot to deal with before it even opened. Many had pinned their hopes for the day and the entire week on today's housing data, who were surely disappointed. Existing home sales were up 3.1% in July. However, as Ross Perot used to say, the devil is in the details: prices are still falling like a rock, 40% of all sales were foreclosure or other distressed sales, and inventories are at a NEW record high.

Inventories are very high relative to sales rates, and would probably be even more so if all those wishing to sell their home actually had the house on the market instead of pulling it off in the face of weak demand and eroding prices, said Josh Shapiro, chief U.S. economist at MFR Inc.

Real Time Trading Signals*for

Trade Date: 8/25/08

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

1) TP sell @ 11:50am at 1267.50 = -1.75 (1 lot)

2) OTF buy @ 1:00pm at 1269.00 = +1.25 & -.25

3) Algorithm trades (2)...combined total...+.25


ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Sell @ 9:43am at 118.255 = -2.5*2

2) Buy @ 11:07am at 118.275 = b/e (1 lot)...combined total...-5.00


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