A Game of Chicken

by Larry Levin

Traders played a normally dangerous game of "chicken" today with the Federal Reserve. Like two children riding their bikes directly at each other, neither flinched - yet. The Fed did not cut rates today, but traders held their resolve - not steering the bicycle away from the impending danger - and drove stocks up to the close, essentially demanding a bailout of AIG. They heard the Fed and Treasury say no more bailouts for Lehman Brothers - for ANYONE they said - but nobody believes them.

As I type this, there is no public resolution to AIG's problems, which makes me wonder: do certain parts of the market actually know of a resolution? If not, today's game of chicken with the Fed is very dangerous. Considering the hundreds of billions in super cheap money from the Fed, bailouts from the Fed and Treasury, and the Federal Reserve breaking the law to make Wall Street happy, would it be out of the realm of possibility that some banks were told of an AIG solution before the public? I say no, it is not unreasonable to believe with the craziness that is happening today.

Or perhaps it was something else? Some of the guys on the floor today were so flummoxed by the massive and immediate reversal higher at exactly 1:38pm Central time today that they were sure the government was buying. Again, with the suspension of Federal Reserve Act rules, with the Governor of New York willingly allowing AIG to break insurance laws to acquire funding from subsidiaries and more, why would it be crazy? These traders were sure it was the Plunge Protection Team (PPT).

What caused this accusation? The buying at 1:38pm led to a colossal explosion of S&P500 futures of 25.00-points in just 90-seconds - on NO NEWS! A 25-point rally often doesn't occur over a several week period, but today it happened in 90-seconds. There was no reason for it at all. So the boys in the pit were saying the cat was let out of the bag, regarding an AIG rescue plan, and that the big Wall Street banks (BAC, MS, GS, WB, WM, C, etc) were told, but that we won't learn about it until this evening. Their other idea was the PPT stepped in to buy thousands of futures contracts which instantly reversed the post non-Fed-rate-cut-slide, which is believed to have reversed the 1987 crash. After its successful initiation, the executive name was given as The President's Working Group on Financial Markets and was officially signed into law by Ronald Reagan with Executive Order 12631.

I, however, posited a different possibility. I suggested to my fellow traders that tens of thousands of US citizens caused the reversal. Yep, thousands of Barney Bungalow's and Joe Six-Packs called their brokers at EXACTLY THE SAME TIME (1:38pm) and collectively said: We don't care about AIG. We don't care about Lehman's bankruptcy. We don't care about the Fed not cutting rates. We want to buy, buy, buy, and we want to buy S&P futures for some odd reason - just buy!

Oh mercy, we had a good laugh. If you believe the public turned around the markets today at precisely 1:38pm Central, I have a great deal on some collateralized debt obligations (CDOs) and mortgage backed securities (MBSs). LOL!

Real Time Trading Signals*for

Trade Date: 9/16/08

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


1) OTF buy @ 10:25am at 1184.00 = +3.75 (1 lot)

2) Very Volatile Conditions again today.

3) Algorithm positions (8)...combined total...-3.25

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

1) Buy @ 7:40am at 123.100 = -2.5*2...combined total...-5.00


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