Worst January Ever

by Larry Levin

Some say, "As January goes - so goes the market." It is supposed to be a predictor of how the rest of the year will be, which according to last month's decline, would portend another awful year.

Personally I believe this has as much predictability as ridiculous NFL comments such as, "Every time Curt Warner has had a breakfast of sausage and eggs with a side order of corned beef hash, 3 days before the big game, followed by three lunches of meatball sandwiches and Shasta - he wins 80% of the time by a 3-point margin." Yeah, right.

Both comments are in a word: silly. Every football game, as well as every January in the stock market, is different (good or bad) for the reasons at the time. Said another way, if the stock market has another poor year it will be due to the current economic malaise and bank insolvency, not because the Dow and S&P 500 closed about 9% lower in January.

During Friday's trade the market had started a rally in the early afternoon that broke above a well defined resistance level. It looked as if the S&P was going to make an attempt to charge into the close because the rally was driven by strong buying. However, that buying was cut off in an instant by a Charlie Gasparino breaking news comment on CNBC: the Obama administration was reconsidering the "bad bank" idea. The market dropped with heavy selling volume on the news.

I was going to title today's missive, Bad Bank - On Again/Off Again, because Washington is once again considering the idea over the weekend. Washington is determined to screw the taxpayer by giving him all the garbage debt in hopes of appreciation at a later date. That's a Hail Mary pass if ever I heard one. Once this is done, surely Tim Geithner or a whiz-kid from Goldman Sachs will come up with a plan to repackage the toxic debt with treasuries and other government-controlled IOUs and sell the newly bundled products to investors in CRAP auctions (Cleverly Revalued Asset Plan) in hopes of finding a "greater fool".

Meredith Whitney at Oppenheimer is one of the few analysts that are worth listening to because she looks at both the upside AND the downside of assets, but more importantly, is not afraid to sound the warning bell. Since she has been 100% correct during this bank insolvency led bear market, I looked up her thoughts on the bad bank idea. Not surprisingly, she agrees with me.

In an interview with Fortune she said "The bad bank is a covert way to recapitalize banks by paying more for the assets than the market would. Then the banks might be able to write up the value of the securities. This would give them, on paper, more tangible equity. In theory they would look stronger."

But Whitney believes the banks will remain weak, even if their books look healthier, because they have to deal with a lot more than just bad assets: As consumer and business spending slows, banks will still incur losses on their "good" loans; they would be forced to set aside more cash, which would cut into earnings; and there's also the simple fact that a recession means less demand for their business.

Whitney says what most of us believe, which is that it would be better to force big institutions like Shitibank and Bank of America to sell the marquee pieces of their businesses that they can, fill the hole left by their horrendously bad decisions, and shrink their businesses.

"That's what people like you and me, what taxpayers have to do when we are in financial distress. We have to sell whatever it is we can, which is almost always our best assets, and deal with it. We can't just sell what we want to, which would of course be our bad stuff."

Of course that is exactly what the banks want to do - stick you with the bad stuff and hold onto ALL of their good assets. And why wouldn't they if the banks know they can get away with it? If they know you won't complain? If they know the Senate will roll over once again?

But the banks say they can't sell any of their assets now, which is complete nonsense. It may not be the price they want, but that's too bad. "There is always a buyer at the right price, be it private equity or a rival business or another bank," she says. "If the government provides a facility through which people can get long-term funding, then buyers will come to the market for the 'crown jewels' assets of these banks."

Previous Day's Trading Room Results:

Trade Date: 1/30/09

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

1) FT buy @ 12:20pm at 832.75 = -2.00 (1 lot)

2) TP sell @ 1:00pm at 829.00 = -2.00 (1 lot)

3) Algorithm positions (1)...combined SofT and Algo total...-4.00


Electronic (YM) Mini-Dow:


1) Buy @ 12:26pm at 8010 = -21*2...combined total...-42



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