DCB indeed!

by Larry Levin


I have to start out tonight by thanking all of you who sent in so many great comments to last night's email. If you haven't sent yours yet, click that "send" button today.

Yesterday's email wondered if Wednesday's bounce was about to spark a short covering rally with some substance, or was it just a dead cat bounce (DCB)? Given today's boot-stomping, it's safe to say "DCB indeed!"

The market just keeps getting barraged with bad news. Late yesterday JP Morgan debt was downgraded. GM admitted today that it is just days away from bankruptcy. GE's debt and share price is under pressure too, as some now say GE could face bankruptcy soon. Wells Fargo debt was downgraded. Shitigroup traded BELOW $1.00 today (yes, it's a penny stock now) and may be banished from the Dow along with Bank of America.

And all of this happened before what could be a death blow: tomorrow's jobs data. Of course, it could already be "baked in the cake" - who knows?

At one point today GM shares had dropped 18% when its auditor stoked fears that the carmaker may not make it. Moreover, GM reiterated in a recent SEC filing that bankruptcy is a real possibility (read: inevitability) if its "viability plan" fails to be viable. GM wants another $30 billion, as well as another $6 billion from foreign countries (because it has manufacturing plants in these other countries).

In the words of mega-accounting firm Deloitte & Touche: Recurring losses from operations, stockholders' deficit and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.

I read a Dow Jones report that said GE Capital credit default swaps worsened even as GE released a statement emphasizing its strong cash position. The CDS are most recently quoted at 17.5 points up front, from 16.5 points up front earlier today, according to Phoenix Partners Group. That means investors must pay $1.75 million up front, plus a $500,000 annual fee, to protect $10 million of GECC senior bonds against default for five years.

That means the first year cost is about $2.25 million, which is a 22.5% first year cost to insure $10 million against default. Apparently, the market is saying that the odds of GE going bankrupt within the next twelve months are greater than one in five!

Adding more fuel to the fire was a memo from Shelia Bair of the FDIC. The FDIC needs to change banks new fees to replenish its ability to take over insolvent banks because it's running out of cash. "Without these assessments, the deposit insurance fund could become insolvent this year," FDIC Chairman Sheila Bair wrote in a March 2 letter to bank executives. "Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative."

If that wasn't bad enough, tomorrow morning could be one of the most important data points in decades: the monthly employment figures. As mentioned above, the sure-to-be-bad-data may already be factored in. However, past month's figures are always "updated" which could be problematic if revisions are extremely negative.


Previous Day's Trading Room Results:

Trade Date: 3/5/09

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

1) IDVA buy @ 9:50am at 693.75 = +1.75 (1-lot)

2) TP sell @ 10:50am at 688.50 = +2.00 & +2.00 (2-lot)

3) FT sell @ 11:30am at 688.75 = b/e (1-lot)

4) TP sell @ 2:20pm at 687.00 = +4.00 (1-lot)

5) Algorithm positions (11)...combined SofT and Algo total...+15.00


Electronic (YM) Mini-Dow:


1) Sell @ 9:35am at 6,740 = -9*2

2) Buy @ 11:49am at 6,643 = +5 & -10...-$115.00 net



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