There have been two major developments overnight which have rocked Wall Street. Shortly after the close yesterday, it was announced that Bernard Madoff was taken into custody by the FBI. Madoff was the former chairman of the NASDAQ stock market and the owner of Madoff Investment Securities, LLC, the closely-held market maker entity heStarted in 1960. More notable is that he extraordinarily quietly was running a $50 billion hedge fund. He admitted on Wednesday that the whole thing was one big Ponzi scheme and that the firm is insolvent. Thus, investors who thought they had $50 billion suddenly donât have $50 billion anymore. And it is not just hyperbole; no less than the SEC note that all of the assets of the fund are âmissing.â This news in and of itself wonât affect the market in that Madoff has to sell what he has in order to cover losses because, well, there isnât anything. The way it will affect things starting today is two-fold: first, people who thought they had money suddenly do not and they may be forced to liquidate other positions. Because many of these entities are large institutions, this may have a direct impact on the futures market. Second, many hedge fund investors will be taking a look at exactly what they have their money in and some may panic out particularly when combined with the end of the year on the calendar and in wanting to salvage what they do have. And we hadnât even gotten to the main course yet. The other development that took place last night was that the GM bailout bill failed in Congress. The amount of money - $14 billion- was a mere Band-Aid to the problems besotting Gm and Chrysler and with the UAW unwilling to bend on wage cuts before 2011, the bill failed to muster the 60 votes needed in the Senate. The gut reaction here is that people will begin to comprehend of a world without GM, but this has a far-reaching impact on entities such as auto parts suppliers and dealers. We must keep in mind that the first House $700 billion bailout bill failed as well and the markets reaction was one of sheer terror. Thus, today will be a day of sheer emotion- there will be a little greed and a lot of panic. It is a day in which day traders can do very well if they get to work early and prepare while being disciplined throughout the day with tight stops on all trades. It will be very illiquid and volatile so please be careful and certainly keep your temperament about you; donât ask âwhyâ a stock is going up or down rapidly if it is going against youâ¦know where you are wrong if wrong and stick to it. And if you are right, ride the wave because today is one of those days because there will be a lot of waves- for the prepared trader. Overnight, equities in Asia were down about 5.5% in both Hong Kong and Tokyo with declines extending to 4% to 5% throughout Europe. Oil is down sharply and the dollar had slipped to another low against the yen with bonds sharply higher. State-side, markets are going to open sharply lower. Trading will be very illiquid and volatile all day. Most notably is that it will be rumor-driven. Prices are likely to stage a small rally mid-morning as shorts take in some of their good fortune, but if there is no major development to shift sentiment intra-day, the sell-off will likely gain steam as the day progresses. Reiterating-If the whole story is not there - If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified- Good- The following stocks have good news and/or a strong technical pattern MATK- decent earnings AIPC- closed near a high; potential momentum buy thru yesterdayâs 22.82 high Bad-The following stocks have bad news and/or a weak technical pattern GMH- if you can short this thing anywhere above 3.50 â particularly pre-open, it is likely a wonderful short with the common shares of GM tumbling as well SOA- closed near a new multi-year low; looking to short thru 4 if it opens above 4 WAT- warned badly for the fourth quarter SLG, AMB, AIV, SPG, VNO, EQR- among the REITâs that were hit very hard yesterday; looking for continuation thru yesterdayâs low on all of them (SLG 17.80, AMB 15.97, AIV 10.02, SPG 45.63). However, if they all open higher, sell off a little to around unch, and then rally back to opening highs, they are all buys CTBK- nearing a multi-year low of 5.02; may gravitate toward that today USB, WFC, JPM, PNC- all major banks closing near lows. Same story as REITâs; short thru yesterdayâs lows if they open above them (USB 24.71, WFC 25.71, JPM 29.74) yet if they open a tinge higher and hold unchanged, buy thru opening highs HTLD- nearing 12.81 trend low; may gravitate toward and through that today ISYS- closed near low after posting terrible earnings; look to short thru Thursdayâs 15.41 low if it gets there Earnings: none today Good luck today. Erik R. Kolodny
The bailout failure is most likely priced in. I also do not see the significance of the fund failure the way you do and doubt it will cause much of anything. My bias is short but I don't think it will be as bad as you suggest. In any event I don't care because I will trade what I see.
I alway trade what I see; it is just that I try to set a bit of a framework for myself going in; for instance, I shorted that GPM early this morning above 3.50 (3.74 actually) and covered an average of 3. I just jot down my thoughts and ideas and use the if-then algorithms the best I can. What I am saying re the fund failure is that existing fundholders will question the safety of their money. And as we are in the 'act now, ask questions later' mentality of the day, it is entirely plausible that the sell-off extends. madoff was well-trusted; if this could happen to his fundholders, it can happen anywhere. If the bailout failure was priced in, GM wouldn't be down 30% more this morning and the futures would be a lot steadier. In any case, again, it is as you say- trade what you see.
The bailout means almost nothing for the common share holder. It will probably be bad, dilution etc. The Government is going to want GM to lower it's debt. How is that done? Issuing stock to pay down debt. Next question is what I have been preaching about the banks, when is a profit expected? I don't see one for a long long long time, unless they have an Epiphany. However, what Erik preaches is buy the new highs, short the new lows. On a daily chart I would be shorting GM. If I could short them, the question would be "How many do you want?" I have not been able to locate a share. Has anyone been able to get short?
It's not about the "news" . . . it's about how the marketREACTS to the "news" that is important. The market had 4 straight up days during day after day of bad news from TXN, FDX, etc before profit-taking took over on Thursday afternoon. Many of the steel, coal, energy, fertilizer, and oil service stocks got very over-extended after 30-60% gains. In my opinion, the auto "bail-out" news ( this morning ) is merely a side-show that became the media's "excuse" for profit-taking. Watch how the market closes today. If it continues to shrug off "bad" news and stocks close well off their opening lows. . . the uptrend since last Friday's low is still intact.
Exactly. Here is how I perceive it. Everyon ethinks GM is going to approach ZERO. But, when the market starts bidding up F it drags GM with it. When the stock trades at a high it brings in two market forces, conspiracy theories (someone must know something) and short covering. I followed Erik from his chatroom. We bought GM at 4.12 which was a high and when F was making new highs. It was a trade to do in size, made 5 and 12 cents. Then it sold off. Pricing and timing. You can be right on the daily, and wrong to the minute.
Well put. On the S&P (March ES), the overnight low was exactly a 50% retrace of the all-time lows to the most recent high. And yet the total sum of the recent bad news is greater now than when the market hit that low. The market's discounting of bad news may well have already begun.
Thank you gentlemen. Finally, a thread of which quality thoughts are shared. Lets try to keep it. Does anyone have any thoughts of what is the next shoe to drop? Can this Madoff scandal lead to more redemptions, ie selling? Erik, What do you think?