In another show of resiliency, the markets rallied sharply yesterday. Over the weekend, the Obama administration provided some more much-needed details about its âplan.â The centerpiece of the proposal is targeted towards toxic assets a.k.a. illiquid assets (most of which are real estate related). Basically, the thought process is that as much as $1 trillion in purchases of the toxic assets using about $75 billion to $100 billion of the remaining Treasury bank-rescue monies. The montage of utilizing public and private funds also will require financing from the Federal Reserve as well as debt guarantees from the FDIC. Astoundingly (right or wrong, but it is âastoundingâ in light of recent financial events), the plan relies on the concept of leverage. Utilizing leverage will allow the government to âinvestâ just under $100 billion into $500 billion of powder as it attempts to rid the system of the toxic assets and get credit free-flowing anew. The way it will work is as such: if, say, Bank of America (BAC) wants to purge $50 million of troubled loans with a face value of $200 million, the FDIC would study the loans and determine the correct amount of leverage to use â up to a 6 to 1 debt to equity ratio. Thus, if the loans sell for, say, $42 million at an auction, the buyer would only have to put up $6 million. The Treasury would put up $3 million, private investors would put up $3 million, and the balance ($36 million) would come from FDIC bonds. If the loans decline in value from $42 million to $36 million, the Treasury and private investors would be wiped out with the FDIC taking on the loss thereafter. If the loans went to $48 million, the investor and government would double their money. Several long(er)-term things here- first, arenât we always told not to use a great deal of margin- particularly when holding long-term investments. And didnât many elected officials (of both major political parties lest we go down that road) criticize the usage of âleverageâ in the first place? Second, the concept of the government treating our money as a casino boggles my mind. This may well work and I readily acknowledge that I think this is the best idea of any of them so far, but it boggles my mind. Third, is it enough? Will $1 trillion fix the problem? Put another way, does anybody truly know what the cost is to fix the problem (unless the markets sort it out by themselves)? Is an artificially-derived market the best market to have? Next, will people hold back from doing this out of fear of a backlash if it works that their profits will get taken away ala the people who got AIG bonuses? Finally, I wrote a piece awhile ago about this- the most important thing here is to let these instruments trade. A pricing mechanism must be established â the faster the better. If the pricing mechanism cannot be established, how can a market be established? That said, in the immediate-term, this is an idea that the markets seem to be comfortable with. The concept of ridding balance sheets of toxic debt is one that would theoretically unfreeze long-locked credit markets. Thus, the markets had a huge rise yesterday. Is it sustainable? Now, see, that is not for me to answer because I day trade- I trade what I see. And when I see an up tape, I trade moreso to the long side and vice versa. Again, trade what you see and stop thinking. I literally had to walk out of my office yesterday a few times to keep my head clear as many people were skeptical of the rise and kept looking for âshortâ opportunities. Itâs good to try understand what is going onâ¦but do not try to make sense of what is going onâ¦go with what you see. Markets in Asia were up about 2% on average on the heels of Wall Streetâs rally. In Europe, the rally paused after higher-than-expected inflation numbers in Britain; the DAX is up about half a percent while Britainâs FTSE is down 1% or so. Oil is down a little, but the dollar is stronger. State-side, futures are down as doubt seeps in a bit after yesterdayâs huge gains over some of the longer-term gains cited above. Also, the central bank governor of the Chinese equivalent of their Federal Reserve gave a passionate speech calling for one global currency with the U.S. dollar out as the worldâs reserve currency. As the Chinese government is weary of what is going on here due to their stake in the U.S. bond market, this carries some weight. Look for a downside open followed by some short covering as some nervous shorts scramble. After that, it is highly likely that weâll settle into consolidation mode as has happened so frequently after huge rises recently. Use financials as your benchmark and keep an eye to the newswires should more details seep out about the governmentâs plans re this $1 trillion investment. Reiterating- Please understand that if the ideas do not get to the hoped for set-ups cited below, more often than not, one should not blindly trade the symbol next to said idea. If the whole story is not there - If something is good, assume either a short 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 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 SONC- great earnings MOD- closed on a high NCS- closed on a high LNC- closed on a high with a spike at the end of the day BAC, JPM, WFC, PNC, USB, STT, STI- all big banks closed at or near their highs MS, GS- brokers closed at or near their highs X, NUE- steels (and other industrial metals) all closed near their highs of the day AFL, PRU, MET, ALL â major insurers closed at or near their highs CVX, XOM- big-cap oils closed near their highs FSP, SNH, MI, SHO- among smaller REITâs which closed near a high BRCM, RIMM- among big-cap tech closing near a high PCAR- among transports closing at/near a high VLCCF- -closed near a high; breaking out GNCMA- closed near a high RIG, APA, ESV, SLB- among madcap oils closing near highs CMI- closing near a high BNE- gigantic multi-day gain yet closed at high of day APD- mentioned positive on âMad Moneyâ Bad-The following stocks have bad news and/or a weak technical pattern PVH- poor earnings HRB- closed near a low after posting disappointing revenue information FMCN- missed earnings estimates and warned on next quarter WSM- warned on outlook Earnings: TUES MAR 24 BEFORE CCL CMC MKC WSM TUES MAR 24 AFTER JBL RBN Good luck today. Erik R. Kolodny
Thanks for the reply yesterday. Does the level of short interest in a stock play a part in your decision-making, or is that over-analyzing things?
My average time horizon for a trade is about two minutes. So, if I think XYZ is going to go bakrupt, but it is trading at the high of the day at a price of 3, up 1 (50% gain) and I think it can go to 3.20 in the next two minutes, I'll buy 3. Same thing here; I try not to confuse trading with investing. Investing-wise, the level of short interest is important...but in a quick day trade, I for one don't really rely on the level of short interest as a factor.