The Credit Crisis Financial Stocks Short Journal

My decision on the FFF should be an easy one. I need to hold the futures even if I'm not sure 100% if there will be a cut or not.
If there is no cut, the dovish statement and cnbc reports that aig faces $75b+ margin call and likely bankruptcy by wed plus a meltdown of financial stocks that will follow will bail me out as the market prices in a .50 cut for oct(I'm holding the november contract) if there is a cut then the fed funds bubble should be back as the market prices in an avg 1% ff for 2009

the fed said in august the next one is up, they also told the market fu no bailouts with LEH/AIG it would be strange for them to bailout the market out and lose credibility like this but I think these academics had enough with their tests on the market.
If I lose money betting in a cut after the worst stock market collapse since 9/11, major bankruptcies and informed ff traders agreeing with me then I cant blame myself. FFF is also long fixed income, so any major disaster up to Nov and I make money

The risk is, no cut and a bailout of AIG which leads a market recovery but I might be able to hedge that with long XLF

I agree with cutten here, this is time to bank profits on the shorts and look to buy XLF. I'm going to be patient on this one because when you dont think they can go lower, lower they go but all the hate for financials will go away quickly when the market finds the right excuse
 
The arguments against a prediction of a cut doesn't seem to make any sense('it wont help'). They pale with comparison with

The largest bankrptucy in US history with the threat of another huge bankruptcy with the worst stock market decline since 9/11, this type of thing will have a big effect on the fomc voters I dont think arguments against it will have as much weight as the ones for it. 'insurance ease' comes to mind.

pimco also seem to be over rating the change of no change because they dont want to lose face. informed ff futures traders are expert handicapers of changes in fed days they dont get this wrong, the ease will come
 
I was wrong on the fed cut. I think I know why. Having read greenspan book and observed the bernanke fed I'm positve the fomc knew about the AIG bailout.
These guys pay a lot of attention to market expectation and orderly markets.

The very phrase 'emergency meeting' tells you that when there is panic they step in and help(like 125bps worth of cuts because equities were being meltdown back in jan).
So a cut would be a way to calm the markets even if they think their other tools are more effective. Absent of the aig bailout if this was just about lehman going under, equities being decimated they would have cut.

I mean how likely is that the fed will hold when the TED spread is on the moon and people are worried about markets freezing?the last thing they will do is inject more fear by frustrating the market.
But given that they(correctly) knew that AIG would have a bigger impact they just figure the bailout would bring down fear and spreads. So I stand by my view that this is not the enviroment that the fed says fu twice(not with the ted spread on the moon!)

That said I think I learned some other lessons here.
-When there is fear and emotions are running high relying on the market is more risky

The ff traders tend to get it right but yesterday emotions were too high so they must have overstimated the chances. perhaps the true odds of a cut were 60%. 30% with a aig bailout on the pipe. so when the fff rocketed to the moon when the vix opened at 33. I should have taken my profit(that pig flew to as high as 98.3x :eek: )
In other words, I relied on a expert bookmarker/handicapper but he was a little drunk that day

Another lesson is that the fomc doesnt like to change their mind quickly. if pimco was having a tough time changing their mind then I should have know the fomc would have a even HARDER time. these guys are academics they are not used to admit that they are wrong and be flexible. they spend the last 40 days thinking of no change, a few events didnt made them change their mind.(because they already had aig on their sleeve)
they need the 'adjustment meeting', fisher calms down, they mention export growth likely to slow and setup for a cut down the road. They are still a bureaucracy after all.

Fortunally the impact to my PL was limited. the nov contract is at 98.15, well above what is was before lehman brothers but I did let a ridiculous profit escape
 
Just switched from the fed funds contract of NOV at 98.15 to JUL 09 98.08

I stand to make more bps and I will get an extra 5 meetings(total 6 meetings).
I believe we can get 2 cuts and maybe a third one. so I get to make 50-75 bps, my downside is the fed standing pat and I lose 8bps. High R/R but thats ASSUMING NO DISASTERS!
Nationwide banks runs(lead by fdic distrust), more large bankruptcies, terrorist attacks, dramatic downturn in the economy could make the potential profit on this trade became silly

I think is an excellent way to play the credit crisis, if you look back at the last credit crunch(90-91), greenspan slashed the rate starting in 1990 from 8-7%(depending on which rate you are looking at) to 3% and then kept it there up to 1994, the fed being the bereaucracy that they are it takes time for them to move

The risk here is a comeback of real estate, the economy AND commodities but this is the fed the cut rates or stood pat when commodities were in a meteoric rise. We won't see a performance like that in a long-time and even then fed will likely do nothing, fearing a double dip recession and losing face
 
An update on financials I'm looking to short (or add to existing positions) when the VIX falls back closer to 20:

WM, AIG

then WB, MS, NCC, ETFC, AIB, IRE

SFI (lower market cap than others)

then ones I am not as confident about:

RF

GS UBS C RBS BAC/MER LYG/HBOS

MER and HBOS were lucky to get rescued. If they have significant problems then they could still be good shorts. Alternatively the predators (BAC and LYG) could be short candidates.

Also, depending on how much free money the government gives to the autos, GM and F are very sick puppies.

SIRI is also a good short, however it has fallen a lot in recent months, and chews up a bit of margin given the sub $1 share price.


Quote from m22au:

http://www.minyanville.com/articles/index.php?a=18620

Beyond Fannie, Freddie: Three More Problem Children?

Good article about RF, WM and LEH

m22au's list of financials to short:

FRE and FNM
WM
LEH, MER, WB, RF
AIG

(GM and F excluded from this list because they are primarily carmakers)
More...
 
rros, I can't see anything new in the 8k from this morning. It just looks like the press release from earlier this week.

Am I missing something?


Quote from rros:

Are you still considering AIG a short after the latest 8-K filing this morning?
More...
 
m22au, there's a line in there that says:

"In connection with the revolving credit facility, AIG issued a warrant to the Board of Governors of the Federal Reserve ("Federal Reserve") that permits the Federal Reserve, <b>subject to shareholder approval</b>, to obtain up to 79.9% of the outstanding common stock of AIG (<b>after taking into account the exercise of the warrant</b>)."

1. There will be a shareholders approval (or not) for this.
2. The 79.9% ownership takes place only after the exercise of the warrant. And we don't know the details.

It appears those who thought the 79.9% stake was a fee in exchange for the loan weren't correct.

Although one can argue that the approval must have been tacit at the meeting with management and that the warrants carry a nominal value of zero, the wild card could be Greenberg who may try to re-negotiate the terms to more favorable ones.
 
Well game over for us at least for now. sec banned short selling in 799 companies till october.
I'm thinking they are doing short-sellers a favor here. the outlook for financials in the short-run is very good, they were holding up strong till LEH bankruptcy. (even then LEH massacre the week before barely got financials down much)

I'm starting to grow convinced that the stock market doesn't really pay attention to the fundamentals, what you have is a shift in moods. if a piece of news comes out today saying that a money market fund is blowing up I dont think anybody would care, two days ago this would send everybody running for cover. a 400 point day plus hopeful news can be quite a mood changer, investors are likely to interpret anything as good news from now on and ignore bad stuff(unless its just so ridiculously bad). the amount of ridiculously bad news on this crisis have been so high, thats why the market is not getting a break but without shortsellers and with a mood change like this, I'm getting out of the way

I made a ill timed XLF long yesterday. Jumped a bit too soon but I was confident a turn was around the corner, we have extremely active government officials(plus election year)
the correlation between big moves by then and a high vix must be pretty high
I was worried about a crash but I just kept reminding myself, dude if you get a crash you got unlucky

We better think of creative ways to sell things short, otherwise we might be publicly hung in times square by the government one day
 
This is NUTS. fff for Jul 09 had an ask at 97.79 the close of yesterday was 98.23
The ff market is using the equity market as a guide and everybody is just short covering. so if the expert handicappers went wild I need to fade them. Just avg down on the JUL 09 contract. this is NOT SUSTAINABLE. I lighted up on XLF as well
 
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