Monday, September 22, 2008

Wrap - Up

The DJI gave up up of its Friday gains (and a wee bit more) today. The buying vacuum was in full effect as the short sell ban worked as it should have, although not as it was intended. As of 5:52 PM EDT, the Congressional bail-out plan is still being worked on.

Bank stocks were hammered as the interbank market has, quite simply, stopped functioning. Any day now, 3 month LIBOR will carry us over the turn. This will probably be the messiest turn since 1998.

Posted below is my comment from last Friday:

This is a shameful day in the history of the U.S. financial markets. What makes us any different from the shady characters that run the Russian, Chinese or Pakistani capital markets? Changing rule on the fly to suit the needs of the connected few and hurt legitimate traders, remove the ability of an American to have an opinion.

It is now impossible to short the stock of 799 financial companies. Some of these companies' shorts as a percentage of float was as small as 5%, tough to claim short sellers were depressing the price. ETFs have been halted. Since you can't short, option traders are hamstrung. They can't hedge puts, so how can they sell them effectively.

On Black Monday (Oct, '87) the Dow fell 20%. ONE DAY !!!!! 20% DROP !!!! No short selling ban was instituted. The Dow has dropped 20% in 10 months and we need to destroy our integrity? Why shouldn't poor management in the financials be punished by the same forces that made them multi millionaires?


- This does not replenish the capital of these financial institutions, some of whom were not even rated (so you can't claim that shorting damaged collateral agreements). Several of these companies will still need to add capital because THEY OWN CRAP on their books.

- A financial company bail out will have the following impacts: mark to market and equity dilution. The new RTC (or whatever it will be called) is not going to buy the paper at par. They will buy it or transfer it to their books at however many cents on the dollar the paper warrants. No more mystery pricing will be possible, the paper will only have a new home, not par pricing. If there are bail outs, guess what? Equity dilution. Why are people bidding stocks higher when the only possible scenario is dilution in the near future? i don't know either.

- Pakistan initiated a similar short selling ban in June of this year. the market rallied from 11,000 to 12,000 in 2 sessions. it is now trading at 9,000.


Anonymous said...

It is refreshing to get some intelligent and critical commentary on Wall St history in the making! Thank you for starting this blog.

MK said...

Much thanks, please feel free to drop me an e-mail with topics. MK