Procter & Gamble Nov 95.00 Call & Put Volume Spikes (Options Update)

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I was watching the Dow Jones Newswire today and I came across the CBOE most active put/call list. Procter & Gamble (symbol: PG) was number 1 on the list. At the end of the close today PG had 133,100 95 NOV Calls traded and 133,000 95 NOV puts traded. Both had 60,400 already open. So the volume was more than double the open interest so something is up here! It looks like option traders already moved into the 80 strike of both the calls and puts both having 245,000 contracts open. So there will be hundreds of thousands of puts and calls open at the 95 and 80 strike which expires on Nov 21, 2008. The price of the 95 Call today was unchanged at 0.05, however the put closed up 0.45. **Added 11/7/2008: It looks like this was an arbitrage play taking advantage of the Folgers/Smuckers merger. Here's the Wikipedia definition of option arbitrage.

P&G Nov Option Chain (10/30) (Source: Yahoo Finance)

Procter & Gamble's earnings just came out on 10/29/2008. Sales rose 9 percent to $22.03 billion however they dropped the low end of their earnings guidance due to commodity and foreign exchange volatility (Reuters). As of today's close, for the 9/30 quarter, the P/E ratio stood at 16.82 and forward P/E at 14.98. The 5 year range is 16.6 - 24.50 so it looks decently valued given a looming recession. However if there's a big disappointment next quarter the stock could fall to readjust the p/e. Here is the CNBC update with a JP Morgan analyst. Couldn't embed, directs to

Damn It Feels Good To Be A Banker - A Wall Street Musical (Video)

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I had to put this up, thought it was very funny. Biggest financial rap battle in history. "Damn It Feels Good To Be A Banker -- A Wall Street Musical". Bankers vs. Consultants.

St. Louis Adjusted Monetary Base Spikes to $1.174 Trillion (Chart)

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(Source: St. Louis Fed)

That is a HUGE spike in the monetary base, not that we didn't know this was coming. It went from $707 Billion on 10/30/2002 to $1.174 Trillion on 10/22/2008. This is from the St. Louis Bi-Weekly Reserves and Monetary Base release. Here's straight historical data.

Is the Unwinding US Dollar, Yen Carry Trade Overextended? A Look at USD/CAD, AUD/JPY, FXC, UUP, GLD, Charts and Analyst Quotes

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Volatility spilled into the forex market recently. Carry trades have been unwinding as investors began to dump risky assets funded by cheap Japanese Yen and US Dollars. During the past few years investors have been borrowing cheap currencies to buy higher yielding currencies to profit from the spread and exchange conversion while magnifying gains with leverage. They used the Yen and the USD to fund the investments, which were sold to buy the higher yielding currency which ultimately pushed down the value of the YEN and USD.

Recently investors have been fleeing from emerging market risk; dumping higher yielding currencies and buying back the borrowed USD and Yen. The US Dollar Index and Japanese Yen Index were up 20% since the summer. As these safe haven currencies were bid up, and volatility infested the forex market, the carry trade started to lose value. Also overleveraged funds were seeing redemptions and margin calls which exacerbated the situation. The inter-bank lending freeze and the lack of US Dollar liquidity also contributed to the USD bid. Commodities linked to these higher yielding currencies have seen a steep fall. Canada and Australia are big commodity exporters and their currencies were directly affected.

Has the unwinding carry trade overextended itself in the near term? Could there be a CAD/USD, AUD/JPY relief rally? I charted these currencies out last night, and it looks like it is already taking place (as of 12:06pm Est on 10/29/2008). The Fed is supposed to lower rates today which is putting pressure on the US Dollar. It is interesting because global central banks have pumped billions of dollars into the banking system but banks have not been lending it out. Once risk appetite presents itself again and liquidity gets released into the system monetary inflation could make commodities more valuable, especially precious metals, if demand destruction continues to affect energy prices (as Ashraf Laidi, chief FX strategist at CMC Markets mentioned in the video below). This would benefit countries producing and exporting the commodities like Canada and Australia against the US Dollar and Yen.

Peter Schiff, Rick Santelli Talk U.S. Dollar, Gold, and Future Dollar Recycling (10/23 - CNBC)

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Peter Schiff of Euro Pacific Capital and Rick Santelli of CNBC via the Chicago Board of Trade talk about the U.S. Dollar, Gold, and the future of Dollar recycling that is currently funding our deficits. This CNBC clip was on 10/23/2008. Here are a few quotes by Rick Santelli.

"Peter's on to something that I really agree with, that the end game here is that all of these countries recycling our dollars back to support our current account deficit, our trade deficit, even our budget deficit, that once the realignment of the Euro and Pound is done that they aren't going to do that so I agree with him, there's got to be a major higher interest rate environment around the globe when they stop supporting each other's debt habits"

"I deal with a lot of French and Norwegian bankers, I just met with some yesterday, and what I hear is, is that the only thing Europeans liked better than French pastries were U.S. derivatives!"

Dissecting Alan Greenspan's Testimony, Finds Flaw in His Ideology

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I hate to keep writing about C-Span hearings, but Former Federal Reserve Chairman, Alan Greenspan, admitted there was a flaw in his ideology that markets could regulate themselves without a problem. Greenspan didn't price in "failed banking model" risk into his ideology. This kind of reminds me of Long Term Capital Management's collapse in 1998, when unpredictable outside forces caused the genius treasury arbitrage model to fail, and these models were Pulitzer Prize certified.

Greenspan basically said he thought he could trust the banking system, credit rating agencies and loan officers to price risk appropriately when playing with shareholders equity. But with extremely low interest rates, home buyers salivating, and shareholders, CEOs and loan officers getting rich, why would they think about sacrificing their stock price, profit or commission? Debt securitization was also a big money maker and it turned out quantity not quality ruled the game. Greenspan blamed the heated securitization market from 2005-2007, and felt everything before that time period was working out just fine. Originators of debt securities decided not to waste time underwriting because the debt was quickly securitized and shoved off to somebody else's balance sheet, all for a nice fee. So should Greenspan have used his powers to clamp down on the market??? Would he have done something if he was still Chairman in 2006/07, after the fact? Did he lower rates too much to cause the overheated credit market to collapse? What if Greenspan started raising rates in 2003 and not 2004, would that have caused just a minor credit correction? That I wish I knew.

Fed Funds Rate

Below are quotes by Alan Greenspan and Henry Waxman during the hearing, taken from the C-Span script which is attached to the video. The video is queued up to start right when Greenspan speaks. In the beginning of the hearing Alan Greenspan gave his reasons why the financial crisis occurred, and then came Q&A.

Hearing on Credit Rating Agencies (C-Span Video), Plus Chanos Called It on Moody's in 2007

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On Capitol Hill today there was a hearing on credit rating agencies. This was the description from, and I also provided a link to today's video.

"What role did the three largest credit rating agencies - Standard & Poor’s, Moody’s Corporation, and Fitch Ratings - play in the current financial markets turmoil? Former and current executives testified before the House Committee on Oversight and Government Reform."

Marc Faber on CNBC: World In Vicious Downward Cycle, Peter Schiff vs. Jeremy Siegel (CNN).

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Marc Faber made his way onto CNBC this morning. Faber's company, Marc Faber Ltd. based in Hong Kong manages $300 million. Faber publishes the widely known "Gloom Boom & Doom Report" at Here is part of his bio from the website.
"Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude. Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager. Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW'S GOLD – Asia's Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world." Source

Time to Buy Municipal Bond Indexes? A look at the S&P National Municipal Bond ETF

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Why was the S&P National Municipal Bond Index down 12% this past month??(Chart1) Muni bonds have been held hostage by the credit crunch, bank failures, hedge fund redemptions, lack of confidence, and lack of institutional support. Recently no big money was willing to bid up municipal bonds (except for retail investors) which was directly responsible for creating the lack of liquidity and wide bid/ask spreads. The combination of hedge fund redemptions and lack of institutional support created a falling knife in the secondary muni market. Also, investors could be pricing in potential downgrades in municipal credits due to the possibility of shaky underlying credit quality. A downgrade could lower values, increase yields and create more forced selling.

But with all of this said, there comes a point when yield becomes attractive for muni bond investors. It surprises me that the 20-Muni Bond Index tax-equivalent yield to 30 Year Treasuries is almost double (chart2). Usually muni bond yields are lower than treasuries because they are tax exempt, which is a main reason why they're so attractive at this point, unless all of the sudden U.S Treasuries get dumped! (Treasury CDS Spreads????) The 20-Bond Index is run by the Bond Buyer which consists of 20 highly rated general obligation bonds that mature in 20 years. Historically investment grade municipal bonds have been a safe investment because the average Moody's investment grade default rate has been < 1%.(chart 3)

S&P National, NY & CA Muni Bond Indexes (Source: S&P Data)

20-Bond GO Index vs. 30y Treasury Yields (Source: Bloomberg 1, 2)

Muni Bond Default Rates (Source: - 3/2007 Report)

Another reason why muni's look attractive is because Moody's might change the way they rate muni bonds.
"Criticized by states and cities for how it rates their bonds, Moody’s Investors Service said on Thursday that it was considering rating municipal debt on the same scale it uses for corporate debt. It would be a significant change for the tradition-bound municipal bond market and could help to lower borrowing costs for some local governments during tougher economic times. It could also lead to less demand for bond insurance at a time when several big guarantors are faltering." NYTIMES, June 13, 2008

The Municipal Meltdown. Current Health of U.S Municipalities (Videos / Links)

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We have seen forced liquidations in every asset class except U.S treasuries recently, and surprisingly it has affected the investment grade general obligation municipal bond market, normally a safe haven like treasuries. Counties, cities and school districts have been directly affected by the credit crunch which rely on taxes and continuous funding for various local projects. The result of the housing bust and mortgage meltdown have lowered real estate taxes significantly which are a huge portion of revenues. Plus revenues from building permits, business licenses, sales tax, and state aid are falling due to the slowdown. So now, just like the banks, debt coverage could become an issue which is why some municipalities are looking to cut programs and even seek short term funding from the Fed. However, the new commercial paper program structured by the Fed does not extend to municipal issuers.

Earlier this year Vallejo, CA went bankrupt (video below) and now Jefferson County, Alabama is on the verge of seeking bankruptcy protection. Go to my post a few days ago 'Jefferson County, AL - Possibility of Biggest Municipal Bankruptcy'.

Buffett Says Buy American Stocks! -NYT

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Big news came out today. Warren Buffett wrote a piece in the New York Times today titled "Buy American, I am.". Here are some quotes from the article, but I suggest you read the whole thing at
"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

"Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."

Here is a video clip from CNBC this morning where Becky Quick explains the article in detail and talks about previous times when Buffett gave the buy signal. At the bottom I provided a CNBC transcript which includes the three most recent Warren Buffett interviews with Becky Quick. 1. After his $5 Billion investment in Goldman Sachs. 2. After he made an investment in General Electric. 3. After the House approved the $700 billion bail out.

Buffett Says Buy U.S Stocks (CNBC Video Link - Couldn't Embed)

CNBC Transcript Link: 3 recent interviews with Warren Buffett

Looking historically, this should be a nice confidence boost for American and foreign investors. However, the Buffett call could take time to digest.

S&P 500 Technical Update, New Low To Test 839.80, VIX Needs 750mg Benzodiazepine

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Between 900 - 1000 in the S&P has been the range where most of the extremely volatile swings have occurred recently. Today it closed right at the lows of the range, 907. If 900 is breached we touch 839.80, or the capitulation point we saw last week. It could happen again given today's volatility levels. Also the Relative Strength Index tested the July lows under 30 last week. It bounced above 30 recently following the upside in the S&P, however it could retest those lows. Usually when the RSI is under 30 continuously it means we're oversold. Surprisingly the Money Flow Index has not put in a new low since July and could be diverging with the S&P on a 4 month basis. On a monthly basis it looks like the S&P 500 is oversold on a technical standpoint. However since the volatility index increased 25% today to 69.25 and the S&P was down 9%, until things simmer down, technical indicators (longer than 5 minutes) will not be able to guide this market. This market needs a daily 750mg dose of Benzodiazepines to calm it down at this point. Hopefully these liquidity injections by the Fed will do the job, and the VIX will double top from here. We’ll see.

At 1:52am, the Nikkei is down over 10%, and overnight Dow and S&P futures are down 1.6%, and 1.8%.

S&P 500 Index (Source:

VIX Index (Source: Yahoo Finance)

Jefferson County, AL - Possibility of Biggest Municipal Bankruptcy In History

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And you thought the sub-prime mortgage market was bad, take a look at Jefferson County, AL. Yeah a county, which is supposed to act like a low risk muni-bond credit. Turns out Jefferson County made some risky interest rate swap transactions against $3.2 billion of debt originated mostly by J.P Morgan. In the early 1990s Jefferson County had sewage problems and was sued by it's residents, so it was forced to incur fixed rate debt backed by sewer/water revenues to rebuild the infrastructure. The financial problems started when the County took advice from J.P Morgan to refinance their fixed rate debt into variable rate and auction debt, or long term bonds auctioned off on a short term basis (weekly to monthly) which kept interest rates low. The County also bought interest rate swaps as a hedge against their variable rate debt, which would indirectly create a fixed-rate bond (bank pays County 1-Month Libor, County pays bank fixed rate on swap). Later on the County even got cash up front by structuring a swap where both parties were obligated to pay a % of 1-Month Libor, with the bank adding .49%. (read the Bloomberg article below). This was all done for large unnecessary fees ($100 Million) to the bank, which could have been used to pay down their debt!.

In early 2008, the sewage hit the fan when the auction rate market froze and banks refused to be the buyers of last resort which caused interest rates to double. On top of that, Moody's and S&P downgraded the County's insurance company FGIC that insured the bonds, which in turn forced investor liquidations and boosted rates even higher. And to finish it all off Moody's and S&P cut Jefferson County's debt rating to junk due to their debt service coverage issues. Eventually Jefferson County couldn't pay their interest payments and defaulted on billions of dollars now owed to swap obligees, and debt holders through insurers. Weren't those interest rate swaps supposed to hedge against interest rate risk? The swaps were not protecting against default or marketability (failed auction) risk which spiked up their interest costs. The swaps were protecting against floating market rate risk since the County refinanced into variable rate debt. In Feburary of 2008, floating market rates were actually moving lower while Jefferson County's interest rates were spiking, so the hedge worked against them. Below is a chart of one of the sewer bonds which is distressed yielding 21%. More information on this sewer bond can be found at (Sources: Bond Buyer, Businessweek, Bloomberg, BusinessStandard).

Jefferson County, AL Sewer Revenue Capital Improvement Bonds
As of 10/8/2008 (Last Sale) -

It's also interesting that it looks like both the banks and the County are trying to hold off a bankruptcy court hearing for as long as they can, and from this article it looks like Jefferson County is trying to squeeze tax revenue from other sources.

Overnight LIBOR rate drops 51% to 2.469%, It's a Start!

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Overnight LIBOR rates dropped 51% this morning to 2.469%, down from 5.09% yesterday. This is a good sign. It's a start, next we need to see a correction in the 3-month LIBOR rate, which actually increased 1.4% to 4.82% this morning. Hopefully the overnight improvement will feed into longer term paper and stabilize these crazy credit markets!

Overnight LIBOR Rate (Source:

You can find LIBOR quotes at, or you can find rates and charts at you might need to register.

Interbank Lending Pressures Continue (Libor Rates), Even With Central Banks Performing Surgery..

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Looking at what's going on in the inter-bank lending and forex market is really interesting. I never thought it would come down to a global funding freeze. Money flow is like blood flow; blood is needed to transfer important nutrients to cells, money is needed for the transfer of goods and services between businesses and people. Without the availability of short-term credit (1-mo., 3-mo.) by lending institutions, the problem trickles down to every company needing immediate liquidity to fund payrolls and day-to-day expenses. This is happening right now. With the fall of Lehman Brothers and so many others on the brink of nationalization, lending between banks has frozen up due to insolvency exposure risk. Nobody knows who is infected which is the reason why Libor rates spiked. Also inter-bank lending pressure hurt those in need of U.S Dollars, which could be part of the reason why the value of the U.S Dollar has increased (lack of supply and institutional hoarding). This forced institutions in need of $US to go out into the forex market and bid it up. Since this continued pressure will have a drastic impact on our economy, the Fed is trying to relieve this pressure by funding 3-month commercial paper directly, lowering the fed funds rate and maybe even taking direct stakes in banks. The Libor rate usually is in lockstep with the fed funds rate, but they've diverged significantly which is a big concern. Plus lowering the Fed funds rate won't work if there's no lending going on, it could spark confidence but a recession would just counteract that effect. Once credit is able to flow again to mid-prime borrowers the crisis will be solved. With the Fed performing 3 day's worth of surgery, 1-month and 3-month Libor rates still haven't come down. Banks are just flat out scared to provide capital. But since there is a lag effect to the fix here is an optimistic view, along with 1-mo and 3-mo Libor 10 day libor charts below. The carry trade unwind is also an interesting story, stay tuned.
"Source: Banks borrow record $420 billion per day from Fed (Reuters, 10/9/2008)

"The Fed's various measures have not been quick fixes for the CP market, but they will eventually help. "People act on a lag. It's not a night-and-day difference," said Deborah Cunningham, chief investment officer for Federated Investors' taxable money markets, on Wednesday. "But people are gaining confidence and that confidence is what is needed to restore normal operations, and it's coming back slowly.""

1 Month Libor Rates (10 Day Chart) - Source:

3 Month Libor Rates (10 Day Chart) - Source:

US Markets Lose 7%, VIX Spikes, GM's Judgment Day (Ticker View, VIX Chart)

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The major market moving news today was about GM. "Standard & Poor's Ratings Services on Thursday placed General Motors Corp.'s debt on CreditWatch with negative implications, meaning the automaker's credit, which is already in junk territory, could face another downgrade". Marketwatch Link This killed GM's stock and exchange traded unsecured senior notes.

Market Summary 10/9/08 (Ticker View)
Volatility Index Spikes

GM (Common Stock)

GMS (Exchange Traded Unsecured Senior Notes)

So it's going to be judgement day for GM soon. Around 8,000 on the Dow is the post '87 crash trend line along with tech bubble lows. So in my opinion 8,000 (+/- 300pts) will not be breached, and we closed at 8,579 today so I think we're not that far from a bottom, unless this DOES turn into a great depression.

Nouriel Roubini: Possibility Of Big U.S Bank Failure, Nationalization (Tech Ticker)

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This is a must see, it's from Yahoo's Tech Ticker which is a great financial internet show. Roubini thinks there's a possiblity of a big U.S bank failure which could be nationalized. This could hurt many institutions exposed, here's the video. I remember he was predicting this financial crisis in early 2007, also look at this recent New York Times article about Dr. Doom and his arguments on CNBC in 12/2007. I'm wondering when the Roubini trade will get too crowded though, we'll see if he continues to be spot on..

Embedded Video FromYahoo Tech Ticker

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer. Dr. Doom, NYT, Published Aug 18, 2008"

Roubini on Kudlow & Co. Bull Bear Smackdown! 12/07

Here is info on Nouriel Roubini from his website
"As Chairman of RGE Monitor, Nouriel provides strategic guidance for RGE Monitor's business and content. Professor Nouriel Roubini is an internationally known expert in the field of international macroeconomics. He is a Professor of Economics at New York University's Stern School of Business and is also the co-founder and Chairman of RGE Monitor, an innovative economic and geo-strategic information service named one of the best economics websites by BusinessWeek, Forbes, the Wall Street Journal and The Economist.

Professor Roubini served as a senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department; has published numerous policy papers and books on key international macroeconomic issues; and is regularly cited as an authority in the media. He received an undergraduate degree at Bocconi University in Milan, Italy and a Ph.D. in Economics at Harvard University, and was previously a faculty member at Yale University."

Tokyo Nikkei 225 Down 9.38%, Coordinated Global Rate Cuts

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The Tokyo Nikkei 225 Index lost 9.38%, closing at 9202.32. This shows that the financial crisis is global. Here's the 5 day Nikkei chart from Yahoo Finance, and it has followed the S&P.. Also many central banks around the world decided to cut rates..
"Fed, central banks cut rates to aid world economy

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent and the European Central Bank sliced its rate by half a point to 3.75 percent. The central banks of China, Canada, Sweden, and Switzerland also cut rates. The Bank of Japan said it strongly supported the actions."

I'm thinking there has to be a an upside correction sometime soon in all markets... We'll see.

LIBOR Rate Update, How It Relates To Consumer (3-Month LIBOR)

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Since the LIBOR rate is all over the news and affecting the global financial system, I wanted to post some charts and information. LIBOR is the London Inter-Bank Offered Rate. Here's a description of the rate and why it's often used, along with a nice flash graphic below.
"Libor, set every morning in London, is what banks pay to borrow money from each other. That in turn determines prices for financial contracts valued at $393 trillion as of Dec. 31, 2007, or $60,000 for every person in the world, and helps set consumer interest rates on everything from home loans to credit cards.

Corporate bank loans are often linked to three-month Libor rates. Libor also affects interest costs on credit cards, student loans and adjustable-rate mortgages. From 2004 to 2006, more than half of the U.S. subprime mortgages at the root of the financial crisis, or those issued to the least creditworthy borrowers, had adjustable rates linked to Libor, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland." Source:, 10/3/2008

Click For Larger Image, via Bloomberg Link

This rate is very important because it measures liquidity risk between banks. Because of so many bank failures recently in the U.S and Europe, banks were unwilling to shell out 3 month loans to other banks because of solvency risk. As a result 1 month and 3 Month LIBOR rates spiked making it more expensive to borrow money. As stated in the description above, the 3 Month LIBOR rate is linked to corporate bank loans, as well as consumer loans including adjustable rate mortgages. Here's a recent chart of the 3 Month LIBOR rate and you can see it spiked recently due to the financial mess.

3 Month LIBOR Rate Chart (Source:

Bernanke's Outlook For Economic Growth Has Worsened

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Here is a video of Bernanke's speech at the National Association of Business Economics conference giving his economic and inflation outlook..
"Bernanke: Economic outlook weaker: Fed chairman says financial crisis will dampen economy well into 2009 and hints at future rate cuts; says recent actions by Fed, Treasury should help economy recover." CNN Money

Interesting Article About Market Sentiment & Time Magazine Cover

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I came across an interesting article from, "Sentiment Now Bearish As All Heck". Gary Kaltbaum talks about many sentiment indicators of a market bottom, and backs it up with 7 reasons. By the way, the Dow at 3:00est is down 311 points to 9,643 and the S&P is down 35 points to 1021 and "Bernanke sees worsening economy, hints at rate cuts".
"I just want to note that all the reactions we usually see at near term lows are being put in place. I did not say bear market bottom... and nothing is 100%. First off... here is TIME MAGAZINE!" Continue with article.

Source: Time Magazine Cover 10/13/08

Jim Cramer on the Colbert Report (10/6/2008 Video)

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Stephen Colbert gets insight on the turmoil of financial markets from Jim Cramer, host of CNBC's "Mad Money." 6:15 minutes (updated from fancast to comedy central video).

Will Fed Lower Rates? Technicals of Fed Fund Futures Chart, Options & Curve

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There's talk on the street that the U.S. will cut the Fed Funds rate, possibly coordinating with other foreign central banks. Here are quotes from the Bloomberg article: Treasury 2-Year Gains Unstoppable as Fed May Cut Rate (Update2), plus a CNBC video with Diane Swonk @ Mesirow Financial.
``My biggest concern has been and continues to be that the real economy is going into the doldrums,'' said Thomas Girard, a money manager who helps oversee $110 billion in fixed income assets at New York Life Investment Management in New York. ``That ultimately leads the Federal Reserve to lower rates, maybe over the next six months by 100 basis points, and if that is the case Treasury yields will decline.''

"Goldman Sachs economists predicted on Oct. 3 the Fed may lower its target by 1 percentage point in coming months. The firm previously expected policy makers to keep rates unchanged."

Here are charts from that show the Fed Fund Futures Chart, Options and Curve. It should be noted that the Call/Put Premium Ratio is 63.50..

Jim Cramer: Time to get out of the stock market (MSNBC Video)

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The Dow Jones Industrials just broke through a major 10,000 support level, which was created from the '94 and '02 lows. Jim is saying we could fall 20% from here and he could be right if we don't see a capitulation volume day with a reversal over 10,000. The post '87 crash to '94 bottoms, disregarding the tech bubble lows, brings us to 8,000 on the Dow, which is about 20% below today's levels. Click the chart for a larger view of these trends. If massive hedge fund redemption's occur and European banks keep failing, it's hard to tell what could prop up this market.

An Idea To Prevent The Next Credit Default Swap Illiquidity Crisis

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In order to prevent this financial massacre from happening in the future there must be capital and collateral ratio requirements that CDS counterparties must follow in order to sustain their ability to honor existing swap obligations if portfolio holdings get distressed. I'm sure Lehman, AIG and Bear had risk controls in place, but they obviously did not factor in any type of credit disaster risk. If anyone reading this knows about CDS risk management practices please comment. Credit ratings agencies and institutional buyers thought these pooled mortgage backed securities diversified away risk, however too much bad risk (sub-prime debt) was concentrated in these securities and cash stopped flowing in, so the A rated securities were written down to distressed levels.

These counterparties must have the ability to honor existing swap obligations or be forced to sell the obligation to another party or raise additional capital. There must be liquid collateral posted to the par value of these obligations to easily calculate a ratio breach.. If there were conservative ratios in place I'm sure these forced bankruptcies and counterparty ripple effects would have never happened. If these swap counterparties violate a conservative CDS Obligation/Liquid Collateral Value ratio (kind of like how the home builders breached their debt/tangible net worth ratio bank covenants when they kept writing down land values) they must transfer the obligation to another party within a certain time period, or be forced to raise capital or post additional liquid collateral to cover the ratio breach. I'm sure there could be ways to incorporate the underlying securities if they were to be swapped in a default, incorporating CDS par value-underlying market value into the ratio. Again I'm not sure how these transactions are structured. I'm wondering if this could work and what affect it would have on the CDS market and spreads. I also want to know how the illiquid CDS obligation would be transferred to another party since it could bring massive risk to a new party. What if nobody wants it and they can't raise capital?? Could it be transferred in pieces?

This would force financial institutions to deal with their liquidity problems quickly and efficiently, instead of creating a cross-default domino effect like we saw last month. Indirectly these banks were not hedging away their default risk which needs to be addressed for the future health of the CDS market, and the next debt security crisis, when everyone wants to buy an aircarhome in 2108..

Here's an interesting write up on SeekingAlpha: How Banks Hedge Counterparty Risk

Dow Index Analysis, 10,000 Key Long Term Support Level, Falling Wedge

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Looking strictly at the technicals, 10,000 is the next major whole number for support as well as the 2004 and 2005 lows. On Friday the Dow closed at 10,325, breaking last week's low of 10,365 when the Dow lost 777 points in one day. So that breach might mean we continue lower, of course it all depends on how traders digest the bail out. Looking at the chart, it seems the Dow is in a falling wedge pattern in an underlying downtrend. Usually these patterns predict a corrective reversal but requires some sort of catalyst for the wedge to squeeze the crowded trade which is around 10,250 on the chart. However, eventually the long term trend prevails and if there is a corrective reversal I'd like to see a successful re-test of the reversal point to tell if we're ready for an uptrend. If there are serious issues with our economy, the Dow could break down from that wedge and test 10,000 which is where the '94-'02 trend hits today. Any type of correction could be delayed due to the short sale ban affecting a squeeze or institutional capital staying on the sidelines. There is also a second trend which tracks the lows of '87 and '94 and it hits today at about 8,000. So hopefully the state of our economy is almost priced into the indices and we don't break below 10,000... And hopefully the Fed doesn't have to subsidize the labor force!

Dow Index: Falling Wedge (Source:

Description of Falling Wedge Reversal (Source: Sharp2be)

Dow Index: 25 Year Chart w/ Trends (Source:

I also posted about this on Sep 13, 2008,

Conversation With Jamie Dimon (CEO J.P Morgan) on Charlie Rose (July, 08)

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Interviews with Jamie Dimon (CEO of J.P Morgan) on Charlie Rose. Jamie Dimon and Henry Paulson of the U.S Treasury were responsible for the emergency bailout of Bear Stearns in March, 2008, which could've had catastrophic consequences if left to go bankrupt. (The full videos were taken down but here's a good clip from the interview.)

Conversation With Warren Buffett on Charlie Rose (October 2008)

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The full interview videos were taken down, but here's a clip and a link to the full transcript.

Surprisingly XLF and XHB Have Outperformed SPY In Last 3 Months

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This economic bail out news is now a national joke on network TV and I'm starting to believe that negative sentiment right now is a coiled spring, and if the House passes this bill, the $VIX will be sell off hard and the Dow could rally 1000 points, at least in the short term. The indices are brushing up against the 15 year trend line and Warren Buffett is loading up on the best of breed. Of course the House needs to pass this bill in order to restore market confidence, or we will see, what Warren Buffet says, the "economic Pearl Harbor", and the rug under the US indices will be pulled.

What's surprises me is that the XLF and XHB have actually outperformed the SPY over the last 3 months, when IndyMac, Fannie, Freddie, Lehman, Merrill, AIG, WaMu, Wachovia all lost their lives. What else could seriously go wrong, besides the economy spiraling into a black hole. The XLF was up 9.92% and the XHB was up 27.8% on the SPY during the last 3 months! How crazy is that?? Shouldn't hedge funds be making those returns on the S&P and not sector index funds?

SPY vs. XHB & XLF 3 Month Chart (Source:

Looking specifically at the XLF, it needs to clear above the $20 support level with strength to catch a major bid, and it needs to break above the downward trend. Plus you can see two capitulated lows on those volume spikes (between $15-20). That could in fact be a double bottom but it seriously depends on this bail out, which will unfreeze the banks and bring liquidity back to main street. If the bailout fails again confidence will not be restored and we'll probably see another volume spike to the downside.

XLF 4 Year Chart (Source:

PowerShares Bullish U.S Dollar Index (UUP), Options Pegged At 25 With Rising Put Activity

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The previous post looked strictly at the technicals. Looking at the options of the PowerShares US Dollar Index Bullish (UUP), calls vs. puts open going out until December favor a price of $25+ (less premium)...

UUP October Options (Source: Yahoo Finance)

UUP December Options (Source: Yahoo Finance)

However, during the past month of September, put/call volume has been increasing, as well as the put/call open interest ratio which shows the presence of bears. Plus the Schaeffer's volatility measure is moving higher and there's a load of shorts.. Will call volume spike and UUP break out of resistance????? We'll see how UUP reacts to the house vote.

UUP Put/Call Open Interest Ratio (Source: SchaeffersResearch)

UUP Put/Call Volume Trend

UUP Schaeffers Volatility Index

Chart Sources:

U.S Dollar Index at 80 Resistance, House Vote Is Catalyst

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Futures down, US dollar up... U.S Dollar Index is at 80-81 resistance, will house vote catalyst allow USD to pierce through that level?

US Dollar Chart (Source:

It's interesting that DOW futures are down 1.3% (-138) to 10,752, and the US Dollar is up .07% (.555) to 80.09 tonight after the Senate passed the revised bailout bill. It's tough to say what will happen with the USD when the House vote catalyst hits the wire. What is currently driving the bid in the USD? Is slowing global growth overpowering the USD dilution/economic growth fears? Plus there's a chance that the European Central Bank might lower rates, which could also bring support to the USD.
"European Central Bank President Jean-Claude Trichet has stated his strong support for the US effort saying that the must “go (in favor), for the sake of the U.S. and for the sake of global finance.” Such statements have led some to believe that today’s ECB meeting will result a rate cut. Furthermore, the Euro hit a low of 1.393 ahead of the key meeting."

We'll see how the USD reacts to the catalyst and if it can pierce through resistance at 80 - 81... If traders react negatively to the vote, the USD could correct to 78 - 76. Here are US Dollar bets from a Bloomberg Article I read tonight..

Dollar Bullish
``Market consensus is that the bill will eventually pass in some kind of form,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan's fifth-largest bank. ``The package is likely to reduce worries over the U.S. and bolster the dollar.''

``The Senate's approval may alleviate concerns over the U.S. a bit,'' said Tsutomu Soma, a bond and currency trader at Okasan Securities Co. in Tokyo. ``It's supportive of the dollar.''

``The ability to secure funds in the money market hasn't improved in the slightest,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``This should support the dollar as banks that need the currency will simply buy it outright in the foreign-exchange market.''

Dollar Bearish
``U.S. stock futures are down a lot after the vote, and that's one reason to sell the dollar,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third- biggest bank. ``There's still some doubt whether this bill will pass the House.''

GM Exchange Traded Notes Being Dumped (What's The Logic Here?)

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I've been watching the exchange traded notes of General Motors (hgm, xgm, gms) get smoked during the last month. What's interesting is that these debt securities have lost more value than the common stock. From the chart below, during the full month of September, the XGM exchange traded unsecured senior debt security lost 23% vs. the GM common stock.

1 Month Change GM vs. XGM (unsecured debt)

I'm trying to figure out the logic behind the debt and equity trade. I know the ETN's are unsecured, but still the senior unsecured's would be higher up on the entitlement ladder than the common equity during a reorg or liquidation. So why is the retail debt being sold off more than the common stock? In the debt's case, I'm thinking the $25 Billion Government loans are more senior than the unsecured retail debt, and without the $700 Billion bank bailout auto lending would remain frozen. Looking at the numbers ended 6/30/08, GM had a net worth of -$57 Million, with $74.5 Billion in current liabilities, $35.2 Billion in long term debt and $81 Billion in "healthcare/pension/other liabilities". Adding $8.3B loan to the debt load would probably put the $4.7B of total ETNs at risk of recovering capital in bankruptcy. Also a week earlier GM tapped $3.5 Billion from it's existing credit line, which shows they're still desperate for cash.

But none of this makes sense because the equity is not pricing in this risk, even though it did touch a new all time low of $8.51 when the market lost 777 points yesterday. GM closed at $9.45 today, unchanged from the mid July lows. Also GM flipped over it's balance sheet these past few weeks by diluting common equity to pay down debt. GM was able to issue 44.3 Million shares to exchange for the $498.3M principal on their Series D Senior Convertable Debentures due 6/09. The fact that this institutional buyer would exchange hundreds of millions of debt for equity at this point is basically saying there's a light at the end of the tunnel for the common shareholders. SEC Filings (9/19, 9/29). GM also plans on raising $2-4B to boost liquidity by selling off assets including the Hummer Brand, Strasbourg manufacturing operations and land. Looking at Schaeffers Research volatility and options data during the past 21 days, GM volatility spiked to all time highs this past week, the Put/Call volume ratio increased from .93 to 1.07, and the Put/Call open interest ratio stayed relatively stable at 1.23 which is a slightly bearish bias. Put open interest and volume actually spiked on 9/22 but tapered off since then. The short interest chart has also been correcting. So there's a tug-of-war going on between positive and negative sentiment, and it could be that GM volatility will ultimately be sold and the stock bought in the short term if congress gets the bail out package passed, however a spike in option volume could go in either direction. So are these retail bond holders dumping to take the loss to load up on the common, are they forced institutional sellers, or are they seeing a bankruptcy hearing around the corner??? We'll see..

GM Volaility Index (

GM Put/Call Volume Ratio (

GM Put/Call Open Interest Ratio (

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