XLI April $18 Call Open Interest Over 278,000, XLU Calls Active

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Shout out to Investing With Options for mentioning this on Ustream. The Industrial Select Sector SPDR (XLI) saw 269,000 contracts trade on it's April 2009 $18 Calls at around $0.30 on March 5, 2009. That's the right to buy 26.9 million shares at $18 by Apr 17, 2009 (not sure of the exact nature of the full trade). It closed at $17.22 today. Either someone was hedging their short exposure or getting long for a month in size. If XLI hits $19.30 by April 17 and the calls are exercised the trader would net $26.9 Million or 330% (26.9Mil/8.07Mil premium). Wouldn't be bad for a months pay.. On a technical standpoint there isn't resistance until $19-$20 (Nov low, 50 day moving average). This blog post is a little late but it will still be interesting to see how this ends up.

There was also activity in the XLU (Utilities ETF). As of yesterdays close the April '09 $25 calls had 173k open and the Sept '09 26 calls had 100k open. XLU closed at $23.30 today. Read the articles below and watch Rebecca Darst, NYSE Euronext managing director, on CNBC explain this activity on 3/6/09.

XLI April 2009 Call Chain (Yahoo Finance)

XLI April 2009 $18 Call (Optionsxpress.com)

Roubini Sees S&P at 600 or Below. CBOE Speech Videos via CNBC (3/9/09)

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Roubini is a machine! I have bad news though, he thinks the S&P could hit 600 or below (Bloomberg) with a possible L-shaped 36 month recession. "He puts the chance of a severe U-shaped recession at 66.7 percent, and a more severe L-shaped recession at 33.3 percent." (CNBC.com, 4th video below). The S&P 500 closed at 676 today (3/9/09.

Roubini was keynote speaker at the CBOE Risk Management Conference today and I found his full speech via CNBC.com. I say ride the Roubini trade until the trend breaks. I threw in a Barclays S&P forecast at the bottom.

Nikkei at 1982 Levels, Exports Fell 45% in 2008, Watching Nikkei/Yen Relationship

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The appreciating Japanese Yen and global recession has killed Japan's export driven economy. Here is the data from Japan's Finance Cabinet in a pdf file. A snapshot is provided below for the year 2008. Japan's Gross Domestic Product (GDP) fell -3.3% from the previous quarter, or at an annual rate of -12.7% from the Oct-Dec period. It was the "steepest slide since the oil shock of 1974 and more than triple the 3.8% annualized contraction in the U.S. in the same quarter" (Source: Reuters, AP). Exports got killed. On an annualized basis from the Oct-Dec period exports fell -45%. Since Japan is an export driven economy when global demand slows and the Yen appreciates it kills the top line. Export pain continued through January 2009 with exports "tumbling" -46% from a year earlier with the trade deficit widening for the 4th straight month (source).

Japan 2008 Numbers (Source: Esri.cao.go.jp)

What's interesting now is the Yen started selling off in February. Here are three possible reasons to explain this. Which is right? We will find out. 1) Risk appetite is coming back to the market with people building Yen carry trades. 2) The Yen lost it's safe haven status. 3) Yen Intervention threats.

Now to the Yen/Nikkei relationship. Looking at the chart below the Nikkei is sitting at levels not seen since October 1982. It's also down 81% from the 1990 peak! The Japanese Government is trying to stimulate its economy by "buying commercial paper, corporate bonds, and stocks from financial institutions to try to help infuse money into companies" (1, 2) and possibly intervene in the forex market to lower Yen/stabilize exports. Last month the Yen sold off while the Nikkei made lower lows (chart). Looking at the Yen/Nikkei relationship historically they either moved together or were inversely related. It will be interesting to see where commodities and the US Dollar go from here and how the Nikkei will be involved.

When will the Yen reach a point where Japanese exports catch a bid? As with the U.S market, wait for the Nikkei to base out and make higher lows w/ volume before scooping up a protected iShares MSCI Japan Index (EWJ) long position (not a recommendation)

Jon Stewart Ruins CNBC (Sir Allen Stanford Clip)

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Jon Stewart ruins CNBC and has clips to back himself up. The best part was when Jon Stewart showed a CNBC clip with Carl Quintanilla asking Sir Allen Stanford (guy who ran an $8 billion dollar ponzi scheme) questions about how he avoided the subprime crisis and about being a billionaire.

Carl Quintanilla: "Before we let you go, is it fun being a billionaire.?"
Sir Allen Stanford: (Laughs) "Well uh yes, yes I have to say it is fun being a billionaire".
Jon Stewart: "F* You!".

Bernanke: AIG Was a Hedge Fund Attached to a Stable Insurance Company

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This video is on Bloomberg.com.

Bernanke's Own Words on Government Bailout of AIG
"If there's a single episode in this entire 18 months that has made me more angry I can't think of one more than AIG. AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company that made huge numbers of irresponsible bets and took huge losses."

$USO, March 25 Calls Made Moves, Trend Still Down but Contango Narrowing...

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I saw some action in $USO and the March '09 25 Calls today. I have no idea if these moves were related but thousands of blocks hit the calls at 1:50pm for $1.45 right before a 4% upside move in the ETF. 21,398 Mar 25 calls and 17,294 Mar 24 puts traded by the end of the day. I got this quote from remoratrade.com or @remoratrade on twitter.
"~USO (UBOCY: MAR'09 25.00 CALL) 13:50 (15,204 @$ 1.45) [BID: 1.45 ASK: 1.50 BIDSIZE: 5,092 ASKSIZE: 47] (atBID) VAL: $2,204,580"
The value of the trade was $2.2 million and it looks like they hit the bid. I have no idea how the full trade was set up or if it was playing the long side (17k puts traded) but I'll show you what happened to the value of the calls and USO right after the transaction occurred. Here's part of the order book below.

Is the US Dollar a Black Swan?

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Is the U.S Dollar a Black Swan? The consensus bet has been that the U.S Dollar would fall as the trillion dollar stimulus and monetary base spike would dilute the value of the USD. That makes sense however the break down in other currencies has put a bid under the US Dollar as a safe haven. The spot USD Index pierced through resistance at the November 2008 highs. The trend is your friend but watch out for unexpected catalysts that could reverse the trend (reflation/CRB currency bid). If it can sustain it's run here the next resistance level is around 92-93 from the highs made in 2005.

US Dollar Index Spot (Fxstreet.com)

Dollar Index March Future (Optionsxpress.com)

Dollar Index June Future (Optionsxpress.com)

S&P Technicals: Ugly Logarithmic Chart, Broke 2002 Lows, at 1996 levels (700).

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The S&P closed today at 700 on the dot. We're at levels not seen since October 1996. In order to go long this market you have to wait until the market retests support successfully and sees higher lows. I'd also wait for the ^VIX (the market fear gauge) to implode. It recently broke out of a pennant formation and is currently testing resistance at 53. I feel like I have a couple blog posts talking about this. You have to keep your inverse index ETFs (DXD, SDS) hedged with some upside call protection until the trend reverses itself with conviction. If you're itching to be net long you have to wait until real market value is discovered. The market is still awaiting the fate of Bank of America, Citigroup and GM.

Below I posted linear and logarithmic charts of the S&P going back 30 years. The logarithmic chart evens out the percentage difference on the y-axis. The long term log chart is more frightening than the linear chart. The linear chart shows the trend line hitting today in the high 600s however the log chart goes into the 500s. Remember these are just lines but they do provide a historical look at supply/demand for the S&P. Also you can draw lines from different data points to provide a different perspective. Good luck.

S&P Logarithmic Chart (Bigcharts.com)

S&P Linear Chart (Bigcharts.com)

Nassim Taleb on "The Black Swan" (Video 2/4/08), Roubini & Taleb Discuss Crisis on CNBC (2/9/09)

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The man, the myth, Nassim Taleb talks about his book "The Black Swan" on 2/4/08. It's an event that is difficult to predict based on historical information. Check out his webpage Fooled By Randomness. At the bottom watch Roubini and Taleb discuss the crisis on CNBC on 2/9/09. As a special bonus I added a video of Roubini on PBS. Roubini makes a good point about nationalization and how IndyMac was scooped up by the private sector once restructured by the FDIC.

Dow Breaks Nov '08 Lows, S&P Testing Lows, Market at 1997 Levels. Need Positive Catalyst Immediately.

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Today the S&P tested the November lows closing at 743. The S&P hit 741 in November, 2008. The Dow already broke the lows a few days ago and it's been in a pattern recently that the S&P follows the Dow (link). I'm not saying it will happen this time.... Still we're trading at levels not seen since 1997 which has been a disaster for the long term index fund investor. These are major levels if breached here. What's interesting though is the $VIX (Volatility Index) isn't even close to the highs we saw in November so does that mean we're in for a slow death or a base around these levels? Things are definitely bad right now w/ nationalization fears, poor earnings and economic data but back in November when Lehman went bankrupt the financial system almost broke down, LIBOR spiked and the TED Spread (difference between what banks and the Treasury pay to borrow for 3 months) widened.

Now we're dealing with the same problems. GE Capital was valued at 0 today, AIG needs more capital to stay alive, the Gov could own 40% of Citi's common stock and JPM just cut their dividend by 87%. Also Obama could tax some market participants on Thursday (video and quote below) so be on the lookout for the market reaction. Here are the charts. Some of the shorts could get knocked out here but we really need a positive catalyst. Plus I'm also watching the U.S Dollar. With the monetary base spiking and the US Dollar Index catching a bid it doesn't reflect well on the strength of other countries or the reflation attempt. So what will the positive catalyst be, nationalizing the banking sector??? (Roubini says a takeover and resale is the market-friendly solution (WSJ.)

Taxpayers Could Own 40% of Citigroup's Common Stock, Implied Volatility and Option Volume Popped on Friday

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It looks like there's a possibility that the Gov will convert 7.8% of their preferred Citi stock into common stock. This would bring massive dilution to the common holders however it would improve the bank's financial health by boosting it's TCE (tangible common equity) ratio. Preferred stock is not factored into the ratio. Citigroup officials are also trying to persuade other large preferred stock holders to convert like the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority. This could possibly stem off bankruptcy fears. $C's implied volatility was definitely predicting this type of news on Friday (chart). We'll see how the US markets react to this. It looks futures are up overnight. It's important to know that this is just a proposal and could fail. Also we have Bank of America and the autos to deal with so it's a mess but hopefully we get through this eventually..
"Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said." WSJ


Citigroup Options & Volatility (ISE.com)

Also read this WSJ Article: 'Nationalize' the Banks. Dr. Doom says a takeover and resale is the market-friendly solution.

Rick Santelli at CBOT Rallies for Capitalism (2008 on CNBC Video)

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Rick Santelli and traders at the Chicago Board of Trade rallied for capitalism today on CNBC. Rick thinks Thomas Jefferson and Ben Franklin are rolling over in their graves with the current mortgage subsidization plan. He says there's a Chicago Tea Party in July lol. Respect to Rick Santelli. Also I hear Andrew Jackson would be shooting people up right now since he was strongly opposed to the National Bank. Then there's the argument that the global economy would collapse if there was no intervention. What do you think?

General Motors 2009-2014 Restructuring Plan (Full Video/Document)

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Here is the actual General Motors 2009-2014 Restructuring Plan and full briefing video. It looks like they need double the funds to stay solvent.

"DETROIT (Reuters) - General Motors Corp said on Tuesday it could need a total of up to $30 billion in U.S. government aid -- more than doubling its original aid -- and would run out of cash as soon as March without new federal funding".. more

"DETROIT (AP) — General Motors Corp.'s restructuring proposal says the company may need up to $30 billion in government loans as it implements a survival plan that includes cutting 47,000 jobs and closing five more U.S. factories"..more

The stock has been bleeding ever since they got their first round of capital. Today the stock broke an important support level. The common will keep getting diluted with debt-to-equity conversions and Govt ownership priorities. We'll see what happens here, either they file Chapter 11 with Govt assistance or limp along with $30 billion in aide and restructure out of court.. Chart Source: stockcharts.com.

For more in depth analysis of the plan go to Zero Hedge.

GM Plan - Free Legal Forms

On a similar note read this next article. The whole supply chain is dying. Auto Suppliers Seek $25.5 Billion Government Bailout

E-mini March '09 Dow, S&P Overnight Futures Sell Off. GM, Chrysler Face Treasury Deadline and Wal-Mart Reports Earnings.

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It's Government vs. Free Market Capitalism at this point. Every move made by the Government is affecting the market. Tomorrow is a big day. GM is set to receive $4 billion in aid, GM and Chrysler will present their viability plans to the Treasury and Obama will sign the $787 billion economic stimulus bill (1, 2, 3). GM is trying to renegotiate deals with the UAW and its unsecured creditors to avoid a bankruptcy filing. Also Wal-Mart reports earnings before the bell and Moody's might downgrade banks with units in eastern Europe (source).

I was watching the E-Mini March '09 Dow Future (YMH9) and the E-Mini March '09 S&P Future (ESH9) both sell off about 2% tonight. Looking at the charts they broke through some important technical levels. The March S&P Future MUST hold 797 to attract buyers. Also we're at an inflection point in the VIX. If volatility spikes from here the Dow and S&P could retest November lows. We'll see how the equity markets react to the news tomorrow. Anything can happen.!

Chart source: Optionsxpress.com

E-Mini March 2009 S&P Future

E-Mini March 2009 Dow Future

John Paulson: Hedge Fund Manager MVP 2007-08, Congressional Testimony Video

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Most hedge funds performed poorly during '07-08 (chart below) but lets not forget the stock market generals who positioned their investors to weather the crisis.

HFRX Global Hedge Fund Index (as of 2/15/09) (Bloomberg)

John Paulson (easily confused with former Treasury Secretary Hank Paulson) gets the 2007-2008 MVPM (Most Valuable Portfolio Manager) Award from this blog. Why? On a risk/reward basis not only did Mr. Paulson's hedge fund Paulson & Co time the market perfectly for the subprime meltdown, he also bet with a small amount of capital and hardly any leverage. For more detailed information you should read all of the articles scattered below. He wasn't the only one betting against the housing market. I remember Doug Kass, Gary Shilling 1, 2, and Roubini were predicting this publically on CNBC, with conviction.

Starting in 2005/6 Paulson wanted to short the housing market and since he couldn't short houses he shorted the subprime mortgage index, or ABX (Chart: 7/30/07 - 1/30/08, markit.com) via credit default swaps, debt protection on subprime mortgages. The risk premium, or spread pricing default risk on these securities were very cheap in 2005. As the credit crisis gained momentum banks and other institutions rushed to buy protection on these securities which widened the spread. Paulson killed it. His funds were up "$15 billion in 2007", his "older Paulson Credit funds rose 590% while the newer one rose 350%" WSJ source.

His streak didn't end in 2007. The Paulson Advantage Plus fund was up 37.6% net in 2008 (the S&P lost 36.9%). He also made some interesting plays in the merger arbitrage speace. The full Paulson & Co. 2008 Year End Report can be found here (Scribd report via NYT DealBook), it's a must read.

Plenty of people have been hating on Paulson claiming what he did was criminal profiting from the crisis, but lets not forget he invests for pension funds, endowments and foundations and I'm sure they're all glad they didn't have money with Madoff. He also donated $15 million to the Center of Responsible Lending, which also brought questions... It looks like Paulson & Co. set up a recovery fund which I believe includes, or will include IndyMac Federal Bank. Paulson manages $36 billion.

Also he was at the Hedge Fund hearing on 11/13/2008 testifying before Congress. Thought you might be interested to hear what he had to say. Video via C-Span.org.  Also if interested, watch the biggest hedge fund managers George Soros, Ken Griffin, James Simons and Falcone testify before congress here.


READ THIS: Trader Made Billions on Subprime (WSJ) 1/15/2008

Get Shorty: The man who has bet £800m against British banks (Guardian.co.uk)

HFRX Global Hedge Fund Index (Bloomberg)

Investor consortium to buy IndyMac for $13.9bn (AltAssets)

John Paulson, Proud Short (Felix Simon/Portfolio.com)

The Man Who Made Too Much (Portfolio.com)

John Paulson’s Funds Shine in the Gloom (DealBook NYT)

Hedge Funds Lost Record 18.3% on Misjudged Markets (Update3) (Bloomberg)

Paulson & Co., Brevan Howard, Caxton, Touradji post strong gains in 2008 (MarketWatch)

Sun Hung Kai, Paulson to launch distressed fund (Reuters) 1/16/09

Distressed Debt Specialists See "Bonanza Year" in 2009 (A.E. Feldman)

Hedge fund chief pessimistic about UK property (FT.com)(June, 2008)