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Could this be the Monday we have all been fearing?

September 14, 2008 5:10 pm

The Lehman (NYSE:LEH) crisis was taken (somewhat) lightly on Friday. Markets were initially down, but it seemed as though most if the traders were moving in and out and had no particular sentiment, either way. Markets down, markets up, no big deal right?

Not so fast. How do we explain a 150 point turnaround on economic news that should have been considered negative? Unemployment and spending were in focus during the week and Friday’s reports should have had those continuing to weaken.

Perhaps these are some things we need to again consider (Source: dismal.com):

  • Yield on the 10-year note moved higher to 3.72%
  • Fed funds futures are showing a 14% chance rates will decrease at the Tuesday meeting
  • Last month, the fiscal deficit rose to $111.91 billion
  • The dollar moved lower against the euro by 1.6% to $1.4226
  • The dollar rose 0.7% as compared to the yen to ¥107.90
  • Retail sales report were much worse that anticipated
  • Profit-taking on the dollar ahead of next week
  • Crude oil briefly touched below $100 per barrel – recovered to just almost $101

In addition to that we have Barclays backing out of the Lehman (LEH) buyout. AIG  (AIG) in trouble; Bank of America (BAC) potentially merging with Merrill Lynch (MER) and much more fun news to consider.

Is there panic? Is there concern? If you look at the markets that are still holding on just near official correction levels, you would think not. Perhaps now things are going to change.

There is panic tonight as there is an emergency trading session opened Sunday afternoon to allow for Wall Street dealers to reduce their derivative exposure ahead of the potential bankruptcy filing by Lehman. The mad scramble is on to do all of this ahead of the Asian markets opening as there is fear that without massive protective measures, Asia will crash.

(See “What if all of the banks are closed” for my latest ideas in this market)

Alan Greenspan is calling this a “once in a century event,” while at the same time, fingers are pointed directly at his loose monetary policy for much of the current wealth destruction.

Frankly, it is apparent that confidence is broken and I would not be surprised if the continuing correction for the market is exacerbated into this news. Realize that there has been an attitude that has permeated the markets that most firms are. “too big to fail” and the markets have already adjusted for the inevitability of such problems.

I don’t believe it. No No No. This is not a good situation. It is not the simple fact that Lehman is going down, but the fact that no one wants a part of it. The suitors are backing away because they know just how toxic it is since they too have similar problems on their books. I think we all need to realize that there are two types of concerning loans outstanding:

1) Those that they know about and are bad and,
2) Those that are bad that they do not now about.

The second group is why HELOCs have been closing and investors are running for the exits. It will not be surprising if Monday starts a domino effect that will help top wash out those on the brink like Washington Mutual (WM), AIG and the smaller region banks that were handed their death sentence when Freddie and Fannie went down last week.

Now is the time to be cautious and at the same time investing with eyes wide open. Surely there will be opportunities as there will also be landmines. Therefore, hedging all bets with inverse ETFs and options will be the best portfolio strategy as it will help to alleviate the massive volatility that should be showing up within hours.

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Written by Andrew Horowitz · Category(s) Economy, Gameplan, Markets    |  Tags: • •   

3 Responses to “Could this be the Monday we have all been fearing?”

  1. Trevor Gauntlett on September 14th, 2008 6:06 pm

    You mentioned that you had a funny feeling the weekend before Fannie and Freddie were taken over… Well, on Friday as I watched the markets do their dance with no clear direction or decisiveness I wondered if it was the moment to get out. If this weekend would have some major news that would alter the coming months or years. Well, hindsight is great, but Monday is going to be very interesting. I really hope that tomorrow isn’t the tipping point, but it may be the beginning of much tougher times ahead.

    I think I’m going to make a trip to the market today to stock up on some consumer staples such as canned food, water, and batteries. I do live in an earthquake area so it is best to be prepared.

  2. Andrew Horowitz on September 14th, 2008 10:54 pm

    Trevor:

    The Bunker Fund!
    A

  3. Jon Lawson on September 14th, 2008 11:25 pm

    This is going to be an Epic Monday open. I go into Monday with -170 negative deltas and 86% cash. I pray that all reading this are similarly positioned.

    As of late Sunday evening we have broken S&P and Dow pivot support and the next big support line on the SPY is 1190, after that 1100. Hold on to your hats, this is going to be a bumpy ride.

    The Euro resistance I am looking to is 145.5. I look to play it via the XDE.

    What are the odds that the FED preAnnounce their 50 bps rate cut?

    BTW, I sure hope the CEO/CFO of FNM, FRE, and BSC get some jail time.

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