Bear Deal Forces Market To Significantly Reassess Market Caps of All Financials...

With Bear being taken under by JP Morgan for a truly embarrassing $2/share, the market will move to rethink valuations in every single financial stock.  The deal exposes the significant downside risk in every financial institution as the consequence of a run on the bank is brought to reality.  With risk/reward profiles for financials now significantly out of whack (downside risk for most of them now is probably 50%-100% with upside being 20% in the most optimistic scenario) the market will move to dump these stocks very hard as institutions are literally unable to quantify a long position and must remove any semblance of a financial off their books if they hope to maintain any clients.  There is simply no reason to own any financial right now.  The only question that remains is whose next? Is it Lehman, is it Citi, or maybe even WaMu? All seem like good candidates, with technicals and short interest dictating significant probabilities of much more downside.

Big US Bank In Trouble...

While we as traders will always be on the outside of this Wall Street banking crisis, we can nevertheless extract enormous amounts of information simply by observing trading patterns.  It is just as highly skilled poker players extract all the information they need simply by reading how their opponents bet and react to bets.  Notice today that the market supposedly rallied on an S&P report that we were nearing an end to large write-downs, yet the XLF still closed red. If the worst was really behind us we would have surely seen the large banks rally hard off the depressed levels they currently trade at.  Even Tuesday's Fed-induced rally failed to move the large banks in any significant manner.  Something indeed appears very fishy in the financials... 

Watch For Additional Fed Intervention By Friday...

While the Fed's intervention yesterday was no surprise to us (see monday's blog), we are looking for additional intervention by friday as the USD appears to be on the verge of collapse. Watch for Fed to step in yet again and slash both the Fed Funds and Discount Rate by 50 bp by friday at the latest as an attempt to stem a global equity market meltdown provoked by an outright crash in the greenback. This however will do nothing more than evoke an even greater state of panic. As outlined in our monday blog, we expected any equity market rally provoked by Fed intervention to be short-lived and as such took it as an opportunity to add aggressively to short positions. It appears the final act of our Feb. 29th blog prediction is here.

Watch For Possible Inter-Meeting Rate Cut Tomorrow...

With Fed Funds futures continuing to price in 100% probability of 75bp cut by March 18th, we are now in the red zone for a possible inter-meeting move.  Tomorrow looks like it might be the day as both S&P 500 and DJIA are at or near possible double bottoms on the charts.  Fed may seek to restore a bit of confidence in the market technically by moving tomorrow morning ahead of the open or intraday to reverse any marked sell-off in order to defend the January lows.  However, as outlined in our Feb. 29th blog I am looking for any rally to be short-lived and would take any bounce as an opportunity to add to short positions as a morning rally will likely fade by the close, and an intraday move will likely be a one-day wonder.  As such, we continue to hold our Feb. 26th short position from DOW 12,700 as technicals continue to deteriorate and commodities continue to push higher adding to inflation fears.  Moreover, our Oil long position taken on Feb. 10th continues to work precisely as expected with our $107-110 target being hit today.  We continue to hold the position as funds from across the globe continue to accumulate finding it necessary to be heavily long the commodity as an inflation hedge.  Note that we are approaching the end of Q1 here so the commodity move is getting a bit of "gas" (pun intended) with funds doing some expected window dressing adding to Oil and Commodity positions.  In addition, look for continued weakness in tech and financials as funds unload these Q1 losers from their portfolios.  I also expect mutual fund redemptions to intensify over the next few weeks as mom and pop throw in the towel on equities all together.  This will put additional pressure on tech specifically as fund managers liquidate their largest 2007 overweight position (tech) to raise cash.  

Moreover, on a bit of a doom and gloom note (I know that I've been rather doom and gloomish as of late but this sentiment has indeed been valid observing market action) the negative news flow not only continues to present itself within the banking sector but it has begun to intensify. Just today Fitch put out a warning that US Banks' home equity loans are worsening fast and there continue to be murmurs of additional write-downs and credit downgrades with regard to the major banks. We are also beginning to hear louder rumblings that commercial real estate may be the next sector to fall which would wreak additional havoc in terms of write-downs on an already worsening situation. Furthermore, Bernanke and a host of very notable speculators (Wilbur Ross today) are now convinced that a number of banks will indeed fail this year. What I'm getting at is, with confidence in the entire banking system now in question, is it possible that the foundations of the stock market will come into question shortly thereafter? I mean what exactly are we holding here? Pieces of paper that say we own a share of some company? Where's my money exactly? I mean if people begin to lose faith in the institutions that supposedly house and provide direct access to our own cold-hard cash and savings, what makes you think that in a state of panic people won't begin to question the soundness of brokerage firms and mutual funds and this entire risky thing we call the stock market? Is it that far fetched? I don't think so.

Oil Gets Green Light To Test $110....

With OPEC holding production levels steady and the EIA reporting a surprise 3.1M barrel drop in crude inventories this morning, we now have the green light to test and likely take out the $110 level in crude. Our Oil thesis outlined in our Feb. 10th blog appears precisely on point with Oil now a stones throw away from our $107-110 target. Continue to hold all long positions in Oil and Metals as the fundamental backdrop of the entire commodity sector remains firmly in tact. With regard to the equity markets, please note that structural weakness in financials and tech are now being masked by strength in energy and commodity related plays.  However, begin taking profits in large cap Oil and Agro stocks as I expect a decoupling of these stocks from their underlying commodities over time....we're seeing a bit of that today in the Oil sector with XOM and VLO in the red even with Oil up $5.  In general I continue to be much more comfortable being short equities rather than long.

Mastercard (MA): A Disaster Waiting To Happen...

Well I don't need to reiterate where I stand on this stock (just revisit our Feb. 5th and 7th blog posts for our thesis).  Our short from $210 is working nicely and I continue to hold the position as the stock continues to make lower lows. What I'd like to note is that observing the trading action as of late, the stock looks set to gap down huge soon.  I believe hedge funds are now comfortably short the stock, and what I'm looking for now is a negative headline of some sorts.  Something to the effect of "Mastercard shares gap down on report of increased credit card defaults."  The gap down is coming, I can feel it...i'm looking for a -15-20 point day on heavy volume soon. 

Also take note of increased insider selling past few months:

http://finance.yahoo.com/q/it?s=MA