Tuesday, April 8, 2008

The Bid Remains

I don't know how the market will react and the market continues to seem to desperately want to test that critical area between 1385 and 1400 on the S&P but the news today seemed just awful, especially after the bell.

You had UPS warn on upcoming earnings which is very close indicator of the economy.
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20080408006573&newsLang=en

You had S&P downgrade 4 insurers, Old Republic International Corp, MGIC Investment Corp, PMI Group, and Radian. These downgrades are under new estimates for S&P that housing prices will fall 20% from top to bottom instead of 11% assumed 5 months earlier (still may be to optimistic).
http://www.reuters.com/article/bondsNews/idUSN0840265820080408

Then Freddie has demanded remediation from these insures which probably means more capital raising, if they can get it.
http://www.marketwatch.com/news/story/freddie-requiring-remediation-plans-downgraded/story.aspx?guid=%7B1AC90169%2DF833%2D4E98%2DADF9%2D8400DB10ECF7%7D&dist=TQP_Mod_mktwN

You have financial week estimating losses of $15 billion for Citigoup next week while Bank of America may be $9 billion.
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080408/REG/32470639/1036

However the XLF (the etf that tracks financials) was up over 2% after the bell on this particular news.
http://www.marketwatch.com/news/story/citigroup-close-sale-troubled-debt/story.aspx?guid=%7B9FEC1075%2D89D6%2D4B1B%2DA672%2DA60A89EF2C09%7D

Basically Citigroup is nearing a sell of $12 billion dollars of bank debt for a little under $.90 on the dollar. Without having any idea what pieces of bank debt this consists of, my guess is this will be a 3 to 5% haircut compared to market prices. The LCDX (the index that tracks bank debt) has been trading around 93 ish. To move such a large amount of bank debt off the books would require some sort of haircut.

The reason this is bullish is because it continues to show that there is a bid out there at some price. It establishes a bottom. You saw the same thing with Washington Mutual. You saw a bid which people weren't sure a month ago existed at any price. Yes it was extraordinarily expensive and dilutive but it was a bid. I made a mistake in this one. After being down around 10% today I closed out half my position. The press release did not have very good detail in my opinion. After finding out some additional information I realized my mistake and sold some naked calls up above where it was trading and may short back my other half tomorrow. I think looking at this deal after running some numbers WAMU should be trading at 10 tops but the point is once again this shows there is a bid. At some point this bid (referring to the overall bid for financial assets) could disappear again or move lower. At this point though this is keeping the market buoyed.

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