3.05.10

3.05.10

            The economic report we always refer to as the The Big One (because it most often results in a triple-digit kneejerk reaction in the Dow in one direction or the other), lived up to its history again on Friday. This time it was to the upside. But how much was short-covering given that the consensus forecast was for a very negative jobs report, which probably had traders heavily on the short side and needing to rush to the buy side to close out those mistaken short positions? From the looks of the very low volume not many investors on the sidelines were pulled in. Perhaps they are aware of the other side of the history of the market’s response to the jobs report. Whichever is the direction of the initial one or two-day triple-digit move, it’s usually reversed over the following one to two days, and the market goes back to trading on its previous influences.

          The large institutional firms accounted for a large portion of the light volume on Friday. These firms play both sides of the markets, long and short. They usually make money in down as well as up markets. They are very nimble and fast on their feet. The big profits major financial firms make from short-term trading for their own accounts, and the huge bonuses their traders receive for producing those profits, have certainly been in the headlines over the last year. The latest SEC filing from Goldman Sachs shows that in 2009 the firm made more than $100 million in one day on 131 days. That’s an average of about every other day. It lost money on only 19 days, and Goldman reported that none of the losses on losing days exceeded $100 million. (For the year the firm reported earnings of $13.4 billion from all sources).

Last year’s trading performance broke its previous record, set in 2008 (when the bottom was dropping out of the financial sector, and the financial system was close to total collapse). In 2008 Goldman Sachs made more than $100 million in one day on 90 days.

Ah yes, but these same financial firms advise public investors to just buy and hold because the market cannot be timed and too much trading ruins performance. Yet they trade their accounts on a daily basis and make most of their annual profits from timing the markets.

The FDIC reported a few weeks ago that bank lending plunged last year to its lowest level since 1942, with the failure to lend showing up in all forms of loans, including home mortgages, commercial loans, and construction loans. The Federal Reserve reports that lending remains tight. And how are the major banks doing with their promises to aggressively modify mortgages for qualifying home-owners, those who are behind on payments but able to handle payments if loans are modified to more reasonable rates or extended to longer terms?

The latest report from the Home Affordable Modification Program shows incredible foot-dragging and excuses. Of 3.4 million qualified mortgages only 3% have been modified. The lender with the best record is GMAC, which has modified 17% of the 65,751 qualifying mortgages on its books. One of the worst records has been by Bank of America, by far the largest lender, with 1.1 million delinquent mortgages, of which it has only modified one percent. As they did after a similar report six months ago, the banks have promised to do better.  Don’t hold your breath!

          The SEC voted two weeks ago against re-instating the uptick rule, and instead provided a rule that any time a stock has declined 10%, short-selling will be banned for the rest of the day and the following day. It is so ridiculous that even those at Wall Street firms laughed about it and called it ludicrous. So now a stock can still be driven down 10% in a matter of minutes, but it cannot be driven down another 10% until two days later.

          Adding to the insult to investors is the memory of how the financial firms howled bloody murder 18 months ago when their own stocks were subjected to heavy short-selling in the aftermath of the collapse of Lehman Brothers. Regulators rushed to their rescue by banning all short-selling in some 799 financial firms for the duration.  The result was instant in creating a ‘short squeeze’ on short-sellers, forcing them to move to the buy side to close out their positions, which in turn sent the shares of banks and other financial firms rocketing to the upside. (The short sale bans were quietly removed a few months later after they had done their job). Yet the financial firms insist that short-selling is good, contributing to price efficiency and adding market liquidity, and need not be regulated. Well, apparently as long as it doesn’t include short-selling of their stocks.

          We are seeing some improvement in certain areas but still not enough to make us put any money to work in the market. We are still 100% in CASH, but looking for an opening to start trading again.

Till next time

The MTA Staff