Friday Rallies Persist - Madoff's Ponzi Scheme Could Cause Problems


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What a day. I felt like I was riding a never ending roller coaster. Investors had no idea how to "day-trade" in today's market as digestion of all the new economic and auto bailout news was a bit difficult. Then to top off the day, we have the Madoff hedge fund scam that should cause some noise next week.

As expected, pre-market trading was very negative, in response to the rejection of the auto bailout last night with The Senate as well as the Madoff scheme. The Dow dipped as low as 220 points today, but quickly gained strength as President Bush announced the possibility of utilizing a portion of the "Tarp Money" to assist in preserving the autos. As I discussed yesterday, I did not see a very likely chance that they would completely abandon the auto makers.

We then received the retail report, which once again brought down the market. Retail sales came in down 1.8%, which actually was lower than market expectations, but it also has been the longest stretch of negative sales (beginning in July) since the Commerce Department began tracking the number in 1992. Many people believe the reason for this semi-optimistic number, is that more people did ALL of their holiday shopping during the Black Friday weekend, instead of spreading it out over December, as it has been in prior years. I don't know about you, but lately, the traffic in the shopping malls near me have been pretty modest.

Another positive that bumped the market a bit, was University of Michigan's consumer sentiment report came back more positive than the previous month, rising to 59.1 from 55.3. Much of this was contributed to the incredible drop in gas prices, as most people are getting anywhere from $50-200 extra a month now. However, studies show that people are not spending this money (either being saved, or paying bills). So in turn, that doesn't do much for our monetary supply chain. At any rate, they don't call the end of the year "The Bull Season" for nothing. People are a bit more positive during this season.

In the end, we did see the "end of the week rally" prevail as I believe that makes it 8 weeks in a row we have seen a rally on a Friday. I am still hearing from analysts on the news that, because of the ability to stay positive in the midst of persisting negative news, that means we're at the bottom. Hilarious. We are ankle deep in this current economic crisis, that has a very long winter ahead of it. And what happened today with the Ponzi scheme is a preview of what we can expect in coming months.

Today, Bernard Madoff, the well respected Wall Street guru who managed a billion dollar fund, and who was the Chairman of the Nasdaq Stock Market in the 90's, was arrested due to frauding investors of what could be more than $50 billion in what authorities are calling a "ponzi scheme." Madoff was able to fool investors into thinking their fund was producing great returns, when in fact their money was being sent to what Madoff called, "money heaven." This gives more weight to the phrase, "if it seems to good to be true, it probably is." Even though, the market seemed to plow right through this, this is a big divot in our recovery. This directly affects investor sentiment. After this story being in the headlines all weekend, many investors will question their hedge fund's integrity. If it wasn't difficult enough for hedge funds to gain confidence from investors to keep their money with them, now they have one more big obstacle they need to clear. Having been looked right over today in the "Friday Rally", I believe we will see this scheme factored in next week, as people will realize how big of a deal this really is.

We've got a lot of action in next week's trading. Not only do we have the Fed's meeting to discuss another rate cut, we also have Morgan Stanley's and Goldman Sach's earning announcement which should cause some momentum (either bad or good) for financials. I plan on selling my UYG options before than, as I do not expect good numbers, due to the disappointing announcement from JPMorgan yesterday. SKF and Faz could receive strong bumps, if those earnings are indeed disappointing. Also, there is still a consideration that the tarp money could not get allocated to the automobiles. Although, I still feel it is unlikely, it is possible. There is a lot of opposition to the bailout and it is still a crucial element to moving this market.

Going into the holiday season, volume should continue to get lower and lower, which makes it more vulnerable to volatility. It should be another crazy up and down week as we end the year. I still think we should continue to get gains from the shorts as more and more of this bad news gets factored into the consumer.

I am still loving SRS, FXP, EEV, GDX, and DIG for the next year, as I think they should receive some good gains. Note the recent volatility of SRS lately. Just in the past two days we have seen it be up 30% one day and down 20% another. Even though, I love this fund as a long buy, it could be a great play for you day traders. If you can buy into SRS in the $70's price and sell at around $100, you may be able to turn some quick profits in a very short amount of time. Keep that in mind. Have a great weekend and Happy Trading.

3 comments:

  1. s Says:

    I wanted to get into SRS yesterday and good thing I didn't.I'm gonna pick it up next week , hopefully in the 70's.Got some EEV but sold this morning.Good thing I got out , it went down a little bit.
    Got some FXP too at 32.40 out of boredom.I still hold it , maybe I should've got out today.I also sold my F , no, not this morning , I waited till it got above 3.00 and got out.I was getting sick of here's the bailout , here isn't.
    Not that I was smart not selling in the morning , I was too lazy to get up at 6.00 AM and I didn't want to watch it anyway , I thought it was gonna hit 1,50 , and I said to myself , I'm long on F now , but when I got up it was already 2.60 and thought that was not bad.I didn't have the guts to watch it go up and down.
    To all of you that still hold it , congratulations , I wish it would hit at least 4 for you.You deserve it after all the ride we had today.
    I should jump on DIG too I just don't know when.
    My BAC went somewhere , probably home , but if it keeps it up like that I might get in again , really hard this time probably half of my cash.
    Can't wait for it to go up there where it belongs.Who knows , maybe in the summer?
    That's it for me guys , good night and good luck.

  2. avid reader Says:

    This is a phenomenally interesting article on the dangers of all these double shorts:

    http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfs

    I am wondering what your response is to the article, and how you make current and future decisions considering Viswanathan's points (particularly 1 - inverse and leveraged etfs lose money over the long term, 4 - degenerative decay and relationship to volatility, and 5 - constant leverage trap.

    Thanks for being such a great help!

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