Now that the US government has promised the American people a bailout of Wall Street the financial markets are waiting to see what congress comes up with. Last weekend’s euphoria continues to fade away as the SP 500 now sits halfway between the panic sell off of 10 days ago and the bounce that occurred when Treasury Secretary Paulson announced the bailout plan.

With all eyes focused on the US Congress, no one seems to be paying much attention to the fact that the commodities markets are on the rise once again. Keep your eyes open for trading opportunities that are beginning to develop in some of the futures markets. ETF option strategies may be a safer way to take advantage of these situations than direct participation in the underlying securities.

I’m not willing to speculate on what will happen, or how the markets will react to the proposed solution. While the relatively high volatility makes buying options expensive, selling premium may be too risky for many traders. Whatever you decide to do, consider your risks before your potential profit before placing any trade. Sitting on the sidelines may not be a bad idea for the next couple of days.

JD

So, lets get this straight.  The government allows Lehman to fail, which causes one of the largest money market funds to “break the buck”, and which now allows the powers that be to ask for the largest financial bailout in history?  This is ludicrous. 

BA

Instead of giving the banks 700 Billion to fix their mess, I have a new idea.  Why not fix the root cause of the problem?  The government should give everyone who owns a home on Jan 1, 2009 an across the board 1% 15 year mortgage.  Instead of fixing the backend of the problem, why not fix the frontend?

BA

The Dow has never had 4 straight + or - 350 point days in its history.  I have a feeling the market has only pushed off its date with the executioner to October 2nd when the ban on short sales is set to expire.

BA

If you went on vacation last week and checked the stock market this weekend, you would have thought you didn’t miss much. Nothing could be further from the truth.

On Thursday morning, just as it looked like the Stock Market was going to zero, the flight to quality had pushed T-bill interest rates below zero, the VIX reached its highest levels since the days of the 9/11 attack, and Gold prices were going to the moon, the US Treasury announced that it had a plan to save the US economy.

Financial markets did an about face, erasing the huge  losses from earlier in the week. The SP 500 picked up 100 points in just 2 days while the DJIA had a 1000 point range. The word bounce does not do justice to this week’s action.

So what does this all mean? Only time will tell. The only thing that seems certain is that its going to cost taxpayers a lot to bail out the foolish actions of America’s financial institutions. The sad part is that most of the people that caused the problems won’t really be the ones paying the price.

From a technical perspective, and apparently from an emotional perspective, we may have put in a bottom. I’d be waiting for some type of confirmation before betting the farm, or even a bushel of corn, on that one.

JD

AIG is the next company to be in the death spiral.  WM is on its way also.  Anyone with too much leverage will enter the vortex of death.  How can AIG have 441 Billion in CDS exposure and a 10 Billion mkt cap?  People have lost their minds.  Somebody needs to go to jail.  Although, I’m not sure if stupidity is a punishable offense. 

BA

This BAC is an amazing organization.  First, they paid 4 Bil for Countrywide when it was worthless.  Now, they just paid 29 a share for MER in a buyers market when it closed Friday at 19.  Wouldn’t every car dealer in the world love to have a customer come in and pay full MSRP for the most expensive car on the lot?

BA

It is looking more and more like LEH is still standing, the music has stopped and all of the chairs are taken.  Dow futures are down over 300 points tonight.  BAC just bought MER for 44 Bil.  The rumor is that LEH will be filing for bankruptcy in the AM.  The bond market has gone crazy with a huge flight to quality bid.  If someone had told me 1 year ago that BSC, LEH, FRE, and FNM would be gone and that the market had not crashed, I would have called that person a liar.

BA

With all the talk about the problems in the US stock market over the last couple of months, there has been little discussion about the fact that on a relative basis, the US market has been stronger than foreign markets. This is especially true for last year’s darling the emerging markets.

While recent stock market strength has been bolstered by the rising dollar, could it be that this strength is being caused by the fact that the rest of the world is finally feeling the effects of the credit crunch in the US?

So far, it looks like the Iron Condor would have worked again in September, and could work again for October, but the reward to risk may not be worth it. Some better ideas may be some bear call spreads on foreign market ETFs like EFA, and Bull put spreads on bond ETFs like IEF.

JD

LEH is down 40% here on the open.  Bazooka Hank better reload.  Lets hope for all of our sakes that he still has some bullets left.  WM down another 20%.  WOOOOHOOOOO!!  Should Washington Mutual still be allowed to advertise for deposits when they are obviously going under??  Their bonds are trading .50.  The most amazing thing to me is that the Dow is not down a lot more overall with a lot of these financials on the ropes.

BA

Who is next on the list for a goverment bailout?  With LEH down 30% this morning, it is looking more and more likely that this will be the next event.  A shotgun wedding for LEH and BAC?  Do I hear 2 dollars a share again?  Maybe some type of reward for following through with that terrible Countrywide deal?  The giddiness of the FRE and FNM bailouts is starting to wear off and reality is sinking back in. 

BA

As we await news of another government bailout of a public company this weekend, the over-riding theme of this year is: trust the government.  The news of what form this latest bailout will take will be announced before the open of Asian markets on Sunday.  If the equity holders of FRE and FNM aren’t completley wiped out, then there should be a criminal investigation.  The equity holders of Bear Stearns should have been wiped-out.  The liberal use of taxpayer money to support risk taking enterprises is criminal.  This year is turning out to be one of the most historic in the history of this country.

Trust the government to report numbers correctly.  The official job loss yesterday was a loss of 84k.  This number includes the fairy tale birth/death adjustment of +125k.  Does anyone really believe that construction and finance actually added jobs last month?

As for the market,  I have said this all of this year.  This decade has been led by an unprecedented credit expansion.  The market has rocketed higher on cheaper and cheaper credit.  Now, we are facing the opposite of this, a credit depression.  Easy credit is gone.  The market will continue to grind lower into year-end.  This will take years to correct itself, not months.

BA

Friday’s stock markets tested the July lows, providing us with a daily hammer that could be an early indicator that the worst could be over. We will need confirmation from an up day on Monday, but considering the oversold nature of the market we are in position to at least bounce from this position. The problem is that the weekly charts do not look good, so it could easily just be a bear market rally. We will continue to watch the markets closely this week to see if the markets can make some kind of decision, or if we are still playing a waiting game.

JD

The stock market continues to consolidate at relatively low levels. Bears keep knocking the market down with each piece of bad news on the economy while Bulls continue to prop up the financial markets every time the price of oil and other commodities falls.

Both the DJIA and the SP 500 are hugging their 50 day MA while their trading ranges have tightened over the last month. The DJIA is now trading between 11, 200 and 11, 800, with the SP 500 bouncing between 1250 and 1300.  Just when you thought the Technology stocks in the Nasdaq were going to pull the stock market out of the summer doldrums, these stocks apparently decided to join the consolidation club to linger once again between its 50 day MA and 200 day MA.

While another Iron Condor could work going into September options expiration, the drop in volatility in the last month means that the premium you would receive for putting on one of those trades probably does not make them worth the risk.

The people doing best in this market are active traders. Market moves are not lasting more than 2 or 3 days, so trading puts and calls would be a better idea than spreads right now.  That being said, since stocks could break out of this trading range at any time, you need stops in place to protect yourself from sudden market moves that go against you.

If you do not have the time to be an active trader, you may be better off sitting on the sidelines until this market gives us a better indication on which direction it wants to go next.

JD