Last weekend we had a "Wild Weekly Wrap-Up," this week was just rotten.

We lost 800 points in 5 days but we actually lost them all on Monday, got back some on Tuesday and then proceeded to lose it again Wednesday through Friday, finishing with lower lows on Friday than we had on Monday, which was one of the worst day’s in market history. 

Friday looked like we were going to take some back and the chart on the left was from Bespoke’s site with data just before the Congressional vote.  After the bailout bill was passed, virtually all of these daily numbers turned red, giving us horrific performance in both the weekly and monthly columns.  Financials, which were holding up the best, fell 9% off their highs and finished the week down 9%, just a hair over Monday’s finish at the 10% rule.

Do we have further to lose?  Looking at the updated Dow weightings, we can see that the top 10 components now make up over 50% of the weighting so it’s going to be all about the performance of IBM, CVX, XOM, PG, JNJ, MMM, MCD, WMT, UTX, KO.  Fortunately, none of them are financials and PG, JNJ, MCD, MMM, WMT and KO are considered "safety stocks" for a recession but IBM has been awful this week, although they should find buyers around $100.  XOM and CVX are a big concern if oil keeps falling (and we hope it does).  It was the financials who murdered the Dow on Friday with C dropping 18%, BAC, down 5%, JPM down 8%, AXP down 4% and GE down 2.5%.  The other big loser was HD, down 4% but the rest of the index did not do that badly considering…

One frightening statistic is that 29% of the financial sector is still above the 50-day moving average, compared to just 11% of the S&P, while NONE of the Dow components can make that claim.  3% of all tech companies are above the 50 dma, no energy companies or telcom companies at all can make that claim.   As noted above, Consumer Staples are the stars with 1/3 of the sector above the 50 dma but that is down from 80% in August.  Of course, when we say below, that may not do justice to it, as looking at the  Nasdaq can show you how incredibly ugly having a 3% success rate can be!

In last week’s wrap up I said: "My biggest fear is that they fire this huge gun and nothing happens - confidence is not restored and the sell-off continues."  Well, they did and nothing did and this is downright scary but hopefully the action we saw on Friday was the continued unwinding of positions by funds, who have been liquidating all week and took Friday’s opportunity to "sell into the intitial excitement."  If not, we’ll not pretty early on next week that it’s time to stock up on beans, bullion and bullets as things start to unravel around us!

Monday Morning we were more optimistic about the bailout but I still titled the post "Monday Mourning (get it?) - Too Little, Too Late"  Despite evidence of bailouts galore by world banks, we were concerned with the overwhelmingly poor economic data and the only play I liked in the morning was the Oct $20 C’s, as it looked like they were getting the WB deal.  Those calls went from $2 on Monday to $4 on Wednesday and Thursday before plunging back to just $1 on Friday’s sell-off, underscoring the still day-trade nature of this market.  The longer 2010 $22.50s went from $3.50 to $5.25 but are now back at $3.25 for the brave investor to try again.  With those sorts of wild swings on the long end, I sure like the 2010s better than messing around with Octobers as, at least with the 2010’s you have 14 months to recover!

Tuesday morning we knew it was going to be a good day but I warned ahead of the market "do not be easily led into temptation" as there was still PLENTY to worry about.  I set our breakout level at 10,800 on the Dow and our quick, speculative play on the QQQQ $38s at $1.69 was still there in the morning and they finished the day at $2.25 but that was the last long play that worked all week.  I also mentioned the MSFT 2011 $22.50s at $7.38 as a hedged play, selling the Nov $27s, which opened at $1.30 and those are both flat since that pick. 

My take on the "rally" that morning was "Keep in mind that governments are doing everything they possibly can to prop up the markets.  As I said a couple of weeks ago, this is very much like the government throwing sandbags behind the totally inadequate levees in New Orleans ahead of hurricane Katrina - it may look like they are doing something but if the storm hits us, all these efforts will quickly wash away like sandcastles in the tide." 

By Wednesday morning I was very upset about the changes we were hearing on the bailout bill and I titled that morning post "Hedging for Disaster" where I had lost so much faith in the ability of our government to "solve" our problems that I decided to focus on the ultra-short ETFs as ideas for portfolio protection.  Unfortunately, the premiums were very high so the performance wasn’t fantastic but these were the plays we looked at as disaster insurance on Wednesday morning:

• SKF Jan $100s at $19, last sold at $26.80 on Friday.
• DXD Apr $55s at $14.20 are very thinly traded with a bid of $17.50 and an ask of $22.50 so I no longer like these as they are too hard to get in and out of.  Of course these were meant to be longs to be covered and the Oct $69s we looked at selling  already $4.10, a pretty good 2-week return for a caller that is $14 out of the money to the leap but, of course, we sell on the same rule we stop out a short position - when the caller retraces 20% of their gain so the sale target would be a trailing .40.
• SDS is more actively traded and the March $77s were good movers, going from $9.95 Wednesday to $14.60 on Friday’s last sale.  With the ETF at $77.11, the current $77 calls could be sold as a cover for $6.05, a no-brainer if you got in at $9.95 as this is always going to be a useful cover to have.

I set our danger levels for the week at 10,650 on the Dow, 7,400 on the NYSE and 1,135 on the S&P and we lost them on Thursday and again just before the big crash on Friday so they will be important to watch on the upside.  We never headed back up over 10,800 to take the Russell calls but I now like them a lot as a speculative recovery play if we can hold a floor at 1,100 on the S&P.  The RUT March $570s (RUWCN) are $90.95 and were $150 last week.  Establishing this position allows you to sell Oct $650s, which are already $15 for a 17% return in two weeks and the long is $80 in the money to the caller.  When volatility is this high, selling premiums is something you should aim to do in any position but you don’t want to fully cover this play unless we are breaking down as the Russell can fly back up with little effort.  If they get back over $650 and hold it, that would be great. 

The Russell dropped an amazing 10% since Wednesday’s open but it wasn’t unexpected as my closing comment on Wednesday morning was: "These are the consequences being faced after just 2 days’ "delay" of signing the bailout package.  Congress  many think Paulson and Bernanke and Warren Buffett are kidding when they say we are about to go over an economic cliff but I think there is certainly enough evidence to merit serious concern.  In part, we have a crisis of confidence and - even if it were true that we could "muddle through" without a bailout, if just 1/3 of the investors believe that we can’t and pull out of the markets, what good will it do the remaining optimists?"

That 1/3 pulled out with a vengeance over the next 2 days and it seems a lot of it was fund selling as positions were unwound in bulk and the markets dropped hard and fast.  As I noted on Thursday morning’s post, my complaint about the Wednesday rally as I said to members in that afternoon: ""Advance/Decline is still nasty today.  Most of the greens are Banks and consumer goods.  Tech is a sea of red, Materials including oil is wreck, all the Conglomerates are red.  Consumer Goods are mixed but Services look awful.  Utilities are mixed, kind of flat overall.  Healthcare is also mixed.  On the whole, it sure does not look like a sustainable rally but we’re all waiting for the government to drop money on us and that’s what it’s all about."  Those are signals we need to keep an eye on to see if a move is real or not.  Just as I noted above that the Dow was NOT as weak as it seemed on Friday, things were much worse than they seemed on Wednesday.

We looked at the FXE Jan $140s but they never hit our $2.55 target with the last trade I see going off at $3.12.  These calls on the Euro remain a great way to play a dollar crash and are good hedges for European investors who are putting money into US companies but have concerns about the conversion rates.  The only other play I discussed Thursday morning was "the same ETF hedges we looked at yesterday coupled with the positive financial plays (we had looked at in member chat) - just in case this crazy scheme actually works" as we did expect some sort of short-term rally into the bill but, medium-term, the outlook was still bearish.

By Thursday night I was good and bearish and we looked at was to set up option trades with a minimum of risk.  Simple strategies to generate 10% or better returns that are generally market neutral.  Our GLD play is a very good hedge against hyper-inflation as it pays well but also gives you a chance to participate in gold’s upside if things really hit the fan and I strongly encourage members to review that strategy along with Optrader’s advice on how to lower your break-even point without increasing your risk on existing trades and take a look at Option Sage’s new site, where he has a whole section on "Safe Stock Market Strategies" and "Rock Solid Income Trades" available at great discounts to members.  If the markets are going to keep trading down or even flat, it’s all about asset preservation and just trying to generate a return that keeps us ahead of inflation while we wait for things to improve…

Friday morning I said "my advice to buyers is to hold off until after the vote" and, while we did find lots of day-trading opportunities into the vote, no one missed anything by not paying those ridiculous premiums and right after that vote the market threw a gigantic yard sale, with pretty much everything tossed onto the lawn.  I noted in the post that the commercial paper situation was rapidly approaching critical mass and, as we expected Monday, the bailout was starting to look like too little, too late.  My comment was: "I can’t see riding positions into the weekend if we get a big rally without some serious downside hedging as our worst-case scenario remains that the bailout is passed and ends up getting a big, global "so what" from investors as $700Bn is starting to look like a drop in the market bucket if unemployment keeps rising at these rates and housing keeps falling at these rates.   Paulson’s original plan was to catch history’s largest falling knife (a term used to describe calling the bottom by making a large purchase of a rapidly falling asset) by spending $700Bn very rapidly on housing assets.  The package he’s being given takes a slightly more measured approach but if housing prices decline another 20% before the bailout takes effect, another $1.5Tn would be needed to shore up the losses."

Sadly, that’s pretty much how it played out.  We rode right up to my 10,800 target, touched it at 1:05 and then dropped like a rock, even as Congress was passing the long-awaited bill.  During the "rally," at 12:11 I had pointed out to members: "Scary difference between DXD $63 calls at $4.55 and DXD $63 puts at $2.42, that’s a 2:1 sentiment that we are going down at the moment…."  Just before the vote, at 12:56 I said: "It seems to me that they are going to approve it, market is up even though deadline has passed so I imagine funds have done their counts and are satisfied so be careful of anything on the put side but have your finger ready on some cover, just in case and, as I said, if we don’t break 11,000, it’s still shakey and if we can’t hold 10,800 I have grave doubts about Monday."  Despite that I had no idea that we would fall off such a cliff right after the vote although we hit my 10:37 buy target on the DXD Nov $56 calls right at 1:06 and they flew right from $10 to close at $13.95, making very good protective covers.  As I explained on Wednesday’s strategy post, allocating 30% to short plays like that can offset harsh losses on the long side, something that is essential in this very choppy market.

As the voting came to a close I warned at 1:18: "After the vote - selling into the intial excitement comes to mind, looking for covers at around 11,000 unless we punch through it."  Just 8 minutes later, as the voting closed, we already had a problem and I said: "The "sell on the news" crowd strikes first.  Let’s see if we hold 10,700 and 1,140 but this already is a very disappointing lack of buyers." By 1:28 it was already "Damn this market sucks!" and 5 minutes later: "We just blew through 10,650 with little resistance and S&P has little support, this is just awful…"  It all went downhill fast from there - on the whole, a very depressing way to end the week.

I don’t know what the follow-through to that tragedy will be on Monday.  I’m heading to the New York "Value Investors Conference" on Sunday and I’ll be trying to get the pulse of the fund managers I’ll be seeing there so expect a report Sunday evening but Friday was a huge disappointment and if this bailout bill fails to turn sentiment, we have got BIG trouble!

Today’s tickers: Today’s tickers: MGA, WB, C, JPM, WFC, NWA & AMT

MGA – Magna International – Shares in this auto-parts supplier are lower by 10.75% at $40.75 and today we’re showing volume above the typical daily average. Some 17,445 lots are in play and focused at the December 45 and 55 strike puts. The story is interesting at the very least. Today news of the abandonment of a $1.54 billion investment by a Russian auto-tycoon was revealed. He has decided to unwind a 20 million share investment in the company established in May 2007 when shares were above $40. His goal was to tap the expertise of the manufacturer in his own auto-empire. However, the fact that the credit-crunch has spilled over into share prices at non-related companies has caused not just a loss of half of his stake, but also a deterioration in the environment for the company. Curiously, in mid-September when shares were trading at $59.77 a sizeable chunk of 60 strike puts was established at no worse than 7.0. Today that position appears to have been closed at a price of 19.20 as shares slumped. At the same time a fresh long position has been established at the 45 strike put with the premium at 7.80. The situation is curious since the open interest on the options is a mere 9,238 contracts, largely centered on the December 60 put series. While today’s volume at twice the open interest reading is explained by the possible roll from one series to the lower strike, it could be that the Russian billionaire – if he’s the investor here – didn’t lose as much as appears at first blush.

WB – Wachovia Corp. – Not too many financial companies tend to visit share price values of below $2.50 and then recover, but that’s exactly what’s going on at Wachovia today following the shock-delivery of news that Wells Fargo is muscling in on Citigroup’s bid for part of the group. The unexpected development has created a surge of 70% in Wachovia’s shares to $6.61 and has created a flurry of some 250,000 options contracts on the issue. This makes it number one listed equity on our volume scanner today. Nevertheless, reading the tea-leaves is more difficult given the fact that when liquidity gets drawn to an issue like we see today, it becomes an active traders market with volume always greater than any resulting change in open interest as traders open and close positions as they scalp positions. In the October contract the 5 through 10 strikes saw good flow of buyers and sellers on the call side while blatant optimism over a bigger rebound saw mainly buying at the 12.5 strike. On the put side some doubts were voiced on the sustainability of the rally with traders favoring the long side at the 5 and 6 put strikes.

C – Citigroup Inc – On the flip side of that same trade was an unwinding of optimism on Citi’s shares, which took an 8% haircut to $20.70. Options on Citi were once again very active with pre-noon volume totaling 207,000 contracts. Call activity was finely balanced at the most active strikes (20 through 25) while October puts at the 17.5 strike had a firm bias towards buyers paying 71 cents. Meanwhile volume at the 20 strike put was sold.

WFC – Wells Fargo – Right up alongside the divorcees comes heavy activity in options on the new groom, Wells Fargo. Its shares rallied 5.7% to $37.15 on the offer while options volume of 130,000 lots kept this issue on our most active board. The trade was a little more transparent here: The October 40 strike calls above the current share price were sold and indicate a belief that its shares are capped even if the deal occurs. The October 25 puts were also active on volume of 12,743 contracts and were bought today for 30 cents.

JPM – JPMorgan Chase. – It appears that option investors are breathing a little easier on this financial stock judging by the sale of the November call options at the 50 and 55 strikes. With shares less than 1% lower this morning at $49.43 and recoiling from a fresh 52-week high, options on both sides of the fence are losing value. Options implied volatility has declined overnight by 7% to 69%, which means that the price of the October at-the-money straddle has slipped from 6.69 to 6.14 today.

NWA – Northwest Airlines – With crude oil lower and unemployment rising, it’s a mixed bag for the outlook for the airline industry. Shares at Northwest are just 1.5% higher at $9.87 but our screens caught a large trade in the December contract where the 7.5 calls traded 32,000 times at 3.10. Since this compares to open interest of more than 89,000 contracts, it’s hard to determine if this isn’t simply an investor closing a position.

AMT – American Tower Corp.– Recently we have watched option implied volatility rise to a peak at 60%, while shares have trended lower. Today they are undergoing something of a rally and are ahead by 5.9% to $35.52. Our unusual volume scanner has picked up a pair of large trades going through whereby the October 37.5 strike puts were sold at 3.0 and perhaps traded against the purchase of a similar 10,000 lot volume at the January 35 strike at 3.80. The open interest at the January strike is less than today’s volume and so is undoubtedly fresh positioning. If this is a calendar roll the investor is carrying protection against a long stock position and today has rolled down to an in-the-money strike.

Ah, the DEAL is back on the table and the futures are brighter (7am).

We still have the killer jobs number to get through at 8:30 but Congress has started making the right noises now that the market crashed again.  My advice to buyers is to hold off until after the vote because it appears our Congressional leaders make their decisions based on the last tick of the tape or the last phone call they get from an angry voter, with no particular conviction either way.

The markets had a lot of conviction yesterday and it was all down.  The nature of the selling - steady, widespread unwinding of pretty much all positions, led many to speculate that we’re seeing a boom in Hedge Fund redemptions as over $600Bn has been moved to cash in anticipation (or need) of redemptions.  This massive outflow of capital is the falling tide that lowers all ships but is hitting widely held securities particularly hard, droppin INTC, for example, so low at $17.20 that their small dividend is now 3% of the stock price.  AAPL hit $100, dropping it’s market cap to $88Bn, just twice as much as MSFT is spending on stock buybacks this year and less than Steve Ballmer probably spent developing the Zune - maybe MSFT should do a little shopping with that cash!

WFC went shopping this morning and snatched WB out of the clutches of C, paying $15.1Bn for something C was about to take over for $2.1Bn and they are doing it WITHOUT the FDIC, indicating they see real value there.  Wells Fargo will acquire Wachovia in a stock-for-stock transaction. Included in the deal are all of Wachovia’s businesses and obligations, including its preferred equity and debt, and all its banking deposits.  Under terms of the deal, Wachovia shareholders will receive 0.1991 a share of Wells Fargo. The transaction, based on Wells Fargo’s closing stock price of $35.16 on Thursday, values Wachovia at $7 a share. Shares of Wachovia closed Thursday at $3.91 a share yesterday and were trading as low at .75 on Monday.  C had traded up as high as $23 on the news of a JPM-like gift from the government but is crashing all the way back to $20 pre-market.

While this is a positive sign for the banking sector, it’s the only one at the moment.  There is an alarming trend in Commercial Paper loans, which are short-term loans to businesses that fund day-to-day operations and have fallen off from $2.2Tn outstanding last summer to $1.6Tn as of Wednesday.  "It’s unprecedented to see the markets shut to so many firms at one time," says Peter Andersen, a portfolio manager at Congress Asset Management Co.  Overall, the amount of money loaned to companies in the form of "syndicated" loans (generally larger loans arranged by teams of banks) has dropped 40% in the first nine months of this year, to $2.31 trillion, according to Dealogic, a financial-data service.

That kind of puts the $700Bn into perspective as that 40% drop is $1.5Tn worth of loans that are not being made this month and many banking analysts predict that drop to almost double if the bailout is not passed, driving commercial lending activity down to 20% of last year.  The current decline is impacting "Main Street" by about 14%, hence the lack of concern as the small banks that lend to small companies are the last to freeze up but GE was forced to go to Warren Buffett for cash as even that AAA-rated company saw the cost of insuring their swaps rise from $160,000 per $10M to $700,000 per $10M last week.  If that’s happening to GE, you can imagine the torture being experienced by other companies. 

Meanwhile, AIG is looking to save themselves, saying they "have been contacted by numerous parties regarding possible sales of businesses. That will include selling part of its foreign life-insurance business."  The company has drawn down $61Bn of the $85Bn Federal credit line but they now feel that through asset sales and collecting a basket of private loans, that they will be able to aviod the government taking over 80% of the stock.  "Our goal is to emerge from this process as a smaller but more nimble company that is solidly profitable and has good long-term growth prospects," said CEO Liddy.

China is still closed and missing all the fun.  We looked at the FXP (ultra-short China) as good covers yesterday in case the bailout fails as they will lag our sell-off but may have a spectacular fall on Monday if our markets fail today.  The Hang Seng did drop 528 points overnight but it was merely a gap down to the middle of Thursday’s trading range as investors had more of a wait-and-see attitude into the weekend.  The Nikkei was not so complacent, with a 2% (194-point) drop and a bad finish at the week’s low of 10,938.  A lot of this drop can be attributed to Japan’s $750Bn investment in US-based assets, which are not looking like a good bet as of yesterday’s close.  Japan still has $954Bn in the government’s foreign reserve fund, some of which may be heading our way in the form of bond purchases to aid in the bailout program (if it passes).

Europe is flat at 8:30.  Although the ECB held rates steady yesterday, Trichet signaled that a rate cut could be in the offing, perhaps sooner than the next meeting.  The money continues to flow from the banks that are not backed by government guarantees to the ones that are, causing massive disruption and EU action is needed before an economic war begins over there.  It turns out UBS is predicting to turn profitable in Q3 on the backs of 2,000 lay-offs as the bank cuts staff and exits several business lines.  Spain looks to be the next Euro-zone economy to fall into recession as unemployment climbs to 11.3%, up from 8% last year.   "Unemployment has risen in all sectors, largely the result of the end of many residential construction projects, which has a knock-on effect on other sectors," Spain’s Labor Ministry said.

Our own unemployment is no great shakes either with 159,000 jobs lost in September, giving us an unemployment rate of 6.1%.  Hourly earning increased 0.2%, up 3.4% from last year indicating the workers who still have jobs feel they are lucky to have them and certainly aren’t pushing for raises.  That is being interpreted as good news for the markets as it puts a Fed cut squarly on the table so it’s one of those cases where terrible news for humans is good news for business.  The usual gang of expert economists had predicted just 105,000 jobs would be lost but the 50% miss is pretty much par for these guys. Although Hurricane Ike struck Texas during the payroll survey period, "we believe the storm did not substantially impact the payroll employment estimates," said Bureau of Labor Statistics Commissioner Keith Hall.

It’s all about Congress today and will the House pass the now $1Tn bailout package.  If you want to know how business in Washington is done, the WSJ has an account of how Jim Ramstad’s (R-Minn.) vote was swayed.  He voted against the bill on Monday but endorsed it yesterday because the senate added an amendment (don’t say earmark!) that requires health insurers to provide more generous coverage for mental illnesses. "There’s too much at stake to let the legislation fail," said Mr. Ramstad, a longtime proponent of the mental-health bill.  Yeah, that’s the ticket…

The question remains, as I said on Monday, is it going to be too little, too late.  Now that it’s 4 days later, the too late issue looms very large and I can’t see riding positions into the weekend if we get a big rally without some serious downside hedging as our worst-case scenario remains that the bailout is passed and ends up getting a big, global "so what" from investors as $700Bn is starting to look like a drop in the market if unemployment keeps rising at these rates and housing keeps falling at these rates.  Paulson’s original plan was to catch history’s largest falling knife (a term used to describe calling the bottom by making a large purchase of a rapidly falling asset) by spending $700Bn very rapidly on housing assets.  The package he’s being given takes a slightly more measured approach but if housing prices decline another 20% before the bailout takes effect, another $1.5Tn would be needed to shore up the losses.

Barry Ritholtz has a great article about the credit and housing crisis, keep it in mind to keep yourself balanced in case we get a huge rally and you forget what a mess we are actually in.  Hopefully, Congress will pass the bill, we’ll retake our levels and post a flat candle for the week at 11,000 but anything less than 10,800 on passage of this bill indicates more trouble is likely ahead of us and the longer Congress takes to decide, the more likely it becaomes that we don’t have time for a 500-point gain.