Darshan's Blog

Darshan's Daily Market Ponderings

CIT - 5th Largest US Bankruptcy - Does The Market Care?

Monday 2nd November, 2009

Hello all!

So I hope you've all had a great weekend and are ready for the madness, that is November! Let me tell you - this month is going to be great if you're a trader - with plenty of volatility and a tonne of fake outs. However, before I begin today's post - it's a Monday and you know what I tell you on Mondays? That's right - the update on failed US banks - Wave goodbye to 9 more on Friday.

Bank Failure Counter: 115 in 2009 (I'll keep updating this, until all the crazy green shoots brigade pay attention).

Of course it does not end there. Remember the CIT problems from summer? Remember, how the government stepped in to save it at the last minute? Well - CIT Group now intends to file for bankruptcy protection within days. So does CIT, the lender to many small and medium business in the USA, matter to the market? Seemingly not, the futures are up overnight. The creditors have approved the filing, so that the Group can lower liabilities and stay in business. Of course, the real winners are the bondholders. The new deal would supposedly give them new debt worth 70% of the face value of their old debt. Add to this an ownership stake in the company, equating to almost 93% of the common stock. That's not a bad deal for a dead company - the bondholders are laughing!

This is the 5th largest bankruptcy in US history - with more than $70bn in assets at stake. Again, look at the futures - does the market care? Of course, this story only gets worse because Uncle Sam provided CIT with $2.3bn in TARP money last year. That is your money and it is likely to now vanish. Congrats on a great deal dear US citizen. The fact is CIT should have filed ages ago - it's been another story of good money, thrown at bad management. More than anything, this bankrupcty was more predictable, than the ending of The Titanic movie. Any shareholders in CIT, have only themselves to blame for chasing a dead-end stock. (Are you listening, all AIG, GE, Citi Group holders?)

Right with that reality out of the way - let's move on to the markets. Here is what my preferred option on Friday was:

"Option 2:

The alternative is that the bulls will now have more sell stops to target and might want a better price to buy into. So look at the Weekly candles - not so good looking. So here we have scope for a drop down to the 9600 or just below to meet the long term weekly trendline from March. That might take until next week and then the bulls strike again.

The way I see it - the latter would be a nicer game play - as just about every bear will now be looking to reshort the indices and they will be allowed to have their fun down to that trendline - where they will fall into the bear trap and get chewed up as the short-coverinng begins. At the same time, every bull will now be going long on that daily candle, thinking all is dandy again. So this scenario would kill equal bulls and bears.

All in all, the risk to the downside is always greater than the risk to the upside in this market. It's been a great week for me, so I'm going to stay out of the market today but yes - take both the scenarios above and see if it makes sense according to your own analysis. I'm leaning towards option 2."

Well I didn't expect most of it to come all in one session but hey we hit a low in the upper 9600s...not a bad guess hey? (haha as if! That's a lot of price watching and TA to get those numbers.)

Not only was the crazy volatility on Friday a complete and utter fake move down - but more importantly, it once again proves that news does not matter. (If you have read this blog enough, you'll know that I pay very little attention to news). After all, on Thursday we were told that the US was out of a recession (Ehem as if!) - so you would expect the markets to be rocketing right? So why did they drop over 250 points on Friday? Very simple - the traders in the pit do not care about the news - they care about making money. They make money, by others losing money. It's not a total zero sum game (commissions and slippage on each trade) but in this game, it's almost there. It pays to detach your mind away from CNBC.

So now are you convinced? Will you listen to me? Good.

So now that October is out of the way and with it the US Mutual Funds tax year too - we can move on. As I kept saying, all last week was the funds resetting their clocks and offsetting profits against loses from 2008. This is why it's going to be dangerous for anyone still short this market by the time we revisit that area just below 9600 (Could go as low as 9450 on a spike) on the Dow and 1020 on the SPX.

The key factor is that the market is focusing on broken support levels. I'm hearing crash calls wherever I turn and all because the indices lost their entire October gains in under 5 days. Of course they did - they took it up, so they could take it down and still finish all square. Sure from a technical perspective, the SPX has broken below the 50 day EMA and the weekly close was indeed ugly and don't get me wrong there is a lesson to be learnt from this...Anyone long these markets is either brave or insane. Simple. A lot of people think I've turned into a bull - NO! I'm simply saying that they are setting up a bear trap for a November pump and that the waterfall decline will come later in the month, when (if) the USDX bottoms - at that point, you can see how quickly these markets can lose their ill gotten gains.

So for now let's take a step back and keep a look at the big picture. What we need is a revisit of the October lows, so that the fundies can dip back in at the same price as last month. It should happen sometime this week and just to reiterate - that should be something you need to be careful of if you are stuck short. If you are long, stop panicing - learn your lesson and sell out when these markets rise again to above the last highs or buy some puts to protect yourself.

Right now, we are very oversold and so we should expect a rebound of sorts to retrace some of Friday's losses. If we manage to retrace all the losses, then it will be very bullish but I expect a pump up to about 9888 on the Dow and then a correction to test those lower numbers mentioned above, before we rocket up again.

So stay focused this week - for there will be many amazing trades to take advantage of. Let's nail it...

Happy trading,

Darshan

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