The Senate will be voting on Wednesday 10/01/08 to pass the bailout package that was rejected by the House on Monday. This is earlier than expected, so there is a good chance they are planning to approve it.

Being that there is a good chance that the majority of Senators will vote for it, giving hope to the bill passing in Congress and becoming law, traders should put some risk capital to work early Wednesday and buy financial stocks and ETFs in advance of the vote.

Traders could also consider call options on financial stocks and ETFs. However, watch out for extremely wide spreads between the bid and the ask. Most options on financial stocks are all ridiculously priced right now. Try to avoid buying any option that has more than a $0.75 spread.

Even that would normally be too high, but if financial stocks rally on the chance that the bailout plan might become law, the gains on the trade(s) will be more than sufficient to cover the spreads.

If stocks will be rallying on the vote, then the markets will start moving up early, so try to get in close to the open.

There is always the possibility also that the nays could have it again as they did on Monday in the House and needless to say, if that happened, the drop in stocks will be steep. But if you have some risk capital, put it up. If the plan gets approved, you don’t want to be on the sidelines when that happens.

 Tags: Bailout Plan

With the Dow dropping a historical 777.68 points yesterday because the house voted to reject the bailout plan, we may see lawmakers going into overdrive and working on trying once again, to get the bill passed as early as today.

Initially, it was believed it would take at least a couple days for lawmakers to address the situation again, as Monday evening was the start of the Jewish holiday Rosh Hashanah, which lasts for two days.

However even those lawmakers who were skeptical that the markets would see a precipitous drop if the bill was not passed, now understand that the economy is in a free fall, we need some sort of brakes applied and they need to act quickly.

On Monday 09/29/08, Citigroup (C) bought the assets of Wachovia Bank (WB) in a fire sale. While Vikram Pandit, Citigroup’s (C) CEO, extolled the deal in a press conference, which considering that they picked up $700 billion worth of assets for $2.2 billion (they immediately wrote down about $30 billion of those assets) it does seem to be, you still have to wonder how much prodding they got from the government.

In other words, this was a rescue plan albeit from the private sector, that was done to “prevent” the failure of another very large bank just four days after Washington Mutual (WM) became the largest ($307 billion in assets) U.S. bank to fail after it went under on Thursday 09/25/08.

And with the bank failures now getting larger in scope and happening more frequently and the FDIC having only $45 billion in the insurance fund that covers deposits (up to $100,000 per account) in federally regulated banks, it won’t take much for the fund to get wiped out and the FDIC will have to go hat in hand to congress.

Today, on the economic news front, we will be getting Chicago PMI, which measures manufacturing activity in that region, for September, as well as Consumer Confidence, again for September.

The numbers will be bad needless to say and the fragile state of the economy will continue to be a topic of discussion, especially now that we can add major bank failures to the discussion.

From a trading perspective, unless we get a technical bounce and there is a big rebound in stocks today, there will be little buying and until the bailout package gets passed, its possible we won’t see any meaningful rise in stocks. So the trading plan for today is to gauge market direction, trade according, that is go with the flow and take early profits.

Sitting on your assets today, is not a bad course of action and we would recommend getting in only on one of two conditions, if it looks like we will get either a big move in stocks, in which case you short if we are heading down, or you go long if we are getting a bounce, or congress will be voting today on the package, in which case, you go long.

Other than that, watch for what lawmakers are doing, and on the day we will be getting a vote, go long the markets by trading indices and ETFs that track the market, or buy call options on those instruments.

If we do get that bailout rally, look to lock in your profits within two to three days. The fundamentals of the economy are horrible and earnings season is around the corner to remind us of that. So stocks should be heading down further.

 Tags: Citigroup  Wachovia  Bailout Plan

Morgan Stanley (MS) and Mitsubishi UFJ Financial Group (MTU) of Japan today confirmed that the Mitsubishi UFJ Financial Group (MTU) will be investing $9 billion in Morgan Stanley (MS) and in return, will receive a 21% stake in the company.

Mitsubishi UFJ (MTU) will pay $3 billion, or $25.25 a share, for a 9.9% stake. MTU will also buy $6 billion of convertible preferred stock at a conversion price of $31.25. The preferred stock will pay a 10% dividend. Also, a Mitsubishi UFJ representative will join Morgan Stanley’s board once the deal closes.

Mitsubishi UFJ (MTU) is Japan’s largest financial group and the world’s second largest bank holding company with $1.1 trillion in bank deposits and $1.8 trillion in assets.

According to Morgan Stanley, “After one year, half of the preferred stock automatically converts into common stock when Morgan Stanley’s stock trades above 150 percent of the conversion price for a certain period and the other half converts on the same basis after year two.”

Tags: Morgan Stanley  Mitsubishi Financial

In a deal that was facilitated by the government’s Federal Deposit Insurance Corporation, Citigroup (C) will acquire the banking operations of Wachovia (WB). Citigroup (C) will be paying $2.2 billion in stock for Wachovia’s (WB) assets.

According to the FDIC, the details of the deal are that “Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.”

Perhaps in a bid to avoid a panic situation as another bank goes under, the FDIC is making it a focus to point out that “Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.”

Wachovia, which was one of the largest banks in the country, is the latest victim of the credit crisis. In a bid to grow into a money center bank with a national footprint that could offer every retail financial product to just about everyone, the bank went on an acquisition spree.

Amongst its purchases, was one of California’s largest mortgage lenders, Golden West Financial. Wachovia (WB) paid $24 billion for Golden West in May of 2006, at what turned out to be exactly the peak of the housing market. With the downturn in the housing market, and California being one of the hardest hit states, those mortgage assets, have led to Wachovia’s undoing.

Wachovia’s stock which closed on Friday 09/26/08 at $10, are indicated to open around $0.75.

Tags: Wachovia  Citigroup  Bank Failure

Members of congress are close to finalizing an agreement to implement a bailout plan that would buy bad asset-backed securities from financial institutions, in an effort to try and lessen the effects of the credit crisis, which has seen credit availability to both businesses and individuals almost freeze up, putting the economy in a downward spiral.

According to Speaker of The House Nancy Pelosi,  who announced the breakthrough just after midnight, Sunday morning, members of congress have settled ”our differences so we can go forward with a package to stabilize the market.”

Instead of the full $700 billion that has been bandied about, the funds will be issued in tranches. If the bailout plan is passed, $250 billion will be immediately available and a further $100 billion will be available if the president makes a request.

It is expected that a vote to approve the plan will come on Sunday.

Tags: Bailout Plan  Credit Crisis

First they were for it, then they weren’t. Word started emerging Thursday 09/25/08 afternoon, that the rescue plan which looked like it was just about a done deal, was hitting major snags, as republicans started balking.

As a result, stocks, which had surged on Thursday, started indicating a lower open on Friday evening in after hours trading, as it was basically confirmed that there were major obstacles to the plan. With the failure of Washington Mutual (WM) and the disappointing earnings from Research In Motion (RIMM) late Thursday, we could definitely see a major drop in the stock market on Friday.

However, we do feel that a rescue plan of some sort for the financial industry, will emerge soon and the largest bank failure in U.S. history should only help spur that along. As much as our politicians might want to play politics, the economic situation on main street continues to worsen and to do so fast. They have no choice, but to act.

Even though Washington Mutual was already on life support, with a stock that was down 87.5% for the year as of the close of the stock market on Thursday, and Standard and Poor’s cutting it’s rating earlier this week, the failure will be seen as a major shock on Friday and that should light a fire under our politicians.

We’ve recommended that subscribers to our Options Capitalist trading advisory service buy calls on the Proshares Ultra Financials (UYG) in anticipation of a rescue plan. We recommended the October 22 calls on UYG. Until the rescue plan is official, there will be ups and downs in the Proshares Ultra Financials (UYG) so be prepared for a bumpy ride. However, we should see a plan announced very soon.

A trading plan would be to wait to see what stocks do early Friday 09/25/08, since we are expecting a lower open, then at some point in the afternoon, enter into the trade.

Wall Street could use some good news and once a rescue plan is approved by congress, if Wall Street likes the details of the plan, we should see a very nice financials led rally that traders will not want to miss. Of course with the underlying economy in dire straits, we won’t expect the rally to last so if we do get the rally. Take early profits.

Tags: Bailout Plan  Washington Mutual  Research In Motion

In what just became the largest U.S bank failure in history and the world for that matter, the Office of Thrift Supervision late Thursday 09/25/08, seized Washington Mutual (WM) and transferred control to the Federal Deposit Insurance Corporation, which then immediately sold Washington Mutual’s (WM) assets to JP Morgan Chase (JPM).

The FDIC ranks bank failures by the size of the assets of the failed banks, and Washington Mutual (WM) had $310 billion in assets. Prior to Washington Mutual (WM), the largest U.S. bank failure was Continental Illinois National Bank, which failed in 1984, with assets of $40 billion. Second in line was IndyMac, which was shut down in July of this year, with $32 billion in assets.

In a failure this size, a major concern would have been whether this would deplete the FDIC’s insurance fund, which makes whole, depositors with accounts of $100,000 or less in a failed federally regulated bank.

The fund currently has $45 billion and had it had to cover Washington Mutual’s (WM) depositors, there is a good chance that the fund would have been depleted. With JP Morgan (JPM) stepping up and taking over, that disaster was avoided, for now.

Considering the current economic environment, this won’t be the last bank failure over the next twelve months.

The bank’s problems heightened this week and it became clear that failure was inevitable. It had put itself up for auction last weekend, but was having problems finding a buyer.

Then earlier this week, Standard & Poor’s downgraded its ratings, which made a bad situation worse. The head of the FDIC, Sheila Blair, summed up the situation today when she stated that Washington Mutual (WM) “was under severe liquidity pressure.”

Customers of Washington Mutual (WM) will not incur any losses and as far as depositors are concerned, the FDIC is terming this “a combination of two banks, and that depositors can expect business as usual on Friday morning.” If anything, they’ve just been moved over to a more secure bank.

Shareholders however, will most likely be completely wiped out. Already, Washington Mutual’s shares have fallen 87.5% so this year (09/25/08 closing price) and the shares which closed at $1.69 on Thursday, are down $1.24 or 73.37% in after hours trading.

Washington Mutual  Bank Failure  Continental Illinois  WAMU

Shares of Research In Motions (RIMM) are tumbling $18.93 or 19.41% in after hours trading, after the company reported 2009 second quarter results for the three months ended August 30, 2008 Thursday 09/25/08 evening.

Revenue for Q2 2009 was $2.58 billion, up 15% from $2.24 billion in Q1 and up 88% from the $1.37 billion that the company reported in the same period last year.

According to the company, the revenue breakdown for Q2, was approximately 82% for devices, 13% for service, 3% for software and 2% for other revenue. The company shipped approximately 6.1 million devices in the period.

Net income for the quarter was $495.5 million, or $0.86 per diluted share. This compares to $482.5 million, or $0.84 per diluted share in Q1 and net income of $287.7 million, or $0.50 for each diluted share in the period last year.

For Q3 2009, Research In Motion (RIMM) is guiding as follows: “Revenue for the third quarter of fiscal 2009 ending November 29, 2008 is expected to be in the range of $2.95-$3.10 billion. Net subscriber account additions in the third quarter are expected to be approximately 2.9 million.

Earnings per share for the third quarter are expected to be in the range of $0.89-$0.97 per share diluted based on a gross margin of approximately 47% and operating expenses that are 1-2% lower as a percentage of revenue than in the second quarter.”

Tags: Research In Motion RIMM Earnings

Solar stocks rallied on Wednesday 09/24/08, after the U.S. Senate on Tuesday, approved an energy bill that could benefit solar companies and expand the U.S. solar market. While the bill still has to get approved by the House of Representatives, President Bush has indicated he will support the bill.

One of the solar stocks that showed action on Wednesday, was Energy COnversion Devices (ENER). The stock opened at $63.44 from Tuesday’s close of $56.46, reached an intraday high of $66.30 and ended the day up $7.33, to close at $63.79.

We are looking for the stock to trend up to the $70 level and if the house approves the bill, which could happen over the next two weeks, we could even see the stock higher than that.

Tags: Energy Conversion Devices  Solar Stocks

Goldman Sachs (GS) shares are surging in after hours trading on Monday 09/22/08, up $15 or 12% from the closing price on Monday 09/23/08, on word that Warren Buffet through Berkshire Hathaway (BRK-A), is buying $5 billion in Goldman Sachs preferred shares. The shares closed at $125.05 in regular trading.

The shares will pay a 10% dividend. Berkshire Hathaway will also purchase $5 billion of Goldman Sachs (GS) common shares at a strike price of $115. Goldman Sachs (GS) in a separate deal will also raise $2.5 billion in a common stock offering.

In addition to Goldman Sachs (GS), the news is sending shares of Morgan Stanley (MS) higher, as well as S&P 500 (SPY) futures, which if holds, could mean a higher stock market at the open. Morgan Stanley (MS) shares are up $4 or 14% in after hours trading, to $32

If the stock market does open higher, traders might want to be careful not to get caught up in a bear trap. We will be getting Crude Inventories numbers for last week as well as Existing Home Sales numbers. These could possibly lead the market lower. So it might be prudent to wait until after 10 AM when those number come out, before initiating trades on Tuesday 09/24/08.

In addition to Goldman Sachs (GS), the news is sending shares of Morgan Stanley (MS) higher, as well as S&P 500 (SPY) futures, which if holds, could mean a higher stock market at the open.

If the stock market does open higher, traders might want to be careful not to get caught up in a bear trap. We will be getting Crude Inventories numbers for last week as well as Existing Home Sales numbers. These could possibly lead the market lower. So it might be prudent to wait until after 10 AM when those number come out, before jumping into the market on Tuesday 09/24/08

Tags: Goldman Sachs  Morgan Stanley  Berkshire Hathaway