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

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

With no major economic or earnings news expected today, the focus of investors will be on the continuing melt down of the financial industry and its aftermath. We got news Sunday night, that Goldman Sachs (GS) and Morgan Stanley (MS), which now operate as investment banks, will become bank holding companies.

While both already have subsidiaries that will speed their entry into their new status, it probably is also very likely that they will be looking to purchase existing banks, especially now that those banks can be had for cheap.

Traders should look for which bank stocks, especially the regionals, are showing very heavy volume on Monday and possibly take positions. Washington Mutual (WM) was already being mentioned as an acquisition candidate over the past week and Morgan Stanley (MS) was in merger discussions with Wachovia (WB), although this might end with Morgan Stanley’s (MS) new status. So we might see some bullish actions in those stocks although with the incredible rebound in stocks from last week’s lows, we could see some profit taking today.

Tags: Goldman Sachs  Morgan Stanley  Washington Mutual  Wachovia

While financials will continue to be the focus of the investment community today, we will also be getting Initial Jobless Claims numbers for the week ending 09/13/08. This piece of economic news has the potential to rattle the markets today. If more filers than the 440,000 that forecasters are expecting, applied for benefits, stocks could take a beating.

And considering the state of the economy, if the number of filers is less than expected by a significant amount, the stock market will get a significant boost that is if the overhang on the market does not dominate the trading day.

The numbers will be reported at 8:30 AM, which will give Wall Street time to digest the news and maybe move on to concentrating on the crisis going on in the financial sector.

Something else that Wall Street will have to focus on, is that Wachovia (WB) is reportedly in merger talks with Morgan Stanley, while Wachovia has put itself up for auction and also pursuing other capital raising opportunities.

We may see a bounce in stocks over the next few days and weeks, but these will be nothing but bear market rallies, and traders should look to profit by shorting the market. A good way to do so will be by buying puts on the Ultra S&P 500 Proshares (SSO).

Word of caution, the October 50 puts have an ask price of $4.90, while the bid is only $4.10. This is a very wide spread and the underlying index will have to move a bit to cover this spread. Those looking to purchase the options can put in a lower bid, say $4.50, but if you believe the stock market is headed much lower, then bite the bullet and enter into the trade if placing a lower bid does not work.

Morgan Stanley  Wachovia  Lehman  S&P 500  Options  Puts

According to the New York Times, Morgan Stanley (MS) is considering a merger with Wachovia Bank (WB). The paper is reporting that Wachovia (WB) approached Morgan Stanley’s (MS) CEO John Mack, and very preliminary talks are now underway.

Both companies are under tremendous pressure, as their stocks have been beaten down in the wake of the credit crisis, the Lehman (LEH) bankruptcy and the takeover of AIG (AIG) by the government.

Companies typically worry about their stock price as a general course of business, but this time there is an added sense of concern. The meltdown of Bear Stearns started with a rapid decline of that company’s stock. Then credit default swaps, which are used to insure against default of a company’s debt, for Bear Stearns debt rose dramatically in price and this is seen as a sign that a company is now very risky and has diminishing chances of paying off those debts. A company in that position is also seen as having little chance of survival. The same is now happening to other banks and Wall Street firms.

When this happens, it has a tendency to become a self-fulfilling prophecy. As concerns as to whether a company can pay of its debt grows, customers may start pulling money while trading partners stop doing business with the company so as not to take on undue risks. This then leads to failure. With Morgan Stanley (MS) and Wachovia (WB) now in that boat, they are looking for ways to stay alive and shore up investor confidence.

Morgan Stanley (MS) shares are down a further 8% in after hours trading on the news, while Wachovia (WB) is up 3%.

Tags: Morgan Stanley  Wachovia  Merger

With stocks rallying rather sharply yesterday 08/05/08, posting their biggest one day gain in four months, the convincing manner in which stocks moved yesterday could turn out to be a bear trap that’s ensnared investors who got in yesterday afternoon, after they saw stocks hold on and tack on to early gains.

Since May 1st of this year and including yesterday’s rally, there have been eleven days in which the Dow Jones Industrial Average climbed at least 100 points. But for July 16th, when stocks climbed 277 points, and then followed through the next day with a 208 point rally, stocks have given up those triple digit one day gains within the following seven trading days.

Note: stocks gained 186 points on July 30th and we have not given those gains back yet because of yesterday’s rally, plus there is not enough data (trading days) to see if the same would apply.

Financials were big gainers yesterday, with Wachovia (WB) up $1.95 to $19.06, Citigroup (C) up $1.09 to $19.92, AIG (AIG) up $3.20 to $29.89, Wells Fargo up $1.36 to $31.54, Lehman Brothers (LEH) up $2.30 to to 20.24 and Merrill Lynch (MER) up $1.83 to $28.22.

These moves present clear near term shorting opportunities and traders should closely watch these stocks. As soon as the rally mode fizzles, short these stocks. If Lehman Brothers (LEH) stock starts giving back from here, a move to just $18 would be a 10% gain for traders shorting the stock!

On July 14, Lehman Brothers (LEH) was trading at $12.40. Financial stocks rallied from there and on July 18th, LEH was at $19.11. The stock fell to $18.32 by the 21st and then rallied again to $21.10 on the 23rd. It was then downhill from there, with the stock back down to $15.27 by July 28th.

Fast moving traders using the current stock market volatility to their advantage, could see a substantial gain in their portfolio. With AIG down from the $60 range at the start of the year, it probably will end the year down, but one could trade the stock and realize at least a 20% plus gain by December.