Option Investor
Intra-Week Blogs

Massive Dumping on Bill Failure

Printer friendly version

The U.S. House voted to not approve the bank bailout bill and the markets were not impressed. Energy stocks were crushed along with other sectors and nobody was spared. Big losers were CEO -18, PTR -15, RIG -14, CNQ -14, HES -13 and DO -12. I could go on because the list is endless but you should already have the idea.

The Dow dropped -777 points, Nasdaq -199 and crude oil -11.38 at the day's lows. It was a rush to the exits with the major government officials yelling fire. The government painted the picture of financial Armageddon if the bailout was not passed and then expressed shock when the markets crashed on the no vote. Pull your head out and think about what you are saying to shareholders by painting such a negative picture. Having another major bank taken over by the FDIC and Citigroup did not help either. Wachovia was forced at gunpoint to sell its banking arm to Citigroup or risk having the government take over the entire company. Citigroup could lose up to $42 billion on the deal.

The price of crude was crushed back to $95 as funds raced to liquidate any position to raise cash. There were also fears that the bill failure could lead to a massive string of bank failures in the U.S. and a serious global slowdown. If the economy took a sharp turn lower as a result of bank failures many businesses would be forced to scale back, layoff workers and postpone expansion plans. Fears of lower demand offset worries about continued outages in the gulf. The MMS reported that 57% of gulf production was still offline. Tropical storm Laura has formed in the Atlantic but much farther north than a typical Caribbean storm. It is not expected to make landfall or cause problems.

Ironically the U.S. dollar rose sharply as fears over weakness in Europe forced those currencies lower. The rising dollar also helped push crude prices lower.

What we are seeing today is a crisis in confidence and a flight to safety as traders try to find somewhere to put their money where it will be safe. U.S. equities and commodities are being seen as troubled investments and bonds and money markets as safe havens. If this crisis continues for a couple more days we could see oil retest $90 and the Dow test levels below 10,000. Until the financial crisis is solved the weight of trillions in weak mortgages will continue to weigh on banks and limit new loans for businesses and consumers alike.

I would not be a buyer of anything, energy, oil or equities, until some stability comes to Wall Street. I would look for a trade in oil futures should we test $90 again but that would be just a trade and not a long-term hold unless the financial problem is solved. Just getting a bailout bill approved does not mean the problem is solved. It just means an immediate disaster has been averted.  That could provide a short-term bounce but it remains to be seen if any bounce will last.

Jim Brown

Leaps Trader Intra-Week Blog Archives