ZAY Blog

Shares of Citigroup has down 36% at 9:15am EST due to the news of government boosting its stack by converting preferred shares to common shares. S&P futures down 2.1%.

Be ready for a rough day ahead!

The market was a little hesitant towards going up this morning, and I was a little worried because the consumer confidence and home prices data did not look so good. Consumer confidence was the key for economic recovery, which has plunged to the lowest since 1967, when the index was first measured while home prices had the largest drop in 21 years.

However, all fears seems to have erased  and the market bounced back fairly quickly after the Chairman of Federal Reserve, Ben S Bernanke, testified in congress that the recession could end as early as this year.

“Could”, of course, means there may be a “could-not”, but any assuring remarks from the government is something that investors are definitely hope to hear.

S&P ended up bouncing back to above 750 points, which is something that I feared it would stay below or drop further for a while.

However, the question remains:”are we there yet?”

Frankly speaking, I would pay someone 1000 bucks if he could convince me we are definitely at the bottom, and it is a good time to buy some oil while short on gold, a typical bull-market strategy.

The reality is, there are still questions remain to be cleared before the market advance further.

AIG is still in talk with the government to try to spend more money in reviving what was once a giant in the insurance industry (or perhaps spend those money on more luxury holiday resorts).

Citigroup, although far from collapse, remain unclear of the direction that it is heading to in the next couple of months.

Finally, the automakers are talking about merger, but whether they could survive to the day merger happens remains to be a huge question mark.

On top of that, we still have to face the reality that the general public are still in fear of what is going on.

The remarks made by Bernanke, to me, is more like a defibrillator to the economy – the heart will beat for a second or two regardless of who the defibrillator is applied to, live or dead.

However, whether it is the magic pill of revival remains to be seen.

I was literally watched with fear and frustration today as S&P slide down below 750 in the afternoon, and dropped 1% in the final hour of trading.

The last time S&P went this low was in 1997, almost 12 years ago, during Asian financial crisis.

What was really scary to me, this time, is that the market is not reacting based on any news.

In fact, there was news that US government was considering purchase some of the shares of Citigroup, which resulted in a 20% rise in C today.

Not so long ago, Obama just signed the stimulus package into law.

Even before the market was opened today, I bet some institutional investors did not see such a bad day. After all, the S&P futures were going up in the Asian market, and the Dow Jones index went up by more than 70 points in the first half an hour.

This is an indicator that rather than selling out of panic, investors are actually losing confidence on the government in solving the current problems, which means unlike what happened last November, when huge selling pressure built up after the collapse of Lehman Brothers, and quickly disappeared after the US Congress announced the bailout plan for the automakers, the current downward trend may persist for a while.

Furthermore, earlier today, the market was still trying to stay above the support level, only to loss that late in the afternoon with large trading volume. This is usually a sign that the downward trend will continue further.

The next couple of days will be crucial in determining the fate of the stock market for at least the next year or so. If the market continued to slump, there is a reason to believe that we may still be far from the bottom, and be even further from the recovery point.

Until then, I would hold on to cash positions and sit tight.

Today was obviously an interesting day to see on GM and F and the not-listed Chrysler.

The news started to unfold at 9am, when President Bush announced the bailout plan for the Big Three (Big Two rather, since Ford is not asking for money), and the market reacted extremely positive at pre-market, when share price went up as high as 4.80 at one point of time.

Then market opened and within minutes, the share price fell back like free fall before coming back to 4.20 and stayed there for pretty much the rest of the day, and shot up to 4.47 right before the end of the day.

The day was particularly interesting as today is the expire date of all stock options expiring in December, and the market is definitely more volatile than usual despite the fact that it was trading at positive territory for the whole day.

First, my condolence to those owner of the put options, or those who wrote calls. The 3- and 4-dollar strike puts were virtually worthless, if the announcement were made a couple of days ago, there was still a chance of profiting from those puts, but unfortunately Bush just happened to announce it on the exercise day.

What surprised me, in this case, is all those shorters? Don’t they need to cover their positions ASAP? And why the stock is not shooting up as the short interests was almost 50% of the market cap?

Look at Citigroup, their shares were traded at 4 region, but went up to as high as 8.5 after the bailout. Why not GM and F?

My only guess is that the shorters have either shorted early enough to get a really good price, or they simply do not want to realize the loss and hope the price would bounce back a little or hold the short position till March and see if GM and Ford could turn in a reasonable rescue plan to restructure themselves.

However, today’s trading was by no means a good indicator of the perception of investors, since lots of options were exercised right before the market was closed (look at the last five minutes), the real reaction from the market to the bailout package would be in on Monday, when the regular trading resumes.

By then, hopefully the market will react more rationally to the news.