Friday, February 1, 2008

02.01.08 - Yahoo! Boost + CDO Fraud Trade Idea

Yahoo, a positive ISM, a possible bond insurer bailout afoot (edit: add), and first-day-of-month effects are keeping us nicely propped up here in spite of the jobs report. However, looking at the daily time frame, we may be setting up for at least a small-pull back here based on the magnitude of the snapback alone.

Meanwhile, cumulative tick remains constructive as we move laterally here. Can we hold gains going into the weekend? If we can, it would be quite bullish in spite of my short-term pull-back call.

Trade Idea: This comes from my brother, Greg Pietsch: Short Merrill Lynch (MER), Long the S&P Select Financials Spider Fund (XLF). The Wall Street Journal links below tell the storey, we'll see how this develops:

UPDATE: Merrill is pulling away! Hey now! Cramer (I know) says "short covering" across the sector with the most beat up benefiting the greatest... OK, so wider spread...?

2:10PM CST UPDATE: If you bought on the day I conjectured (1/18) "Capitulation?", today near the close would officially be a good time to close out if you were only in for the trade. If you did, congratulations, you made nearly 5.5%. Further, if you dollar cost averaged in on Tuesday, as intimated, you're up over 6.0%.

WEEKEND UPDATE: A second short-sale candidate, UBS. As my brother and I discussed on Friday; however, it really would take a basket of these and a whopping smoking gun to have the trade ultimately make sense. And with the yield curve steepening, things are looking more and more favorable for the banks in general. Besides, these things always seem to end up resolved in an industry-wide negotiated settlement... Well, don't they?

If we are skeptical, it's because we were both heavily involved in the Resolution Trust Corporation Savings & Loan clean up in the mid-1990s. If that looked messy in the papers, I can't even begin to describe how bad it looked on the ground. Interesting how MER reduced/accepted potential damages on the civil action by disgorging profits so quickly though. Hmmmm.


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