MON. JUL 14 THOUGHTS

Friday was a rather extraordinary day for trading. As has been harped on repeatedly since the inception of this blog, the critical entities leading the market are the direction of oil prices, Lehman (LEH) and most recently, the fate of Freddie Mac (FRE) and Fannie Mae (FNM). Let’s work on this from macro to micro. Oil is obvious; the higher the price, the harder the economy is. Lehman is one of the nation’s leading investment banks so if it is so much as perceived that there is trouble there, there is trouble for the whole financial sector. But Freddie and Fannie are two different animals. They ostensibly provide funds to mortgage lenders, but have government backing. So, basically, it is the government that supports both of them as a last resort. This is where it can get complex: Fannie and Freddie can still operate- no matter how many bad loans they have- simply because you and I and all of our American taxpayer friends fund Freddie and Fannie. But, if the companies themselves have negative net worth, the stock price has to go to 0 and the companies must be absorbed by the Federal government. Again, it doesn’t matter if they have $75 billion of bad mortgages because you and I will absorb those losses. So, the headlines we’ve been hearing center around the ability of these companies to maintain funding and how/if they will get it . As far as trading, the only way to make serious money in these things is to breathe and make sense of the news. When the “New York Times” runs a front page story that the government may absorb the things and the stocks are nearly flat at 6:45AM AND the futures begin selling off, selling them just below unchanged is the only prudent thing to do. Period. A number of people here had one of their finest trades of the year on Friday morning by doing just that. The moral here is to pick spots, be patient, and don’t overtrade. If traders lose money by trading 50,000 FRE and losing money net-net, those traders won’t be around along. So especially in this volatility, exercise caution…and of course precision and a lack of pride in trying to prove yourself right; expedience is the key here in this market.

Overnight, the Federal government took action to essentially be a lender of last resort for Freddie Mac and Fannie Mae which gave foreign markets a boost with momentum spread over to the futures in the U.S. The markets will definitely open higher; the question of the day of course is “will it hold?” The only answer offered here is this: traded into selected major strength and weakness; if the market is strong and a major financial is near unchanged, it is likely a short thru unch…that type of thing.

FRE,FNM- no obvious trades. Mention them simply to advise everyone to ‘be careful.’ Stocks in middle of pre-morning range…nothing clear. But they will lead the market today in all likelihood.

CSIQ- pre-announced to upside. Stock a likely A-B-A2 of some sort. Also, watch other solars for relative strength type trades, i.e. if CSIQ is strong and an LDK or a FSLR is weak, short those type things thru unch.

ZION- was downgraded to sell at Goldman Sachs. If it does not open down a lot, buy thru unch.

YHOO- spurned Microsoft over weekend. If stock opens down but close to unch, it is likely a buy thru unch because there really is no reason to own it today per se.

ATI- pre-announced to upside. A-B-A2 of some sort

CRME- positive phase II data. Stock very strong…likely an A-B-A2 thru 11.

MEE,PPG- on Cramer

Earnings season starts in earnest as the weak goes along; today, MTB and PHG before open and DNA and NVLS after the close.

Please please please be extra nimble today. Things will be whippy. Have extraordinarily tight stops, particularly for those in the ‘short’ mentality should the market really go to the upside as that is how most people are programmed to think right now.

Good luck today.