Bail-Out Plan Goes Down And The Market Follows

An amazing thing happened today...

A group of democrats walked away from their leadership in the House of Representatives and joined arms with a group of Republicans who walked away from their leadership in the White House, and they both agreed to vote down the bail-out plan.

Guess what?

We’re still here. Sure, the market sold off hard today but if you had been paying attention to this blog and studied up on options you likely had a few put options in your back pocket to make the it a bit less harrowing.

As we headed into the weekend, we were told that this bill had to be passed if we were to avoid a total collapse of our financial system. Yes, Wachovia joined the list of failed financial institutions. No sooner than it did, they were bought by J.P. Morgan Chase.

Don’t tell anyone, but I am no financial genius. What I know about the markets is earned from many years of investing, studying, and trading. The sum of my experience tells me that no matter how complex, or “creative”, or sophisticated finances get there are those who owe and those to whom it is owed.

The financial institutions that are failing are victims of their own actions. They loaned money to people they knew, or should have known, could not pay that money back under the terms it had been given to them. It was great fun when housing prices were rocketing skyward, but did they really think the party would never end?

Well, it did and the bill has arrived. So, who shall pay it?

On the one hand you have those who made bad loans, guaranteed bad loans, insured bad loans, and invested in bad loans. You also have those folks who took out loans that they knew, or should have known, they could never re-pay.

On the other side of the equation, you have the rest of the American tax base. The folks who go to work, pay their bills, pay their taxes, and struggle to get some of their income into savings and investments.

Who should pay?

Well, the first group can’t pay because they’re broke. The ones who took the loans they can’t re-pay are defaulting on the loans. The ones made, guaranteed, insured, and invested in the bad loans can’t pay because their portfolio of loans has imploded and the real estate they used to secure the loans is worth a lot less than it was when they wrote the paper. No one wants to loan them any more money, either. Why would they? Look at the mess they’ve already made. How could making more loans to that group make things better?

Oh. But, then there is the Federal government...

Let’s bail ‘em out. Let’s take on the $700 billion dollar mess, pick up these unfortunate “victims” and dust them off. We’ll just add that to the already staggering debt this country already owes. After all, it’s not like our generation will ever be able to pay it off. We’ll stick our kids and grand kids with that. Just like we stuck ‘em with the cost of bailing out Fannie and Freddie. Just like we’ll stick ‘em with a bankrupt Social Security and Medicare system.

Has it ever dawned on you that the Federal government is not very good at fixing financial messes? Has it ever occurred to you that the government is much better at creating financial messes?

I say to hell with the bail out plan...

What? But the world will end. Life as we know it will cease to exist! Or will it...

Will the credit markets dry up? Well, I imagine that those who have money to lend will become a bit more careful about lending it. I’m not sure that’s a bad thing, though.

Will the real estate market disintegrate? I’m pretty real estate will survive. There may be a period of time while foreclosure properties contribute to supply and keep prices depressed, but that’s a market economy and since when did we decide that government intervention in real estate markets is good?

The market is already sorting this mess out. Private equity is funding the purchase of assets at the failed institutions. Those asset purchases are being driven by profit motivations. Someone is going to make money from all of this. Those profits will need to be re-invested. That re-investment creates liquidity.

Oh, but the stock market is selling off and retirement accounts are getting hammered. Yep. But, it wasn’t that long ago that everyone was telling us how great 401k plans are and that we need to save and invest and we’ll all have a great future ahead of us.

The reality is that life is uncertain.

Investing, saving, and just surviving from one day to the next are uncertain endeavors. When crisis arises, we tend to run for shelter and look to the government to make it all better. It’s a peculiar response, because when all is said and done we are the ones who fund the government, along with paying our bills and saving for the future.

With that realization, I am quite comfortable having my representative government pass on this bail out plan. The only reason put forth why this bail out is necessary, or even just a good idea, is the notion that without it all else will come undone and our country will plunge into the abyss.

It’s fear mongering.

The real abyss is the debt this nation owes and the additional debt the bail out plan would create for taxpayers to pay-off. That’s the abyss I fear.

Here’s the bail-out plan I favor. Let’s figure out how to bail-out the tax payer. Let’s come up with a plan that eliminates the staggering debt we currently carry. Let’s agree upon a plan that saves our “golden parachute,” formerly known as “The American Dream.” Let’s bail that out.

I think we’ll survive the fall of Wa-Mu, Wachovia, and even Lehman Bros. The markets will bump and grind along, regardless.

What’s all this mean if you’re a trader?

It’s time to grow up children. It’s time to set aside the childhood fantasy of picking the next big winner. It’s time to learn how to manage risk, create a trading plan, and develop the discipline to trade in difficult market environments.

There is no such thing as security any where in this world. There is only opportunity, and despite the current propaganda our financial markets remain one of the greatest sources of opportunity any where in the world.

If you're inclined to take responsibility for your financial future, now is the time to "step up" to the plate and do something to make your future a bit brighter. McCain and Obama aren't going to do it for us.

My friend and trading mentor, Bill Poulos, is one of the guys that helped me "see the light" when it comes to trading. I've learned a lot of valuable lessons from him. If you're willing to study, work hard, and apply the lessons he teaches there is no reason why you can't enjoy a sense of confidence in your future, too.

Click here to learn more about how to trade in any market...

Washington Mutual And Bail-Out Fail

U.S. stock futures are pointed to a sharp sell-off this morning, after the proposed $700 billion bank bailout package stalled and Washington Mutual was seized by regulators in the country's largest-ever bank failure.

Yesterday, there was optimism that the bank bailout package would be passed. U.S. stocks rose higher, despite General Electric issuing a profit warning and reports that orders for durable goods had dropped. The Dow industrials closed up 197 points, the S&P 500 added 23 points and the Nasdaq Composite rose 30 points.

The bank package began to unravel, however. A White House meeting blew up in acrimony, with House Republicans refusing a demand from Democrats to come back to the table. The Democrats now insist they will not bring the package to a vote unless Republicans support it.

Adding more fuel to the conflagration, federal regulators seized Washington Mutual and sold it to J.P. Morgan. WaMu was the second biggest originator of "Option ARMs," which were marketed to borrowers via low introductory rates and included various payment options. Those loans often included the option to pay only interest, which caused the borrower's debt to grow with each payment, resulting in negative amortization. When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to enormous losses for WaMu and others who had extended the credit or purchased securities based on that extended credit.

Make no mistake about it. Our nation's credit market is in crisis. Right now the financial markets are clinging to the hope that politicians can set politics aside and put together a sound bail-out plan. With the Democrats and Republicans at each other's throats in advance of the upcoming election, they may very well invest more time blaming each other for the crisis to win votes rather than working with each other for the good of the country.

With crisis comes opportunity, however. There is a great deal of volatility pushing option prices higher. These markets are no place for the amateur, but if you can avoid the whipsaws and sell-offs there is money to be made.

Mind your risk, and trade well.

Christopher Smith
TheOptionClub.com

A Total Market Melt Down Spurs Government Reaction

If you just returned from a week long vacation on an island, you would be wondering what all the commotion was about.

For the week taken as a whole, the market experienced just a modest rise. Stocks gained less than 1% — the S&P 500 up 0.3% and the Nasdaq 0.6%. But, that doesn't come close to telling the story...

This last week was one of Wall Street’s most remarkable and turbulent weeks in it's history. A week that overturned a financial order built over decades and changed the face of the financial landscape forever.

Lehman Brothers filed for bankruptcy. American International Group agreed to a bailout that ceded control to the Federal Government. Merrill Lynch agreed to be bought by Bank of America. With Morgan Stanley searching for a buyer, that would have left Goldman Sachs as the last big independent broker.

The week shook the foundations of the world financial system.

The London Interbank Offered Rate rose dramatically during the week, pointing to the reluctance of banks to make overnight loans to one another. At one point midweek, the yield on Treasury bills fell to nearly zero as investors raced to the safest of havens. The financial system seemed to be unraveling at the seams.

On Thursday night and Friday, the government took unprecedented steps to avert what some feared would be a complete melt down our financial markets. All of these problems had their root in large portfolios of defaulting mortgages. Those firms that owned those mortgage backed securities could not sell them, because they were being viewed as essentially worthless. These faltering firms did not have the capital necessary to avoid the losses.

Something had to be done to avert unmitigated disaster. Thursday, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with congressional leaders. That night they began to craft a plan to buy those illiquid mortgage securities and then auction them off at some later date.

Details were not discussed, probably because no one has really worked them out. Friday's announcement by Mr. Paulson was short and he quickly exited the conference after fielding a minimum of questions. In lieu of details, the plan is being compared to the Resolution Trust Corp., that was formed after the failure of savings and loans associations in the late 1980s.

Money-market funds, a safe haven where institutions and small investors alike park cash, came under unprecedented pressure in their nearly 40-year history. The Treasury Department said Friday morning that it would activate a fund to protect money-market funds.

The Securities and Exchange Commission issued a temporary ban on selling financial stocks short. The ban runs through Oct. 2, but the SEC could, if necessary, extend it another 30 days. The SEC also eased rules to make it easier for companies to buy back their own shares.

The Federal Reserve expanded its emergency lending to allow commercial banks to finance purchases of asset-backed paper from money market funds. It also said it would buy short-term debt from Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

On Tuesday, the Reserve Primary Fund, the original money fund, was forced to write off $785 million in Lehman notes, 1.2% of its portfolio. As a result, its net asset value fell to 97 cents from $1, meaning investors lost 3 cents of every dollar. It froze redemptions after investors pulled out nearly two-thirds of their money during the previous two days.

That was the first time since Orange County, Calif.’s bankruptcy in 1994 that a money-market fund had “broken a buck.” The next day, Reserve announced that two other funds had broken a buck, including a fund exclusively for offshore investors that will return only 91 cents of every dollar invested.

It got worse. Wachovia’s Evergreen Investments, Bank of America’s Columbia funds, Ameriprise Financial, Legg Mason and Frank Russell Funds said they were either shoring up staggering money funds or stood ready to do so to prevent them from breaking a buck.

On Wednesday alone, investors yanked $89.2 billion, or 2.6% of total assets, out of money funds, which the day before held $3.44 trillion. The next day, Putnam announced that it was liquidating a money fund that was under pressure from redemptions.

So, there was a lot on the minds of investors and traders during Friday's session. Add to the fact that this was a quadruple witching trading day, the short covering, and you got the sense that anything could happen.

Whew! What a week, and less than a 1% change to show for it all...

Christopher Smith
TheOptionClub.com

Big Rally On Wall Street On Hopes Of Paulson's RTC

Wow. What a day we had yesterday. Talk about a wide ranging day!

This morning, the futures are up massively. Considering the sell-offs we've had this week, what the heck is going on?

It appears that the world's central banks are injecting liquidity into the markets and the U.S. Government is going to bail out...every body?

The rally was sparked by news reports that Treasury Secretary Henry Paulson might set up a facility to take on bad debts from banks, bringing relief to a sector battered by the financial crisis.

The Paulson facility reportedly would be similar to the Resolution Trust Corp., set up in the late 1980s to take over failed assets during the S&L crisis. It would let ailing banks take bad debt off the books and free up money for loans and other transactions.

Some news reports said Paulson spent part of Thursday pitching the plan to Congress.

Other reports said the plan might not mirror the RTC, or that it was just one of many possible options.

Paulson made no public comment.

Whether such an initiative could make it into law is another matter. Earlier, White House Press Secretary Dana Perino questioned the wisdom of crafting sweeping measures in the midst of the crisis. She added it might be difficult to approve a bill quickly.

Well, Pauslon is scheduled to speak within the hour. This should be a very interesting day on Wall Street.

We have what appears to be a very credible rally, but it also seems to be based on stories of what may happen. It may also be magnified by further restrictions on short selling. Be cautious.

Christopher Smith
TheOptionClub.com

Washington Mutual And The Big Independent Brokers Endangered

The futures are suggesting we'll see a little relief this morning, but keep in mind that we are going to continue seeing some turbulence in this market.

Washington Mutual has now put itself up for sale, following in the wake of Lehman Brothers, Merrill Lynch, and AIG. The failing thrift has hired Goldman Sachs to help find a buyer, with interested parties potentially including Citigroup, Wells Fargo, J.P. Morgan Chase, and HSBC.

Now, Morgan Stanley and Goldman Sachs Group are the last two remaining big independent brokers but Morgan Stanley is reportedly looking for a merger. You'll remember that Bear Stearns collapsed earlier this year, Lehman Brothers recently filed for bankruptcy, and Merrill Lynch shook hands on a deal to be acquired by Bank of America. With Morgan Stanley looking for a buyer, that would leave Goldman Sachs as the last remaining large independent broker. Can they survive?

I doubt that anyone saw this coming, at least not to this extent. The market's reaction has been turbulent and a lot of people are feeling the pain.

Over the last couple weeks, I've been posting links to materials that demonstrate now only how to survive these types of market, but how to actually prosper and grow your wealth when everyone else is feeling the pain.

Free Trading Report And Video Training

These training materials are all available at no cost, but will not be available in definitely. So, I encourage you to take advantage while you can and download the material now.

Christopher Smith
TheOptionClub.com

AIG Bail Out, Lehmans Remains, WaMu's Last Days, And You Prospering From It All...

Everyone who can, seems to be making a deal.

Insurance Carrier AIG Rescued By The Fed

Somehow, AIG was able to negotiate a federal bail out on the heels of the government turning it's back on Lehman Brothers. Apparently, AIG is just too big to let fail.

The Fed is extending an $85 billion dollar loan to AIG, but it ain't cheap. The loan is for just two years and carries a rate of 8.5% over LIBOR, plus the U.S. Government takes a 79.9% stake in the company.

AIG's CEO, Robert Willumstad is being shown the door, and will be replaced by former Allstate CEO, Edward Liddy.

Barclays Feeds On Lehman Carrion

Like a vulture swooping in on a dying prey animal, Barclays is gorging itself on the vitals of dying Lehman Brothers. In exchange for $1.75 billion, Barclays will purchase Lehman's assets, including its North American investment banking operations as well its New York headquarters and two data centers.

Washington Mutual May Be Next

It is being reported that JPMorgan Chase is a potential buyer for the ailing thrift. WaMu has seen its stock price battered as it slumps under the weight of a deteriorating loan portfolio. It's best bet to avoid liquidation is to find a merger partner.

Turbulent Markets...And Opportunity, Ahead!

If you spend any time in the office break room, you're likely to hear co-workers lamenting these difficult economic times, languishing investment portfolios, and an uncertain future. Get your coffee and move on because you do not want to fall into that mindset.

Tough times bring opportunity for those courageous enough and savvy enough to avoid despair and panic, and take advantage of the opportunities that present themselves. There are people making money in this market right now.

Free Trading Report And Video Training Materials Available

My friend and trading mentor has compiled some fairly extensive training materials that he is making available to traders on a complimentary basis for the next few days. The report is ready for download and the videos are being released on a daily basis.

Free Market Mastery Training

These materials are intended to demonstrate how you can not only survive tough economic times, but proper during them. Take advantage of them while they are available.

Christopher Smith
TheOptionClub.com

Merrill Lynch Sold, Lehman Brothers Bankrupt, While AIG And WaMu Totter

The financials are falling! The financials are falling!

We awoke this morning to the cry of Chicken Little, only this time our poultry little friend is not over reacting.

Lehman Brothers tried to avoid bankruptcy over the weekend by negotiating a buy out with Bank of America and Barclays. Henry Paulson, Secretary of the Treasury, had told the market not to expect the tax payers to bail out Lehman Brothers and there was none.

With no government guarantee to protect them against losses, Barclays and Bank of America walked away from a potential sale, prompting Lehman Brothers to file for Chapter 11 Bankruptcy protection earlier this morning.

When Bank of America walked away from Lehman Brothers, they walked over to Merrill Lynch and negotiated a price to acquire the firm.

AIG is scrambling to raise capital to avoid what would be a devastating downgrade of its credit rating. The company rejected a couple of deals that would have injected needed capital, but at the price of control shifting to those capital investors.

An AIG deal may require Fed participation and it is presently unclear whether the government is willing to take on more now that they have a $200 billion bail out to finance off the tax payers' back following the take-over of Fannie and Freddie.

Washington Mutual is now seeing as much as 45% of their Payment Option ARM loans, which were written by the thrift from 2004 to 2007, heading into default.

Today's market open is going to be rough. Minutes prior to the open the DJIA futures are down 370+ points, the S&P 500 futures off more than 45 points, and the Russell 2000 showing 23 points to the downside.

We could talk about how you could have made a small fortune playing these falling financials to the downside. While that is true, it feeds into the sort of greed and lack of risk management that has lead Lehman, Merrill, and perhaps AIG and WaMu to their demise.

Risk management is an absolute necessity, if you hope to survive and even prosper during what will be remembered as the worse financial crisis to hit Wall Street since the market crash of 1929.

Christopher Smith
TheOptionClub.com

Lehman Heading For Bankruptcy

Bank of America and Barclays were Lehman Brother's best, and probably last hope for a deal to unload the faltering 158 year old financial firm. According to reports over the weekend, that deal is falling apart.

Understandably, Bank of America and Barclays do not want to take on the risks being carried by Lehman Brothers without some form of government guarantee. Those guarantees appear to be in short supply now that the U.S. taxpayer has already signed up to bail out Bear Stearns, Fannie Mae and Freddie Mac.

The bailout of the two GSE's alone are expected to cost more than $200 billion.

Lehman's History

Lehman Brothers got its start about 158 years ago as a cotton trading firm in Alabama, and then grew itself to a financial giant. It was the third largest U.S. brokerage, behind Goldman Sachs and Morgan Stanley. The firm's mortgage business was wildly profitable during the recent housing boom, but proved to be the firm's Achilles' heal in the ensuing credit debacle.

Bankruptcy Filing By Lehman Brothers Expected

With Barclays and Bank of America taking a walk and the apparent absence of any willingness by the government to finance a bail out, it appears increasingly likely that this firm will be forced into bankruptcy. The risk of a forced sale or bankruptcy is that Lehman's bad assets will effect the still performing assets of other firms.

More Financial Firms Likely To Fall

Other potential victims of this credit crunch? Concerns seems to be rising with regard to Washington Mutual.

Also, on Friday, insurer AIG, which may see its rating cut by Standard & Poors, said that it is reviewing its business and that "everything is on the table." The popular theory is that the insurer is looking to sell off portions of its business to raise capital and avoid what would likely be a crippling downgrade.

How To Protect Yourself From This Broadening Debacle

This credit crisis is broadening, boys and girls. If you're in this market without a sound exit strategy you may find yourself joining these troubled financial firms.

Risk management is critical to our success in these markets. Yes, we need to learn about the markets and learn about options and how to use them to effect our plans in the market. Just as important as that foundation, we must also learn how to structure our trading portfolio to avoid being over leveraged and to design our trading plans and systems to adjust or exit our positions when the trade is not working out as we had planned.

Free Trading Videos Reveal Common Mistakes Being Made By Traders

The person who taught me the importance of risk management and how to apply it in the context of a trading system is Bill Poulos, a 30+ trading veteran.

In appreciation for what he taught me and for those who could also benefit from his guidance, I put together a Squidoo lens that provides free video interviews featuring Bill speaking on the subject of risk management.

Tumultuous markets always present trading opportunities. Spotting those opportunities is only part of the solution to prospering in tough times. Another key element is avoiding the mistakes so many others make.

Bill Poulos Trading Interview Videos

Take the time now to view these five videos, now...

Christopher Smith
TheOptionClub.com

Bill Poulos Trading Interview Videos on Squidoo

Yesterday, I posted a video interview of Bill Poulos who shared some insights. That video was part of a series and I've not got access to all five videos.

But, instead of posting them all here, I created a lens on Squidoo. So, check out the Bill Poulos Trading Video Interviews on my new Squidoo page.

Bill Poulos Trading Interview Videos

If you find something useful there, all I ask is that you rate the page.

Thanks, I appreciate it.

Bill Poulos Market Mastery Video

Today I have the first part of a five-part interview series featuring my friend and trading mentor Bill Poulos. The video is called "Mistakes Traders Make" -- and it's simple, easy to understand, and incredibly powerful thinking.

In this first interview session, Bill was asked about the mistake that people make by trading stocks (or Forex, or anything really) when they shouldn't. Bill's answer is so...simple - So simple, you'll probably ask "Why didn't I think of that?"



I'll be posting additional videos between now and Saturday, so be sure to check back here.

Adjusting The XLF Options Trade

Last month we opened a diagonal option spread on the XLF, after watching the financial stocks get hammered in the market for most of the year. It appeared that the XLF had found support at around $20 per share. A video was produced showing how the trade was set up, but since that time we have adjusted the position once and are considering a second adjustment.



This second video demonstrates how the two adjustments modify the risk and reward profile of the position, to help keep us profitable as the XLF continues to move in the market.

Keep in mind that this is not a recommendation to trade or trade advisory service, but intended as an educational opportunity to demonstrate how adjustments can be made to an options position to keep your trades profitable.

Christopher Smith
TheOptionClub.com