Merrill, Merrill on the Wall, Which Bank Will Goldman Fall? ~ The Risk Averse Alert

Monday, July 28, 2008

Merrill, Merrill on the Wall, Which Bank Will Goldman Fall?

Let the feeding frenzy begin!

Crayons everyone ... it's time to play "connect the dots."

Merrill Lynch analyst Guy Moszkowski reports on Monday the growing likelihood Goldman Sachs, eager to establish a new and more stable source of funds, might snap up a bank "if [one] with excess deposits were available at the right price."

The operative words, of course, are "the right price" ... as in cheap ... or better yet, a steal ... literally.

But how?

Well, after the close we got a clue... Take a CDO tranche with an original $30 billion face value — recently (June) revalued at $11+ billion — and sell it off for a cool $6 billion.

Hello industry-wide write-downs! Get your bank stocks ... red hot bank stock here.

Then, possibly to assist Goldman further, Merrill announces it is going to raise $8.5 billion in new equity capital, diluting current equity holders' stake by over 25%.

Given recent reports financial firms are struggling to raise new capital, I might say we will just have to see how this goes. However, maybe it won't matter ... as long as Goldman gets their bank. In return Merrill could get absorbed, as a quid pro quo, and likewise gain access to the very same "excess deposits" Goldman apparently seeks.

One step back, two steps forward ... at least for Merrill and Goldman. As for the rest, well, get ready for a pants-ing.

Who ever could have predicted a rapidly accelerating financial industry consolidation?

This, I suspect, should hasten the stock market's capitulation...

[5:00 p.m.]
So, the Elliott Wave Guy is now looking at last Wednesday's peak a little bit differently than he has up to this point. Suddenly, there is less uncertainty about what has unfolded since. What's in store has become clearer as well.

OEX 5-min

The change in view is a rather subtle one. It simply supposes the counter-trend advance beginning on Tuesday, July 15, 2008 (labeled wave c) topped during the afternoon on Wednesday, July 23, 2008, rather than the morning.

Let me just say this slight alteration is no stretch of the rules put forward in the Elliott Wave Principle. Likewise, given what's to come, the brief moment of suspended animation marking top perfectly fits the big picture.

So too does predominantly sell-side RSI registered since last Wednesday. We have yet to see a noteworthy extreme reading, either ... and this suggests more selling is still to come.

Although what's ahead appears a lot clearer than it did this morning, I remain suspicious sideways trading within the range established over the past couple weeks could unfold over days ahead. Believe it or not, index price action on the Pump and Dump alerts me to this possibility.

NASDAQ 5-min

I am inclined to mark top in the NASDAQ Composite much as I have in the S&P 100. Here, though, it came at the open of trading on Thursday (7.24.08). Any Elliott wave geek can see a 3-3-5 wave unfolding since then — the first "3" down; the second "3" up; and five waves down in the process of forming.

Just look at today's pathetically weak RSI performance. Now, you might notice a price-RSI divergence registered over the course of the day as the NASDAQ Composite proceeded to sink lower. I am not at all concerned about this. In fact, you see something similar occurring throughout the day last Thursday. And just look at how she closed ... with RSI confirming the move lower ... thus, indicating the NASDAQ Composite would fall further still ... which, in fact, is precisely what happened today.

We should see a repeat performance.

Now, there might be some consolidation of today's losses come Tuesday ... at least during some part of the day. Or a pasting might unfold right from the get-go. Either way, I am inclined to say look out below.

Once indexes extend their losses to the area of recent lows over the past couple weeks, I'll be looking for a bounce ... maybe ... and then ... FINALLY ... the market's moment of capitulation quite likely could be at hand.

[9:00 a.m.]
It is not clear just how the trend lower from here will proceed. Despite wishing I had held onto my August OEX 570 Put (purchased at the close on Tuesday and sold Thursday morning out of fear the S&P 100 might make one last push higher — WRONG!) ... I expect an opportunity to sell some portion of my August OEX 520 Put position today or tomorrow.

I continue to be 100% certain the stock market has much lower to go before commencing a melt-up. The question is when will we see the stock market's long-anticipated capitulation. August generally has been an up month in my experience. But then again, the credit market was never so dysfunctional.

Prior to the open on Friday CNBC's David Faber indicated he could not contact a single hedge fund manager for comments. He assumed everyone was taking a three-day weekend. I had two thoughts on this.

First, I gathered we might see just how much pull hedge funds have in this market. The answer: apparently a lot. Friday being left to those whose portfolios are mandated to be more or less fully invested, we got precisely what one might expect: a nowhere trade with a slight upward bias.

And second, I thought these hedge fund guys and gals are living dangerously. Granted, one does not need to be in the office to conduct business these days. However, were things to turn rocky might being at the trading desk prove a decisive edge? So, does being away on a business day demonstrate complacency? Just a thought...

OEX 5-min

Hopefully we get a move down to the 570ish area today. I am not, however, certain the channel you see drawn above is meaningful. Like I said on Thursday, the initial move lower from Wednesday's peak appears "corrective" in form (it's an Elliott Wave thing) and suggests the market might trade sideways for a time within the range established over the past couple weeks.

That's why I want to reduce my deep out-of-the-money exposure (August OEX 520 Puts)...

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