You Were Warned About State Street
We put up a post yesterday afternoon that focused on the chaotic drop we were witnessing in shares of
In that post, we warned investors that were thinking about chasing the move down on the short side. I have seen those moves happen in my many years of being a trader. It was a classic "bear trap" that was being set up. Unfortunately, the "disappearing bids" hurt the long investors that were looking to get out when the first signs of the free-fall occurred. Here's the scenario:
Joe Trader needs to move a decent-sized block of shares upon getting a whiff of the rumors that were out there yesterday -- money market safety, exposure to Lehman, etc. Joe Trader calls up his broker to try and move a big block, and that's when the pain starts.
Instead of dumping all the shares on the first drop from $66 to $60, the Joe Trader peels off some, thinking he doesn't want to sell at the bottom. He stays on the line with a constant ebb and flow of "Where's the bid now?" His palms start to sweat, thinking it's only a State Street issue. He then starts peeling off the rest of his shares at any price he can get, $55, $50, $45, $40, $35, and yes even down to $30.
What Joe Trader may failed to realize is that
Bank of New York Mellon
were also getting tagged at the same time. This is the type of trade that makes people quit the business, as the result completely decimates the investor and his confidence in the markets.
Our tip yesterday was focused on the adage of "never short a free-falling stock." I have seen cases throughout the years where stocks get halted, then the company reaffirms that everything is OK. Or maybe there was an old or mistaken news story that somehow got published -- remember the UAL bankruptcy post that caused a big drop a few days ago. In any event, when the stock re-opens, the pain in these cases is immense for the short-seller.
We focus on long-term ideas, but we know investors like the short-term stuff just as well. Therefore, we want to keep investors informed of any potential opportunity to make dollars with the stocks we cover.
This Is Not What a Real Bottom Looks Like
We are witnessing a plethora of mega-bailouts of companies like
American International Group
and now even stock trading rule changes. This is not the solid foundation of a true bottom that we were hoping to see.
Don't get us wrong, we feel bad for people getting laid off as a result of this debacle. But it was the companies themselves that created the mess with their own style of doing business. The combination of greed and leverage is a recipe for disaster.
What makes a real bottom is when the top players see value at a certain price. Look at what happened with
( CEG) yesterday. Warren Buffett saw plenty of value left in company, and then pounced at the right price. You don't think Warren Buffett would have bought or invested in
( BSC), or American International Group had there been value there?
Bank of America's
timing of a deal to buy
( MER) last weekend, as we figured Merrill Lynch may have gone to single digits if Bank of America didn't make a move when it did. In any free market, the players involved understand that you will never buy a stock -- or even acquire another company -- at the very bottom. The trick -- as always -- is doing your homework and making an educated move at the right time.
We strongly believe that the market should decide who become the winners and losers. Changing the rules to stifle further drops only makes for artificial upside performance. We don't need these kinds of "steroids" for the game to be profitable for many. We need to get back to the basics. No phony trading rules changes to protect the companies that all but bankrupted themselves. This is a temporary fix at best.
If You Stayed Short Financials Into Today, Punishment Is At Hand
Looking at a pre-market quote for
up 50%, makes me think about how much money have I left behind in my career as a trader.
Don't get me wrong, I love what we do at Dividend.com, but when the trade is that blatantly obvious, you wonder how big a day it would have been for making mega dollars.
First, let's replay what was happening on that fateful day yesterday. The financials were getting hit hard again. Rumors abounded that deals were not coming together, and that money markets were in danger. But then we get the 1PM announcement about the United Kingdom banning any shorting of financial stocks. The market started to make a comeback, but nothing feverish. If you were short, you had plenty of time to react. Then we started getting anecdotes from companies like Bank of New York that things were fine, so those financials started coming back. Then came the fire alarm about the Resolution Trust -- which started to get the market hopping a bit -- but you still had time if you were short to get out with not as much harm done.
Now comes the last hour, which is what separated the best traders from the mediocre ones. Traders had to realize that options expiration was at hand, and that there was the possibility of an SEC announcement as well regarding any changes -- from bringing back the uptick rule, to possibly putting its own shorting ban in place. The latter of the two was what actually was decided on.
As a trader or short-term investor, you always have to live to fight another day. A real maverick would actually have not only covered the short, but would have even went long -- that was the ultimate trade that most would not have made. One thing that happens to traders is they don't change their style on a dime -- if a trader is printing money on the short side, they won't do a 180 and go 100% long in a split second. The change is normally more gradual -- and also applies for the converse, going from long to short.
For those that stayed short, you have to pick yourself off the floor today and take the hit. It's going to hurt, but the market keeps giving investors/traders opportunities on a daily basis. Eating a big piece of humble pie goes a long way. Trust me, I've been there. It's the only way to learn and improve as an investor.
Dividend Stocks in a Coordinated 'Bear Trap'
Yesterday's sudden drop in names like
Bank of New York Mellon
came out of the blue, but it couldn't have been scripted any better.
The panic about the safety of each company's money markets and balance sheets came on the heels of the previous day's story on The Reserve Primary Fund, which had dropped below $1. This fund dropping below a dollar is a very rare occurrence, and the heavy exposure to Lehman Bonds was to blame.
It can be said that the stage was set for shorts to bite on this story, and for several hours yesterday they did, seemingly ignorant of the punishment that was soon to come their way. First came the U.K. story on banning the short-sales of financials, and then came the slowly released news bites from beleaguered companies that everything on the balance sheets was still in good shape. Finally, you had news of the new "Resolution Trust" that got the spike really going.
If you are a short-term investor or hedge fund manager, you now have to think 4 steps ahead. The minute the short-selling ban news came out of the UK, you needed to start scaling out of the trade. Did you expect State Street to go from $66 to $1, and as well BK, NTRS, and FII to also go to zero in one day? The hint we were given was that the market should have been down 500-1000 points when these stocks were getting pummeled, but we were barely down 150. The timing of this trap, and the way it was set, from a market's standpoint, was as good as it gets. If you like the short side of the markets, you better know how to time things or you will not be around for very long.
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At the time of publication, the author had no positions in stocks mentioned, although positions may change at any time.
Tom Reese and Paul Rubillo are senior editors of Dividend.com. Visit Dividend.com for more dividend stock ratings, picks, news, and analysis for long-term and income-seeking investors.