Wednesday, May 6, 2009

Light at the end of .....

Ok, I confess, I don't get it. The Treasury finally offers its assessment of the very weak stress test for BAC and the light shines brightly. The hard hitting stress test assumes a worse case of 8.5% unemployment when we are already at 8.6 among other soft pitches down the middle of the plate and then guess what? Bank of America is fundamentally insolvent to the tune of $34 Billion and the stock goes up like a rocket.

I once used to sell metals and alloys to a manufacturing company in Wisconsin and recall a conversation one day with the purchasing agent. This fellow dabbled in commodity trading for himself and was focused like a laser on the silver market. The day in question he said to me, "John, it makes no sense. The silver market makes no sense. Something is going on. It's being manipulated." I being the wise and youthful know it all smirked. Not long afterwards the Hunt brothers were arrested, silver plummeted from $40/oz to single digits.

This time its different. You don't have to look hard but what the outcome will be, I can only guess, change my mind and guess again.

Goldman Sachs is incredible. No, not incredible, god-like. In trading, being right slightly more often than wrong is the stuff of legends. A trader is going to be wrong, a lot. But the concept of cutting losses and letting profits run is what separates good from gone. That being said, GS was right in predicting the market 87.5% of the time in the first quarter! They generated over $100 million in trading profit 34 trading days, was profitable 56 days and lost money on 8 days. The days they lost over $100mm? Zero.

The NYSE's Supplemental Liquidity Program is designed to promote aggressive quoting activity and liquidity to the market. In return the NYSE will pay providers a 15 cent rebate per 100 shares traded. Additionally, it is designed to lead to tighter spreads between the bid and ask price. One of the reasons given for GS profits is very wide spreads in a program for which they seem to be the sole beneficiary. GS is currently the dominant trader on the NYSE, trading about 6x the trades as principalof the nearest competitor, Credit Suisse.

Look at the US Fed and Treasury activity, trillions of dollars in guarantees, purchases and loans. This administration clearly has a rocket in its pocket and Goldman is the fuse. But I can't help but hear in the back of my head the saying, "when the Fed taps on the brakes, somebody goes through the windshield."

Tread very very carefully people.

John Barnyak