… there’s something very different about the market today than in ’08. I don’t know how closely many of you have followed the things over the last few years, but I have and there is something very different that might not setup this big decline. Sure, 100 to 300 points on the SPX is no biggy in the bigger scheme of things. But not 600 to 1000 like some have called for. The reason is actually quite simple. ‘They’ aint gonna let it.
I’ve never told this story before – in summer of ’08 I was on the phone with my buddy who works at Goldman and we were talking about the market direction. Because after all, who cares which way the market goes, you just want to be in THAT direction, right? So he tells me that word at his end is that LEH was in trouble behind the scenes. This I think was right after Dick Fuld, LEH CEO, testified that everything was hunky dory to congress. [My friend] says that guys he knew at his firm were ‘on the side’ buying heavy blocks of puts on it. Now he’s an inside analyst and has no trading authority with the firm and I think can’t trade anyway for conflict reasons. He’s just paid to do homework and offer up reports as to the direction of a bunch of semi stocks. But we go way back and he was just giving me a head’s up on what he was hearing from some trader buddies of his. Rumors were flying rampant back then.
I think it was a week later or so I was watching Fast Money on CNBC when Dillan Ratagan was still hosting and John Najarian mentioned that they were seeing MONSTER blocks of I think it was Nov (July or Aug at the time) $5 puts being bought straight out. Not even hedged as a spread. The stock was around $30 at the time. Hundreds of thousands of dollars being put at risk of total loss with just a few months of expiration left. Now that’s a lotto ticket! That is unless you knew something.
Now I didn’t have the balls to do that trade because I was brainwashed into thinking how strong those investment banks were – or had been. What brought down Bear Stearns was the couple of hedge funds they bought that were totally invested in subprime MBS’s that blew up. LEH had the same problem and just a few weeks later ended up blowing up themselves.
What made the market back then fall off the cliff was forced liquidation. Most hedge funds are just simple trading firms that trade just like us who have direct access brokers. I use IB, some of you have similar types. Scottrade or Fidelity or ETrade are NOT direct access brokers – they are retail brokers and you’re getting screwed if you use them for trading. TradeStation is another direct access broker similar to IB, but I think IB is better for speed and execution and price. Although TradeStation has better trading platforms. Many of these hedge funds (larger ones) won’t use an IB or Tradestation for the simple reason that they want better ‘on the street’ access. By using a large institutional firm like a LEH you not only get status, you get an open door to the Street. It’s all BS, but in the end, making money in the market on a big scale is all about networking. Like Gordon Gecko said, ‘The most important commodity I know is information.’ The only way you get it is to know people who have it. You open an account with LEH as the clearing broker with millions of dollars and you get invited to some very cool parties in New York, if you know what I mean. You’re your own little Bud Fox and you start to get those calls about who Blue Horseshoe loves. Know what I mean?
But what happens if you, along with say 150 other large hedge funds wake up on Monday morning to find that LEH has been forced into BK and your accounts are locked up? Add to it you have sitting open positions that are levered up 30 to 40 times that have expirations coming due? SCREWED!
Those that were around in late ’08 trading probably remember the late day 500 point selloffs? Day after day? Literally in the last 10 min of nearly every day for about a month? Add to it the removal of the uptick rule and all the quant algos get to pile in on the shorts on top of liquidation? You have the making of chaos squared. No one in government understood this. It was so hip to say, ‘let LEH go BK – it’s capitalism.’ Yeah, but what about if all the banks then have runs? We all wake up and our credit cards, ATM card, and checks no longer work?
We all live in a real life ‘Matrix’, like the movie. Stability in your life is a state of mind and your government is trying its damned to keep it that way, all the while sweating bullets behind the scenes to prevent what’s really going on from getting out of control. What’s worse? Chaos or inflation? Who really cares of gold is $5000 or $10000 an ounce? Oil matters, but they can control that. Stock prices going through the roof only help everyone, not hurt. It’s just paper monopoly money anyway. Screw you bond holders – rich SOB’s. Buy stocks! That’s why Bernanke is buying bonds – make the returns so low you can’t invest in anything else but stocks.