Monday Madness – Welcome to the House of Fun!

“..Welcome to the house of fun, Welcome to the lion’s den, Temptation’s on his way, Welcome to the house of fun..” – Madness, House of Fun Lyrics, 1982

Temptation is indeed on its way and the market sure does feel like a lion’s den!  The steeper the drop, the more severe the decline, the more painful the feeling, the higher the VIX (currently 25.16 after an 18.57% increase on Friday!), the more Cramer flies off the edge, the closer we come to the bottom.  BUT, that does not mean we should try to predict when it will occur so two things to keep in mind this week:

1 – “IT IS NOT MY JOB TO SAVE THE MARKETS” – Phil Davis

2 – DO NOT TRY TO CATCH A FALLING KNIFE (meaning it’s dangerous to try to buy a stock that is falling because likelihood is it’s falling for a reason!

The S&P agrees “Investors were provided with a reminder of why it is still too early to go bottom-fishing in the financial sector when Standard & Poor’s downgraded the debt rating outlook for Bear Stearns (BSC 108.42, -7.21) to negative from stable.”

Indeed Cramer followed up on Friday in his Mad Money show with the comment “It will never be harder to keep you in the market than over the next two weeks”.  

In response to Cramer’s desperate call for a rate cut Phil commented on Friday:

“The problem is A) The Fed can’t cut. B) What he is asking us to save is to save the brokers who overpaid for commodities and overpaid for energy stocks and guided their companies to overpay for companies in deals that make no fundamental sense and to bail out builders who overpaid for land and materials while overcharging the consumers… etc… They are like crack addicts that need “just one more” interest rate fix to get through the night but THEY ARE NOT GOING TO CHANGE!”

So the question is how are YOU positioned?  Phil noted also on Friday:

“If I wasn’t heavily hedged I’d be 100% in cash after watching today. I’m over 80% cash in the STP (Short-term Virtual Portfolio) already!”

If you are not HEAVILY HEDGED or in CASH, please stand up, move to the back of the room and face the corner!  Yes we can be tough at Phil’s Stock World and we don’t say things to make you feel better sometimes, we are on a mission to make money and sometimes the best lessons are the hardest to hear.  At this time, EVALUATE your virtual portfolio – the worst thing to do is nothing if your virtual portfolio value shocked you on Friday.  Hope is not a winning strategy! 

Well with that said, let’s move on to the ‘news du jour’ – yes we’re speaking French in honor of Phil’s European tour!

The Wall Street Journal reports that Bear Stearns’s co-president, Warren Spector, and the person most likely to succeed James Cayne, the 73 year old Chief Executive is out.

WSJ:  “He told Mr. Spector he had lost confidence in him. "I think it’s in the best interests of the firm for you to resign," Mr. Cayne told Mr. Spector, people familiar with the conversation say.” 

And the Journal reports that this week isn’t likely to be much fun “"This week is going to be a nightmare," says Melissa Cohn, chief executive of Manhattan Mortgage in New York. Lenders are scaling back so fast that it isn’t clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers.”

And it goes on and on “American Home Mortgage Investment Corp., shut down its lending operations after creditors cut off funding; the chief executive of another big lender declared that the mortgage-securities market was "not functioning;" and Countrywide Financial Corp., the nation’s biggest home lender by loan volume, felt compelled to issue a statement Thursday saying it had plenty of cash on hand. Despite that reassurance, Countrywide’s share price dropped 6.6% Friday. Some lenders temporarily stopped taking loan applications Friday because they were unsure about their ability to sell mortgages to investors.”

Maybe it’s best to move abroad and see how Asia is doing as it approaches 3AM in New York….

Hang Seng DOWN 2.5%

Jakarta DOWN 4.6%

Nikkei DOWN 0.39%

Seoul DOWN 1.16%

Taiwan DOWN 1.28%

Singapore DOWN 3.96%

Shanghai Composite UP 1.11%…woohoooo!  1 out of 7! 

In Japan “Among the tech stocks, Fujitsu added 0.65%, Kyocera advanced 2.77%, Matsushita Electrical Industrial gained 1.18% and Minebea improved 0.28%. Also, NEC added 0.53% and Sony gained 0.99%. However, Advantest dipped 0.89%, Fanuc slid 2.16%, Oki Electric Industry lost 0.91% and Tokyo Electron declined 0.36%.”

“Among banks, Mizuho Financial Group lost 1.37%, Bank Resona Holdings dropped 0.84%, Sumitomo Mitsui Financial Group edged down 0.10% and Mitsubishi UFJ Financial Group remained unchanged. Oil scrip Nippon Oil dropped 1.41%, Nippon Mining Holdings dipped 1.71% and Showa Shell Sekiyu KK slid 3.05%.”

We’ll soon see if this feeding frenzy feeds upon itself and starts to cannibalize the US markets Monday.  But the week ahead is likely to be interesting with FOMC policy statement on August 7 being a pivotal day as Bernanke assesses the gravity of the situation.  Here’s the calendar for the week:

Week of August 06 – August 10

Happy Trading, Zman and I will be make every attempt to be your triumvirate while Phil takes a well-deserved short break but he’ll be popping in often and in the meantime make sure to think carefully about each and every trade you consider in the market.  Now is not the time to be the hero but the time to ensure you live another day. 

Trade Safely & Have A Great Week!

OptionSage