The US Is Becoming a Subsidiary of the Middle East

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin's Daily Trading Report, please click here.

The previous commentary was Friday, and the SPX finished that day +4.0% on lots of talk about the Paulson/Bernanke proposal, with limited details, and the necessity for Congressional approval by a group of lame brains that can't shoot straight. Friday was also "triple witch" option expiration. I never use the word quadruple, because futures on stocks are just not a significant factor, or product. There was nothing finalized over the weekend on the proposal, and the SPX had an "air pocket" yesterday, and finished -3.8%. The volatility is unprecedented, and the SPX over the past six days has finished -4.7, +1.8, -4.7, +4.3, +4.0, and +3.8 yesterday.

The US financial system is obviously on the brink of insolvency to some extent, and so far the disappearance act in this crisis includes BSC, FNM, FRE, LEH, AIG, MER, MS, and GS, just to mention the major firms and agencies. MS and GS are now bank holding company's because they had to, not because they wanted to. The short sale action taken is a panic bandaid by the SEC, when all they had to do was put the "uptick" rule back on, and also enforce the pre-borrow rule. They even added GE, AXP, and GM to "the short list" yesterday, so it is like a fraternity to get on the list. If a company is mismanaged you should be able to short it with impunity, but have to do it the right way, which is on a plus tick, and have the pre-borrow rule enforced. I have said many times before that when the PPT (plunge protection team) started intervening more, and more, in the market, that the US markets were looking no better than a third world manipulated market. Now, it is even more so. And on top of that, with all the foreign sovereign investments at a significant discount in US companies, and real estate, the United States will soon be just a subsidiary of the Middle East, and various other countries.

Volatility and too much leverage has blown up many traders, and now it is close to taking out the financial system, because the regulators since 1993 haven't done one thing to prevent it, and in most cases they are incapable of understanding, or recognizing it. Both Paulson and Bernanke made statements early on that the sub-prime problem was an insignificant part of the economy, and of course fast forward, and there is now a who's who list of failed companies, and a credit market that has seized up, and not functioning properly.

The trading these past six days has obviously been volatile, but also very profitable, because the news/rumors have generated extended intraday moves to the 2.0 and 3.0 Volatility Band levels, and the contra moves have been sharp. The anticipated key price zone where the plan was to do some scale down buying was 1172 to 1077, and that process was initiated last week as the SPX traded down to an 1133.50 low on Thursday. The reversal came from the key price zone, so there is plenty of room to make adjustments or go flat if the "proposal" becomes a negative. It would be "no harm no foul" because the correct reversal zone was anticipated, and I also said that the 1200.44 7/15/08 low would get taken out on the way to a bear market low. This is a financial system insolvency problem, and not just a business cycle problem, so the market is in uncharted waters.

Have a good trading day!

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