The most violent short-squeeze we’ve witnessed in more than a week transformed a despairing stock market on Friday into the proverbial lipsticked pig. But don’t expect the little oinker to fly much higher when stocks start to trade again on Monday. The rally occurred with such unexpected swiftness, and so late in the day, that even the Wall Street Journal’s market wrap-up lagged well behind the excitement and its apparent cause. A half hour after the NYSE closed, and nearly an hour after the blitzkrieg rally began, the Journal’s Peter McKay was still reporting that “Wary Mood Pressures Stocks.”
In fact, it was the un-wariest mood imaginable that had turned stocks blithely higher, prompted by a “report” that there were “hopes” for a bailout of bond insurer Ambac Financial Group. We put those words in quotes because, an hour after the NYSE closed, it was still unclear where the news had come from. Columnist McKay referred in his lead to “hopes for a bailout,” and to “word of a possible deal to bail out the troubled bond insurer” in the next sentence, but he made no further mention of the story/rumor or its source.
Thimble-Riggers
Even so, there can be little doubt that the story was put into play by some of the most capable arse bandits on the Street, timed as it was to hit in the final half-hour of the trading week. The fact that it could not be sourced immediately, even by The Wall Street Journal, further suggested that the story was a plant -- and a spectacularly effective one at that. To put the reaction in perspective, if you had bought ten S&P futures contracts at 3:20 p.m. (EST), just before the rally took off, you would have made about $75,000 in a little less than thirty minutes.
Not that we think the thimble-riggers who sprang this heist were shooting so low. No sirree, if we were sleuthing around in the time-and-sale records of the Chicago Mercantile Exchange, we’d be absolutely flabbergasted if we didn't turn up at least one shady operator who had quietly accumulated a thousand or more contracts ahead of the quote-unquote news. Let’s do the math: At $7,500 per contract in nearly instant gains, that would have amounted to a quick $7.5 million. That may be small potatoes in the Merc pits, but not so small that the dupes who sold ahead of the rally, and who effectively gave up that $7.5 million, would not try to track down the perpetrators. (Here’s an offer: If you’re one of those who got fleeced, click here and we can put you in touch with my old partner-in-crime-solving, Kyle Rimdahl, the storied San Francisco private eye at Lipset Service.)
Ambac’s Re-Rescue
We should also point out that this was not the first time bulls have racked up some hefty unearned mileage from Ambac’s recurring rescue story. Recall that, a couple of weeks ago, Warren Buffett made an offer to take Ambac and two other insurance biggies out of their miseries by buying up the least risky tranches of their portfolios. They turned him down, but not before stocks had reversed 500 points at the mere prospect of a white knight.
Not that anyone other than Kudlow and a few other CNBC shills actually believes that a supposed “bailout” of Ambac is going to save the world. Trouble in the mortgage markets has already spread moral hazard to the entire universe of credit instruments -- even to your supposedly perfectly safe money market fund. Concerning the knee-jerk reaction to Friday's shadowy news of yet another giant bailout (if such a thing were even possible in so fearfully skeptical an environment), it is not believers who cause short-squeezes like this one, but rather, panicky shorts who know full well that the erstwhile nose-pickers in the trading pits will not long ponder what the Ambac news might actually be worth before they leap wildly into the bidding frenzy.
The Buffett rally detumesced quickly when reality reasserted itself the next day, and this rally will too. But at least it will have given the pundits and shills another opportunity to make fools of themselves, even if their factually challenged brand of optimism is completely forgotten in a few days.
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Seats Are Going Fast
The 12 seats I’d allotted for the March 8-9 Hidden Pivot seminar are filling up. If you’d like to attend this online event, click here for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time. If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.
