Houghton and Atkeson

SEC Seeking Transparency from Financials

by Houghton and Atkeson   05/08/08

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Editor's note: While Sam Collins is on vacation through May 15, OptionsZone.com contributors and professional traders Andrew Houghton and Nick Atkeson are taking over the Daily Market Outlook as guest columnists.

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When we wrote about Fannie Mae (FNM) yesterday, how it reported abysmal earnings but had a turnaround plan ready and the stock advanced, we did so because we thought it was a good example of how the financial sector and market as a whole acted on Tuesday.

Little did we know, it would maintain that role for a second day.

The Securities and Exchange Commission (SEC) announced yesterday afternoon that it will require Wall Street firms to disclose capital and liquidity levels. The reality that the firms in question might actually have to come clean on how much paper they are holding -- and the exact quality of that paper -- has pushed down shares across the entire financial sector. Merrill Lynch (MER) and Lehman Bros. (LEH) led the sector lower, as both declined more than 5.5%.

The volatility in this sector, combined with a lack of direction, has prompted us to keep our exposure to the financials light. Long positions were established in Goldman Sachs (GS), JPMorgan (JPM), Merrill (MER) and American Express (AXP) on May 1, but the first three names were sold during the weakness early Tuesday morning and AXP was sold very soon after the SEC news broke yesterday. It seems now that giving these positions a minimum of rope was all that was needed to hang themselves.

The housing sector sank along with the financials as the realization that, if the SEC unleashes its bank examiners on the Wall Street crowd, the latter is going to spend so much time explaining why it's OK that a bond worth 50 cents is on the books at $1, they won't have time to provide more financing for the homebuilders.

TRANSPORTATION NAMES CHUGGING ALONG

The Dow Transports (DJT), which had been doing a pretty good job of ignoring $120-plus-per-barrel oil, suddenly took umbrage at the non-farm productivity number released yesterday in another case of "good news is bad news."

Higher productivity would usually mean that more things are being made that need to be shipped. The sector seemed to be interpreting things this way as credit default swap spreads for most names in this group had been narrowing while share prices were rising.

This combination is hard to ignore and we are long Burlington Northern Santa Fe (BNI), CSX Corp. (CSX), GATX Corp. (GMT), Navistar (NAVZ), Ryder (R) and Union Pacific (UNP). Stops were not hit in those names as of the close yesterday, but any further deterioration will begin to trigger them.

WHAT'S HAPPENING ON WALL STREET

The technical guys were throwing around support level numbers and talking about ascending wedge patterns after the market broke yesterday. We are not qualified to address those issues formally but if recent history is any gauge, its seems like there will be a reason for all of that which was negative yesterday to be positive in a few more days with the sole purpose of keeping the markets moving sideways until all the problems are sorted and all the de-leveraging that needs to occur has occurred.

The financial and homebuilding stocks moved lower pretty quickly yesterday but, for the most part, are still trading above their lows for the year. The time horizon for purchases in these areas should be a multi-year view.

The reality of greater transparency in how Wall Street keeps its books should, after some short-term pain, make these stocks easier to evaluate and therefore more comfortable for investors to hold. This combination almost always translates into higher prices over the long run.

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Andrew Houghton and Nick Atkeson work together to identify unusual options trading activity on the "big money" (i.e., institutional) level and regularly contribute their findings to OptionsZone.com.

For a timely look at big-money options trades taking place under the radar and independent of the headlines, visit Andrew and Nick's full archive of Unusual Options Trading Activity by clicking here now!