IB Net Payout Yields Model

What to Expect Monday....

Naturally the Goldman Sachs (GS) fraud case has dominated the news over the weekend especially in Europe as governments officials in the UK and Germany jump on the shoot first read the details politics. As I type this the Asian markets are down close to 2% so basically in line with the US. Based on that it doesn't appear that the markets will be any further impacted by the news. The US futures are slightly down so it's possible the markets will begin lower Monday, but if it doesn't trade down lower then Fridays lows (SP500 1,186) its very possible that we'll see a rally into the close.

The general media hpye is this leads to the much needed correction. Will the market drop 10% or more? Its possible that this leads to tougher financial regulation especially if most people fall for the mis-informed headlines. Rather it seems illogical that a trade from over 3 years ago that isn't even part of the financial markets anymore causes lasting damage. A game changer needs to impact current revenues and greatly impact future revenue streams and profits. How much does this change GS earnings? Likely little to known. Tougher derivatives regulation will have an impact, but that was already expected to a certain extent. GS stock dropped $12B today. Nobody suggested they'd be impacted that much. Mid morning trading will tell the story. If Mutual Funds are loaded with cash from the weekend, then the impact will likely be short lived.

Cramer had what I thought was a great summary on his Mad Money show of the weak case of the SEC. Lots of people seem to hate him because he is seen as a perma-bull which is hardly the case. As I argued on Friday, this was a transaction between very sophisticated parties. The case against GS seems pretty weak to suggest that a large bank would walk away from a deal because a relatively obscure Hedge Fund wanted to bet against it. Remember that every deal has a seller. If I buy a stock, should I be told the name of the party that sold me the stock? Nope. Thats the way this business works.

This is clearly not the best case that the SEC could bring against a Wall Street firm. Whats clear is that its the highest profile case they could use to grab headlines. Where are all the fraud cases against the companies that went out of business? Why the most successful firm? But why only a small known VP? Once you get past the headlines and you understand the housing market and relative smallness of Paulson back in late 2006, it becomes clear that most would've taken this bet. After all, housing supposedly never declined.....

Buy on weakness tomorrow unless it's something massive enough to cause technical damage to the 10/20ema. Its highly unlikely that the market will stall when 75% of the analysts talking since early Friday have predicted such a move. Go back to the housing market and recall how many people including the Fed Chairman called for a recovery as the subprime market started rolling over. Markets roll over when everybody suggests buying the dips but nobody is left to buy. Currently most people remain underinvested and actually need to buy the market.

EDIT 9:45AM: Market didn't even open as low as expected Leading Indicators were very bullish. More on that latter.


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