Phew, good thing Grace Cheng had a copy of my “The Plummet” article cause I accidentally deleted the original one. Anyways, here’s the original post from yesterday:

Just as I was about to make a post on the status of the markets, I hear news of investment banks Lehman Brothers (LEH) and Merrill Lynch (MER). But before we turn to the big news, let me show you what I was seeing in the S&P500 (^GSPC) over the weekend. Looking at the big picture, I drew the following trendlines:

We ended Friday right at resistance…this indicates that we should hang around this mark on Monday or shoot down from here. We were due to test the 1200 mark again in the next few days. But after news that investment bank Lehman Brothers will face the prospect of liquidation and Merill Lynch agreed to be sold to Bank of America…we might just break below 1200 tomorrow! The futures are down 300+ points already and gold is rising.

You can easily find articles on this breaking news, but I’ll post some interesting excerpts from Wall Street Journal to sum up what has happened late Sunday:

As worries spread across Wall Street that Lehman wouldn’t survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure.

“We have never seen anything like this,” said analyst Glenn Schorr, who covers the investment banks for UBS AG. “There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers.”
The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further.

The future of about 25,000 employees at Lehman and an additional 60,000 at Merrill is up in the air. Lehman’s work force already has shrunk by about 3,000 in the past year. If the firm essentially goes out of business, most of the remaining employees are likely to lose their jobs. That would deal another blow to New York City’s economy, resulting in lower tax revenues on personal income, real-estate transactions and corporate income.

With the demise of Bear Stearns, three of the Street’s five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.

Just a little update boys & girls:

I will be taking profits on SDS today, I still own TWM but I didn`t realize that I was overdrawn on my trading account. Knowing the markets, the fed will be trying to do something to correct this mess in the next few days. Further, if AIG can borrow funds, the market should get a bit of relief.

Richard
richard[at]hedgeagainstspeculation.com