Ares Trading

The ECB, Japan, and US have pumped billions into money markets to stave off liquidity concerns.  The US has announced overnight a systemic resolution to the current credit crisis.  This resolution is rumored to have the following components:

1.  Creation of a government entity similar to Resolution Trust Corporation during the savings and loan crisis which will buy bad debt and hold it for a period of time. This will allow banks and other financial institutions to take these toxic securities out of their balance sheet.

2.  Ban on short sales of various financial companies at least until the end of the year.  This has already been enacted in Europe.

3.  Create some type of federal insurance plan protecting those invested in American money-market funds.

These rumors have lead to massive gains in the equity futures market.  Globally, Asia and Europe markets responded very well to the news, both markets moving up aggressively.

The panic and fear of liquidity concerns which caused Gold to go up 15% in a few days is now disappearing.  Gold (GLD) will definitely face a trend reversal today but it is too flaky to bet on.  Especially with no official congressional resolution passed, there is no certainty in Gold’s direction over the next few weeks.

The proposed ban on short selling will help lift the financials (XLF) out of their oversold territory.  This is a trading strategy Ares Trading is considering.  In addition, Kraft Foods (KFT) has replaced AIG on the Dow Index.  The stock price has actually rallied the last month and has room to go further.  Ares Trading is long on KFT.

Whole Foods (WFMI) has experienced a huge resurgence in its price.  Ares Trading had attempted to trade October puts on WFMI but was stopped out of the position the next day at a 20% loss.  Whole Foods is owned 95% by institutions and is currently in the accumulation phase by these companies.  Thus, Ares Trading cannot go short against the current momentum, but is still short WFMI medium-long term due to fundamental factors.

The energy index ETF (XLE) is poised to rebound after the recent news of government aid.  The energy market has been highly oversold during the recent sell-off.  Ares Trading has initiated October Calls and will hold them until the end of September, depending on XLF’s movement, to maximize gain.

Chesapeake Energy (CHK) had onced reached a peak of $70/share in July and has seen massive insider buying by its CEO.  Currently trading at $38 and change, $4 above its 52-week low; Ares Trading is long CHK.

The VIX (Fear Index) fell below 35 to 33 at the end of trading Thursday, September 18th.  This could be a sign that the market has bottomed out, or it could signal an upcoming false rally.  Ares Trading views the current market poised to go up in the short term.  However, Ares Trading does see risk of another short term sell-off based on new news and information dealing with financial mergers.