Ana_Idkit

Speaking of Bonuses, Cuomo Might Seek Return of Merrill Payouts – Morning Call 30 Jan 09

Whether this is the last year for big bonuses on Wall Street or not, the clawback reality might start earlier than one thought thanks to Andrew Cuomo. Cuomo continues to probe the situation at Merrill, and intends to ask Ken Lewis what he knew and when.

Andrew Cuomo, New York’s attorney general, may demand the return of $4 billion in bonuses paid by Merrill Lynch & Co. just before it was acquired by Bank of America Corp., a person familiar with the matter said.

Cuomo also wants to know what Bank of America Chief Executive Officer Kenneth Lewis, 61, knew about the accelerated bonuses and about Merrill’s surprise $15 billion net loss in the fourth quarter, the person said. Lewis fired Merrill’s CEO John Thain this month after the losses required more federal aid.

The attorney general’s office is looking at whether the companies’ shareholders had all necessary information about Merrill’s finances and whether federal bail-out loans to Bank of America were used properly, the person said, asking not to be identified because the investigation is confidential.

“No longer will this country stand for wasteful spending of tax dollars on bonuses for executives whose companies have taken huge losses and required taxpayer bailouts,” Cuomo said yesterday in a statement about bonuses paid at Wall Street firms that received funds from the Troubled Assets Relief Program, or TARP

Ed Goodman Jr asked if I’d explain what I mean about the ‘gap rule’.

The framework of the ‘rule’ has two phases:

1. The market generally will close at least 50% of an open-gap (i.e. an open that gaps above the previous close) in the first 60-minutes; and
2. If the market does not do this, we can expect a strong day in the direction of the gap.

The are a number of filters that I use:

• The setup does not work on every market. It works best in the S&P and 30-Year Bonds. I have not tried it on the 10-Year Notes and T-Bills. It does not work on Gold, and the Currencies.
• The open-gap must be at least mean +1 ATR of the current structure. If you are unfamiliar with Barros Swings,  use a 40-day ATR.
• If at the end of 60-minutes, the market has not closed at least 50% of the open-gap but is trading near extreme closest to the 50%, I would wait another 30-minutes.

The tactics I use with the open-gap are many, especially when combined with some other tools:

• Market Delta Volume indications
• Market Profile ideas: open relationship with the previous day’s value area; the type of open; where we  are trading relative to the open-range of 5, 30 and 60-minutes intervals.
• Larger time frame context: for example prior to the open-gap, have the market ranges been compressing (this makes a trend day more likely) or they have been experiencing above average range days (this makes a rotational day likely and therefore ‘fading’ is likely to succeed).

What is fading? This brings me to the two general strategies.

The first and most common is to fade the open-gap and the second is to ‘go-with’ with the open-gap looking for a trend day. By ‘fade’ I mean take a contra open-gap trade; by ‘go-with’ I mean take a position in the direction of the gap.

If I am fading a gap, I will usually take a position in the second 5-minutes. As a rule with an open gap, the market will spend the first 5 minutes moving in the direction of the gap. ‘Five minutes’ is not a fast and hard time but rather an indication of some time spent. Here Market Delta volume and Open-Range ideas are very useful.

Here’s an example for a ‘fade’ entry. Let’s say that:

• The context would favour a rotational day. And,
• The market gaps up and nearing the end of the first 5-minutes, we see Market Delta Volume signifying at least a potential short-term top.
• The market then closes below the low of first 5-minutes bar.

In this situation, generally, I’ll wait for a rotation back up to sell.As far as exit strategies for ‘the fade’ are concerned, here are some ideas:

• Stop: One place for the stop would be above the highs of the day plus filter
• Profit Target (core profit contract): a tick or two above the closing of the gap (if day-trading).

For trend days, if I were day trading, for core profit exits, I’d use a trailing stop and look to exit at 4:00 am EST – since a trend day usually closes in the extreme 25% of its range. Thus in an up day that has a range of 32 points, I’d expect the close to close within 8 points of the high.