Traders,
Well for all the assumed volatility we would have yesterday, it was kind of a let-down – the stars did NOT align – GDP broke any hopes of that happening coupled with more depressing housing data. I will be the first to admit that I was rather shocked (and wrong) not to see that kind of volatility I was expecting. I think a couple of forces created a tug-a-war on the volatility which reduced same-side momentum, meaning that between the 50bps cut and the bad GDP that there was enough bears and bulls to keep the market from making a dramatic move in one direction or another.
However, the 50bps cut could not get this market off the mat – and that is very troubling. We are now at rates at or below (depending on what numbers you wish to use) the rate of inflation. That means that if you put your money in a US bond or CD you will actually be losing money by maturity – since the rate of inflation is out pacing the return-on-investment (ROI) on the CD / Bond. This creates a conundrum, where bonds are usually referred to a “flight to safety” they are now not as safe since they are a wasting asset. Where then to invest money for those that don’t have the propensity for market risk? That is a good question. I seriously think we are a very similar road Japan’s economy faced in the 80s, the dreaded triple down-turn, the market dropped, their interest rates went to zero, the currency weakened severally – even real estate values dropped fast. There was no place in Japan at the time to invest money that was safe from depreciation. The answer is diversify overseas and into inflation fighting assets.
The confidence in the Fed’s ability is severely lacking and as predicted the dollar is slipping further – inflation is real and is rising faster. WATCH the EURO, if it breaks 1.50 we could see a quick smack-down on the dollar.
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US Dollar – facing a serious problem
The rate cut is putting serious pressure on the dollar and that is a very serious problem to the economy and therefore the market. Here is the 1,000 foot simple view of the problem.
1. This country (the entire economy) is based on credit lines that are extended to us via the purchasers of US treasuries. The largest purchasers of these treasuries are foreign nations, banks, sovereign funds, etc.
2. The purchasers of treasuries look at the interest rate return vs. the underlying asset risk (the strength or weakness of the dollar) to determine if it is a good investment. Just because a bond pays interest does not mean the investor WILL make any money. Example: A European Bank converts Euros to Dollars to purchase the treasury bond. At the end of the year the treasury bond 5%, but if the US dollar falls 10% to the Euro, when the bank repatriates their money (from dollars to Euros) they have actually lost money.
3. Interest rates are traditionally INCREASED to offset underlying risk (in this case the dollar).
4. When Bernanke (the FED) cuts rates there is less incentive for foreign funds, banks, and firms to purchase US treasuries because the interest rate return is less and the underlying asset (the dollar) is dropping in value.
This is a circular problem, the more they cut rates the less foreign money (which we rely on) are willing to purchase treasuries, the lower the dollar drops, and the cycle continues – pushing the dollar further and further down.
We do have many domestic people purchasing treasuries – but domestic investments in treasuries pale in comparison to the amount of money foreign nations invest.
The problem becomes even bigger on a global stage as the world (except a couple nations) has dropped the gold standard and the US dollar has replaced it as the stable asset which everyone relies on. The US dollar IS the world’s reserve currency, almost every nation in the world holds vast sums of dollars to secure their own currency and economy. However over the last 6 months several nations have openly commented on their lack of faith in the dollar and have been shedding dollars rapidly to look for something more secure. This is also putting tremendous stress in the dollar – and also a factor in inflation. The MASSIVE cuts in the interest rates by the FED is certainty not giving ANY foreign nation confidence in the US dollar – thus forcing these nations to further quickly exit the dollar as a reserve. If the US loses its status as a world reserve currency (which is starting to accelerate – specially in China) we could see a very big problem happen in this country. We are currently in very uncertain times and uncertainty brings volatility and volatility brings more risk.
Watch currencies very closely – it could bring serious pressure the equity markets.
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Bond Insurers
MBIA, one of the largest bond insurers, still has a AAA credit rating. The ONLY reason it does it to keep a domino effect from happening that could cause losses to US pension funds that are already looking at losses that could exceed $100 billion nationwide. MBIA reported record losses and SHOULD be losing their AAA status – but has not because of its serious repercussions. MBIA is scrambling and meeting with credit rating agencies as to not loose it’s very important rating. Additionally they need to shore up losses and raise money fast – as the “favor” can be only extended so long.
S&P credit rating agency cut or put on review over $500 billion in bonds and CDOs (held by state pension funds, financial firms, and other investment related firms) additionally they publicly stated that mortgage-related write-downs will exceed $265 billion.
The stop gap insurance companies of these SIVs, CDOs, and bonds are in serious jeopardy. Collectively they insure $2 trillion in US financial related instruments. The two largest are on the brink of bankruptcy and are looking for money.
This has caused concerned both for state governments where a majority of their state pension funds are invested in bonds and CDOs that are insured by these companies. Additionally foreign investment funds, banks, and governments rely on the credit rating of these products as well.
This could be the next shoe to drop that could cause an even bigger problem.
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Futures Pre-open
The futures are front running the cash and the spreads are fluctuating. ARB traders slip-risk is fairly big on the opening if they leg from the long side (buy futures) to short the cash at the opening (or pre-open). Expect pressure on the opening. The jobless claims that just came out is putting more pressure on the futures in the pre-open.
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Support / Resistance
We did see some intra-day volatility with the INDU swinging about 400 points over the day. However the close saw some negative pressure.
INDU 12,000 / 13,000 (It looks like the intra-day high of 12,600 range was it. We are heading lower – the jobless claims are not helping.)
NDX 1700 / 1900 (We closed to almost unchanged after a 40 point pop intra-day. The pressure seems to be to the downside.)
SPX 1300 / 1400 (The S&P could not get off the mat – and it looks like we are probably heading lower – the intra-day pop might have been the last up move before heading lower)
RUT 650 / 750 (We couldn’t stay above 700 and the RUT took the biggest % hit yesterday – this is not good for the market as a whole)
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Conclusion
I thought the stars would of aligned and all the economic data combined with the 50bps cut could of given the market a very SHORT term rally over the next 3 days. But the GDP and now Jobless numbers have screwed that up. Talking Heads are still talking about whether we are going to have a recession – that story is getting old – we might as well be in one now.
The rate cut is not helping after 125 bps in a week – that is a VERY scary thought, since the FED KNEW the risk of the pressure it will put on the dollar and inflation – which on the backside will put even MORE pressure on the market.
I think we are going to visit the recent bottom sooner than later, I did think we would have a short-term (3-5 day) pop to retest the resistances – but that is not happening.
The next shoe to drop is even more alarming than the write-downs of the banks – it’s the write-downs of the insurance companies that these banks rely on. Additionally the losses to state pension funds is already expected to exceed $100 billion nationwide and S&P is stating that over $250 billion of write-downs from financial firms is coming – that is over $150 billion MORE in write-downs to come.
Hedge positions!!!
Traders – look to take advantage of the skew!
Traders,
Is the stars (economic data) aligning for a solid rally? That’s what traders (investors) are hoping for. However, the GDP this morning is showing a slow down at a .6% growth – below forecast, but the ADP is showing some strength in the job numbers (prior to the government numbers on Friday) above expectations at 130,000. Mixed signals for sure – ADP showing strong job growth but the GDP showing we are heading into a recession – well the Futures whipsawed on that news as they came in one after another. The question is how the Fed spins these numbers, the ADP (which probably is a good indicator the Gov. job numbers will also beat – reported on Friday – but you know Bernanke has them already) is showing strength. Maybe the spin is that the 4th quarter was the worse and the job numbers are showing we are rallying off these bottoms. Market expects a cut and they WANT a 50bps cut. Needless to say the spring is taking on a serious load at these levels and we will most certainly see it unload with a JOLT!
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McCain and Hillary win Florida
It looks like Giuliani is done, so is Huck and the rest. A two person race for sure on the Rep. side (Mitt vs. McCain). I think McCain will take it because he pulls lots of independents and is more “likeable” by both parties. Hillary and Obama are still in it as well, what will make the difference is who Edwards decides to back. My guess it’s one of two outcomes McCain vs. Hillary or McCain vs. Obama . I think (very unfortunately) that both race and sex COULD be a hinderance for the Democrats – wish more people could look beyond it.
You probably all know where I stand and I really don’t think there is any candidate out there to will inspire this nation and has a solid economic plan to strengthen this nation. The democrats will raise taxes and probably put this country further behind the eight-ball and the republicans need to change their image SERIOUSLY both foreign and domestic. Neither side has a REAL plan. That is why we are seeing such a wide open race! Unfortunately most people probably feel “Anything is better than Bush” – which is no way to vote.
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GDP – can you say WHACK!!!
The GDP came in lower than expected by HALF. Expectations among economist (77 surveyed) was for a contracting expansion of 1.2%. At .6% the economic growth of the country has contracted to levels that many say “SHOULD” be considered a recession. Either way you look at it – it is most certainly looking negative. Most of the blame was the massive drop in credit spending as consumers are fully tapped out. The nation relies heavily on consumer spending and the majority of that spending comes in the form of credit (or deficit) spending. However those lines of credit have shrunk significantly. The first signs of the credit crunch was the housing implosion and the default / foreclosure rate, then we started seeing it in the auto-loan sector, and most recently even in the student loan sector which has had to increase their reserves for defaults by 400% year-over-year.
As I mentioned earlier the ADP job numbers (not the official job numbers) came in WAY stronger than expected – so the spin could be that the GDP is showing the bottom in the 4th quarter – add in the strong job numbers and we are coming back strong and COULD avoid recession. Of course I don’t buy that story – but market perception is all that matters. I am already hearing some of that “type” of spin this morning on Bloomberg and CNBC.
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The FED
CNBC compared Bernanke to Hamlet and I think they are pretty much spot on. His speeches in the 3rd quarter last year were clearly that the FED was focused on the economy and inflation and they would NOT cut rates to service the financial institution from because of failed loans. Needless to say (via the freedom of information act) a week after his speech in Colorado – Bernanke had meet with the CEOs of the major lending institutions and had meet several times with Treasury Sec. Paulson (ex CEO of Goldman) and bang – we got the first surprise rate cut and a 50 bps cut at the discount window. I don’t think Bernanke while making that speech had any clue how bad things were at the financial institutions – then he got a peak behind the kimono! Since then he has been serving two masters the economy and the major banks. He knows that major cuts in interest rates will keep several of these firms solvent (and within Fed guidelines) at the same time it will put serious pressure on the economy (mainly the weakening dollar – which fools spin as a good thing). So he has been “pussy footing” with 25bps rate cuts. Now I am beginning to think that those meetings with the CEOs back at the end of the 3rd quarter was probably still not clear enough as to how deep the problem runs.
The surprise rate cut of 75 bps has clearly shown that he is now jumping in with both feet and things are worst than even imagined in the 3rd or 4th quarter last year – mainly the possible failure of the bond insurers that insure almost $2 trillion in bonds – Fitch (a credit rating institution) cut over 130,000 bonds – clearly showing the sign that AAA ratings don’t mean RISK FREE.
The problem – if he continues to cut and we get to 2, 1 or even .5% then what? He can only toss his hands in the air. Goldman predicts 2.5% by the 3rd quarter. If we get another 50bps cut today we will be below the “reported” rate of inflation.
Question – are we on the similar path as Japan in the 80s? The dreaded triple down-turn! Equities, Bonds, and Currency all heads into the toilet! I seriously hope not – but with the rate cuts and the dollar falling, it is only the market at this point holding things up.
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Futures Preopen
Talk about morning volatility – futures down prior to the ADP – then with strong job numbers we get a rally – then the GDP curtails that and we start falling off again. The futures are looking down and the action is pretty volatile. Most ARB traders will probably sit on the sideline as morning action is already pretty uncertain. The spreads are expanding-contracting minute by minute and not worth a long or short leg at this point. The opening is looking to have some selling pressure – but after that – who knows.
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Support /Resistance
The “SPRING” is taking on a massive load and is ready to release with a jolt and possible whipsaw. Today will probably see some heavy volatility.
INDU 12000 / 13000 (we are at the 12,500 level – just below and did get above it yesterday intra-day – the market is poised for a big and fast move. We could easily see 13,000 or 12,000 today or close to it. Yeah – we could have a 300-500 point move – do NOT be surprise if we get something like that today.)
NDX 1700 / 1900 (we are loading here at 1800 and getting ready to move fast and hard.)
SPX 1300 / 1400 ( we are loading on the 1350 line – ready to move)
RUT 650 / 750 (Again 700 is the pivot point)
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Conclusion
This market is loading up for a move, if the GDP had not come in with such a major WHACK – I would say the ADP alone followed by a 50bps cut would send this market up fast and hard. But that GDP number is rather looming and casting a nasty shadow over everything – the cut is the first thing to come – prior to his actual words – so we will get an initial JOLT from the cut – then we will absorb his words (and if he spins the GDP in to a positive or states the economy is going to get worse) – that will be the second JOLT intra-day.
No doubt this market WANTS to rally – the question is have the stars aligned for a optimistic euphoric move? The GDP certainly is certainly lining up.
Get ready for some action today. Do NOT take a delta stand today with OUT hedging. An initial move to the upside could be followed by a major sell off or an initial downside move could be followed by a massive rally.
Get ready for the roller coaster!
Traders,
We had a fairly mild day yesterday with a good steady push to the upside. The finale State of the Union was fairly benign as talk (of course) was about the economy and the stimulus package. For the most part the market could careless at this late state in the game with what the President has to say, but would rather hear from Fed Chairman Bernanke this week. The market is expecting another rate cut, at least 25 bps and possibly 50bps. The talk in the market is how the market will perceive the rate cut and if 25 bps is not enough. It is suspected that the Fed will have the Job numbers in hand before reporting and a fairly good assumption is that a 25 bps cut will mean the job numbers on Friday will be fairly in line, however a 50 bps cut (or more) could mean those Friday Job reports are looking worse than expected. Whatever the case – it spells volatility.
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US Durable Goods Orders Rise MORE than forecast!
The Durable Goods rose in December more than forecast – indicating that the business side of the equation is holding up fairly well in the weakening economy, however these numbers are always lagging. The 5.2% rise was the biggest since July – the weak dollar is helping spur oversea orders as US goods are becoming relatively cheaper. Those companies with overseas exposure are holding up quite well, but that is still a fraction of the economy. Expectations is that the US consumers need to find a bottom soon and bring strength back to the spending levels as the overseas sales in a few sectors can only shoulder the burden so long.
The aero-space industry (Boeing) has seen a rise in overseas sales and the weak dollar is giving them a edge over Airbus. Additionally, other heavy equipment orders to China, Russia, and the Middle East have seen a steady rise – again attributed to a weakening US dollar (United Technologies, Otis, Pratt & Whitney, and others).
Some analyst are saying this may be a sign that we avoid a recession – yeah whatever! It does give the Fed fuel to cut rates – using this as an excuse that the cuts are NOT impacting the economy.
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Countrywide – just when you thought it was over!
We all might of believed it was over and we wouldn’t be in for anymore Countrywide headlines when BofA decided to take the reins. However, the monster reared its ugly head again. Countrywide announced another lost over $400 million in the 4th quarter after they promised to return to profitability. BofA with their head in their hands is watching good money follow bad into this never ending sink hole.
CEO Mozilo agreed to sell the company (for $4 billion) to BofA – significantly lower than where it had been only a few months prior. Rumors had spread that the largest mortgage company was facing bankruptcy and at $4 billion – you could say that it was more of a take-under that a windfall for shareholders. Of course many believe that BofA was trying to save face when they had previously made a $2 billion investment in the company only to watch the company continue to fail.
CFC is down over 15% from the share value of the takeover and after this latest news I am sure BofA is on the phone to renegotiate this massive investment debacle.
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Bond Insurers looking for a bailout – maybe too late!
MBIA and Ambac (the two largest bond/investment insurers) have guaranteed about $2.4 trillion of securities of US city, state, bond back mortgages, and credit cards – have technically failed. Merrill Lynch had to write-down $1.9 billion over INSURED investments since the insurance they purchased had failed. Many other banks, pension funds, city, and state bonds are concerned as their investments while on PAPER insured – are in reality not. Many of these bonds have investments in SIVs, CDOs, and other structured debt securities have failed and the stop gap (relying on the insurers) have failed. Florida Pension are looking at losses that will probably exceed $1 billion.
Rating agency, Fitch, has cut the ratings on more than 137,000 bonds from AAA rating. The credit rating being lowered could create a massive selling frenzy as many investment funds are not allowed to hold investments without the coveted AAA rating. Several state pension funds have already been forced to sell several positions – unfortunately there are not a lot of buyers out there – since the insurers are pretty much bankrupt.
The banks (who also rely on these insurance agencies) have been asked to extend to them a line of credit – I think that is a pretty tall order to ask of a bank that is already taking losses and are relying on these insurance companies. Ask Merrill Lynch how they feel about their insured investments!
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Futures Pre-Open
The futures had been down over night and started to rally into the Durable Goods report. The Report has definitely brought optimism to the markets and we are seeing some strength across the board. The futures are front running the cash, but only slightly. The ARB traders would be taking a little more risk than usual if they decide to short the futures into the opening and leg into the long cash basket. Expect a pop at the opening – after that it is anyone’s guess.
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Support / Resistance
We are hanging in there and the RUT got to a good level to show broad strength.
INDU 12,000 / 12,500 (We are in the middle and moving up towards 12,500. It will need help to break through 12,500. So here is the score – if we can NOT bust through 12,500 after the rate cut – expect to head back towards 12,000. However, if we do break 12,500 we could get a massive rally back to 13,000. So expect hidden volatility at the 12,500 level if we reach that range prior to the rate cut.)
NDX 1700 / 1900 (We are just taking a massive spring load here at 1800. We are either going to rocket to 1900 or drop like a rock to 1700 – all eyes will be on the heavy weights in this index on the market’s perception to the rate cut and job numbers.)
SPX 1300 / 1400 (Same for the S&P as the NDX. We are seeing volatility loading up.)
RUT 700 (We are above 700 which is good. Now let’s wait for Bernanke 750 or 650 would not be a surprise by Friday or sooner).
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Conclusion
The Durable Goods gives Bernanke (economic perception) room to cut rates and use the report that would could avoid a recession. I am sure he will also have the job reports hidden in his suitcase prior to the cut announcement. My guess from the Durable Goods number is that we could get a 50bps cut – since they could say the economy is stronger than we think. If that is the case expect a better jobs number on Friday – which could cause a follow-up rally.
My guess is we are going to get a good and solid rally this week. The Durable Goods, Rate Cut 50bps, and better job numbers are all going to be the catalyst to get the market to rally. Remember it is perception. Now we may get a good jerk to the upside – if these 3 things come to fruition. However, it doesn’t change the fact the inflation is increasing, the dollar is still going down, Gold is over 900, and oil is back above 90. Any big rally out of here (I would expect) to be short-lived. So be prepared for more volatility down the road.
Traders,
Friday the market gave up some of its gains and looked rather week. The Tech sector to the biggest pummel as MSFT could not hold pre-market gains as it dragged not on the tech sector back down – but as a issue in the INDU and S&P it tugged on the broader market as well. This is a big week for news, between the “State of the Union Address” and Bernanke speaking and several important economic data reports – expect lots of volatility and knee jerk (up & down) reactions. Expectations are still high that Bernanke is going to cut again at the meeting (Fed futures are priced almost 100% for 25bps cut and 75% for another 50bps cut). It is unprecedented to have the Fed cut over 100bps in week – but we will probably get it. Unfortunately – it is only a band-aid and will continue to put pressure on the dollar. What happens when the Fed cuts to 1% or less? Where does he go from there – other than tossing his hands in the air? Again – cutting rates is not the answer. Additionally this $600 per person stimulus package is a joke. I heard names for the stimulus package from “Sizzler Night Stimulus”, “50% off a Plasma TV Stimulus” to “Closing Cost on my 80/20 mortgage Stimulus”. Anyway – just putting the government further in debt and not really solving anything.
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Sallie Mae takes out its own Student Loan
Sallie Mae the largest US Student lender secured $31 billion in financing from banks, replacing the expiring credit line from an abandon buyout last year. After the lawsuit has been dismissed and the buyout candidates left the table – this massive loan is a 364-day extension from a basket of banks both foreign and domestic. Sally Mae reported a $1.6 billion in losses for the 4th quarter. Additionally they were forced to raise it reserves for defaulted loans by over $500 million, after adding $92 million a year earlier. While some are calling the securing of the $31 billion by CEO Lord a victory – I would rather call it doing his job and shoring up a massive f-up!
This is alarming as it is showing the credit line problem is spreading beyond just the sub-prime. We recently saw the bond insurers fail and the auto-loan defaults ramping. Now Sallie Mae having to add $500 million in reserves (which is unprecedented) to cover defaults!
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Another CEO kicked to the curb
The latest in CEO’s to be sent packing is CEO Lewis of Sears Holding Corp. Many have viewed Sears Holding of more of a real-estate company after the merger of Kmart (which had filed bankruptcy and focused on it real-estate sales and leasing). The stores have been seriously losing ground against Wall-mart and Target. The real-estate was a key component bringing equity and revenue to the table. Now with the collapse in the real-estate market, the weak-dollar which is cutting deep into margins, the slow-down in consumer spending, and not gaining an inch against competitors – it looks like Lewis has not come up with any game plan to move them from behind the 8-ball.
While ditching a CEO when a company is usually good news – in these economic times it’s going to take more than just a CEO to get Sears/Kmart back on track. Expect some volatility. SHLD is showing a very-wide bid-ask spread in the pre-market. So far no one knows what to expect. Watch the Skew if you are trading SHLD. It’s in the NDX – but not an overweight.
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Futures Pre-Open
The futures were getting a bigger smack-down earlier after the world markets were taking it on the chin, however it has made up serious ground heading into the opening. The ARB is pretty flat and I would expect most ARB traders to sit side-line this week as volatility is a HUGE uncertainty. Any minute some announcement could spike this market up or down – more so than normal because of all the economic data and Fed meeting. Expect a little downside pressure – but I think the market will sit tight until we get better resolution from the financials.
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Support / Resistance
It looks like we were getting a couple of solid days put together to get out of this funk. However, most of the rally came from the knee jerk rate cut and a massive amount of short covering.
INDU 12000 / 12500 (We touched the 12500 level but that was short lived – the spring is loading and we will most likely see 12500 or 12000 this week. Today could be rather flat – but be ready for a big jerky move.)
NDX 1700 / 1900 (At 1800 it is really no-man’s land. It is not an area for support or resistance. Expect big volatility this week.)
SPX 1300 / 1400 (We are fairly in the middle on this one too. Expect the support and/or the resistance tested.)
RUT 650 / 700 (If we can’t close above 700 – I would think that any of the narrower based indices will have a substantial problem getting above their resistance points – over even too them.)
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Conclusion
We are still far from getting through the worse of it as more credit problems surface – Bond insurers were the talk last week and now Student Loans. This week should see some jerk market action from the government reporting numbers. I think the FED will probably cut again – which could send the market up – but it would only be for the short-term as it doesn’t solve the problems of the day. The stimulus package is also a joke, while it may be true that we might see a pick-up in the retail numbers in the 2nd quarter from a possible (and most likely) $600 shopping spree – what happens when that all you can eat night at Sizzler’s is over?
Expect huge volatility this week. We could very well rally hard after a 50 or even 75 bps rate cut – but it could stall after a day or two and selling pressure could most certainly revisit.
Oil is pulling back below $90 this morning – but I am not thinking that is an indication of a bottoming in equities and believe oil will be in this range for short-term foreseeable future. Additionally Gold and most currencies are still rather strong against the dollar. Another rate cut will help boost Gold and currencies higher.
Investors stay hedged and don’t get sucked into anything this week – as one day could be a huge move up the next could be a huge move down.
Traders – trade the skew – watch OTM premiums. The OTM calls could get a jolt going into the rate cut and see some intraday volatility pops. You will probably have to watch intra-day legs more closely than normal in the expected volatility action.
Traders,
I must apologize for yesterday’s financial advisor frustration. I received several emails and a few phone calls from some very close friends and colleagues who ARE financial advisors and happen to receive this email. They all had excellent points that a financial advisors goal is long-term investing – rather than what we as professional traders are doing . I think I was just airing my frustrations dealing with my father and his financial advisor. I failed to realize that this Market Preview goes out to several financial advisors – opps! Believe me my intention was not to blast the financial advisory industry – actually one of my best friends (who has been in the industry longer than me) is an excellent financial advisor, additionally another very good friend of mine – whose office is only a block away and also gets this news letter is another fantastic financial advisor. I just hate to see my father lose money – when he should not be – and to deal with someone who doesn’t want to learn anything (or knows anything) is upsetting – but my father (and myself) are only to blame as we should seek better advice. So believe me – I did get some responses from very close friends in the industry saying “Don’t judge an industry because of your father’s poor experience.” They are absolutely right –there are many great financial advisors (who know a hell of a lot and have solid track records and ARE concerned about returns vs. inflation) – I guess it is OUR (and my father’s) responsibility as investors to do our own due diligence and find a GOOD financial advisor. If you need advice or recommendations – I know 5 very good financial advisors than can help you and yes they all read this news letter. So again apologies go out to them and please let me clarify – that a few rotten apples should not spoil the lot.
One of my friends (who is a financial advisor) totally agreed – that if a financial advisor made a comment that inflation doesn’t matter because we earn US dollars and spend US dollars – the financial advisor’s decisions on investments are probably not taking inflation risk into consideration and therefore is not looking out for his investor’s long-term goals. We live in a global community.
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MSFT helping to boost markets
MSFT the top over-weight in the NDX and also a big component in the S&P an DOW is giving a solid boost to the market, including techs this morning in the futures. MSFT is currently up about $2 in the pre-market, which is about $7 points in the NDX giving it a strong drive to the upside. The increase in sales of personal computers world-wide and the need for Operating Systems is helping to offset slow-downs in the US.
Expect the positive news to help carry across several sectors.
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Credit Ratings, Bond Insurers, & Bail-outs
There has been serious finger pointing between the Credit Rating agencys and the Bond Insureres is to who is at fault. Acusations of fraud from the product themselves to the insurers of those products are being slung by the credit rating agencies. But some have commited on the due dillegence of the Credit Rating agencys before issueing such ratings. An anaylst on Bloomberg made a statement – which we are all aware of – the Credit Rating agency is PAID to by these companies for their ratings, is there not a possible conflict of interest? It is an interesting question.
The problem is not just contained to the like of Moodys (the rater) or Ambac (the rated AAA insurer) – the wider impact is the pension and other large state and union investment operations that rely on those credit ratings and more important the insurers of those instruments based on their charter that they HAVE to meet certain credit ratings prior to investing in financial products. Florida’s largest pension fund made those type of investments based on trusted rating and has now has suffered losses in the $100s of million, if not billion when all is said and done.
Sidenote: I attended a lecture by our local NONPROFIT hospital that is raising their millage by 50% per year, my concern was they raised $400 billion dollar bond to build a new building, but instead decided to invest that money in the market – prior to breaking ground. Their charter is similar to other Florida pension programs and our hospital has made similar investments – they have not reported for 2007 yet. But if they loose money – will it be the tax payers that have to pay? Probably.
Anyway – there is talks of bailing out these AAA insurers (Ambac and MBIA) the two LARGEST bond insurers – both rated AAA by Moodys but have insured these CDO and sub-prime mortages – which are reporting writedowns in the 100s of billions.
New York’s Insurance Superintedndent, Eric Dinallo met with executives of the banks and securities firms this week to extend capital. I think they will take a pass – they have already loss 100s of billions and relied on these insureres – I am sure they don’t want to extend that risk. Go try Eric – but I think it was more show than substance.
However, Ambac is getting a solid POP to the upside as rumors of Wibur Ross is circling waiting to scope one of these bond insurers that have been hammered in the recent market.
Keep an eye on MBIA and Ambac – expect volatility – take over targets.
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Futures Pre-Open
The futures are getting a good pop and front running the cash in the pre-open with MSFT leading the charge. AAPL, GOOG, INTC are all getting a solid rally in the pre-market. The spread is 4-5 points in the futures over the cash. Expect the Arb traders to short the futures and buy the basket into the opening. The futures may get a slight pull off prior to the open if the Arb leg more heavily on the short-side. The market will most definitly get a good jolt to the upside at the opening.
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Support / Resistance
The last couple of days seems to have given the market a good shake-out. Again – perception is the worst is behind us, which maybe the case. However, the economy will continue to be slow. I still think we will (sometime in the future) retest the lows and this market jolt to the upside is being fueled by short-covering combined with optimism of some bail-outs, with the 75bps rate cut.
INDU 12,000 / 12,500 (we moved higher but are still short of 12,500. We may get there and may close up there. But I think we could see some selling pressure at 12,500 and the move to 13,000 will be hard press in the short-term.)
NDX 1800 / 1900 (Wide band – but we have seen MASSIVE volatility in the tech sector. AAPL and GOOG fully up-chucked to the downside in what seemed like a 2 day free fall. However, MSFT is showing strength and is pulling some of these short-term oversold issues bounce. 1900 would be nice but anything higher in the short-term is going to be hard.)
SPX 1300 / 1400 (Can we get to 1400? I think 1350 is a massive pivot point and we could move hard and fast to the support or resistance. Expect selling pressure to mount at 1400.)
RUT 700!!!! ( The broad market did NOT participate yesterday and was actually down. Is this a sign that the bounce to the upside has lost it steam? Probably as the narrower based indices above are driven by a few stocks –rather than a broader market. It would be nice to see RUT close SOLIDLY above 700 to give the rest of the market support – knowing that money is moving back in at the broadest capacity.)
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Conclusion
While the VIX may have pulled off – volatility most CERTAINLY has not left the market. I expect to see more volatility through out the rest of the year. The recent news about the ratings companies and insurers is very disconcerning – because it shows serious additional risk exposure penertrating what is typically thought of as very conservative investments being held by state pension funds. Now the crack has been revilied and Florida had announce the end of last year as to the $100s of millions it has lost. We may not know for a few more weeks or months how many other pension funds have been affected. The credit rating agencys and the bond insurers failing (the last two TRUSTED stop gap measures) is disconcerning for the market as a whole. How they get bailed out or bought out is uncertain and the true nature of the risk is unclear – as the focus now is about pointing fingers and looking for extended credit lines.
We had a good bounce, but the RUT didn’t follow – which is concerning since it represents everything except for the narrow indices. Additionally the dollar is getting a serious smack-down – which was expected with the 75 bps rate cut. Add in the fact that Gold is back up above 900 and oil is heading back above 90….well don’t get short sighted that this bounce was the bottom because the other indicators are pointing to higher inflation and more negative economic pressure. The EURO breaking 1.50 is something to be seriously concerned about since that is were most of the forward contracts had been priced at. If it breaks we could see a huge pull back on the dollar – fast. Which would really put pressure on the market as a whole.
After the rate cut, interest rates are parity (or by my calculations BELOW) inflation. Which means buying CDs or Bonds is not going to help down the road. Technically you are making a currency bet against inflation – which I don’t think is the best bet at this point.
Stay hedged – on move ups – lock in gains.
Traders – maintain trading the skew – it is still rather fat.
Traders,
We saw some huge volatility yesterday – Dow down 100s of points and then to close almost up 300 points. The tech sector still was under the pressure of AAPL and GOOG getting smacked down pretty hard. We “Hope” that was the bottom and now we are on the road to recovery, but “hope” is an oxymoron strategy – one day rally doesn’t mean everything is fine. It is still prudent to hedge – even if you decided to pick a bottom at this point. We are still facing a credit problem, housing slump, etc. The daily fluctuations of the market (up or down) doesn’t mean that the economy has been resolved one way or another – so stay vigilant. Hope is good – but don’t put your money on it.
As I mentioned yesterday in the Support/Resistance section is to WATCH the RUT – which has done better than the narrower bases as far as finding a bottom. This gives us a sense of what the broader market is doing and is not affected by any one stock (like the NDX, INDU, or even the SPX) – so while it is not the top blue chips it is the rest of the market for the most part. While we didn’t get above 700, we could today and this could show some good support areas for the market as a whole.
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Insurers and Credit Ratings
Moody’s, S&P, and other credit ratings are doing some internal reviews about how some of these AAA credit rated products are failing. They seemed shocked?!? Already fingers are pointing at deception on the part of the lending and insurance agency’s = obviously to say “It wasn’t our fault”. Again – people not willing to take accountability and responsibility. I always found it a little disconcerting that a company PAYS to have their credit rated, isn’t there a little bit of incentive to give someone a good rating since they are paying for it. Reminds me of a story of a student paying for grades!
Regardless – the ratings are falling under scrutiny since many of these highly rated products are failing. The problem is even bigger – since most pension funds require financial products to meet a specified rating to qualify for an investment. Now these pension funds are losing millions and in some case billions of dollars. Because the credit rating was bogus. Who’s fault? At this point I think Moody and their ilk have to take some responsibility – regardless of any manipulation by the product or company they are rating. They need to do their due diligence.
More news is getting focused on this because more products are starting to crack (or fail) additionally the stop-gap measure – the insurance companies of these products (bonds, structured products, etc.) are also failing. So the insurance purchased on these products is no good. I think this will credit trepidation in the future as to the credit rating and whether these products are insured (hedged) efficiently.
Anyway – it would seem the Bond Insurers are the next in line for a bail out.
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Jobless Claims
It would seem that the economy is not that bad off – if we look at the jobless claims which unexpectedly dropped by 1,000 to 301,000. Economist expected Jobless claims to rise by 25,000 (the avg based on 39 economist polled by Bloomberg). The reason it seems off is that most economist have expected more job lay-offs in the housing and construction sector, additionally the announcements of job cuts from the mortgage, financial, and banking have ramped up. Economist stated on Bloomberg this morning, “The numbers are lagging, while the job cuts have been announced it will not be reflected in the number until we move into the next quarter, but we didn’t expect the jobless claims to drop!” However – if you read my essay on the CPI (which includes a section on how the government reports jobs – well it’s really not that surprising. Bank of America is laying off 1,000s of jobs – which was announced. Citigroup is looking to cut over 10,000 jobs. So there is job loss in some sectors.
The market reaction in the pre-open has not been that volatile from these numbers – mainly because we already got the 75bps rate cut. However, if that had not transpired – we may of seen more volatility.
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Futures Pre-Open
We saw a fairly strong rally in the futures in the pre-open. Which was leading the cash by a few points. The Arb traders have been selling futures into the opening and we are seeing a pull-back – as they look to purchase the basket and capture the spread. We are still seeing a slightly strong opening – but it will be any ones guess after the market – expect volatility.
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Support/Resistance
We saw a great rally heading into the close – causing more psychological rather than fundamental (via trading/GTC/program) support. However – keep an eye on the close.
INDU 12,000 / 12500 (we are above 12,000 and 12,250 seems like a good middle or low level support. However we really need to get back above 12,500 were we broke down from to see the return of general strength to the blue chips.)
NDX 1700 / 1800 (We almost got back to the previous close level – but AAPL and GOOG drove the sector into the toilet. And AAPL is looking lower at the opening.)
SPX 1300 / 1350 (Almost back to 1350 – which is a good sign – let’s close above it before we start cheerleading.)
RUT 700!!! (We saw a solid rally in the broader market back towards 700 – getting above and closing above 700 is a clear sign that the market is getting broader support)
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Conclusion
The euphoric rally was optimistic that the worse is behind us, but I don’t think we are close to getting out of the woods and would expect continuing huge up and down swings in the market. Don’t be surprised for another 300 point rally or fall in the INDU. We also had a lot of short-interest in the market and it was severely over-sold. The rally was driven by the shorts covering and the rumor of the bond insurers getting bailed out. However we may see a continued rally from the employment numbers – but I think we will probably retest the lows sometime in the near future – so that means HEDGE.
STORY:
My father was visiting last night and as you have read I am not impressed at all with his financial advisor. But now he dropped another BOMB on me. What I am about to tell you is something I have heard several times from novice or ignorant investors, so I usually ignore this. However, this came from the mouth of my grandmother’s financial advisor. My father had mention his concerned about the weak dollar (dropping against other currencies) and inflation, the response from her financial advisor, “You earn dollars and spend dollars so it doesn’t matter.” I nearly fell out of my chair! In all my 20 years of being in the financial markets I have never heard a professional say something as idiotic as that! I told my dad if you go to a mechanic and say you are concerned about the oil light coming on and he tells you “You buy gas and it runs on gas, so it doesn’t matter.” – well you would find a new mechanic.
You may never travel overseas – but yes the weak dollar and inflation does affect you.
Quick Simple Course:
Simple Lesson 1: Energy Prices
If you earn $100 and gas cost $2 a gallon and you fill a 10 gallon tank with gas, that is 20% of your earned income going to energy.
If gas price rises from to $3 a gallon and you fill a 10 gallon tank with gas, that is 30% of your earned income going to energy. That is real inflation. Pickens estimates that oil has about a $5 premium in it just from the falling dollar.
Simple Lesson 2: Bond Investing
If American Investor A buys a US bond for 5% and American investor B buys a Euro Bond for 5%. At the end of the year the US dollar falls 10% to the Euro. Which investor has made more money? Again – currency rates, inflation, does matter.
Simple Lesson 3: Business Model = Shopping
If retailer buys their tube socks from China (after converting dollars to the local currency) for $1 to sell it for $2 in the US. His revenue is $2 but his profit (margin) is $1. If the dollar falls and now it costs the retailer $2 to buy tube socks from China (after currency conversion) and has to raise his price to $2.25 to see any profit – his revenue is $2.25, but his profit (margin) has shrunk to $.25. Yeah – the consumer feels the weak dollar at retailers – since over 80% of merchandise purchase comes from overseas – prices go up with inflation.
Simple Lesson 4: Inflation vs. CD investing
If the government reports inflation at 4% and you buy a CD at 3% - did you make money at the end of the year?
People forget that the dollar is NOT about face value, it’s about buying power. What does that $1 buy? It’s buying power that matters – that is all.
So if you can feel, see, and measure inflation shouldn’t your financial advisor take that under consideration when making investment decisions. If he is ignoring that risk and not planning on how to protect or increase returns to BEAT the rate of inflation (via weak dollar, currencies, energy, etc.) he really is doing you a disservice.
I am becoming more and more concerned (dealing with my father) that many financial advisors out there really don’t know anything other than playing “go fish” with some mutual funds and they actually believe that diversification is risk management – it is NOT! It is an investment strategy – not risk management.
I point this lesson out because 99% of the people that are getting this morning market preview are professional traders and KNOW everything I just said. The reason that I point it out – maybe it’s time that you sit with your parents and grandparents to make sure their financial advisor is not a total idiot like my father’s or my grandmother’s. I wish I would of spent time with my father years ago before waiting. It’s time that we – the professionals take the time to sit with family members to explain to them ways to hedge their investments, questions they SHOULD be asking, and maybe helping them find a Financial Advisor that care more about investing than assets under management.
The Financial Advisor / Brokerage business model has changed over the last 2 decades from a commission model to assets under management. These new financial advisors take courses on how to GATHER assets rather than learn how to make investment decisions. They have NO motivation to learn anything because they get paid the 1% whether they do anything or not. I am not saying they are all bad – but just like searching for a doctor, mechanic, etc. you need to find one that is knowledgeable, wise, and educated – not just a NICE GUY. If you went to a doctor about your cancer and he said we only use radiation, we don’t believe or know how to operate or any other form of treatment because we are conservative. You would most likely go to another doctor.
If a Broker or Financial advisor says we don’t do options, ETFs, futures, or the wealth of other financial products because they are conservative, what they are really telling you is that they are lazy and are getting paid 1% whether they lift a finger or not.
And if you financial advisor ever says something as stupid as “You earn dollars and spend dollars so it doesn’t matter.” (It being inflation, weak dollar, or anything) go get another financial advisor QUICK! This guy apparently failed ECON 101.
Traders,
I got a lot of questions about the market reaction yesterday and what to expect going forward. Of course any information I provide is just my opinion and you should take it with a grain of salt and read and investigate other ideas to form your own conclusion. I believe the FED had planned a 50bps to 75bps emergency rate cut for a long time in case we did have a meltdown. Yesterday’s rate cut was more reactionary to market conditions than to serving the economy (inflation or banking solvency issue) – they left some powder dry to inject some “Hope” – I would call it a “Hope” cut to stop the bleeding.
I also felt the world markets going down on Monday and Tuesday was reactionary to several issues in the US. The confidence in the US economy (and the Dollar) has been eroding fast – the world reserve holding in the dollar has been declining as Foreign governments and central banks look to hold a broader basket of currencies instead of relying on the dollar. The World is watching the US and continually sees more problems surface (Housing, Government Debt, Bank write-downs, etc.) – however I think the “straw” that broke the Camel’s back was the insurers problems. The stop gap to risk is Insurance and the measure of Risk is Credit Ratings. For the most part they have not been in the news until recent. Now we are seeing the Bond insurers suffer – big time and that insurance is based on Credit Ratings. We all (domestic and foreign) pay close attention to credit ratings as to the risk factors. When these credit ratings do not reflect the risk factor than something is seriously broken. Now the insurance companies are failing (mostly bond insurance). One of the financial institutions that I reported on took losses exceeding $2 billion in insurance (hedging) of the SIV/CDO and other mortgaged packaged securities. This has sent a ripple affect across the world. People are asking that if the insurance companies are failing and the AAA credit rating products are failing – then how do we measure risk and more importantly how do we hedge credit risk?
The panic set in and we saw a worldwide flight to cash – giving people enough time to get liquid and make a financial decisions while being on the sidelines.
However – I think the rate cut was a knee jerk reaction by the Fed – and it does nothing but slow down the problem. Eventually the FED will run out of room to cut – and where does that leave US? Are we heading down the same path that Japan faced in the 80s? A triple down turn – where bonds, the market, and their currency all went into the toilet! You could put your money in your mattress and it still lost value – with rapid inflation. I have my own idea of a stimulus and save the economy package – and if I have time I will write it – but it flies in the face of what the government and most pundits think.
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Stimulus Package – the New Buzz Word
We are hearing talks about a Stimulus Packages – ever candidate has their own Stimulus Package – but what I find is that it is being used more as a magic buzz word with fancy packaging and no substance.
The problem is grid-loc in both houses and the executive branch – they all have their own idea from tax cuts to rolling out checks to individuals. The problem is that so far everyone is a temporary band aid to the problem and no one wants to address the problem.
I really hate to say this (and this is not intended to create fear or doom) but we ALL KNOW what I am about to say and you will NOT hear a single candidate or politician say this because it is political suicide…..ready……..The US Government is BANKRUPT! It’s the unspoken truth that everyone knows – but no one is willing to mention. We are in trillion dollars of debt, we are printing money and lending credit lines to banks (via the Discount Window) thus shouldering more debt and more uncertain risk. The world central banks (which I believe hoped that we could get through this – now with the failed credit ratings – is waking up to that same fact). The Government is hoping that printing more money is going to solve the problem – or injecting billions into the economy through some stimulus package is it.
The bright side – we can recover – we can get out of debt – but I am very concerned about getting the proper administration in there to turn this ship around and shore up the wholes.
The world markets are bouncing back today strong – but the futures are showing a further (massive) drop in the market – as if that emergency rate cut was a band aid to a hemorrhage. I mentioned to a friend of mine yesterday – maybe these are the times when the US loses its status as a World Economic Super Power! At first his reaction was typically arrogant (which I must admit we as Americans are) – he felt despair – we can’t let that happen. But you have to ask yourself so what – maybe it’s another countries time to carry (or burden) that torch – maybe China. Don’t forget the Sun DID set on the English Empire – they are doing quite fine and have been RELIEVED of the burden of policing the world and being the center of the world as far as economic policies and markets. If this is happening – there is not much we can do – we should realize the change – understand it – and get ready to prosper with that change. Look for opportunities to invest overseas (bonds, companies, and currencies). Remember – the markets are not patriotic – they know NO boundaries – we as investors need to take that same approach. This assessment is reality – the question is how fast do we get there?
For now I think the Stimulus Packages are band aids – none of them are a solution.
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Futures Pre-Open
The market bounced yesterday and was only slightly down – due to the (not so) surprised rate cut. However – that was short lived and most of the indices closed down 1-2%. The futures are looking seriously down again this morning and the cash is following. We might get a pre-open boost (slight rebound) in the futures as Arb traders look to get long futures legging into the short basket to capture the spread. But after the opening I don’t know how long it could last.
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Support / Resistance
We did get a good bump from the bottom on the rate cut – but have we found supports? Please keep in mind that these SUPPORTS are not places to get NAKED long or bottom pick – please hedge are long positions.
INDU 11,500 / 12,500 (Yeah it is wide – but we broke down from 12,500 – so that is where we have to get back to. While we didn’t hit 11,500 we probably should of. )
NDX 1750 / 1900 (1900 is where we broke from. We should close above 1800 to see some level of strength and create a support area)
SPX 1275 / 1350 (I would love to see a strong close above 1350 – even if we sat there for a while. This would start building a confidence area. 1300 is maybe a psychological support – but beyond that – who knows)
RUT 650 / 700 (This is actually a good sign. The boarder market saw some strength yesterday. If we close above 700 and stay there – even if the narrower based indices get wiped sawed – it shows that money flow is coming back into the market in a very broad manner and would be a good sign of a bottom support. Watch the RUT)
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Conclusion
My friend said “The 75 point rate cut was like giving a crack-whore $100 bucks – she’ll be good for an hour – the problem will just go away – until the hour is up, the crack has run dry, and she is needing just a little more – I promise this is the last time”. I think while a vulgar and crude interpretation – it kind of hits the nail on the head. I will let you guess (and many of you will – and correctly) who said that! I have to agree – but I may not of put it in such a way.
I think we will continue to see massive volatility and expect (from the futures this morning) that the market is going to – at least on the opening take a hit. We did get a slight save going into the close as stock rallied back – a good sign – but maybe just temp. The world (specially Asia) markets are up – Hong Kong index was up 10%. So they are seeing a massive rally – but it is not following here – maybe we will get a little help and follow the rest of the world back to higher ground – but don’t bet on that!
My Stimulus Package:
I see two problems that have to be addressed separately. A quote that I have used many times “No nation in the history of civilization has devalued themselves to prosperity!” That is EXACTLY what the Fed is doing with these rate cuts – he is putting more and more pressure on the dollar. We are almost at a level that investing in bonds will equal negative returns (against inflation) – that is devaluation. I also feel the market is going down – regardless of the rate cuts – there are too many issues to keep it from doing so – where the bottom is and how soon we get there is just a guess. Also a few states are already in contracting growth (a recession) and the US is probably in or heading into a recession (depending on which economist you ask).
So my first step would be (ready for this one) – RAISE INTEREST RATES! Yes – raise them to at least 6%. The market of course would not like this (but guess what the market is going down any way – if we find a bottom faster than great) – but I am not raising rates because of the market – I would be raising rates to STRENGTHEN the dollar. As I said the Dollar is the world’s GOLD standard. We need to give it value. By raising rates – we would see a huge return of foreign central banks flood back to the dollar and treasuries. We could regain positive status as a reserve currency. We would reduce inflation. We would give consumer MORE buying power –rather than less. Now the banks would be pissed off because they are hurting (through no fault but their own and their failure to address risk) It’s the government (ostensively the Tax payers) burden to bailout a failed business plan. And yes a few banks would probably go bankrupt or get taken over.
Second step – the Stimulus – instead of handing out checks to people – I would cut all 2008 Federal income tax to a FLAT 10% for the year. Now most of the US is on W2 – meaning they would have with-holdings. Those with-holdings would DROP and they would see a massive increase in take home money. So the government doesn’t have to take billions and inject it – the businesses who pay their employees would take that burden – the government is just lifting the burden of taxation on people. Now the US consumer (poor, middle class, and wealthy) all would share in getting MORE money. Additionally with a strong dollar (from the RATE HIKES) putting inflation at bay would give them massive buying power.
The problem with my Stimulus Package – The Republicans wouldn’t do it (since Paulson – ex CEO of Goldman) are all march-step in line with SAVING the banks at the governments (or taxpayers) expense. The Democrats wouldn’t do it - since they are about giving out money and raising taxes. They have plans for more social programs. Additionally – no candidate wants to piss off the banks who are help funding their candidacy. Example Hillary and Citigroup.
Anyway –that would be my Stimulus package!
Strategies?!?!
Stay hedged – for the shorts – buy some extra calls we could get a knee jerk UP – with ANOTHER rate cut on Jan 30th – do be surprised to see another 25-75 bps on Jan 30th.
Look at some ETFs (foreign currency, gold, emerging markets) many of these are liquid and have options. Great for hedging and yield enhancements.
Investors: Options are the key for preservation of wealth and increased yields – specially in these times.
Traders: Trade the SKEW – it is out of control – now is the time to SELL fat juice if you have tails or bullets.
Traders,
It would seem that the market is not getting a break at all – which is probably a good thing. The quicker we can find a bottom and shake out all the issues the faster we will be on the road to recovery. One of the problems with the housing crisis and the sub-prime issue is that it moves very slow before we get an accurate picture – this is because of several factors: States require a certain time period to elapse before they can foreclose (3 months on avg), the courts are back-logged (in Florida by 4-6 months), and the process between the courts, banks, and lawyers are takes forever. We are still seeing a rise in foreclosures – so it is still rather cloudy as if we have found the bottom. I also heard (rumor) from a inside source that a public traded bank in Florida has massive amounts of second mortgages on their books that have not really come to the light of day – and they are scrambling to figure out 1-3 year discount payment methods to breath ANY type of life into these 2nd mortgages (which really are probably worth nothing – at current housing prices). Countrywide also admitted to such an issue. The problem seems to be expanding into credit cards, auto loans, and other related loan areas - because if consumers are failing to pay their mortgages you can bet they are failing to pay other loans (would you rather lose your house or default on a credit card?). Now we are also hearing about how the bond insurance is massively failing – Merrill accounted for their insurance failure to the tune of $3 billion. Buffet and Ross are circling the insurance companies (Buffet to build his own and Ross looking to scope in on one that is ready to default). If MBIA fails the problems are going to get seriously worse and fast – being one of the largest insurers. The credit ratings of AAA are suspect and Moody ratings are almost becoming a joke.
So concerns still rest as we may be seeing a bottom if the credit market is able to contain the current issue and the bond insurers don’t fail! Keep an eye on this problem as it could be the second shoe to drop.
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GE Profits
GE came in line with expectations and their diversified portfolio (Network TV, Jet Engines, Trains, Power, etc.) with HUGE oversea sales has help them survive the massive slowdown in the US. GE is getting a boost in some of their vertical sectors by the weak dollar and rising sales in products overseas (an increase of 30%). While the domestic entertainment sector was up – expecting a slow down with the decline in advertising may mean less expansion in that sector.
However, GE does have some credit risk exposure in their finance and insurance section. They managed (unlike others) to dump (sell) what was left of its U.S. subprime mortgages early in the 4th quarter – reducing the need for additional write-downs. Additionally they are exiting their relationship with WMC Mortgage relationship with remaining assets of $1.1 billion sometime in the 2nd quarter – but the figures are undisclosed (or unknown) at this time. This could put a short-term dent on earnings in the 1st and/or 2nd qtr for the company.
There were also questions related to an accounting error regarding profits from long-term service contracts (after an SEC review dating back to 2002) – which means there could be additional reinstatements going forward.
I personally have always been a fan of GE and their many divisions – I think unlike the rest of the companies involved in the credit problems they have managed better than most – it is disconcerting about some of their accounting issues in the past – and if we take them for their word going forward they should be able to weather the storm better than most. Their oversea diversity in several sectors is a good hedge. However –continue to use options as a yield and hedging instrument.
GE is currently giving broader market confidence and we are seeing a boost in the pre-market in all indices across the board.
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Futures Pre-Open
We are getting a strong front run in the futures the cash is lagging about 9 points in the NDX and even more in the INDU. Expect the ARB traders to take short future legs going pre-open and buying pressure on stocks at the opening as program trading kicks in to close the spread. Expect a good jolt to the upside – but how long it last is anyone’s guess.
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Support / Resistance
Support no longer exists – most program trading (Long-Short /Neutral styles) have been pared down significantly. Also the GTC support orders are non-existent. The market is waiting for any type of rally and relief to FIND (create) a support area.
INDU 12000 / 12500 ( I am just guessing now – since we are in unknown waters – it would seem psychologically that 12000 would be a good support – but I doubt there is much of a GTC or program buy systems at that level – why risk it.)
NDX ???? (Who knows)
SPX ???? (Who knows)
RUT ???? (Who knows)
I wish we could have a little clarity – but for now the market is really taking on some unknowns and the big strategy funds are sidelined – no one really wants to risk calling a bottom – unless 100% hedged. We SHOULD get a MASSIVE rally at the rate cut (or a surprise) announcement – which would CREATE new SUPPORT areas.
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Conclusion
The rally in the pre-market is optimism and hope – rather than a fundamental shift that the market has found an economic bottom. The problem is moving like molasses which is too bad – meaning that we may not see a bottom until the 2nd qtr – if lucky. However – I would expect HUGE knee jerk jolts to the upside. Volatility will continue to rule the day – as traders do well and investors continue to scratch their heads.
These are the times were staying in the game is more important than profiting – hedging positions, monitoring risk, avoiding huge deltas and Vega positions. Making sure that going into the close your positions are not exposed to upside or downside pre-open surprises. There is MORE risk overnight than intra-day – as this market is waiting for any news (good or bad) to determine the next step going forward.
Continue to expect surprises – I don’t think we have seen the worse play out yet and the credit disease is spreading to insurance, bonds, credit-cards, auto-loans – etc. The stimulus packages that some of the candidates suggest is a very UNFUNNY joke. $650 is not going to cover anything and if elected some of them will be raising taxes. Great give me $650 dollars and then bump my taxes, you know the $650 will not cover the increase payout to the government. They talk of SPENDING MORE – to what purpose? We DON”T WANT TO EXTEND CREDIT LINES!!! We need this country to STOP spending, start saving, (specially the government – please stop spending, start cutting, start saving) – giving out a check for $650 does nothing! Those Katrina $2500 vultures did what exactly?
I would love to give some of those candidates a swift stimulus kick in the ass!
Traders,
Yesterday’s action was unusual, as if the market really didn’t know what to do. We saw some interesting intra-day volatility – the futures showed big downward pressure in the pre-open, only to move into the positive territory and then to give it all back up at the close. The Tech sector was fairly mixed, with GOOG and AAPL getting smacked down hard, while QCOM, ORCL, EBAY, SYMC were up. Yesterday did NOT see any sector rotation or driven activity as the entire board was pretty mixed. It would seem the smart money is side-lined determining the lowest risk/reward ratio – as all sectors are taking it on the chin.
The credit problem is not over and we are still seeing caution and uncertainty move forward. The presidential race is pretty indicative of the current market – and that is UNCERTAIN. I think it will take a few months before any CERTAINTY is established (for the market and presidential candidates) – and even then we should still leave room for pause.
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Merrill Lynch – more write downs.
Merrill writes down over $14 billion – at the higher-end of any forecast. Let’s put that in perspective – Merrill Lynch usually has between $1 - $3 earnings per share – this write down is OVER MINUS $12 dollars per share. Larger than any forecast – the average was for $5 per share.
Now you could say this is a good thing (many are) in that the new CEO (Thain) is taking an aggressive stance and taking the maximum write-down and trying to put the worst behind them on a strong road to recovery. Additionally, the other sectors at Merrill had a fairly strong quarter. So I think Thain is probably right and trying to shore-up the hole in this ship.
A simple view of the break-down is this over $11 billion in losses (from mortgages) and over $3 billion in losses (from insuring the mortgages) – showing clearly that their ability to off-set the mortgage via structured insurance products (and the reliance on other financial institutions ability to do so) is fairly worthless. The $11 billion in losses from their mortgage holdings is a MARK (they didn’t sell it) – from some analyst they have marked their positions to about $.35 on the dollar (note: Morgan was at $.25 on the dollar and Citigroup marked to about $.60 on the dollar). It is important to note this because they still have risk to the tune of about $10 billion more (at a .35 cent mark) – if defaults and foreclosures continue. What we further need to take into consideration is that the insurance and hedging positions accrued losses of $3 billion additional. So we are not out of the woods yet. Our hopes is that .35 cents is a good mark and that these mortgages will not lose any more. Their combined write-downs in just the mortgages have exceeded $19 billion.
They are also taking on over $12 billion in Sovereign Fund (or I like to call Vulture Fund) assets and are giving them a great deal in guaranteed interest payments, shares, and probably the “wink” favor – which is always an unwritten but implied notion that they can call in special favors – no doubt they will.
As I had been saying in previous Market Previews – I have been waiting for a journalist to ASK the point blank question about the Sovereign Funds that many of these candidates have argued against while they were senators. Last night it happened on Bloomberg. The interviewer asked Senator Clinton – point blank – what is your stance on the Sovereign Funds investing in the financial sector – being that some of your largest contributors to your campaign come from the likes of Citigroup, and should they be taking this money? She said YES – her only concern was the transparency of these Sovereign funds – but she was not against their investments into the financial sector. It’s amazing the about face she has taken – while she was a Senator (prior to the election race) she was one of leaders against foreign controlled companies and/or sovereign funds making investments into US companies. Now since she is running and she some of her financial contributors and supporters sit on the board or in key positions at some of these financial institutions, well she has toned it down severely and has no issue with it – but for transparency. The problem (which I might add she argued correctly only a year ago about these funds) is that they are NOT transparent and still are not transparent. They sovereign funds are even less transparent then the foreign controlled companies that she had issue with. Again, Senator Clinton is not the ONLY presidential candidate that has special interest based on capital contributions – and it’s not just Democrats – the Republicans are just as bad. The point is – the presidential campaign will not and has not put forth any TOUGH questions – so far it’s been a “touchy feely” and “warm and fuzzy” stump speeches and that they want to bring “CHANGE”! -------- whatever! I was disappointed with her answer and for a stubborn, intelligent, and strong person that she is – it was very apparent as to how easily she will bend to support her special interest or big contributors on the “hot issues”.
Sorry about breaking off on a tangent – MER looking slightly lower – the market seems to like the big write down – as if the worst is behind us – only time will tell.
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Jobless Claims UNEXPECTEDLY Declined ?!?!?
Of course this SURPRISE gives Bernanke (the FED) room to cut the rates without the perception of an increase of inflation worries. Yeah Right! As you know I am extremely suspect of the government reporting numbers (mainly because of the massive SWINGS in the revisions to the tune of 50 - 200%). I fully understand the need for revisions and the margin of error – but the government has been doing this a long time – a margin of error that exceeds 100% is a little over-board.
Remember late LAST year when the Job numbers came in worse than expected – and the FED immediate cut rates by 50bps – THEN (surprise) they revise them back up by over 100,000 jobs (a swing of over 200%) and guess what back to being in line with economic forecasts! What I found even more FUNNY (and not funny HA HA) was that the BLS excuse for making such a dramatic revision was that they FORGOT to count teachers (and some government payroll) – yeah whatever. Ether they really are that stupid or as I continue to suspect there is more “Tom Foolery” then meets the eye.
Regardless –the bolsters the excuse to cut rates and that inflation is at bay – which ironically is the exact opposite of what the financial firms are reporting, housing start slow downs, and increase in the announcements of layoffs. Let’s keep an eye on the revision (which in a month from now – after the rate cuts – they hope that we all forget about).
I am not saying the government is wrong – just that they get a free pass to revise and in the recent decade revisions have become expected like clockwork and in the last 6 months economist estimates have been so far off from what the government is reporting – that it just does NOT add up. You have to ask yourself for years economist estimated averages have been fairly inline – how come all of a sudden they are off by 10, 20, 50, 100%? I find it odd.
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Futures Pre-open
Initially they were down – but we are seeing a pretty good rally going into the opening. Arb traders are starting to short futures into a long basket leg – expect a good pop on stocks at the opening from the buy programs. But it could be short lived.
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Support / Resistance
The supports have been for the most part blown out – so where does that leave us? In an area where we need to establish supports. This could be a good basing area for a strong jolt rally from the expected 50 bps rate cut!
INDU 12,500 (we dropped below 12,500 at the close – while not good if we can base at 12,500 and close above it and stay range bound we MAY get a good jolt from the rate cut to the upside. Getting long means HEDGING positions 100%)
NDX 1900 (Breaking 1900 was NOT good – we need to close above it. I would like to see that with a follow through jolt to the upside from a rate cut – only to reenter into short positions at the topping area.)
SPX 1400 (Again below the needed 1400 support line – we need to close above 1400)
RUT 700 (we are close – but above 700 is key)
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Conclusion
The write downs are still marks and these firms continue to carry billions in mortgages – Citigroups write downs (marks) have been the most optimistic, while Morgan and Merrill are taking a more conservative and aggressive position – but still carrying billions in questionable positions. So far none of them have called the bottom with their marks first around .70-80 cents on the dollar and now at .30-.50 on the dollar – is that the last mark? Who knows. Additionally we are seeing defaults now in the credit card, insurance, auto loans, and second line credit loans – which is showing that consumers and businesses are tapped out and are having problems paying back ANY loan. This spells recession and slow down. While we maybe be finding a bottom sooner than latter – the bottom may last longer than initially expected.
The additional issue is how many more cuts will we see and how will inflation be affected? These could be the additional pressure we do NOT need if we are wanting to recover quickly.
Stay hedged! And expect more volatility – we could get UP SIDE jerks too – show hedge the shorts!
Watch short Vega positions – while the VIX might fall off – expect pops too!
Traders,
Yesterday Citigroup’s negative report sunk it’s ugly teeth into the market and did not let go. Even Steve Job’s pulling the “world’s thinnest laptop” out of an envelope trick could not get the market, tech sector, or even Apple stock to rally. Unfortunately, while the laptop is no doubt very cool, it is not the innovative technology like the iPod or iPhone to get us to shift focus from the financial crisis to hopeful optimism.
Additionally, Romney has now moved the GOP into a 3 horse race and Dems are still in a 2 horse race, with a very lagging Edwards. Nothing exciting yet – probably will have to wait for Super Tuesday before we get any clear idea of who the front runners. However, no of these candidates will be able to do anything until next year – we are still left with our current administration and it needs to get it’s ass in gear and focus domestically on the increasing financial crisis – more than tossing a few rate cuts at the problem.
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JPMorgan joins the ranks of write-downs (1.3 billion)
JPMorgan’s profit falls 34% and misses estimates. What is more concerning is the clear picture that the consumers are faulting in other areas and not just mortgages. JPMorgan’s credit card losses increased 40% and default rates were up – additionally their auto loans (very small segment) was also seeing a ramp-up in defaults and losses. This is giving us a clearer picture that the consumer and the credit lines (or debt) is wide-spread and not just segmented to the mortgage (or even the sub-prime mortgage). This is not a good sign for the economy (if defaults are increasing in other credit areas).
Note: Wells Fargo also got dinged to the tune of 38% in losses.
===How did JPMorgan, Wells Fargo and the Consumers get here?
My expectations is that the consumer buying power (which is heavily weighted on credit spending) is on the brink of collapse. If we follow the money we realize that over the last decade consumers have turned to their homes to tap NEW FOUND money. It was almost as if there was a MASS SOCIETAL AWAKENING to a NEW found credit line that people had not been consciously aware of – their HOME EQUITY. Of course as with all “Supply and Demand” issues – mortgage companies sprung up like weeds to convert that “new consciously” realized equity into money. Unfortunately – as with a majority of consumers in the US (that do NOT understand the concept of saving and investing) just SPENT the money – new car, new toys, etc. Then the second wave hit, “Hey if I am able to tap the equity in MY home, why don’t I buy another home and tap that equity too?” – and so the massive race for more equity (which for the dumb consumer meant more money to spend) happened. The problem – is that we created invisible (fake) wealth – it was solely predicated on credit lines – not ACTUAL savings or investments. These consumers spent even more – instead of investing or saving. Now they have racked up massive credit card debt, home loans, car loans, every kind of loan you could think of. The problem – they relied on more equity lines and the housing market forever going up to continue to pay off debt. Now with the housing market crashing the debt is massive and their income via their job (if they have one – since a lot of people became real estate agents or worked for a mortgage company) they don’t have any money to pay.
This country is a CONSUMER nation (that consumes) – that consumption is based on credit lines (NOT INCOME). We had a massive BOOST to spending because of the new found equity lines in homes – which became self perpetuating – and now the Piper has come to town to collect and there is NOTHING.
What happens next? I don’t know – I do know that from JPMorgan’s report were they are showing an increase in defaults and losses in both the credit cards, credit lines, and auto-loans spells more trouble – even if the housing market does bottom. Where will money or credit lines come from in the future? It will take a while, that is for sure. Most of the consumers do not have money to put down on a new home and 250 mortgage companies are out of business – the ones that are left have seriously tighten lending procedures. So it will take time to shake this out. Several economist are not concerned about how DEEP the recession will be, but rather how long it will be. There is a great story in the Economist (this week) about these problems and the problem is more about length of a recession rather than it’s severity. Some suspect 3-5 years and the bottom of the housing market not reached until 2009. We will see – but it is prudent to focus on principal protection (regardless if the market rallies or not).
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CPI rose .3% in December
As you know (if you read my CPI essay) that I take the CPI reporting with a SERIOUS grain of thought. I think it probably rose a lot more than reported and we may see a revision after (wink wink) Jan 30th – when Bernanke cuts rate. There is a rumor that the FED may make a rate cut prior to Jan 30th and a benign CPI (inflation) is a must to JUSTIFY a rate cut. As we all know rate cuts will send the dollar lower and inflation higher – we have been witnessing that since mid-last year.
So the CPI rising ONLY .3% (slower than forecast) is perfect ammunition for Bernanke to cut rates .50bps and we may yet see an emergency rate cut before Jan 30th. However – I think it will be interesting to watch a revision next month to the December CPI number – I think it would be a fairly good bet that it would be revised HIGHER after the FED cuts rates. Note we saw that happen with the Job numbers and CPI last year (with revisions that in some cases were over 250% swings in the revision – pretty crazy.)
Expect 50bps on Jan 30th and do not be surprised if we get one before then.
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Futures Pre-Open
The futures are taking a good smack down in the pre-market. Last night at the opening of the Globe-x session at 4:30 ET the futures got a serious knock down. INTC and several tech stocks saw huge after hour sellers (INTC -2 points, AAPL -5 points, GOOG – 10 points, etc.) late yesterday – which sent the NQ futures down 30 points. The ES, AB, and DJ futures also had been seriously smacked down in the opening session. So far they have in early morning trading slightly recovered – but they are still front running the cash by 2-8 points (depending on the contract). The Arb traders are starting to leg into the long future to short the basket at the opening – which will exacerbate the downward pressure of the opening. Expect a gap down opening – which may get a little recovery right after the opening – if panic does not set in.
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Support / Resistance
The indices broke some MAJOR support areas – curtailing program buy programs – which created a bigger vacuum to the downside. It’s anyone’s guess were supports are now – we need to create them because they don’t exist. GTC, Limit Day, and Program Buy orders are very thin – because they were mostly taken out yesterday.
INDU 12500 ??? / 12750 (If we don’t hold 12500 and close above it after the close – it will get ugly fast. The opening will be below 12,500 – WATCH THE CLOSE. Any rate cuts could send a upside spike in the market – expect one and hedge your SHORTS incase it happens)
NDX 1900 (We broke 1900 – and the tech stocks are continuing to get whacked in the pre-market. Not good!)
SPX 1400 (We broke 1400 – another needed support level that didn’t hold – again not Good – watch the close)
RUT 700 (OUCH – the broad base market had been looking bad – even when the narrower based indices look to recover – it was a clear indication that the market as a whole was looking worse.)
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Conclusion
A surprise rate cut could send a HUGE euphoric jolt to the upside – but if we have to wait until Jan 30th things could continue to head lower. The picture is starting to become clear that the credit crisis is deeper than we thought – as auto-loans and credit card default and losses are up. Consumer spending has seriously been curtailed, since the credit lines are shrunk or even gone. This is not a good sign going forward and (IMHO) is a clear sign that the recession (if not already here) is almost here. Retailers will probably see continued short fall.
It would be great to just flush this market, housing, credit cards, etc and just shake everything out. A good snap down 5-15% in the market, finish off all the foreclosures, let a few banks collapse or merge, etc. the faster we get to the bottom the faster we will recover. But this is like a very slow bleed – it seems like it’s going to take months if not a year to shake out all these problems and find some real HARD bottom. It is very frustrating for investors – because just when you think the worse was behind us (last year’s write-downs and the FED saying we will avoid recession) we just get blasted with more write downs. Therefore it is prudent to hedge all long positions 100% - because NO ONE knows where the bottom is and the transparency to the banks credit problems is still very cloudy.
Strategies:
Bears = use put bear spreads to capture the skew, cover short stocks positions with OTM calls 100% - we could get a HUGE knee jerk rally to the upside with a surprised rate cut.
Bulls = use calls (do not sell put spreads – you are buying into a skew that will hurt when volatility comes in on a market rally)
These are great time for traders and crap times for investors. Stay focused, toss “hope” into the trash can – there is no room. Don’t defend a losing position – get out or hedge it.
Traders,
Yesterday saw a good bump led by the IBM news – “talking heads” quickly latched on as to speculating that the rest of the tech sector will also see “better than expected results”. All the talk of the sub-prime mess and credit crisis was for the most part push to the back-burner. The volatility that I have been speaking of for the last couple of months is not that the market is in for a bearish market – but rather a very JERKY up and down market. Yesterday was a perfect example of that. Furthermore it is a misnomer that a quick drop in the VIX index is reflective of lower volatility, it is not. It is important to remember the VIX is just a measure of premium (weighted towards the At-The-Money ATM) of options in the S&P. When the market rallies the premium usually falls and the market falls the premium usually rises – to derive anything beyond that becomes very subjective. Yesterday the market made a good move to the upside (between 1-2% in the indices) and the VIX lost over 3%. However the market making a huge move to the upside is STILL volatility. That is what we should continue to expect – volatility (including heavy intra-day volatility). As I said at the beginning of the year- this will be the “Year of Volatility”.
Today further extends that example with the futures getting blasted to the downside on the back of Citigroup’s news. More volatility and yes we will see the VIX spike back up. Even the VIX is volatile.
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Citigroup – record losses and more write-downs
We all knew that Citi was going to write-down some more losses and the “guess” ran the range of 10-24 billion. Unlike many of the other firms writing down billions, Citi is in a unique bind since that are more of a conglomerate of financial services from insurance and credit cards to banking and mortgages. Many of these separate divisions in Citi need reserves in order to cover insurance, credit, and other loans (outside of the mortgage area), additionally Citi has stricter Federal Reserve guild lines (unlike a brokerage like Merrill Lynch) – meaning they need more capital to maintain operations not just for the different vertical markets that I pointed out, but also to remain in good standing with the Fed. The problem is the sub-prime problem has spilled over into every different division a Citi and now they are in VERY desperate need of cash to keep current operations solvent and to stay within Fed guidelines – the Sovereign Vultures are circling.
Citigroup posted their biggest loss every (almost a 200 year old company) to the tune of $18 billion, exceeding most analyst expectations. Additionally (as expected – even though the new CEO said it was not going to happen) they cut their dividend over 40% (bringing down the yield from close to 8% to just over 4%). And they announced immediate job cuts of 4,200 jobs (and some analyst are expecting more job cuts from 10,000-20,000 more by the end of the year). They obviously misjudged their losses and problems from the first write-down they did late last year and the new CEO (who had mentioned he had down a fairly in-depth review – is now going back to review it again) – it’s a big company, so it is easy to miss A LOT?
There is more bad news to come and some say there will be a 3rd round of write-downs (at least) before all is said and done. After more in-depth analyst is being done in the housing market – expectations are for another 20-30% increase in foreclosures with housing prices expected to fall by 10-20% more. Citigroup is trying to get as much of the losses put behind them – but the problem is that most of these are write-downs (not sales) meaning that they are continuing to hold those positions. Additionally, there are cracks showing in their other lines of credit (outside of the sub-prime) are showing an increase in defaults.
Citigroup is now on the road show raising overseas money, as you know last year they raised money ($7 billion) from the Abu-Dhabi group (A Middle East Sovereign Fund – that is not very transparent) and now the Singapore Sovereign fund, the Kuwait Investment Authority, Saudi Prince Alwaleed bin Talal (who already owns 4% of the company) are swooping in to take piece of the pie. In the last round invested by Abu-Dhabi – Citi gave up a lot (over 10% guaranteed interest payments) – this time the stakes are higher and the newest round of vultures will expect A LOT more for taking on risk, which has only increased since last year.
Citigroup is looking down between .50-.75 in the pre-market. Many are saying this is the bottom and the worse is over - they may be right. However, if I were to get long Citigroup – I would hedge my positions 100% or instead use options (bull-spreads) to get long, rather than buying the stock. But – I am not getting long. Any upside (if they are right) is going to be a slow with more bad news expected. The road up will be a difficult one.
So far the presidential candidates have kept silent as to the vulture foreign sovereign funds investing in our financial institutions.
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MAC WORLD – “There is something in the air”
The tag line that is on every banner covering the Moscone Center in San Francisco for the opening of MACWORLD says “There is something in the air?” – The CRAZY rumor mills on the internet are going full steam. The euphoric nature of the show (I have been to a couple) is just nuts. Will it be a new iPod, iPhone, iBook, iPlane – who knows. Most of the rumors are centered around an ultra-light laptop – that the internet rumors have dubbed “MacBook Air” – because of the possible addition of the new Wifi format WiMAX and a recharging method via Power-by Induction. All sounds cool! Steve Jobs is great and getting the fans excited and creating more buzz then the presidential elections.
Keep a close eye on AAPL today and Steve Jobs keynote speech – he is pretty good at giving his stock a good upside jolt during MAC WORLD. Expect some volatility. However, someone supposedly has his keynote speech which was being picked apart on the internet – and the bullet points were not that exciting – nothing revolutionary like the iPhone or iPod – it could leave the overhyped expectations flat. It is now riding on how HOT this new MacBook Air really is – if there is a MacBook Air.
Expect fanfare, crazy expectations, and one hell of a great show – AAPL really knows how to turn it up. MACWORLD = AAPL Volatility that is the only thing guaranteed.
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Retail Sales fall unexpected – PPI (Producer Price Index) also falls
Sales dropped .4%, the first decline since June, following a revised 1% gain in November. The futures are taking an additional beat-down with the unexpected drop, after the Citigroup write-downs. Consumer spending is slowing further than initially expected – as economist had forecast a flat retail sales (based on the avg. of 74 estimates). The bond yields are ticking down and US investors are moving towards (supposed) safe-havens.
The Producer Prices also drop in December, while the mean forecast was for an increase. As retail sales drop and even corporations are spending less, economist are pointing to more indications of an oncoming recession.
``Growth stalled out at the end of the fourth quarter and into the new year,'' Joshua Feinman, chief U.S. economist at Deutsche Asset Management in New York, said before the report. ``The economy will narrowly be able to avoid recession.''
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Futures Pre-market
The futures has slowly gave back early gains from late yesterday and are now receiving the one-two punch from Citigroup and now the Retail/PPI numbers all showing that the worse is NOT behind us and that recession odds are increasing. The futures are front-running the cash by 1-5 points (depending on index). I expect we get a little boost on the futures in the pre-open as Arb traders get long the futures and ready to short the basket going into the pre-open. Expect some downward pressure on stocks – which may be exacerbated at the opening and then ease off.
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Support / Resistance
We saw a great rally yesterday to get back to some important markers – but the futures in the pre-market are showing as sell off and it will be important to watch the close.
INDU 12750 / 13000 (We got above 12,750 great – now we need to close above it – the Dow looks to open about 70-100 points lower. It will be hard pressed to get above it)
NDX 1900 / 2000 (We are right in the middle of the range – we got a good rally in the tech sector on the back on IBM – AAPL may get a good pop in the afternoon session when Jobs speaks at MAC WORLD – it’s in San Francisco – so any rally or pop in AAPL will probably come later in the day)
SPX 1400 / 1450 (Still range bound but is getting some volatility this morning. It will have some pressure at the opening – but it needs to close above 1400 to see any support)
RUT 700 / 740 (It looks like we will give up 100% of yesterday’s gains at the opening – whether it continues is anyone’s guess –watch the close)
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Conclusion
The market is still taking blows from the sub-prime mess, which is now spilling into other financial sectors that rely on capital. Additionally, other credit-lines (credit cards) are seeing stress and an increase in late payments and defaults. IBM yesterday pushed these issues to the back-burner only to see them resurface this morning.
The Citigroup news may mark the bottom, if we are to believe this was the worst of it, but again that is what they told us a couple of months ago. The market seems to be taking the news in stride – the initial reaction was to the downside. Add on the retail and PPI numbers indicating more slow-down and the odds of a recession (if you are still keeping score) are increasing. In my view the problem is not if or when we are a recession, it is more about how long will we be. My expectations are not a quick recovery, but for rather a 2-3 year period – since many forces are creating negative economic pressure – it would be different if it was just one sector, but it is not.
Continue to expect huge upside and downside moves. For those that do not hedge your positions – you are playing with a loaded gun. Hopefully you hedged you E-trade, Countrywide, Citigroup, Bear Stearns, GM, and many other stocks and NOT hoped for a bottom. There is no room for hope. Paying a little premium for a put allows you to sleep at night – KNOWING that your investment is insured.
Watch the volatility skew – expect spikes and don’t read to the VIX as the indicator of volatility. Expect intra-day volatility to ramp up!
