Friday saw the market slip away again – not being able to hold ground. However, it is important to note that the SPX managed to close above 1400 and RUT above 700. The market remains poised for a optimistic rally that the worse is behind us – only later to absorb the reality that the housing, debt, and credit crisis is still with us. Last week Merrill Lynch was news worthy actively looking for another $4 billion in investments and now it looks that Citigroup will probably be writing-down Billions more. Bernanke speaks about rate cuts and hints that a recession maybe still be in the cards, if we are not already there. However, there are good days – like this morning and IBM’s positive pre-announcement - beating estimates – which is currently send the futures up across the board – and may pull the tech sector off the bottom.
--------------------------------
IBM – a silver lining?
IBM the world’s biggest computer (SERVICE) company earnings beat estimates and is surging in the pre-market. IBM sales have grown in China, India, Russia, Asia, South America and Europe. The weak dollar is also adding boosting margins – as their largest growth is coming from overseas. They are adding jobs in Brazil, Russia, India, and China (to about 100,000 as of Dec. – according to Bloomberg).
The stock is looking higher in the pre-market this morning and is pulling up other tech companies with it. Remember, however that unlike other computer companies – IBM shed its actual computer manufacturing to a Chinese company and is now only is the software and service sector – Yup, you haven’t been able to buy an actually IBM computer for some time. China, India, Russia, and even Brazil are all growing – services and computer infrastructure are huge in this countries. IBM’s history and experience is paying off dividends by solidifying contracts in these countries – were growth is at a record pace. The weak dollar is also a benefit to IBM as a big slice of their business is coming from overseas, rather than domestic. Add in the fact that they are no longer paying for computer parts and shipping to build computers – the margins have further expanded. The service industries main overhead is personal, not manufacturing, parts, shipping, or R&D.
It would seem that IBM’s shedding of their computers a while ago has only helped them – specially in these troubled times. However, the bump we are seeing in the tech sector in the pre-market (riding IBM’s coat-tails) is more optimistic euphoria – since the majority of the tech sector is still involved in actually buy, building, and shipping computers. IBM is not really a computer company. We may see IBM continue to rally, but I am not sure that the optimistic tech rally in the futures we are currently seeing will be able to eat off of IBM’s plate for too long – without making serious gains of their own.
The full report comes out on Jan 17th, this is just a pre-announcement. So let’s wait to see what their expectations are going forward – for now it seems great!
-----------------------------------
Dollar starts it slide again
The U.S. dollar is starting to lose ground against the EURO again as the expectation of a US Rate cut increases (possibly as much as 50bps). Remember, London (Pound) and the ECB (Euro) did NOT cut rates. During Bernanke’s speech last week (after Europe decided not to cut) the dollar started sliding again. Additionally Gold and other precious metals continue their awesome rally against the dollar (Gold passes $900 an ounce).
With expectations of a rate cut and not just one (Goldman’s forecast of 2.5% rate by 3rd quarter) is sending the dollar lower and is also creating trepidation on foreign investments (which our government relies on) into US Treasuries – as they will be paid less (via lower interest rates) to hold a depreciating asset (the falling US dollar). Rate cuts are NOT incentives to bring more money into treasuries – which are needed to stave off inflation (from the aspect of printing more money than we are actually receiving via treasuries).
Additionally – concern was heighten with new policies being introduced at the Discount Window – affectively curtailing bond auctions – by (what would seem an auction) at the Discount Window. The concern is two-fold, first the credit problems at the banks are still worse than what is reported and secondly the policy change at the Discount Window, shifts the burden of carrying the debt from the Bank’s shoulders to the US. Governments. Additionally – it causes and injection of temporary inflation (as overnight & short-term loans exceed capital reserves). It is possible that the temporary injection of capital could become permanent – which may very well happen. That would seriously lower foreign central banks confidence in the dollar.
We are already seeing the US dollar as a world reserve currency lose ground rapidly, while it is still above 50% that may not be for long if we continue on this course of action. What will be the results if the US is no longer the world currency? I am not an economist – I really don’t know. What I do know (which is readily apparent to anyone) is a major loss of confidence in the US, the dollar, and our economy. I would further guess it will be the catalyst that snaps the US from being the world’s super power – while Russia, China, and India gain ground. We may have the best military in the world, but that may not be how Super Powers are measured anymore.
----------------------------------------------------
Futures Pre-Market
The futures were pretty flat prior to the IBM news which is sending a massive jolt to the upside (even in future contracts which IBM does not participate). The optimistic rally is predicated on this market WANTING to rally after the dismal fall since the beginning of the year – a glimmer of hope will inject huge volatility. The ARB traders MAY have been caught out shorting the futures prior to the news, however I do expect to see a pull back in the futures prior to the opening – as ARB traders short the futures into the opening against the basket. The futures are running with 2-8 points of spread right now – even with some big names (AAPL, DELL, INTC, etc) all rallying on IBM’s coat-tails.
-----------------------------------------------------
Support / Resistance
We broke some supports and held others – no one wanted to go home Friday holding anything (or that is what it seemed like).
INDU 12,500 ???? / 13,000 (I wouldn’t call 12,500 or even 12,600 a support – other than the fact that it has been flirting with those levels. We will probably see a huge rally today – because of IBM – but 13,000 would be a sure winner if we can close above that – it will be a stretch.)
NDX 1900 / 2000 (The markets took a beating on Friday – now it’s IBM to the rescue – even AAPL is rallying on this news! Expect further volatility – for now we are staying between the marks)
SPX 1400 / 1450 (We just closed above 1400 which gave the slightest bit of confidence that we may hold that for a while longer – or at least until rate cut time. It doesn’t look good below that! IBM is helping charge this index to the upside at the opening.)
RUT 700 / 740 (This index still looks the dog and doesn’t reflect well for the general market. It would be good to see a rally out of this area – but any rally could be short lived).
----------------------------------------------
Conclusion
The news this morning (prior to IBM) was all assessing the further write-downs and losses in the financial sector. Talk of Citigroup laying off 1,000s of jobs, cutting its dividend, and writing down billions more. Mounting debt crisis, which is spilling outside of the sub-prime area into other leveraged debt positions. The weak dollar putting additional strain on foreign borrowed money through the carry trades. Then, as if a fairy appeared and waved her wand – IBM comes to the rescue. It was like magic. Both CNBC and Bloomberg changed their tune – everything became euphoric – “talking heads” started talking about if IBM is doing well so should other Tech stocks. Everything is OK now (no more talk about the credit problems)! – Thank God for the “Talking Heads” on CNBC – if it wasn’t for them – I really don’t know what to do.
Well – it is good news for IBM and there may be other companies that are benefiting from the weak dollar and expansion overseas. However, the euphoric futures rally is based on one thing – IBM. The question is IBM really indicative of the broad market and that we have found a bottom? Are other tech stocks in the same boat as IBM with their business models? I think we will get a good charged rally out of this – but it would be a wise course of action to roll-up some hedges. The credit crisis and economic turmoil is still here, even though this morning it has been shoved onto the backburner as far as the CNBC and Bloomberg are concerned.
Expectations: As I said this is the year for volatility (volatility does NOT mean bear market) it means huge upside and downside moves. Expect them – there will be more.
Strategies – on these euphoric openings and opportunistic trading days – roll UP your hedges and take advantage of cheap premiums. LOCK IN gains on your longs – now room for show-boating. You should be hedged by the end of the day (all longs). This maybe just an opening pop – that could fall off after the opening. I would look to hedge (partial hedge) some things right at the opening.
No comments:
Post a Comment