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.
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