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!
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