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.
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