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.
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