Friday the market gave up some of its gains and looked rather week. The Tech sector to the biggest pummel as MSFT could not hold pre-market gains as it dragged not on the tech sector back down – but as a issue in the INDU and S&P it tugged on the broader market as well. This is a big week for news, between the “State of the Union Address” and Bernanke speaking and several important economic data reports – expect lots of volatility and knee jerk (up & down) reactions. Expectations are still high that Bernanke is going to cut again at the meeting (Fed futures are priced almost 100% for 25bps cut and 75% for another 50bps cut). It is unprecedented to have the Fed cut over 100bps in week – but we will probably get it. Unfortunately – it is only a band-aid and will continue to put pressure on the dollar. What happens when the Fed cuts to 1% or less? Where does he go from there – other than tossing his hands in the air? Again – cutting rates is not the answer. Additionally this $600 per person stimulus package is a joke. I heard names for the stimulus package from “Sizzler Night Stimulus”, “50% off a Plasma TV Stimulus” to “Closing Cost on my 80/20 mortgage Stimulus”. Anyway – just putting the government further in debt and not really solving anything.
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Sallie Mae takes out its own Student Loan
Sallie Mae the largest US Student lender secured $31 billion in financing from banks, replacing the expiring credit line from an abandon buyout last year. After the lawsuit has been dismissed and the buyout candidates left the table – this massive loan is a 364-day extension from a basket of banks both foreign and domestic. Sally Mae reported a $1.6 billion in losses for the 4th quarter. Additionally they were forced to raise it reserves for defaulted loans by over $500 million, after adding $92 million a year earlier. While some are calling the securing of the $31 billion by CEO Lord a victory – I would rather call it doing his job and shoring up a massive f-up!
This is alarming as it is showing the credit line problem is spreading beyond just the sub-prime. We recently saw the bond insurers fail and the auto-loan defaults ramping. Now Sallie Mae having to add $500 million in reserves (which is unprecedented) to cover defaults!
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Another CEO kicked to the curb
The latest in CEO’s to be sent packing is CEO Lewis of Sears Holding Corp. Many have viewed Sears Holding of more of a real-estate company after the merger of Kmart (which had filed bankruptcy and focused on it real-estate sales and leasing). The stores have been seriously losing ground against Wall-mart and Target. The real-estate was a key component bringing equity and revenue to the table. Now with the collapse in the real-estate market, the weak-dollar which is cutting deep into margins, the slow-down in consumer spending, and not gaining an inch against competitors – it looks like Lewis has not come up with any game plan to move them from behind the 8-ball.
While ditching a CEO when a company is usually good news – in these economic times it’s going to take more than just a CEO to get Sears/Kmart back on track. Expect some volatility. SHLD is showing a very-wide bid-ask spread in the pre-market. So far no one knows what to expect. Watch the Skew if you are trading SHLD. It’s in the NDX – but not an overweight.
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Futures Pre-Open
The futures were getting a bigger smack-down earlier after the world markets were taking it on the chin, however it has made up serious ground heading into the opening. The ARB is pretty flat and I would expect most ARB traders to sit side-line this week as volatility is a HUGE uncertainty. Any minute some announcement could spike this market up or down – more so than normal because of all the economic data and Fed meeting. Expect a little downside pressure – but I think the market will sit tight until we get better resolution from the financials.
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Support / Resistance
It looks like we were getting a couple of solid days put together to get out of this funk. However, most of the rally came from the knee jerk rate cut and a massive amount of short covering.
INDU 12000 / 12500 (We touched the 12500 level but that was short lived – the spring is loading and we will most likely see 12500 or 12000 this week. Today could be rather flat – but be ready for a big jerky move.)
NDX 1700 / 1900 (At 1800 it is really no-man’s land. It is not an area for support or resistance. Expect big volatility this week.)
SPX 1300 / 1400 (We are fairly in the middle on this one too. Expect the support and/or the resistance tested.)
RUT 650 / 700 (If we can’t close above 700 – I would think that any of the narrower based indices will have a substantial problem getting above their resistance points – over even too them.)
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Conclusion
We are still far from getting through the worse of it as more credit problems surface – Bond insurers were the talk last week and now Student Loans. This week should see some jerk market action from the government reporting numbers. I think the FED will probably cut again – which could send the market up – but it would only be for the short-term as it doesn’t solve the problems of the day. The stimulus package is also a joke, while it may be true that we might see a pick-up in the retail numbers in the 2nd quarter from a possible (and most likely) $600 shopping spree – what happens when that all you can eat night at Sizzler’s is over?
Expect huge volatility this week. We could very well rally hard after a 50 or even 75 bps rate cut – but it could stall after a day or two and selling pressure could most certainly revisit.
Oil is pulling back below $90 this morning – but I am not thinking that is an indication of a bottoming in equities and believe oil will be in this range for short-term foreseeable future. Additionally Gold and most currencies are still rather strong against the dollar. Another rate cut will help boost Gold and currencies higher.
Investors stay hedged and don’t get sucked into anything this week – as one day could be a huge move up the next could be a huge move down.
Traders – trade the skew – watch OTM premiums. The OTM calls could get a jolt going into the rate cut and see some intraday volatility pops. You will probably have to watch intra-day legs more closely than normal in the expected volatility action.
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