We had a fairly mild day yesterday with a good steady push to the upside. The finale State of the Union was fairly benign as talk (of course) was about the economy and the stimulus package. For the most part the market could careless at this late state in the game with what the President has to say, but would rather hear from Fed Chairman Bernanke this week. The market is expecting another rate cut, at least 25 bps and possibly 50bps. The talk in the market is how the market will perceive the rate cut and if 25 bps is not enough. It is suspected that the Fed will have the Job numbers in hand before reporting and a fairly good assumption is that a 25 bps cut will mean the job numbers on Friday will be fairly in line, however a 50 bps cut (or more) could mean those Friday Job reports are looking worse than expected. Whatever the case – it spells volatility.
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US Durable Goods Orders Rise MORE than forecast!
The Durable Goods rose in December more than forecast – indicating that the business side of the equation is holding up fairly well in the weakening economy, however these numbers are always lagging. The 5.2% rise was the biggest since July – the weak dollar is helping spur oversea orders as US goods are becoming relatively cheaper. Those companies with overseas exposure are holding up quite well, but that is still a fraction of the economy. Expectations is that the US consumers need to find a bottom soon and bring strength back to the spending levels as the overseas sales in a few sectors can only shoulder the burden so long.
The aero-space industry (Boeing) has seen a rise in overseas sales and the weak dollar is giving them a edge over Airbus. Additionally, other heavy equipment orders to China, Russia, and the Middle East have seen a steady rise – again attributed to a weakening US dollar (United Technologies, Otis, Pratt & Whitney, and others).
Some analyst are saying this may be a sign that we avoid a recession – yeah whatever! It does give the Fed fuel to cut rates – using this as an excuse that the cuts are NOT impacting the economy.
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Countrywide – just when you thought it was over!
We all might of believed it was over and we wouldn’t be in for anymore Countrywide headlines when BofA decided to take the reins. However, the monster reared its ugly head again. Countrywide announced another lost over $400 million in the 4th quarter after they promised to return to profitability. BofA with their head in their hands is watching good money follow bad into this never ending sink hole.
CEO Mozilo agreed to sell the company (for $4 billion) to BofA – significantly lower than where it had been only a few months prior. Rumors had spread that the largest mortgage company was facing bankruptcy and at $4 billion – you could say that it was more of a take-under that a windfall for shareholders. Of course many believe that BofA was trying to save face when they had previously made a $2 billion investment in the company only to watch the company continue to fail.
CFC is down over 15% from the share value of the takeover and after this latest news I am sure BofA is on the phone to renegotiate this massive investment debacle.
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Bond Insurers looking for a bailout – maybe too late!
MBIA and Ambac (the two largest bond/investment insurers) have guaranteed about $2.4 trillion of securities of US city, state, bond back mortgages, and credit cards – have technically failed. Merrill Lynch had to write-down $1.9 billion over INSURED investments since the insurance they purchased had failed. Many other banks, pension funds, city, and state bonds are concerned as their investments while on PAPER insured – are in reality not. Many of these bonds have investments in SIVs, CDOs, and other structured debt securities have failed and the stop gap (relying on the insurers) have failed. Florida Pension are looking at losses that will probably exceed $1 billion.
Rating agency, Fitch, has cut the ratings on more than 137,000 bonds from AAA rating. The credit rating being lowered could create a massive selling frenzy as many investment funds are not allowed to hold investments without the coveted AAA rating. Several state pension funds have already been forced to sell several positions – unfortunately there are not a lot of buyers out there – since the insurers are pretty much bankrupt.
The banks (who also rely on these insurance agencies) have been asked to extend to them a line of credit – I think that is a pretty tall order to ask of a bank that is already taking losses and are relying on these insurance companies. Ask Merrill Lynch how they feel about their insured investments!
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Futures Pre-Open
The futures had been down over night and started to rally into the Durable Goods report. The Report has definitely brought optimism to the markets and we are seeing some strength across the board. The futures are front running the cash, but only slightly. The ARB traders would be taking a little more risk than usual if they decide to short the futures into the opening and leg into the long cash basket. Expect a pop at the opening – after that it is anyone’s guess.
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Support / Resistance
We are hanging in there and the RUT got to a good level to show broad strength.
INDU 12,000 / 12,500 (We are in the middle and moving up towards 12,500. It will need help to break through 12,500. So here is the score – if we can NOT bust through 12,500 after the rate cut – expect to head back towards 12,000. However, if we do break 12,500 we could get a massive rally back to 13,000. So expect hidden volatility at the 12,500 level if we reach that range prior to the rate cut.)
NDX 1700 / 1900 (We are just taking a massive spring load here at 1800. We are either going to rocket to 1900 or drop like a rock to 1700 – all eyes will be on the heavy weights in this index on the market’s perception to the rate cut and job numbers.)
SPX 1300 / 1400 (Same for the S&P as the NDX. We are seeing volatility loading up.)
RUT 700 (We are above 700 which is good. Now let’s wait for Bernanke 750 or 650 would not be a surprise by Friday or sooner).
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Conclusion
The Durable Goods gives Bernanke (economic perception) room to cut rates and use the report that would could avoid a recession. I am sure he will also have the job reports hidden in his suitcase prior to the cut announcement. My guess from the Durable Goods number is that we could get a 50bps cut – since they could say the economy is stronger than we think. If that is the case expect a better jobs number on Friday – which could cause a follow-up rally.
My guess is we are going to get a good and solid rally this week. The Durable Goods, Rate Cut 50bps, and better job numbers are all going to be the catalyst to get the market to rally. Remember it is perception. Now we may get a good jerk to the upside – if these 3 things come to fruition. However, it doesn’t change the fact the inflation is increasing, the dollar is still going down, Gold is over 900, and oil is back above 90. Any big rally out of here (I would expect) to be short-lived. So be prepared for more volatility down the road.
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