Well yesterday saw the tug-of-war between technical’s and economic fundamentals fight it out. At the opening we saw some good momentum, futures were up – we got a fairly good rally in the broader market – and volume was decent. It would of seemed (that even with a flat close) that technically we found a support – then……WHAM!!!! The rumors spread like the recent wild fires of California – COUNTRY WIDE (the largest mortgage firm in the country) was going bankrupt. The technical support gave way to the economic fundamentals and the market got smacked down hard. Remember the technical’s ONLY exist due to its self-fore filling prophecy – that there are program traders, GTC orders, etc that create supports and resistances. When they cut and run (for whatever reason) the market moves fast and dramatically (either up or down).
These days the market is ruled by “Fear” and “Greed”, rather than traditional methods – and until the market finds some level of both confidence and economic stability – it will only continue. The talking heads on CNBC are still arguing whether we are in a recession or not. Today the guess host (a large real estate agent) is saying that Vegas and other areas are poised for a big rebound and only SOME segments are the market are getting hit. He further went on to say that Country Wide is still doing loans and is a rather solid company.
I would further state that it is not until BLOOD is running in the streets that we will find any bottom and picking one is setting yourself up for trouble. As I stated yesterday – it technically (in a traditional market) looked like a place to get long – but I was concerned about the economic fundamentals – yesterday was a perfect example of that fight and who won.
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Goldman makes the Doom and Gloom Call!
Goldman forecasts for a 1% DROP in the GDP for the 2nd and 3rd quarter of 2008 and further goes on to say that interest rates will be at 2.5% by the end of the 3rd quarter. So far – Goldman has been right with their last few forecasts (calling the housing market top, interest rates, and credit crunch) – will they be right again? A colleague at Goldman told me in the past they make forecast of what they believe WILL happen, not what they WANT to happen (or think SHOULD happen). That is important – because many forecast (or as some analyst would argue) is what the FED – SHOULD DO – not what they will DO.
As a self diagnosed hypocrite, I squarely fall into that camp. I like to tout what the FED should do, rather than what they WILL do. I am sure several at Goldman think they SHOULD NOT cut rates (or by that much) – but that is immaterial – what they have done (and correctly I might add) is analyze markets and economic conditions on not (what is right or wrong / should or should not) but rather what they believe WILL happen. I must admit it is very HARD to take that method of approach, especially when you may have vested interest in the markets. But it is probably the wise course of action (or thought process) since you are able to deal with risks objectively (rather than HOPE).
Remember that for the most part the analyst on TV (Brokers, Analyst, Fund Managers, ect.) – who all operate from the LONG side (buying stocks, bonds, and funds) have an agenda (Just like a real estate agent) – they are selling you something – the story HAS to be optimistic. Do you really think they are going to say anything NEGATIVE, they definitely will tone it down or TRY to put an optimistic spin on it. For the most part the parade of Analyst that come across CNBC and BLOOMBERG – will ALWAYS talk about a place to get LONG and be optimistic (they have too – that is their business). So when someone like Goldman says (last year) the housing market is going into the toilet and now says the economy is going into the toilet – it is usually against what every other firm will say. You would think Goldman (from a marketing model / business model) would be stabbing their self in the foot. Why would people invest with Goldman if they are preaching Doom and Gloom? Well – as I mentioned earlier – they like to call it like they see it – rather than blow smoke up your ass!
That is another reason that listening to people like Ross, Rogers, Pickens, etc is worth wild. They don’t have an agenda – for the most part they are private fund – they can be HONEST with their views because they are not PITCHING anything! Even Gross said we were ALREADY in a recession!
So let’s see if Goldman is right, AGAIN!
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DuPont RAISES their 2008 outlook
Remember in a Market Preview I wrote a couple of months ago about DuPont? They have one of the world’s best trading floors, in fact a big part of their profits do NOT come from their core business, but rather their trading desks. One of the world’s largest trading desks is in Midland, MI and believe it or not – I suspect they are upping their forecast – because their trading profits are fairly good – regardless of their other business.
To bad they don’t clearly delineate that in their filings – nor do they like to talk about it – it is a fairly well kept secret. Best of luck to DuPont and hope they TRADE well in 2008.
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Futures Pre-Open
The futures were up (like they have been every day prior to the opening) – then I think reality again set in – maybe the Goldman Forecast. Anyway the market is pulling off fast going into the opening. The ARB traders seem to be sidelined for the most part. There was some initially selling in the futures – prior to the Goldman forecast. We may get a good up side jolt after the opening – depending on how SHORT the ARB is on the futures side – if they have to come in a buy the basket after the opening. However – any jolt up after the opening could be short lived.
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Support / Resistance
Well the tech supports yesterday couldn’t keep the fundamentals at bay and broke HARD.
INDU 12,500 / 12,750 (Can you say ugly? It is possible at this rate to see 12,000 quickly. We broke that 12,750 area like butter after the rumors spread about CountryWide)
NDX 1900 / 2000 (We are almost at the 1900 level – if that can’t hold – well I don’t know where the next stop is)
SPX 1400 ????? (Stick a fork in it – we broke 1400 we NEED to close above that – seriously. Lots of program trading WAS sitting at that level and obviously someone shut down the computer when the Country news broke – because there was NO program buying. 1375 next stop – I don’t know)
RUT 700 (THIS IS JUST UGLY – no supports anywhere. As I have been saying – the broader market NEEDS to find support to give strength to the narrow markets)
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Conclusion
I expect that we continue to see downside pressure. Jan 10th could send a spike up – Bernanke speaks. I did hear a rumor about an emergency rate cut prior to Jan 30th Fed meeting – but there is not much basis to it. However – don’t be surprised to see one. If we do get one before and it’s a 50bpser than we could see a HUGE spike (short-term) to the upside – as the HOPERS run back into the market. I really would like to hear what Bernanke has to say – his tone – rather than his words will set the stage. I am beginning to think Rogers is right and the US economy really does SUCK.
The big problem is that we need GUIDANCE and a STRONG LEADER – Bernanke is not cutting the mustered. The presidential election is more a parade of circus clowns and “feel good” speeches – that really can’t do ANYTHING until they get into office and that is not until NEXT YEAR. By the time Nov. rolls around the economy could be in a REAL SHITTER! What then? The media is focusing on the Presidential race – WHO CARES – let’s talk about that MORE in November – we NEED to get the current Lame Duck’s ass in gear and so to the Fed, Treasury, and start leading to recovery. If we don’t do it now and shove it off on the next administration – we could be talking years to recover, rather than months – because in all honesty, we really DON’T know the seriousness of the economic problems – we can only make rational assumptions (ECB injecting 500 billion into the market for 2 weeks, Discount Rate Cuts, Super Funds, Billions upon Billions of write downs, 4 CEOS of major firms stepping down, etc.) – those are NOT signs of a recovery or that things are doing well. Now the CountryWide rumor (which they are denying) – remember when ENRON denied rumors of bankruptcy, so did WorldCom? I actually head Joe Kernan (CNBC) say CountryWide will NOT file Bankruptcy – that’s ridiculous –that could NOT happen. It’s like we don’t learn for the past!
We have a current administration and Fed governor (whether you like him or not) they need to get ON THE BALL FAST. We need to do something TODAY – not wait for the next elected official. Things are bad – really bad – and they are not getting better. If you believe Goldman’s forecast we are not even IN the worse of it yet.
Strategy:
Continue to hedge (100%) of all long positions (or over hedge)
Watch SHORT Vega positions – do NOT let them exceed 25% of net cap.
Hedge short stock positions (expecting volatile knee jerk upside spikes)
Do NOT short call spread to get short – the skew WILL kill you.
Monitor the SKEW rather than the VIX as it is a better indicator of volatility (VIX lags)
Use ratio spreads for extra contracts to avoid premiums
FXE, FXF, GLD etc are all good dollar hedges – note I did NOT include the pound or yuan
Keep an eye on Gold, Oil, Interest rates – they are a better indicator of the economy than any analyst or government reporting number
Don’t buy US bonds to hedge against the dollar – look at Swiss or Euro bonds
I don’t know where we are going – but the smart money Goldman, Rogers, Pickens, etc are all still saying things are getting worse – but the rest of the market talking heads (for the most part) parading on CNBC (and their shows) are looking for opportunity or TECHNICALS – which just got their ass handed to them yesterday.
These are the times for hedging principal risk – not being a hero.
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