It would seem the “I told you so’s” in oil being at the top were wrong again, oil had a 4%+ rally on Friday. Pickens, Rogers, and the rest are still fairly bullish on oil and as Pickens mentioned that there is a $5 premium in oil from dollar weakness. As the dollar rallied last week we saw oil pull back – but as they have said – do expect to see $70 any time soon. Additionally, OPEC has indicated they are looking to re-price oil to the Euro sometime in the future. This rumor has been circulating for some time, but it wasn’t until last week that we actually heard some members indicate that there is serious talk behind the scenes pushing for this shift. Regardless what the man on the street thinks, if oil gets repriced to the Euro it would be a clear sign of the US dollar falling from grace as being the world’s reserve currency. We are already seeing several foreign central banks increasing to a diversified reserve currency.
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Europe facing a possible recession too?
While the ECB has been putting inflation as their top concern and thus has not made the dramatic cuts in interest rates that their brethren across the pond have made, there is now concern that a “mellow” recession might reach their shores. Concerns about Europe and their ties to the US is causing concerns for sure. The Euro has pulled off the recent highs and some say could reach 1.40 to the dollar (while still traditionally high) way below the dreaded 1.50 resistance – were many forwards are sitting. If that were to break – we could see a SHARP fall in the dollar in the short-term as firms try to cover.
For now, the Dollar has gotten a short-term breather and is fought back against the Euro. The US would love to “spin” that Europe will continue to fall in our shadow it will TOO face the same issues we do. Bernanke and his rate cut race to the bottom is in the lead and is more certainly forcing inflation higher in the US, he would love to see a slow-down in Europe and ostensively have them cut as well – taking off MUCH needed pressure off the dollar.
It’s more certainly a battle between ECB and the FED. So far the ECB has been winning and Bernanke has egg on his face. While he may be giving a little relief to his boy’s over at the Firms (keeping them solvent and offering special deals at the discount window) he has done nothing to help the dollar and the economy as a whole. Can you actually believe he thinks this “Sizzler Stimulus” is going to save the economy. I think not….
We will remain in a difficult road.
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CDO’s and insurance becoming an issue, YET?
As I have been mentioning for the last couple weeks the Bond Insurers (AMBAC and MBIA) are the possible catalyst for the next massive shoe to drop on the economy. Initially, the concern about the $2 trillion worth of bond insurance in the US was something no one could really digest. It’s like if they don’t look at it, then it won’t exist. Recently, vulture’s like Ross have been circling and Buffet is creating his own bond insurers. The vulture’s don’t circle unless something is dying. If these two hidden giants fail – the domino effect could be massive. The trickle effect is that state and other type of conservative investment funds require both a certain rating (usually AA or A2 +) combined with bond insurance. The bond insurers also must maintain the same rating as the bond’s they insure.
Over the last several years MBIA and AMBAC (usually only insuring muni bonds) have jumped in with both feet to insure CDO, SIV, and other structured products. Additionally they have expanded in too many different corporate bonds. They relied on Moody’s, S&P, and Fitch rating (which ironically those rating’s are PAID FOR) – to justify the coverage. It was like they said, “Hey, if it is triple A rated then it is as safe as government bonds, right?”. Well – actually no.
I am still amazed that both MBIA and AMBAC have maintain their “super star” ratings, while S&P has publicly announced that another $250 billion in write-downs are in store and Fitch has downgraded bonds at a rate of a Gatling-gun (over 130,000 bonds). Also – we all are aware that MBIA and AMBAC are technically broke and looking for hand-outs (MBIA just raised a paltry $750 million – compared to the amount they cover). So why do they maintain the “super star” ratings? Because – if they don’t – the dominos fall fast and hard. If they lose the rating, then the bond’s they cover are no longer insured (you can’t insure a AAA bond if you are a BBB bond insurer). Many pension funds, state funds, not-for-profit entities investments have to have their bonds insured – a ratings drop in the insurance company followed by the ratings drop in the bonds themselves would cause a watershed of selling buy funds that can’t hold below AA paper.
MBIA and AMBAC (and other insurance companies) ratings are currently just for show – because in reality they are certainly NOT AAA companies anymore.
Keep a close eye on this story – as Gladwell would say, “It’s at a tipping point!” It could be it dodges a bullet with some kind of government bail-out, thus putting the government further in debt and shouldering the risk. This has other consequences, like probably putting more negative pressure on the dollar. What foreign central bank (or for that matter any large investment) want to purchase US treasuries (which obviously hold keeps the money flowing) if the government continues to take on the debt and bail-out everyone. So far – with the DISCOUNT rate cuts and “Special Loans” at the discount window – the government has technically bailed-out the banks and is shouldering 100s of billions in risk and if they step in to take-over and cover the bond insurers (that insure $2 trillion in bonds) – well that is a pretty big weight on anyone’s shoulders. For SURE that builds trepidation on purchasing “green backs” to receive a crappy 3% return (on a risk and eroding asset). It would probably force OPEC’s hand faster to move to the Euro.
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FORD cuts more jobs?
Can you believe it, just when you thought that there was no one left in the Rust Belt with a job at Ford – they managed to find another 9,000 people to fire? I thought no one was left working in the auto-motive industry. I guess I was wrong. The US car companies continue to face mounting hurdles – from the UAW recent strike and squeeze play, to margins getting squeezed, consumer spending dropping, GMAC being involved in the sub-prime business, and selling off Jaguar and Range Rover to India of all places. I guess the Indian’s finally got back at the British – how is that for egg on your face. The India owning two jewels of the English Crown, Jaguar and Range Rover.
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Futures Pre-Open
Futures were down over night but saw are recent rally going into the opening. Yahoo has refused the unsolicited bid by MSFT and the techs are getting a little volatility – NQ futures now up $10 points. However, fair value is still showing a flat opening. The ARB traders don’t seem to be too involved this morning as the futures are fairly flat. Probably a little upside buy pressure at the opening- but after that? Well who knows.
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Support / Resistance
Friday was fairly mixed – The tech sector got a boost – but the market as a whole saw pressure.
INDU 12,000 / 12,500 (We are in no man’s land. Not a place to get long or short. We are drifting lower and will continue to see pressure – but could have some short upside spikes.)
NDX 1750 /1800 (I would NOT get long at 1750 – because it really is not support. 1800 is a pivot point – if you get long hedge, if you get short hedge. It will move away from 1800 fast if it gets there and sits. Think of 1800 of a area for volatility to start LOADING)
SPX 1300 / 1350 (IT would be nice to see this close above 1350 – that could lend to optimistic short-term strength. However, I think we could very easily revisit 1300 before heading higher.)
RUT 700 (This is a big pivot point and if it continues to stay here and close above it we could see some strength in the narrower market.)
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Conclusion
We are starting to hear more about CDOs and their failures, the credit agencies (IMHO) ratings are pretty much a joke (at least FITCH is cutting ratings faster). I am concerned about how MBIA and AMBAC play out – for SURE someone (probably the government) will bail them out – but GOD this is getting pretty serious and fast. The stop-gap measure (insurance companies) are stretched to their limits (if not broken). That is a big concern since they are the DAMN which is holding up the CDO, SIV, and other corp. bond market and the watershed is getting a rate cut that makes a Marine Haircut look shaggy.
I still think the strength is in the commodity sector (while we could see a global slowdown) people need to eat, use oil, and probably DRINK more. Oil may get some pull-backs – but to see it fall to far – well I don’t see that happening. OPEC will defend the price and if they move to the EURO (or talk MORE about it publicly) it could put further pressure on the dollar.
Look at those ETFs (FXE, FXF,GLD,DOG,etc.) for some nice basket balancing.
This might be an area for a short-term long shot (based on optimism) but I would hedge my long bets or use Option Strategies as a surrogate for stock positions.
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