We saw some strength rip through the market yesterday – but the tech sector could not hold up and fell off (AAPL, RIMM, and a few others dragged the sector down). London and the ECB have continued to reject speculation of cutting rates amid a slowdown that has reached their shores. They are still focusing on the inflation risk and feel any rate cuts will weaken their currency – thus pouring gasoline on the inflation fire. The Pound rallied against the dollar as inflation reports in the UK looks to overshoot their 2% goal in 2 years and could break the 3% before then – reducing the chance they will cut rates (or if they do it will be very limited).
If the US continues to cut rates (Bernanke’s race to the bottom – seems he is in a one man race) and the ECB and London remain vigilant against inflation – we could see the dollar slip again. The $1.50 mark on the Euro/Dollar exchange is the big resistance level were many forwards are priced - the Euro has pulled off (back down to $1.45) but it could make another run sooner, rather than later. This could put more pressure on the market as a whole.
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Rate Cutes – Don’t Trickle Down
After the unprecedented rate cut last month 125bps in a week – the “hope” that lower borrowing costs would of trickled down to companies, debt, and homeowners didn’t happen. Banks are widening the spread in order to off-set current risk and to make back significant write-downs. Lending restrictions have tightened up – the exact opposite of what is “theoretically” predicted when the FED drastically cut rates. It was as if the opposite happened and money flows Tightened rather than Loosen. One economist made an interesting observation and stated “The losses (write-downs) and inflation are out passing money flow.” – the economist is probably right.
Merrill Lynch is reporting that companies are paying MORE to borrow now than before the rate cut by as much as 1.25%. The report indicates that property above $417,000 will be harder to sell with tighter lending restrictions and HIGHER borrowing cost – which could further depress the market in this sector.
The FED has certainly ramped up cutting rates – but so far we are NOT seeing any traction. Many are predicting (including Goldman) that the Fed will cut rates to 2.5% and some has even stated they will need to get below 2% before we see any freeing up in the credit markets.
With S&P announcing last month expecting $250 billion in write downs by mid 2008 - based on their recent ratings cut – we should see some more shake ups in the banking sector. It’s as if we are just in the eye on the storm and getting a little breather.
Fed Fund Futures are predicting 100% chance of a 50bps rate cut on or before the March 18th meeting and a 20% chance of a 75bps cut. Bernanke is putting his foot on the accelerator – but right now the wheels are just spinning – we are seeing a lot of smoke. If the ECB and London does cut – watch the dollar slide MORE and inflation rocket!
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US Retail Sales Rise?
The US Retail sales rise .3% in January with increase in auto, cloths, and gasoline. Showing the consumers are still spending amid the massive slow-down. However, what is NOT reported is the percentage of credit spending. Some economist are estimating that credit spending has ramped and will continue to do so by as much as 50% - further putting consumers behind the eight-ball. The market is getting a good boost from the news – as some “talking heads” have interpret this data to indicate that consumers are NOT concerned about a possible recession – going so far as to say that imploding housing market and job losses may not be that bad – yeah right! I find it humorous when these “Talking Heads” make such insane observations. Just because we HAVE to spend money on gasoline, clothes, and autos – doesn’t mean we are NOT concerned – especially if consumers are increasing their spending on credit rather than earned income.
Regardless – as I point out – the market moves on perception and like with yesterday’s Buffet bailout and GM profit – on the surface the news is spun to be optimistic and therefore get a good boost to the market.
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Futures Pre-Open
The futures got a good jolt from the unexpected increase in retail sales for Jan. Expect the ARB traders to short into the futures and buy the cash basket on the opening – thus giving the market a good POP on the opening. The spreads in the NQ and ES are between 3-6 points (and fluctuating) – that will narrow at the opening as they start closing the Arb.
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Support / Resistance
The market got a good boost (except for the NDX – tech sector) however the market needs and wants a rally and all news is being spun into optimistic euphoria (Buffet, GM, retail sales) – so expect a pop and for the last couple days you should NOT be shorting into this. If the sellers step away we could get a solid rally. Be careful – the market moves on perception!
INDU 12,000 / 12,500 (13,000) (We almost got through 12,500 yesterday and if we can close above it today we could get some strength and maybe revisit 13,000 - a good place to short.)
NDX 1800 (We couldn’t close above 1800 as the tech sector got hit. This is still a pivot point and strength at 1800 could get some follow-through to 1900 – but this is a VERY volatile sector.)
SPX 1350 (Another pivot point – if the INDU, NDX, and RUT continues to see strength we could revisit the 1400 area – a place to take off longs and start getting short)
RUT 700 (We closed above it – while the NDX got hit – thus pulling down the SPX a little as well – the broader market is starting to see some strength – as long as this shows strength expect the others to follow suit.)
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Conclusion
The Retail Sales number (getting a lot of positive spin this morning) is bringing optimism to the market – we could continue to see the strong rally – but remember the economy is still facing serious issues going forward. If the FED continues to cut rates and we get to 2%, oil rallies, dollar falls, inflation ramps, housing market continues to fall, and more write-downs (predicted by S&P) continue – while true a optimistic rally could get us back to 13,000 and 1400 in the indices – it may be VERY short lived and we could come right back down – fast and hard (when reality sets in again). For now – don’t fight the rally – check reality at the door – and jump on board the optimistic train. Just make sure to hedge your positions – we will probably (at some point) revisit the lows. The Bernanke and his rate cuts can only pump so much air into this balloon.
IF we can hold and close above those supports – the rally could continue and be strong. When we hit those resistance areas (and believe me the FEAR will leave the market after the rally), and the “talking heads” start their cheerleading – that will be the time to unload your longs and start getting short.
Get your surf boards out because we are going to ride this wave!
Side Note:
I got some flak from some Rocky fans yesterday with my analogy – wasn’t trying to say Rocky was a looser (well maybe a little). The point was clearly that Rocky knew and we knew (as the spectating public) he probably had no chance in hell of winning (he did NOT win, it was a split decision and the Champ Creed got to keep the belt and the title and the fame and the money and the women and etc.). It was HOPE that got Rocky off the mat (along with our cheerleading), but to walk away bloody and brain damaged (Yo, Adrian!) and NOT to win = good movie, but crappy life lesson. The smart money probably played the spread – betting small on Rocky (probably long shot odds) and HEDGED with some money on Creed (Probably Even Odds). It’s sort of like everything else – the point is to WIN, not almost win.
Other examples of NOT WINNING include: Barry Bonds breaks home run record (big deal) what about winning the World Series? Tom Brady breaks many QB records this year, big deal – what about winning the Super Bowl? Lewis Hamilton almost winning the F1 World Championship – so what – almost is NOT winning! So (while a movie) Rocky DID knock Apollo down and DID go the 15 rounds – at the end of the night he is still a loser, going home to that crappy apartment and his crusty girlfriend who works at the local pet store. Yeah – he comes back in Rocky II, III, IV, V (to win and pump up Stallone’s ego) – but it’s just a movie.
So remember, 2nd place is just the 1st loser. Sorry to any Rocky fans – I thought it was a good analogy (Note: It was a great movie – the Oscar’s thought so too – but he still didn’t win.) I am still scratching my head as to why anyone would be offended as to analogous reference to a fictional boxer – and why I just wasted my time rebutting a fictional character’s win/loss record. Oh well – hopefully you all got a chuckle out of it and maybe a point was made.
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