Well it looks like people finished reading “The Secret” yesterday – yeah there was no surprise or secret. Bernanke, Paulson, the MBIA/Ambac testimony, and the jobless claims grabbed our ankles and brought us back to earth and “unfortunate” reality. Too bad, I was hoping that we could of hit those resistance levels to really unload – oh well. Economic issues are just the heavy weight and we can’t punch our way out of it. Toss on Greenspan stating we are at the brink of recession and the CEO “pow-wow” in Florida issuing their report stating 80% of them think they will have sluggish growth and the slow-down will continue for the next 6 months – well it sure is not a rosy picture. Stay down Rock! No, Cut me Mick!
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UBS joins S&P forecasting more write downs….
S&P last month indicated $250 billion in write-downs for 2008, they initially stood alone – as no one wanted to stick their neck out or be the bearer of bad news. This morning, UBS joined the ranks and stated they expect to see “up to” $203 billion in additional write-downs because of the bond insurance crisis.
Write-downs have already totaled $150 billion so far, with S&P and UBS forecasting over another $200 billion – we are not even half-way through the woods.
UBS and several other financial institutions have been watching the bond insurer story unfold with growing concern. MBIA and Ambac continue to struggle and “hope” to maintain their AAA credit rating (which everyone KNOWS they should not have). The bond insurers do not even have close to the amount of money to cover the current losses – god forbid there is more write-downs.
Fitch (the credit rating agency) usually overshadowed by S&P and Moody’s has been fairly aggressive and stepping up to the plate in calling a strike, a strike. They have already dropped the credit rating on 130,000 bonds. Now they have seriously stepped up and downgraded Ambac from AAA to AA citing “significant uncertainty”.
Of course Ambac and others are ignoring Fitch – well there are two other rating agencies that are bigger and well known that have kept their rating at AAA. However, as we have seen Moody’s and S&P’s ratings pretty much don’t hold water.
I find it a little humorous that “talking heads” and others are still giving weight to Moody’s and S&P credit ratings. Hey – WAKE THE HELL UP! Just look at the books – they DON’T have money to cover the current losses (obviously since Merrill had to take an additional $1.9 billion in write-downs cause the insurance could NOT cover it), AAA ratings doesn’t hold water! The finger pointing has been in full swing between the banks, credit rating agencies, and bond insurers – yeah of course it is nobody’s fault.
Now Spitzer has forgotten he is now the Governor of New York and is now reverting back to his old job – and is stepping in and is coming up with a plan and demands for these Bond Insurers – however he won’t tell us what those plans are. What does he really think he can do? Force the private sector to cover the losses? Force the banks to cover the losses? Tax the people of New York into the stone age to cover losses? Government to the rescue is just shifting risk from the company to the government. Great – I am sure if he had his druthers he would just give them a massive amount of government money and bail them out.
One thing is for sure, Bernanke’s biceps are getting massive from cranking on that printing press in the basement!
The Fitch downgrade of Ambac is the first REAL crack – next might be a jump from AA to D?
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Best Buy (largest US consumer electronics chain) cuts forecast
The tech sector is seeing a slow down based on consumer spending. Best Buy has made a small cut from $3.10 to $3.05 a share for the full-year. The company has previously predicted as high as $3.20 a share. It would seem they are on the initial cautious Bernanke model – little cut, little cut, little cut – BIG CUT?
The retail sector has been feeling the pain – but it’s starting to trickle into the tech sector. Concerns of a slow-down in new orders is expected to rise in the 2nd quarter. This does not bold well for Target and Wal-mart, which have increased their push into the technology sales and have become more reliant upon them during the holiday cycle.
Best Buy is already down over 3% in the pre-open – expect a pressure to span into the tech and retail sectors.
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Futures Pre-Open
The futures are slipping after UBS followed S&P with expectations of more write-downs and the concerns in the bond insurance sector is increasing. It is also option expiration day – so we are seeing some additional volatility. The Futures are front running the cash – between $2-$4 points in the NQ and ES – but the cash is catching up – with Best Buy and others losing ground in the pre-open. I am not sure how many Arb traders want to leg long into the futures to take the risk of shorting into the cash basket at the opening. It’s looking like a weak opening.
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Support / Resistance
It looks like Rocky legs are just giving out and he is not able to get off the mat again. Optimism is what drove the two day rally – but the one-two punch of continuing negative economic data is just pounding it down.
INDU 12,000 / 12,500 (We couldn’t stay above 12,500 – if we can’t get some strength to close above it today – well I think we have seen the last pop before revisiting supports)
NDX 1750 / 1800 (We couldn’t stay above 1800 – just too much negative pressure. People pulled the rip-cord and got out when they could.)
SPX 1300 / 1400 (Maybe 1400 was just too much to ask for – maybe 1300 is fundamentally where we SHOULD go)
RUT 700 (We are still above 700 and if we can stay above it and get a little strength maybe the narrower based indices could get off the mat again)
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Conclusion
The negative news just can’t stay away long enough to get optimistic hope to surge this market back to resistance. I have been reporting on the Bond Insurers for over a month – I hoped I was wrong and it would subside and get solved (some how) – but it is back and becoming MORE serious. If MBIA or Ambac fail – the house of cards WILL come tumbling down and we could see that being the catalyst that sends this market down fast and hard. Not only will it affect the market as a whole – in the form of panic – but the state funds (and pensions) could be forced to sell 100s of billions of positions because they can’t hold uninsured products that have lost their A, AA, AAA ratings. However, it could be even worse (which Florida saw at the end of last year) when a Product goes from AAA to D in just one knockout blow. That means EVEN if the state fund WANTS to sell it they can’t since it has already defaulted and no one wants it.
The back-bone of this economy which is really just based on credit – is bending – I hope we dodge the bullet. Even if the government “feels” they have to do a full bail-out across the board (Banks, Insurers, etc) – it would not solve the economic issue. The dollar would drop, inflation would ramp, and the US government would be insurmountable debt.
No doubt we are at a tipping point. As a trader and investors we cannot afford to hope and we need to hedge our positions. While I give the “black swan” even only a small chance (5%) – ANY increase of percentage is not comfort.
Remember – it maybe improbable, but not impossible. (something that Black and Scholes – the Nobel Prize winners who wrote the pricing model forgot and lost a trillion dollars).
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