The market seems to continue to load at these levels – getting ready to unload. The bond and insurance sector is still creating concern and since the transparency remains foggy at best – we really don’t know how the chips will fall. Oil also saw continued strength in the upper 90s band and even spent time above 100. The dollar has also remain weak. Yesterday – the government indicated that we are still facing inflationary pressure (like we didn’t know that – but I guess people need the government to tell them that). The economic storm and (possible) recession is going to be with us a while. Keep watching the skew and different sectors as some areas will benefit from the weakening economy.
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Pickens Speaks
I caught Pickens on CNBC this morning briefly and he made some interesting observations. First of course they asked him where OIL is going (note: being THE oil man and the person that called $100 barrel for the beginning of 2008 – he does have better insight that probably any one). He said he thinks oil will pull back $10-$15 over the second quarter – however the second half of the year we will be above $100.
He also said something I never thought I would hear him say, we need to invest in ethanol! Now that is shocking for him to say, since he has been against it and sited some very valid reasons. 1. It is very costly. 2. The government subside (which he is against) 3. It will create inflation in the food sector. However, he said he laid awake all night, because he could not believe he was going to say this. Let me clarify – he didn’t say let’s buy ethanol to use INSTEAD of oil, but to blend it to stretch oil consumption.
The reason he came to this conclusion (even though he still has issues – as stated above 1,2,3) – is that a billion dollars a day is being sucked out of the US to foreign nations – based on our consumption of oil. At this rate (note up from 200 million a day) is something this country can NOT sustain for any length of period. It will and can bankrupt the country as the money is getting sucked out at a billion a day. He shot Obama’s idea down – by saying bio-diesel only solves 1-2% of the US oil consumption. He went as far as to say he doesn’t think Obama even knows what bio-diesel is. He also said he was concerned that NO candidate is addressing this issue.
He mentioned that both Natural Gas and Coal are the two largest natural resources in this country, the port of Long Beach and soon the port of LA have switched to burning Natural Gas. He also indicated that we NEED to figure out how to burn coal cleaner – between natural gas, cleaner burning coal, and adding in ethanol (to stretch oil consumption) is needed NOW in order to curtail the massive ramping outflow of money out of this country.
If oil (as he predicts) stays above $100 and we do NOT look to quick changes to using existing energy consumption – this country could be facing even bigger economic problems in the very foreseeable future. While we all like to dream about alternative energy sources – it will take years if not decades to switch over – we currently have natural gas, coal, and could ramp up ethanol to solve the immediate problems.
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Jobless claims
The jobless claims decreased by 9,000 last week to 349,000 – below the 350,000 level. While it is a slightly good sign that claims are reducing it is still in the very high band and indicating the slowdown in the economy. Additionally, the number of people continuing to collect benefits rose to 2.78 million (up from 2.73 million). This will continue to put pressure on the consumer spending level – which of course will affect the bottom line at retailers.
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State and Local Government bond auction collapses!!!
While this story is not getting much air time on CNBC or Bloomberg – this is a SERIOUS crack that showing that the $2 trillion dollar bond market is failing and there is NO MORE money for state or local governments.
Hundreds of auctions failed this month sending borrowing costs over 20% for what is traditionally very low rates for state and local governments. The reason for the failure is that the large investment firms stop bidding with their own capital (thus supporting the market) – Goldman, Citigroup, UBS, Merrill and others just stepped aside and the market collapsed. Their propping of this market with their own capital (some say bid manipulation) is has now seen in a blink of an eye over $342 billion market vanish! Guess who is going to pay – the TAX PAYER. If private money does not come to the rescue the only answer to off-set is to raise taxes. The bonds that are auctioned (in now a very thin market) are going for rates as high as 20% - which local and state governments really cannot afford – again higher taxes to come.
Florida’s Citizen’s Property insurance (which is a state-run insurer for homeowners against hurricanes) bond of $4.75 billion (which it needs to maintain cash in the bank ) has jumped from 5% to over 15% at the last auction that failed on Feb 13. More are to come and without the big institutions bidding the rates will only sky-rocket more!
These local and state bonds reset regularly and unlike typical treasury bonds – there is no daily pricing – only at the auction. The state and local governments have relied on the big financial institutions to be the “back-stop” and set price and clean up the balances. When they stepped aside the bottom fell out.
This story is not getting enough attention – but it is clearly showing the economic situation worsen – seriously.
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Futures Pre-Open
Futures are slightly front running the cash – mainly on optimism talk in the decrease in jobless claims. Spreads are 4 points in the NQ and 2 points in the ES – fairly narrow and coming in line. The arb traders – will back off on shorting the futures to heavily into the opening. Expect to see the cash basket pop at the opening a little.
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Support & Resistance
We are getting VERY wedgy at these levels – the longer we tighten on this range the more the load starts to build and when it unwinds expect the market to rip in one direction or another.
INDU 12,500 (Is the pivot point the longer we stay around or close to this level the bigger the load and the bigger the move)
NDX 1800 (Is the pivot point – the load is building)
SPX 1350 (Is the pivot point – the load is building)
RUT 700 (Is the pivot point – the load is building)
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Conclusion
The market volatility is clamming down as we start loading up at these narrower ranges. The market is flagging (getting wedgy) optimism and pessimism is pushing and pulling on the market. It’s true the market has had its teeth kicked in pretty good. However, don’t let a decrease in volatility and the narrowing market give you confidence – it is a clearer signs of concern (as to volatility). The longer we range the bigger the charge. So expect a violent move when this does unload – every day we stay here that move (when it happens) will become more dramatic. At his point I give it a 60/40 to the downside – since fundamentally things are not looking good. However, optimism could get this market going and if the shorts step-aside and some are forced to cover we could rip up fast and hard and test those resistance levels.
The news about the failed bond auctions has me concerned that there are deeper and bigger problems in the credit market. Also – I don’t want my taxes to start going through the roof to off-set the short-falls. I get more nervous about that – as I know McCain (if he wins) might be forced to raise taxes – even though he does not want to, and Hillary and Obama will not even stutter when it comes to raising taxes fast and hard. And the sad thing – raising taxes is NOT going to solve the problem.
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