The market pulled off yesterday as concern in the credit market mounts. The bond market auctions are failing at an alarming rate – over $23 billion in bonds failed in the last couple of weeks as firms fail to make bids (and be the “Back Stop”) on the bids. The refinancing rates for State and Local funds are rocketing from the low 4-5% range and in some cases topping out at 20%. Yesterday over 62% of bond auctions failed (395 out of 641). Several state funds are looking to the private sector or refinancing at higher rates – but simply there is NO MONEY. I bring this up because it is very serious as to the credit problem that will have tremendous pressure on this economy. For 395 bond auctions to fail is UNPRECIDENTED. Think about this – only 44 bond auctions failed since 1984 to last year, to have 395 fail in a day is clearly indicating out very tight money supply is and that banks (lending firms) can NOT afford to use their own capital. As Picken’s pointed out yesterday a billion dollars a day is exiting this country, couple that with a inflation and a weak dollar – we are at the tipping point. So far this issue is not really reflected in the market place and the talking heads have been side-stepping this story. Unless something is done quickly – we are starting to see serious cracks in the fundamentals of living in a fiat currency economy.
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More Pressure on Oil Prices
Turkish Army began ground assaults in northern Iraq against the Kurds. For the first time in over 11 years Turkey is moving a full scale assault in to Iraq. Troop movement has been escalating at the border over the last 6 months, yesterday at 7pm (ET) 2 Turkish divisions moved into Northern Iraq. Two large fire-fights have been reported. While the Kurds (PKK) is no match for the Turkish Army – they are dug in and spread-out through Northern Iraq. The EU is seriously concerned about this latest escalation as it is bringing more chaos to the region.
The oil market initially reacted and rallied in Europe overnight when news had hit the exchanges. The US is currently not commenting on the action, but rumors are that Turkey is no longer willing to listen to the US – since the Genocide Vote in Congress – which put US/Turkish political relationship into turmoil. The US, since the start of the Iraq war has managed to keep Turkey from engaging the Kurds (a long standing feud). Now, as some has said, Turkey is not picking up the phone.
Expect this to put more stress on oil and push prices higher. It is uncertain as to how this will unfold, if the PKK collapses quickly it might ease economic concerns. However, one expert on the region has already stated once Turkey gets a foot-hold into Northern Iraq – they may not let go so easily. Additionally – oil rights to Iraq have been constantly argued about between the US and her allies (including Turkey). If the US pulls out of IRAQ next year – it could bring even more instability to the region from oil grabbing states.
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Freddie Mac and Fannie Mae
I have little faith in government controlled business and Freddie Mac and Fannie Mae are perfect examples. They have both been caught in huge accounting scandals over the last couple of years and now they are losing money (via write-downs) in the billions of dollars. Some analyst say that Freddie Mac and Fannie Mae’s books are so convoluted and their back-room government deals taking on more questionable paper (in a back-door bailout) is creating even more concern.
Merrill Lynch finally gave up their faith in the government mandated businesses and recommended to clients to SELL Freddie Mac and Fannie Mae. So far regulators have been put on the back burner from taking to close a look at their current positions – since they have both been thought to be used as the “Ace in the Hole” incase a bigger bailout is needed.
Smart Money will tell you – that there is really no such thing as a bailout – someone has to lose. A bailout is just shifting losses from a company to the government (Fannie Mae or Freddie Mac). We already know they are losers – so why not just load them up with more junk paper! The government can just print more money, right?
It’s time for Bernanke to head back into the basement and start cranking on that printing press again. One thing is for sure – he is going to have a upper body that will put Arnold to shame from all that cranking!
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Futures Pre-open
The futures are up small and the spread in the NQ and ES from the cash basket is very narrow. I don’t think we will see the ARB stick their neck out to far – so short pressure on the futures will be light going into the opening. The cash will get a little pop at the opening – but not with the strength from the Arb traders buying it.
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Support / Resistance
We broke down yesterday from the pivot points – but are still in a narrow range. There is still no blood in the streets yet to find a bottom. Now doubt it would be nice to have a massive shakeout and find a bottom soon – so we could put these problems behind us. But it would seem that the government and lending firms would rather drag it out and are still arguing about whether or not we are in a recession or going to be into one.
INDU 12250/12500 (We never got up over 12500 to hold there and yesterday started slipping fast. We are still wedging into a range – do NOT get long or short between these levels without hedging. Once we break-out it could move quickly to the 12000 or 13000 range)
NDX 1750/1800 (Another range not to pick upside or down side. Again once we break out we will move fast towards 1900 or 1700 – an beyond)
SPX 1350 (This is still a pivot point again the longer we stay close to this the more the charge is building)
RUT 700 (We are still in a narrow range )
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Conclusion
First is was the sub-prime, then it is the bond insurers, and now it’s the state and local government bonds. The credit problem is spreading wide and far. I recently talked to wealthy investor (from overseas) he made a very funny ironic observation. In order to have a good credit rating you need to be in DEBT! The US is built not on savings or value – but rather how much debt can one hold and maintain payments. The entire system from the top down (companies to individuals) is based on a credit line and when things go south – the government takes the losses and just prints more money. Our government is in such debt and looks to get further behind the eight-ball when all is said and done. I thought his statement was rather true – we take pride in having a good credit score – but what does that REALLY mean? That we are good consumers that know how to spend borrowed money. He understood the nature of debt for making big purchases (house or car) – but isn’t the goal to be FREE of debt and to pay OFF those big payments? Isn’t the finish line a person with no debt, lots of savings, were the credit score no longer matters?
Regardless – the economy is starting to show the cracks behind that massive dam of debt. The state and local governments are unable to borrow any more money – since the lenders are also tapped out, since the lenders relied on the consumers to pay back their debt (which they are not). The circle of debt is feeding on itself and the foreign nations which have been large purchasers of government debt (treasuries) are not coming back – since the dollar is falling and the interest rates are too low .
I think we CAN get out of this problem – but the shakeout needs to happen first. And listening to the “talking heads” still making stock picks and arguing about whether we are in a recession or not are living in a fantasyland. It is no doubt that decades of mounting debt is now weighing down on the shoulders of this economy – the piper has come to town and he expects to be paid.
These are serious times – it is best to hedge you positions (for investors)
However – for us traders – these are the times that history is made. Expect to see the vulture plays take millions and billions out of this market. Traders to take down serious returns with high volatility. These are great days for traders and horrible days for investors.
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