The we got a good smack-down at the opening. It would seem we are far from getting through these issues. The market selloff was expected (even though many HOPED it wouldn’t happen). I was just surprised we got it so hard out of the gate. Remember HOPE is an oxymoron strategy – no room for hope – HEDGE!
As I mentioned before this will be the year of VOLATILITY. Expect to see OIL, GOLD, Commodities (I guess Jimmy Rogers is right – AGAIN) to be the big drivers. The weak dollar does not look to have found a bottom.
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Merrill Lynch II: Second Coming
NOTE: RUMORS
Merrill Lynch already had significant write-offs and as I stated in a recent previous Market Preview – EXPECT MORE. The rumors on the street is this next round may surpass the first round – some expecting over $10 billion this time. Additionally, several job cuts are in the rumor-mil and should be expected to start this morning – some expect the first cuts to exceed 3,500 jobs.
I also heard that this round of write-downs is not the last and to expect more down the road. It is clear that these are “Mark-to-Market” – the question is (and already answered) how accurate are their marks? Obviously not very good if they have to take another HUGE write-down. So it would seem that Buffet is right and these are “Mark-to-Myth” rather than any representive TRUE market value. Remember, until they CAN or DO sell these positions – they continue to hold the risk. Write-downs are based on where they BELIEVE, THINK, or HOPE they COULD sell them at – NOT where they actually CAN. It is representive of the housing market when your neighbor tells you his home is ASSESSED at $1,000,000 – big deal – if you can’t sell it at $1,000,000 then it really doesn’t add up to much. Well that is what Merrill Lynch and other financial firms are doing with these write-downs. However, as we see now their initial Write-down was far from accurate if they need to take another multi-billion dollar write down (with possible more to come).
This continues to show us the transparcency of the credit problem is far from over and we should expect more.
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Bubbbling Crude, Black Gold, Texas Tea – Jed you’re a BILLIONAIRE!
Well the “War for Oil” - (economic war that is) got underway in full swing. The weak dollar, assassination, and inventory levels fired the first massive broad-side into the economy and Oil touched $100 a barrel (highest price even after inflation adjustments). We continue to sit at the 99 level this morning and pause. When is the next broad-side coming? Additionally we saw $3 a gallon for gas with oil at $65 a barrel, so are we going to drift higher towards $4.50? Economist expect that we do – if oil remains this high.
Oil may not see 75 or 50 for a long, long time. The GLOBAL demand is accelerating at a record pace and China (our big opponent in this monopoly game) is playing for keeps and politics is not in their play-book. Another big concern for oil is the election with the Democrat platform of NOT allowing any drilling in the Alaska reserve. While, environmentally I agree – however when gas prices start breaking through $4, $5, or higher – which will also put huge pressure on the GDP and consumer spending – the people will start DEMANDING cheaper gas – and even the Democrats may have to bend to curtail the rise in prices.
Side note: A very good movie to see is “Three Days of the Condor” (Robert Redford 70’s spy movie) I will not tell you the ending, but if you have not seen it – watch it. The movie predicted the future fairly accurately. Listen closely to the conversation at the end of the movie!
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FED – GOLD – WEAK DOLLAR
The Fed may be cutting rates by as MUCH as 50bps according to some economist – combine this view with the CBOE FED FUTURES and the dollar is getting a good smack down against the Euro and GOLD is rallying and passed $850 an ounce – yeah I said $850. Several of the gold horders that I have spoken to are looking for a $1000 a ounce if the dollar continues to slide.
With Merrill Lynch problaby writing down more billions and the slow down on both the consumer and company spending levels – the FED is being pressured into cutting rates, 25bps is almost a sure thing and now 50bps is in the cards. While a 50bps could send the market up in a KNEE JERK fashion – don’t expect it to last. Foreign Money will be racing for the exit door on treasuries because of the falling dollar and lower ROI on such a CRAPPY investment. Meanwhile the locals (US investors) will be buying treasuries – because their Financial Advisor will tell them to limit market risk we should buy bonds. But what they don’t tell you (or probably don’t understand or know) is that US treasuries are based on the dollar – and the dollar continues to fall. It is synomous with buyiung a falling stock because it pays a dividend! That’s just plain stupid. If you are concern about the dollar – don’t BUY US backed bonds – looked at oversea bonds, gold, and inflation hedges – the financial advisor SHOULD know that. Hey we live in a Global economy – so start investing and thinking GLOBALLY.
By the way – I heard Kudlow state that those people shorting the US dollar are NOT patriotic. Patriotism and Investing don’t mix. Invest in what is SAFE and will protect you. Don’t buy in to propeganda on being Patriotic and buy BONDS. If you want to be Patriotic, go vote or join the military – don’t let your patriotism guide your investments. Buffet, Ross, Pickens, and other billionairs don’t! Of course Kudlow also said that oil would never go over $95 last year because the Government would not allow it – what was he thinking?
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Futures Pre-Open
We are still seeing a big mix on the futures in the pre market. The market is begging to rally and looking for some sort of silver lining – investors only know how to trade from the long side. Expect more volatility. The opening is not giving us a good read. So expect more volatility. As I said 2008 will be the year of volatility and so far IT IS! Opening – uncertain.
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Support / Resistance
Well we headed towards some support levels – DO WE HOLD?
INDU 13,000 / 13,500 (we are hovering right above the support level – this is a good place to start flatening short positions – but KEEP downside curvature on – if we don’t hold we could head down to 12,750 very quickly – WATCH 13,000 !!!!)
NDX 2000 / 2100 (Well AMZN was up but the rest of the sector got smacked. We are still above 2000 – but that needs to hold…a day like yesterday and we will be there quickly.)
SPX 1450 ??? (This was the temp support area – not a place to get long. If we don’t hold 1450 then expect another down draft towards 1400)
RUT 740 / 800 (We are still above 740 – for now.)
Becareful getting long at ANY of these support levels – they don’t have much behind them – hedge positions 100%
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Conclusion
My predicition of a volatile 2008 came shooting out of the gate – oil $100, gold over $850, the major indices down over 1%, and the IOWA caucus is getting lots of airtime (maybe because of the writers strike). Expect more volatility – not that we will just head down – but a 50bps cut could send us up in a very quick Knee Jerk fashion (if only temporaily).
It would seem that staying hedged is prudent and avoiding optimisitic type play. Tomorrow the big job numbers come out and we could see more volatility from that! I don’t know what the FED will do – he has turned into a puppet and his masters need a bailout. I wish he had some balls and started defending the economy instead of bending to serve the financial firms.
Recession talk – it’s funny to continue to hear the economist argue over if we are in a recession or not or whether we will have a recession – he guess what NO ONE CARES! CNBC and Bloomberg have turned into worthless debates about recession and inflation talk! I wish they could just get Rick Santelli on their MORE and start focusing on the market – instead of what the latest “Talking Head” thinks. I also though Kudlow was a free market guy – but it seems his true colors are showing of late – to bad.
Anyway – focus – Focus – FOCUS!!!! Leave the silly debate to the knuckle heads on CNBC or the Bar with your friends – don’t late it affect your trading!
Get your positions hedged – delta. Watch short vega positions. Expect up and down spikes.
On the 1,000 foot view hedge against DOLLAR / INFLATION risk.
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