I hope you all had a Happy New Year – and now it is time to ride the roller-coaster of volatility that will make up much of 2008. We start off the year with futures initially up and starting to fall off, oil has continued to rally since the assassination of Bhutto and a decline US stock piles. This morning oil is up almost $2 (just shy of $98). Combine oil with concerns of news in the credit sector and we have a fairly mixed and volatile basket in the futures. Several trading operations will also be on a skeleton crew until next Monday, as they continue to enjoy the holidays. Additionally we will see results this week from the political circus that has once again put Iowa on the map – while it doesn’t have any DIRECT relationship to market conditions – it does set the stage for the Yellow Brick road to the White House and which wizard will be behind the curtain – and with that comes a huge economic fork in the road (Donkeys or Elephants? – note they both leave pretty large messes behind them), that fork spells MORE volatility.
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Dollar find a bottom yet?
The US dollar fell against the Euro extending the year’s decline on concerns of a US manufacturing slowdown – giving the FED more ammunition to lower rates. The dollar also slipped against the yen (lowest in a month) on speculation the ISM (Institute for Supply Management) will state factories production will hit its slowest pace in a year (for December). The US currency continues to slid against 13 of the 16 most-actively traded currencies. Several of the world’s largest reserves have begun the shift from US dollars to Euros as their reserve currency in the 4th qtr. This is the biggest move since the US dollar had become the world’s reserve currency. It still remains above 65% (on average) for most reserves, but economist expect if the dollar does not find strength soon that it could slip to 50% - which would show a huge shift on the global stage and some have speculated that will mark the zenith of the US as the world’s economic super power.
The market is forecasting a 92% chance (a fairly large jump from a 76% chance a week ago) – based on the futures contract - that the FED will lower the Target rate (the rate at which banks lend to each other) from 4.25% to 4% at their next meeting on Jan 30th. This is the primary reason we are seeing that shift from the dollar to the euro as a reserve currency, as foreign investments would receive LESS return when purchasing US treasuries, which is not enough to offset the risk of a further dollar slide. A continuing cut in interest rates will continue to put pressure on the dollar as it become less attractive to hold.
Carry Trade Pressure – if the dollar continues to slid against foreign currencies –this will also continue to put huge stress on the carry trade (borrowing from other countries with low interest rates to invest in local markets) as these positions need to pay back the loan in the currency that it was borrowed in. The currency exchange rate will curtail returns and could force more losses for several US firms that have been borrowing (mainly from Japan).
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US Car Sales look to slow
Tomorrow US automotive companies will report on sales for December. GM and Ford look to be reporting a slow-down in auto-sales for December ending the year with the lowest demand in over a decade. Deliveries dropped 5.6% for GM , 7.8% at Ford, and 7.9% at Chrysler – according to analyst. Additionally the Japanese rivals are expected to see declines as well (however smaller). Toyota Motors finally bumped Ford from the No.2 spot at midyear and is expected to gain market share on the other to US automotive makers in 2008.
American’s bought 16.1 million cars and trucks in 2007, the least since 1998 – gas prices exceeding $3 a gallon and the slump in credit from the housing decline are to blame – according to economist. Expectations are for even a tougher year in 2008 for the US automakers as several forces come to play; higher gas prices, consumer credit lines falling, weak dollar, market share erosion by Japanese and European rivals, and some of the companies own financial credit problems (GMAC).
Watch the numbers reported tomorrow and expect forecasts for the Big 3 in Detroit to look lower.
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Futures Pre-open
I spoke with a trader in New York on Monday who mention the Arb Traders are sideline for the most part until next Monday. There will be opportunity – but most are still on holiday. The futures are getting a little whip-saw in the morning with oil concerns against a couple of issues (AMZN) getting “buy” recommendations – sending a tug-a-war in the pre-open. Definitely a mixed opening – even if the Arb Traders were in force (not on Holiday) they might as well be sidelined because it’s the 1st trading day of 2008, oil is up, some tech stocks are up – which lends to a lot of uncertainty – not to mention the futures were down overnight.
Expect a mix open with pressure in some sectors – however look for AMZN (after the “buy” recommendation) to help send techs up at the opening.
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Support /Resistance
It’s the first trading day of the year and the last trading day of the year saw negative pressure – I guess Santa couldn’t keep the rally going. There is some mix signals coming into the opening this morning – however expect broader pressure to the downside.
INDU 13,000 / 13,500 (we are right in the middle of the range – the futures are looking for a flat opening in the DOW. However, the automakers might bring some negative pressure as analyst are looking for slowing sales)
NDX 2000 / 2100 (we fell off on Monday – however AMZN is up in the pre-market (almost $2) which might pull some other big techs with it. How much credence you want to give to Citigroup’s rating – well I will leave that to you – however right now optimism is sending it up – could it a screaming SHORT? I will say this – I wouldn’t buy AMZN with your money because Citi recommended it, are they not the same ones that recommended E*TRADE and Countrywide earlier this year and have their own house of cards to deal with – of course I could be wrong.)
SPX 1450 / 1500 (1450 is really not a major support area and it would NOT be a place to start getting long, however for the shorts – it would be a place to start getting flat. If 1450 breaks we will vacuum down to 1400 pretty quickly)
RUT 740 / 780 (Of all the futures this morning – only AB (RUT futures) are down – they others are slightly up. This would lead me to believe that the general market isn’t “feeling the love” that some narrower based indices are – via AMZN type optimism. – keep an eye on the broader market)
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Conclusion
I think the longs in the energy sector will continue to see a good start in the first quarter – and retailers may continue to suffer. The economy as a whole is facing some serious challenges and we are also facing an election year – which could create a HUGE shift in economic focus (from taxes to economic policy). This will certainly NOT be the year to measure returns from the S&P, but rather individual sectors. I suspect a VERY fractured market this year – as some companies will THRIVE with a weak dollar and others will SUFFER. Additionally – energy, commodities (including food, corn, water) will continue to remain strong. Look for companies that have huge expansion in China and India and avoid sectors that rely on selling locally and buy abroad.
For those investors out there – now is the time to sit with your financial advisor and address your concerns about the coming year – you DON”T want to be JUST invested – you want to be a LOT MORE picky this year. Continue to watch OIL and GOLD, look for diversity abroad, watch US dollar exposure (hedge against it). Look for US companies that expand in inflationary times and have big product pipe lines abroad. Avoid companies that RELY on the US Consumer – at least in the first qtr.
At the end of the day – HEDGE your positions. Don’t NOT leave your long or shorts exposed. I expect to see SHOCKING days ahead – both to the upside and downside. Don’t measure “fear” and “greed” by the VIX as it seems to be a lagging indicator – however if it does get to single digits – expect a massive squall to follow!
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