Obama and Huckabee are the Iowa winners, but I don’t think that is going to make much difference as traditionally New Hampshire sets the stage – anyway it did add to some excitement – for those that thought it was exciting. It’s interesting how Huckabee’s message changed RIGHT AFTER he won – now it’s all about the economy, low taxes, and business related issues heading into NH. I guess you have to play to the voters of each state. I myself am not fond of any candidate at this point and most have not really addressed any core issues (economy, middle east, debt, deficit, etc) of course most voters want the hear about family values and/or national social programs (ala health care) – it’s a pity that neither side is making any REAL marches forward on addressing issues that they CAN make a difference.
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Jobs?!?! – It’s not over yet!
As I mentioned yesterday the big number we would be looking at is the job numbers – which sets the stage for the FED and what kind of rate cut (or not) we should be seeing on Jan 30th. As I have been saying the market is facing serious slow downs (whether you want to call it a recession or not is immaterial and should be left to academic debate on CNBC and the like) – the reality is in the trenches of the trading pits, mainly the futures and commodity pits which are TELLING us what is really going on better than any government number can.
The numbers JUST came out and we are seeing the smallest gains since 2003 (only 18,000 rise on payrolls) and the unemployment jumped to a 2 year high. These come in WAY lower than expected and are showing a serious slow down, one that we may not have yet found a bottom too. The slowing job numbers is the clearest sign that the economy is getting worse not better – and couple that with the largest resets in the mortgages during the 1st quarter and a increase in foreclosures and the picture is not that good.
I am getting a chuckle right now (in the face of the bad news) because I am currently listening to an analyst (one that frequents CNBC and Bloomberg) who is currently saying “The FED will have to cut rates to ward off this economic slowdown!” – the reason that I find it funny is that this is the SAME analyst that said “The FED will have to cut rates to slow down this over-heating economy!”. It seems that this analyst just wants to cut rates – and either a slow down or accelerating economy is a good excuse. I personally think he just wants a cut to get a knee jerk pop to stocks (because he DOES work for a financial firm and IS recommending stock and mutual fund purchases – so cuts are good!) That is a perfect reason to avoid listening to the majority of the “talking heads” on TV. They either have a hidden agenda or don’t really know anything. They all SOUND smart and KNOW what they are talking about – but most of it is just fluff – too bad it is hard to cut to the meat of things.
So getting back to the jobs – let’s break it down (well the government numbers anyway)
Expectations were for an increase of 70,000 (avg based on 74 economist – low 34,000 high 106,000) – so 18,000 pay roll gains was lower than the lowest expectation. Not Good – (however remember the November numbers were 115,000 – way larger than expected. I think (as you know) a little “tom foolery” is the government culprit – since they ALWAYS revise and the numbers came in WAY OVER for Nov heading into a slowing holiday and concerned ending to 2007.) Either way – at the end of the day we HAVE to get to the real number – which I think DEC (being reported AFTER the new year) is probably more accurate. The economist (in the last several months) have not been able to come to any accurate prediction – which they are usually pretty close in their estimates – that is my reason for the “tom foolery”. Either way – not good!
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US Dollar
It look like late into the year we might of found a bottom in the dollar (that is if you listened to “Salute that Flag” Kudlow). The reality – no one wants to hold a depreciating asset that is based on (Government, Corporate, Consumer debt – that is on a not stop deficit spending cycle) that is paying LOWER returns – not HIGHER to offset risk.
The rate cut (expected by fed fund futures) is looking at 98% - and still there is talk about 50bps. This has nothing to do with the economy slow down or heating up (as analyst would have us believe) – this is about one thing – keeping liquidity flowing at the big financial firms – which are struggling to borrow with each other and the LIBOR. I would expect a big cut on the Discount Rate, which would send major concerns to foreign central banks as to US Treasuries, because a cut in the Discount would mean that the Government would be shouldering MORE overnight risk instead of the banks. Additionally it means MORE inflation as they have to “print” more money to keep lending on the overnight discount rate. Bernanke better get in the basement and start cranking that printing press. That is pretty much all he is good for at this point – since he will NOT stand up to either the administration (Paulson), foreign central banks (asking him to get a handle on it at the G7 meeting), or the CEO’s of the major firms (Telling him to CUT CUT CUT!!!).
Expect the dollar to continue to slide. As I have been saying for the last several months HEDGE against dollar risk!!!! I think the EURO could easily get to 1.50 (which according to some currency traders is where a lot of their BIG forwards are price at) – if it breaks 1.50 we could see a short-term free fall against the Euro if the forward unwinds and firms try to get ahead of that position. For now there is a lot of resistance at 1.50! It really needs to hold. Additionally watch the YEN if Mitsubishi bank is correct and it gets to 95 to the US dollar – things will get very ugly for the Carry Trade – which could unwind even more.
The US dollar is facing some very scary areas – something that we would EXPECT to happen only to a 3rd world nation. It is better to hedge against the dollar than not at this point – and I will keep pounding on that!!!!
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Futures Pre-Open
They are currently in a free-fall after the shocking (not too) lower job numbers. The ARB traders are sideline not getting in front of this because getting the shorts of in the cash basket is going to be a MASSIVE BITCH! They don’t want to be naked long futures running to bang out shorts at the opening (with every other panicked investor). Expect big volatility on the opening. We could get a bounce after the opening panic.
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Support / Resistance
We are facing some important support areas this morning that need to hold – but I think we will see LOTS of GTC cancelations prior to the opening – which means we may not hold!
INDU 13,000 (If we CAN NOT close above this – look out below. There is really NO bottom support at this point 12,750 maybe. This will mean we will need to create a new SOLID bottom – but I don’t know where that would be.)
NDX 2000 / 2100 (We will probably not get through 2000 today – but I don’t think there is probably any REAL support there. Traditionally 2000 would be a fairly good place to get long.)
SPX 1425 / 1500 (We may touch 1425 which is really not support – so don’t get long – just flatten short positions – but keep gamma and downside curvature on)
RUT 740 (This is the scary zone we NEED to hold in the broader market – below 740 it’s no man’s land and we could free fall – which could have the rest of the market follow suit. Watch RUT at the close)
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Conclusion
HEDGE YOUR DAMN LONG POSITIONS – It’s like I am talking to a wall have the time and people are picking bottoms – WTF! I have been telling you to hedge your long positions since mid Oct and to watch your short VEGA positions.
We will get through this and eventually find a bottom – but don’t be a hero. Additionally, unlike the Dot.Com bubble that burst we have a bigger problem – WEAK WEAK and WEAKENING dollar! This could cause wider issues! Don’t buy US Bonds as a hedge – look abroad.
The VIX is finally catching up to the SKEW – which I have been saying is a lagging indicator. Better to expect the VIX to burst through 30 than not – they SKEW is saying IT WILL! The VIX is under priced compared to intra-day volatility. Additionally – watch your SHORT VEGA!!! Your short Vega should NOT get above 25% of your net capital – we could see a spike in Volatility any day.
We are in a fairly decent economic storm (the dollar, oil, credit crisis, etc.) it looked like we dodged it in December, but maybe that was just the EYE of the storm (at little calm) before the back side kicks the economy in the gut! Bernanke is not the leader we NEED and is not serving the economy.
It’s time to hedge your positions and expect the unexpected. While today may ONLY be a KNEE JERK – expect further pressure going forward. Watch the dollar, gold, and oil – they are tell tale signs – when we start seeing strength return to the dollar, gold get back to 700 or lower, oil flatten out getting back to the 70-80 range – then and ONLY then will some of the major pressure on the economy lighten up. The market is always the best gauge of conditions – not an analyst from financial firm that is trying to acquire assets or has their own agenda!
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