Friday was a suck-out and send this market to the bottom ranges. I am looking at the RUT and it’s just hovering above the 650 level – which as long as it can keep above it, I “guess” we could find “some” level of support in the narrow based indices. But the INDU breaking 12k and the SPX breaking 1300 are not very good signs. The NDX is just above 1700. Over night the futures were down pretty good, but then they got a rally this morning – but I think it was just speculative – all hope. Today is the serious test at the supposed support levels. Strap yourself in – it could be a wild ride. Even though (as it was pointed out to me by a friend and reader of this email) that the indices are all at 2006 levels – they still have room to go down further.
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CNBC – some brining out the big names!
I got up this morning to see that CNBC has a list of big name interviews all morning, they started out with Wilbur Ross and Hank Greenburg. The introduction (with all the fan-fare) included a side note by Joe (CNBC talking head) that the markets are up because investors are going to get some sound investment advice by their big line up. Then Ross and Greenburg didn’t paint a rosy picture and the market started going down. Of course I chalk it all up to coincidence, but it was funny that CNBC had tried to make a point out of the market being up with their big name interviews.
On to the meat, Ross mentioned (as did Buffet) that the mark-to-market is ONLY affective if the underlying asset is liquid, that is the whole point of the mark-to-market system. However, these financial institutions are using the same methodology, but are marking them to model (or as Buffet says to Myth) – since there is NO market for them. So it is very subjective. He further stated (which shocked Becky – CNBC talking head) that several lending firms (banks) WILL fail. He mentioned in the last housing recession 1,000 banks had failed. The reason, you can’t make 20-30 loans based off of 90 day deposits (borrowing short to lend long) is a setup for failure. Becky, followed up with a quick question – will big names (Citigroup, BA, etc) fail? Ross, I know that the government will do what they can and continue to lend money and easy credit – I don’t know. He did say expect several medium size banks to fail.
Joe (CNBC talking head) really tried to get Greenburg to talk about AIG, but Greenburg (being a large investor and board member) didn’t comment. However, he said while he was CEO in the mono-line business he would never even DREAM about crossing over into other debt obligations (who’s risk is uncertain). That is why Ambac, MBIA, and others are failing. He further stated he was surprised that they maintained their AAA rating (so was Ross). However – it was fair to say that they could not really split the business – because who do you give the junk paper too?
It was interesting to point out that they both felt we are already in a recession and things are going to get worse, but what was more interesting is that they didn’t seemed concerned. Ross went as far as to say – economy has to go through expansions and contractions – it is the nature of economic change – and that maybe for these younger financial advisors and brokers this is a good thing as they are able to evaluate and understand risk better. They were both very bullish on China and Greenburg is heading back this week.
In closing – they big names (billionaires) – think things are going to get worse and we are in a recession. Note: Since they are not trying to sell us anything – they don’t HAVE to color a rosy picture for us.
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Has Bernanke lost control of inflation?
The market is saying that he has. The 5 year TIP market (treasury inflation protected security) went negative at the end of Feb. Since its inception 10 years ago – it has never traded below zero. The market is clearly showing the Fed is focused on money flowing to the institutions and has tossed concerns about rising prices into the wind. With oil above $100, gold closing in on $1000, and the dollar at record lows against the Euro and the TIP pricing is indicating that when (and if) the Fed stops cutting rates they may not be able to tame inflation – Bernanke has lost control of inflation.
It is amazing that TIP traders are willing to give up yield, something that is unheard of – clearly “real” inflation rates differ from government reporting. The current TIP bet is that inflation will outpace the yield. People are betting on higher inflation!
The last time the market indicated these levels of concern about accelerating inflation, Volcker (the Fed Chairman in the 70s) RAISED rates to as high as 20%, Bernanke is on the opposite train and has massive lending institutions strapped for cash because their positions are fully margined out and losses are still unknown. He is on the bail-out program – which has and will continue to send the dollar lower and inflation higher.
At this point bottom picking is a fools game, you may be right today – but a bigger loser tomorrow.
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Futures Pre-open
We saw the futures strong in the very early morning session – then about 7am ET they started pulling off to flat. Of course if you buy CNBC’s line of thinking – it was their guest that are creating pre-market volatility. The futures are front running the cash about 2 points in the pre-market. Arb traders will probably not take that aggressive of a stance – especially since we are at some level of bottom support (maybe)?
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Support / Resistance
The market got another massive punch on Friday (jobs – what jobs?). The NDX and RUT are still slightly above, but the SPX and even more so the INDU broke any level of support. This will probably be an important basing day – or a further drop.
INDU 11500 / 12000 (I guess Jan lows in the 11500 range could be consider – but it NEVER closed down there – it was there intra-day. So how much credence you want to give it is up to you. At 11500 I don’t know what to think.)
NDX 1700 (we need to stay above 1700 to see any level of support)
SPX 1270 ??? (Just like the INDU it only visited that level intra-day. Seriously it has broken support – so getting long at these levels is shot taking- you could be lucky with a strong short-covering rally – but that would be short lived.)
RUT 650 (OK – 650 is the broad support for this market – if you see the RUT close below 650 – expect the rest of the market to follow)
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Conclusion
These are trying times and we are facing some serious economic issues in this country. Bernanke is on the bailout program and has forgotten that there are citizens that use dollars. Can’t blame him – he is doing what he thinks is right (or maybe his hand has been forced as far as the big institutions) – whatever the reason he has lost confidence on the global stage (dollar, gold, oil) are all reflective of that. Inflation is accelerating and the intraday volatility is in the upper 30s (not 27 like the VIX says).
These are great times to trade – take advantage of the skew (which is very steep). Do not take hard delta bets (hedge them). Look for strong gamma plays and use strategies that reduce premium exposure.
For the few investors that read this – if you have been listening to me you have been hedged 1:1 for the last 6 months, long some gold and long some euro and should be pretty safe and probably even making a little money. Keep that same mantra and you will be fine.
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