No doubt the $200 billion injection got the market to rally in the pre-open – pulling back a little after the opening and then drifting higher. Sometime during the day the sellers stepping to the sideline in conjunction with massive short-interest fueled a massive rally to the upside. It is VERY important to delineate market reactions and trading from economic conditions. It is important to remember that economic landscape didn’t change yesterday just because the market had a single one day massive rally. While $200 billion injection is big, the ECB had a $500 billion injection in December. The credit problems have spread beyond the sub-prime to other areas and the recent problems are now facing the Muni market, with a couple of cities in the US already on the brink of bankruptcy. You may remember from previous Market Previews that I had been questioning the local hospital’s financials and even met with the CFO – well everything I predicted came true and if they had heed my advice in January – they would not be in the mess they are in today. The problem is that the banks which set the bid price for the bonds have Very tight pipelines of money and can NOT afford to have that little liquidity they do have wrapped up in 4% bonds for a hospital, city, or county. In the case of our local hospital the same is true – their interest rates (which I was assured could and would never go up because of their AA rating) has doubled in the last month – sending their $14 million a year interest payment to $28 million. I expect that to increase again in the next 30 days. Additionally their investments (with that money) which is mostly corp. bonds (many have been downgraded). That supposed Arbitrage (which I told the CFO was NOT arbitrage) as inverted to a point that the hospital is running SERIOUSLY in the Red. Their only option is to raise their mileage TAX, but that is capped at 200 bps – and with housing values down – well they are going to see serious short falls. The hospital (according to my estimates) is on the brink of bankruptcy. I only wish the CFO would of taken my advice and unrolled their very stupid position that had huge risk that he refused to see. Here is the recent story http://www.heraldtribune.com/article/20080311/BUSINESS/803110497/1537 . The reason that I bring this up is that this same story is playing out in every state in the US, cities, county, hospitals, airports, and other bonds are facing the same problem. The dominoes are falling. This morning Congress is meeting to review this and talking about MORE regulation – little late and regulation doesn’t solve the problem. Of course it also means the federal government is probably got to bail all these out as well. Expect local and federal taxes to go up – again putting the burden on the tax payer.
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Bernanke send the dollar further into the toilet
While the $200 billion got the market to knee jerk to the up side in a massive rally – it has put serious pressure on the dollar. Foreign investors (as well as domestic smart money) ask “Where is the $200 billion coming from?”. A close look at Bernanke’s biceps tell the tale….they are starting to look like Arnold’s…it’s from cranking on the printing press. The Euro in the early morning session is rallying strong against the dollar and has broken $1.54. Several economist and analyst have already pointed to the failure of the ECB $500 billion injection in December – that failed to keep liquidity flowing and write downs from continuing. The currency swap clearly is saying Bernanke’s Rescue package is too little too late. The Fed Fund futures have declined somewhat after the $200 billion announcement, indicating that a 75bps while still in the cards – is becoming less likely – but that move in the Fed Fund futures could have been a knee jerk reaction just like the market. Keep an eye on the Euro and Fed Fund futures going forward to see IF the $200 billion injection is SOLVING anything. No doubt it’s one hell of a big band-aid.
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Barney Frank – not the idiot that I thought he was?
While Barney has been traditionally for MORE government, MORE oversight, MORE socialism, a very WOMB-to-TOMB politician – he does have a point and that is the bond-rating companies ratings are “ridiculous”. The problem (which I agree with) is that the bond rating agencies are PAID by the same companies they are rating, so there is a conflict of interest in my book. However – we ALL KNEW that – so what is the point? I don’t think more regulation or more government oversight is the answer (the government has proven what a cluster f### of a job they have done – look at Freddie Mac, Fannie Mae, and Sally Mae – accounting scandals, billions of losses, etc. And those companies are technically the prime examples of government oversight and regulation). The problem and the blame is the investor and their willingness to do their due diligence. Just like the CFO at the hospital, I explained in detail what he was doing and the risk he was taking. He instead pointed to a very nice PowerPoint presentation by their investor group and told me they are fully vetted. That doesn’t explain away the risk. Even with more regulation – the problem would still arise – the investor HAS to make an inform decision and understand risk. The hospital had a choice – they just made a bad one. The problem is also not the sub-prime – it’s the state and local government’s who RAISED money via bonds for state and local NEEDS – but instead decided to invest the money. Just like the hospital that needs to build a new wing. They raised $300 million, but instead of breaking ground – they decided to invest it. So who is to blame? They would have you believe it’s the Sub-primes fault – I would argue – that it’s the investors fault – they PULLED the trigger and now since their investments went south they want to blame others and are looking for Old Uncle Ben Bernanke for the hand out (bail out). Thanks! What happened to accountability and responsibility?
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Futures Pre-Open
The futures were up a little, but are starting to pull off. I do expect a higher opening since FV is significantly lower from here. I would also think we would have a further pop in the opening (more short covering?). For now the futures are looking flat to slightly higher. The Arb traders are for the most part sidelined and the spread is fairly flat.
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Support/Resistance
We had a great rally yesterday and I did a couple of emails and calls asking me what was going on. I chalk it up to a combination of euphoria, hope, and short-covering. While $200 billion is a lot – the economic landscape didn’t change in a day. We are back to range bound!
INDU 12000 / 12500 (It will be interesting to see the action going into the close. 12000 is keep to hold and we did retrace 2 days of losses. 12500 and even 12750 is in the cards – but at 12750 would be a serious place to unload positions and get flat to short.)
NDX 1700 / 1800 (Back to range bound again. Staying in the range until more unfolds in the economy is likely. Trade the range.)
SPX 1300 / 1350 (1400) (1350 will see some resistance- but not a place to get massively short – if we can get into the upper 1375 to 1400 range is a place to get short. I would say 1350 is time to get FLAT. 1300 is a support area – but only long and hedged.)
RUT 650 / 700 (Right in the middle of the range. 650 still has to hold and we could revisit 700 again.)
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Conclusion
I had someone ask me what happened – as if I am Mr. Bear – or so he inferred. Let me clarify – I am not a bear or a bull – I see myself as a realist. As a market maker and trader in this market – going up or going down is not good or bad – it is simply how you position yourself. I don’t care which way the market moves as long as we can position ourselves to take advantage of the market conditions. Unfortunately the person that asked me was an investor and only plays from the long side, so for him market going up is good and going down is bad.
I guess I don’t think about investors as far as that is concerned. For me the market is the market and I can NOT afford to be a bull or a bear – but only to react to market and economic conditions.
These are great times for traders and cautious times for investors. I hadn’t realize that – I guess because I have been on the non-investor side for such a long time.
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