Well it looked like Friday’s opening was getting a big boost from the CPI (as if we were not having any inflation and Bernanke could ease his mind about cutting rates) – THEN – the bottom fell out and Bear Stearns was on the ropes – the market tumbled. Could Friday be the last day of hope and the crack in the damn broke?
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Bear – it’s whats for dinner!
Bear was done – stick a fork in it. Even though they held their BBB and BB rating on Friday and it looked like it “MIGHT” get through the write-down problems – according to talking heads on Friday (after the close) – it WAS done – cooked! The FED and CEO’s of major banks had an emergency meeting to TRY to make a decision on Bear before the Asian Markets open. After the close – they KNEW that if they did NOTHING – Bear on Monday morning would be bankrupt and the FED was afraid that with that news there would be a run on US banks and also the Dollar would fall into the toilet. The FED could not really find a bank, other than JP Morgan that would even bail them out. At $2 a share – one of the World’s top 10 investment banks – just sold for about $250 million – down from $20 billion market cap just a few months ago. Additionally – JP Morgan wouldn’t touch it without some guarantees - the FED is shoring up the Bear carcass with $30 billion. However, it’s done no matter how you look at it. Of course if you think Bear’s book of CDO positions is worth ANYTHING then you may say this is a scoop. But the risk is still GREAT – and if it was not for the FED stepping in and shoring up some of the losses – well it probably would have been even uglier than it is this morning. At least the BOND holders are secured (for now) – but the shareholders are going to be pissed!
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Lehman Brothers – on the ropes?
The rumors are that Lehman Brothers is the next domino to fall. The stock is getting some serious smack-down in the pre-market from the Bear news. There is concern that their debt is as bad as Bears. What’s funny is Moody’s is keeping their A1 rating on Lehman and its holdings. Look how well those ratings worked for Countrywide and Bear Stearns! Thanks – credit rating agency’s – your ratings have assured me there is NO problems. Keep an eye on Lehman to see if this one gets blasted!
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Discount Window – free dollars anyone?
The Fed (after the horrors at Bear and the rumors at Lehman) have cut the Discount window over the weekend to keep the money flowing. It’s only 25 bps above the Target Rate. Traditionally – in peace time and normal economic times – the Discount window is usually about 100 bps above the Fed Target rate to discourage banks from borrowing from the Fed. You could say it penalizes them by charging more. The concern is that if all banks borrow from the Discount Window instead of each other’s reserves that several things happen, the shift of risk and debt is now shouldered on the government and it stresses the dollar (weakens). Bernanke has been lowering it in tandem with the Target rate and late last year cut the Discount by 50 bps MORE THAN the target to give Banks relief as money supply tighten. Cutting it over the weekend another 25 bps – well it’s almost parity. When it’s parity (or god forbid below the Target) – we will see MORE banks start borrowing at the Discount Window. This could put even MORE pressure on the dollar – something we don’t need. It will more certainly shift the risk onto the Government’s shoulders. Technically – if it takes the full-load and any more Bear Stearns problems arise – you could say we will be having some NEW national banks (YUCK!).
Fed Fund Futures are pricing in a 100 bps cut! If Bear needed $30 billion from the FED along with the JP Morgan $2 a share. How much do you REALLY think that $200 billion injection by the Fed is really helping? One thing they should do is change the name of the Discount Window to the Liquid Window. Bernanke is getting some MASSIVE biceps cranking on that printing press!
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Dollar, Oil, Gold
The Bear news and the Discount emergency rate cut has sent the World into a panic. The faith in the US economy is collapsing at a accelerating rate additionally the “Faith” in the US Dollar is close to failure and is at a tipping point. The EURO shot to 1.59 over night and the Yen is close to 95 – those kind of moves are huge in the currency markets – I would think that we would of seen a worse opening if the Fed didn’t step in over the weekend.
Rumors are that the FED has talked to the world’s central banks to urge them to start buying dollars to STOP the slide, seriously – that is how bad this is for the dollar. Some US and Foreign companies have been lobbied to champion the Fed and urge world central banks to start buying dollars – as it’s paramount for their bottom line to keep the dollar from sliding into the toilet. Gold ripped through $1000 as people are rushing out of dollars and several smaller countries are shedding dollars as their reserve currency. Concerns of possible bank runs are on everyone’s mind. Bear Stearns failed – which we all were assured by credit rating firms, analyst, and talking heads – that it could NOT happen. Now it has – who is next? Lehman?
The FED’s action (over the weekend) has stopped the slide in the Dollar and we are seeing it pull back from its lows against the Yen and Euro – however that is just for now. The Dollar has gotten the literal SHIT knocked out of it over night. I heard on economist said it looked like the OLD Peso before the devaluation – that’s comforting.
So – as I have been saying – we are probably on the same road as Japan. Triple Down Turn – rates, market, and currency all head south – and we lose an economic decade in this country.
How low can the dollar go, I really don’t know. But if the rumors are true and Bernanke has been on the phone all weekend to get foreign central banks to start buying US dollars to stop the slide – well that’s not really a positive sign.
Truly – the world hold’s the fate of the dollar’s value in their hands! There is NOTHING we can do domestically to shore up the dollar. We RELY on CHINA and the rest of the world to keep its value!
These are interesting times!
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Futures Pre-Open
Yeah – they are down and have been extremely volatile. They are currently front running the cash between 5-15 points – normally I would expect a bounce coming into the opening (we still may get a small one) – The Arb traders might be sideline – not willing to take the risk of TRYING to get off a short-basket of stocks at the opening in this market. OUCH!
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Support? and Resistance
All bets are off – do NOT look for supports in this market. If you take a stance to get long HARD deltas – PLEASE only do it with Spreads or fully HEDGED positions!
INDU ?????
NDX ?????
SPX ?????
RUT ????
Don’t look for supports – we broke them all this morning.
WE COULD GET SHORT COVERING GOING INTO THE CLOSE – SO WATCH OUT FOR BIG SPIKE UP MOVES - IT MAY NOT HAPPEN – BUT IT COULD!
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Conclusion
I had a funny conversation (in hindsight) with an investor last week. He said – you always tell investors to hedge at the end of your Market Preview – when are you going to stop saying that. I said – when you START hedging your positions (which I know he does not). Today is another example why. Ask any Bear Stearns investors asking how he feels this morning.
To me Moody’s and S&P are a total joke. S&P didn’t cut Bear’s ratings, even on Friday when it looked like they had serious liquidity problems. Moody’s is keeping Lehman at A1, and they are all still giving MBIA and AMBAC A+ credit ratings. At this point – what’s the point. (I know why – it’s keeping the pension funds and other investment grade paper from forced selling.) You could say that Moody’s and S&P have their finger in the dike and are keeping the forced selling from happening. Can you say HEDGE!
So – I will say it again – HEDGE HEDGE HEDGE – it’s never too late.
This is some great trading for those traders – have fun but DO NOT get caught out!
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