The 75bps cut was interesting, since it was not the full 100bps that the futures had expected. I heard some interesting commentary about it on Bloomberg last night. One of the thoughts was that Bernanke, after the weekend’s emergency 25bps Discount Cut and seeing the world reaction via the EURO and YEN making unprecedented moves up against the dollar, was concerned that more eyes (world central banks) were on the dollar reaction rather than the market. It’s as if he was trying to serve two masters – the banks that need the liquidity and the world central banks that do not want to see MORE inflation. By ONLY cutting 75bps you could say he was respecting the world central banks, while at the same time serving the domestic needs. The rumors, as I mentioned, were abound with the Fed contacting foreign central banks to start purchasing US dollars to keep it from sliding, maybe not cutting the full 100bps is a sign that he is willing to work with them. At this juncture it is speculation.
As far as the market reaction rally, I had expected that we could get to 12250 in the INDU (a place to flatten hard deltas) – but if we break we could get some massive short-covering and rip 300-400 points (see Support / Resistance). However, I still believe that the market will remain volatile and that (just like with the $200 billion injection) rally – one day does not change the economic landscape. Investors want to put the finger on a day and mark it as the bottom, looking for that turn around day. Investors forget the market is very short-term and reactionary – it is never indicative of a bottom or top in the economy. You can never place your finger on an Index price or day in the market and say “That was the top!” or “That was the bottom!” – for if we could we would all be billionaires. However, we will forever try to pick those days. The economy is a slow moving beast and just because we had a 420 point rally in the market – doesn’t mean that all the credit problems and economic problems have been solved or adverted.
Wilbur Ross was asked this morning by CNBC that exact question, was yesterday indicative of the bottom and the worse is behind us? His answer, If the market reaction was a sporadic EKG of a human’s health we would expect them to die! He further went on to say, the negative economic landscape before Bear Stearns and after the rate cut has not changed. While it is a small comfort that Bear is not going bust and the Fed is taking action – just because we MAY have dodged a bullet – doesn’t mean they have stop firing them. From his comments – the volatility and the negative impact to credit lines and homes is far from over.
Expect to see continued volatility and don’t get naked long stocks just because we had a 400+ point rally – remember the market is currently moving on perception, hope, fear – not a core fundamental change in the economy.
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Morgan Stanley showing better vitals…
Could Bear be the lone babe in the woods? You may think so, with Goldman and others looking to weather the storm better from their reports yesterday. This morning Morgan is also stating they have batten down the hatches, through up the storm jib, and their hull integrity is fairly solid – at least the bilge pumps are working. Expectations were very low for the financial sector, as rumors spread that Lehman may be the next Bear Stearns.
Just like the political race, Goldman, Morgan, and Lehman are trying to differentiate themselves from Bear Stearns. So far it seems the public is buying it and I am not dismissing it or saying it’s not true. However, let us not forget that Bear (just a few weeks ago) said they too were fine and had a $100+ billion balance sheet and they have manage the storm (still singing the praises of their awards for their risk management systems?!). Also, we must not forget all these firms have repeatedly told us last September that they were not in the same problem as Bear, only to report billions of write downs in the 3qtr and saying again that was it. Then in the 4th quarter they took even MORE write downs! So what they told us in September didn’t hold water, what they told us after didn’t hold water, and now they are saying the same thing? I would not say they are lying, I think it is a two-fold problem – 1st they do NOT know the extent of the risks (because of the complexity and entanglement of the structured products) and 2nd they are still using old school mark-to-market theoretical models (which we have come to realize that after writing down $100s of billions – well something is not working). It’s obvious that Bear’s risk system (praised as the best in the market) failed.
So we “hope” at this juncture the new management teams, risk managers, and CEOs have a handle on it and have shored up the risk and losses. However, we must not forget the risk is FAR from being gone – it is STILL on the books. Let’s hope they manage it well – but don’t assume anything. Hedging assets in the financial sector is key.
The good news is that they are all getting a good jolt to the upside – a good place to lock in gains and flatten positions.
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Futures Pre-Open
Initially we were seeing a pull back in the futures going into the opening – but we are starting to see a good rally since 9 am ET – with help from Morgan news.
The futures are front running the cash by a few points and will help fuel a good pop at the opening from the Arb traders buying the basket. Expect to see a small pull back in the futures as the Arb traders short into the opening.
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Support / Resistance
We got a solid massive rally yesterday – breaking resistance had the sellers step away and the shorts racing to cover. I was told that there was some serious covering going into the close – and we will probably see a little follow-through this morning (from some additional covering).
INDU 12000 / 12500 (We CAN see 12500 today – with more euphoric moves to the upside. 12500 is an area to get flat – if you go short – over hedge AGAIN with gamma to the upside – another rip could send us to 12750. However – expect a slow down at 12500 – specially when the shorts (and long buyers) stop and sellers re-enter.)
NDX 1700 / 1800 (We are hitting some small resistance in the 1750-1775 area – but expect a kick in the pants at 1800 – get flat there.)
SPX 1300 / 1350 (We could get to 1350 today quickly at the opening. Start flattening and looking for shorts – over hedge OTM call gamma in case we get another covering rally)
RUT 650 / 700 (700 is in the cards – another place to flatten long deltas and start going short – over hedge OTM gamma in case we get another ripping rally.)
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Conclusion
We had a great rally yesterday – and some serious intra-day whipsaw trading. We are probably going to get some more action to the upside at the opening, from what I heard there is still some buy-side paper that didn’t get filled yesterday. However, after that – well – I think it would be wise to take the coin OFF the table and be happy with profits.
Jimmy Rogers is still going long commodities and mentioned that he is now shortening into this rally and the financials – including Citigroup, Fannie Mae and other investment banks. He said, great their 75bps cut got a good rally yesterday – but what are they going to do when we are down again? Bernanke is not going to have any bullets left! When you take rates to 0, the Fed is now just watching on the sidelines – nothing left to do.
Rogers, Ross, and others see that we have a long way to go before the problem is close to being solved – they are not reacting to the “knee jerks” of the market or jumping on the euphoric rally. At some level, unlike analyst and talking heads on a salary, these guys make money by putting their money where their mouth is. They also don’t have any marketing or political agenda.
Expect a rally at the opening – but if we hit those resistance – expect sellers to step in with Rogers leading the charge?!
Investors – lock in gains and roll-up your hedges!
Traders – have fun!
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