MP 3/20/08

Traders,

Again, just like the 200 billion injection rally, the next day the market sells back off. This clearly shows the continued “uncertainty” of the economic landscape. The financials are getting lots of volatility action since the Bear Stearns failure. The massive rally to the huge pull back. The PR campaigns to differentiate themselves from Bear Stearns are ramping. They need to start building trust and keep their clients loyal – but selling trust to existing and new clients is very difficult among all the recent fall out and the continued uncertain credit risk. So far there has not been any run on the banks, like what we saw with Northern Rock a few months ago – you could say the Fed stepping in with Bear Stearns curtailed any run. Additionally – people don’t know WHAT to do or WHERE to go with their money even if they did withdrawal their deposits.
CNBC this morning touched on why BSC Bear Stearns was up from $2 – I think it’s several issues – people can’t BELIEVE that it is worth only $2 (those are the same kind of people that bought K-Mart, WorldCom, Enron, and the many other companies when they were at similar prices – not believing they too could go out of business). But people forget (or didn’t read the fine print) of the JP Morgan contract – which includes many “lock downs” on stock price, rights to purchase, real-estate guarantees, etc. Pretty much JP Morgan has them in a Full-Nelson and Bear Stearns can NOT get out without losing a major limb. Not to mention JP Morgan is currently “covering” their positions – a quick pull of that plug would put Bear Stearns back to insolvency quickly. So at the end of the day – I really don’t know WHY it would be trading higher than $2, other than chalk it up to “Hope” – good luck with that! There ARE rumors that bond holders (which get about 70 cents on the dollar) are buying up shares to gain the right to vote on the take-over. Bond holders would be willing to give up a few dollars per share to guarantee their 70% equity in the bonds – by having the right to VOTE FOR the take-over. Share-holders have lost almost all their equity – so it’s fair to say they are NOT TO happy about the deal!

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Jobless claims rose!

The Futures were up pretty solidly in the early morning session until the jobless claims brought us back to reality. Initial jobless claims rose 22k to 378k in the week that ended March 15. Important to note higher than economist had forecasted and the high since January. Economist (on avg.) expected only 7k, so the impact over twice as much is rather alarming.
Citigroup has also announced a layoff of over 5% of its work force to curtail mounting losses. Between the financial company credit problems and the construction/building/real-estate/home problems – expect to see increase of lay-offs in these sectors to shore up losses and/or to cut overheads as margins and revenues drop off.
The 85,000 US jobs lost in the first two months, declining retail sales, and weaker manufacturing data – does have some economist that thought we were NOT in a recession changing their tune!

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FED-EX down in the pre-open

While FED-EX did have better than expected earnings – it was their forecast for 2008 that they had lowered has investors concerned. What is even more concerning is that their predictions is based on current dollar exchange rates and fuel costs – and does NOT include “shocks” to prices – which I still think their forecast is rather “optimistic”. It would have been better if they had their “flat cost” forecast and two additional – Optimistic based on a stronger dollar and lower fuel cost – and Recession Forecast based on weaker dollar and higher fuel cost. Yeah – it’s more work – but it would let investors know (and gauge) their forecasts of Fed-Ex based on their own assessment of currency and fuel costs moving forward.
However, even with the flat line forecasts – it lower than expected – which is putting pressure on the stock in the pre-market.

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Commodities and Dollar getting Hit!!!

When there is a rush to the exit you see big moves and spikes. Gold, Oil, and other commodities are falling off pretty good in the morning and the dollar is gaining back some strength. However, there is LOTS of unwinding going on today – because of “Triple Witching” when all three derivative contracts expire today – so we are seeing big rolls and forwards being priced and traded.
So expect some pull backs across the board. Additionally the unwinding of some of the currency forwards are giving some strength to the dollar. However I would not read TOO MUCH into this – just like a 400 point rally in the INDU doesn’t mean that everything has changed. Remember the market is very reactionary and very volatile during these times.

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Futures Pre-Open

The Futures were down over night, rallied into the morning prior to the jobless claims, and then sold off again, now they are back to flat. Toss in expiration and this market is more than a little volatile. Don’t expect to many of the Arb traders to step in at the opening – as the combo of “Triple Witching” – dollar strength – and jobless claims are all pushing and pulling on this market. Add in the last ingredient – tomorrows a holiday – and while trading would be traditionally heavy – we may see some leave early for the Spring Break week-end.

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Support / Resistance

The indices all pull back to some support areas and the short triggers yesterday had some huge gains when we visited some of those resistance areas yesterday. Today it’s about holding supports!

INDU 12000 / 12250 (Today it’s about buying at the support areas, as yesterday was about selling at resistances. The support is 12000 which is an area to get flat and start getting long, however hedge with some OTM puts – if we start to slip – over hedged to give yourself some gamma to the downside. 12250 is not really a resistance area – but is a place to flatten long deltas.)

NDX 1700 / 1725 (Again 1700 is a place to get flat – but it we can’t hold it – make sure you have some extra downside gamma!)

SPX 1300 (It’s the straddle strike – or pivot point – while it is expiration and we could have some pin risk – this thing can rip away (up or down) from the strike.)

RUT 650 / 700 (We have to hold 650 – a place to get flat to long – but hedge.)

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Conclusion

With all the volatility I don’t know how much pin risk will play in reeling in the volatility – which it would traditionally do. The Open Interest is so mixed across the board – it’s hard to say how the hedging will force the issues to the strikes. A small rip could move any issue up or down to the next heavy OI strike – so expect little jerk moves to big OI strikes as deltas move to 100 or 0.

Today is expiration – so get those Do/Do NOT exercise notices out. There is ALWAYS FREE MONEY after the close – so watch the stock in after hours trading and have those notices handy and get ready to trade the stock. If you need help – give me a call – but I am a little swamped because my partner is out Skiing – (he deserves it!).