Welcome back from Easter Egg Hunting – hopefully we can find some GOOD eggs in this market!
______________________________________________________
Bear Stearns
It seems that the shareholders are rebelling against the deal (according to the NYT) – and that JP will step up to $10 a share. However, it is still rather uncertain. There is additional rumors (or stories) coming out of the deal last week – and according to some (while Sec. Treasury Paulson had said with glee that share holders were going to lose most their equity – indicating that the government was NOT bailing them out.) that while the FED did NOT set the price they had indicated the lower the better – since they ARE bailing out the debt. Additionally the $30 billion from the FED ONLY comes after the deal has closed. The shareholders of course are up in arms, that the debt holders are getting about .70 on the dollar and the shareholders are getting nothing. Additionally, there had been talk that debt holders were buying shares to secure that much needed vote, which has driven the price up to $5.
According to the NYT (and the reported that broke the story on CNBC) – the deal should be consummated sometime today and the price would be set at $10 a share. So it looks like the shareholders are going to win out (if you call $10 a share winning) AND the debt holders are going to get bailed out by the FED. Even though you would never hear Bernanke call this a bailout – it is!
______________________________________________________
Fed Running out of bullets?
May be – some are expecting rates to go to 1% - so he doesn’t have much room there to cut. However, he in NOW getting into mortgage back securities? Yeah – you me right. The rate cuts (of 300 bps) has done nothing to help the credit crunch – just band-aid the problem for the most part. The problem remains that the firms are still carrying 100s of billions of worthless paper. So now there is talk about the FED’s last tool, the Resolution Trust Company, that would buy $6 trillion mortgage securities and take that problem off the balance sheets of the banks and lending firms. Now if that is not a bailout I don’t know what is.
The spin-doctors are working overtime to explain away the tax burden of such a proposal. The Nationalist Social Party, sorry I meant to say the Democrats, are already fully on board with such a proposal. Their brethren, the Corporate Welfare Party, sorry I meant to say the Republicans, are also on board with the proposal. At least they are both in an agreement on something.
The unfortunate reality – is that it will cost the tax payer and will put more unwelcome stressed on the government and the dollar, but why not – the government is already several trillion in debt – what’s another $6 trill!
______________________________________________________
The dollar and commodity slide
While we have seen a massive run on commodities and the dollar sliding – they has been a recent turn around and the dollar is gaining some strength. Some currency traders believe that the Euro may slide back to the 1.50 mark – before ripping again. However, volatility of this magnitude in the currency market is not a comforting thought and the dollar has not seen these lows since 1971 (remember inflation back then?).
The G7 (US, UK, Canada, Japan, Germany, France, and Italy) meet on April 12-13th and the talk has been the weak dollar and the recent huge volatility – which is (as they see it) a massive loss of confidence in the dollar. The rumors have indicated that the G7 back in February had pressured Bernanke to stop cutting rates so drastically – which was causing a weak dollar and inflation. Additionally – just as recently as last week – there were rumors floating that the US FED had been asking it’s G7 partners to start buying US dollars to keep it from sliding more – when the Bear Stearns news broke and the Euro ripped to 1.59! I think it was a little late. The FED wants the best of both worlds – but can’t continue to serve two masters (the banks and the dollar).
The G7 (minus the US) has been concerned about inflation and have abstained from cutting rates – it’s obvious that the US is not on board and is focusing on keeping the banks solvent. There has been reported unhappiness among the G7 with the FEDs involvement in the bailout of Bear Stearns and the $30 billion payout to debt holders. Additionally – all eyes are on the Yuan and what China will do with their currency policies. While China has kept it relatively peg to the US Dollar – it is pushing hard to break and go a lot higher. I have heard even as high as 14:1 !
_______________________________________________________
Futures Pre-Open
With Tiffanies reporting a better outlook and the Bear Stearns $10 rumor the futures are stretching their legs to the upside. The spread however is fairly flat going into the opening – so I do NOT expect to see too much ARB trading (program trading at the opening). The futures are only about $1 above the theoretical cash basket.
__________________________________________________________
Support / Resistance
The market bounced off the support and is now (once again) heading for resistance. Last week was awesome for traders – let’s see if this is more of the same.
INDU 12000 / 12500 (12750) (If we get up to 12500 it is time to unwind and start flattening out your deltas. Take some limited short positions at this point, however a follow-through will push us to 12750 – which is the place to get short – hedged of course.)
NDX 1700 / 1800 (We are at the pivot point and could go either way – I think with the Bear Stearns news (if it remains $10) could send the market higher a little – 1700 is the long area and 1800 is the short area – but for now we are at the straddle strike.)
SPX 1300 / 1350 (If we get to 1350 – flatten the deltas and start getting short – a break-out could send us to 1375 – so buy some OTM gamma incase. However 1350 should be the spot.)
RUT 650 /700 (The broader market has been interesting – and a resistance is building at the 680 area over the last few trading sessions. A test of 700 is in the cards – but watch that 680 area today (intraday) – wonder if it WILL get through.)
_________________________________________________________
Conclusion
The FED is running out of cards to play – it is clear that we are far from getting out of the woods on the Credit problem – nothing on the economic landscape has really changed. We are getting some strength returning to the dollar and the commodities are pulling back – but I think that is very short-term. The G7 meeting coming up is going to be very interesting and I am sure there maybe some bullying up on the FED. Buying trillions of mortgage back securities is really no answer and seriously puts the government behind an ever LOOMING 8-ball! You could say that our country is moving fully into a National Socialist state – between universal healthcare and if the FED buys in the mortgages (a nationalizing of mortgages) – add in all the other mounting debt social programs – and we are on the way to bankruptcy, or you could say massive inflation (which is just like bankruptcy).
Side note: S&P has put both Lehman and Goldman in the negative watch list – stating that they have a 1 in 3 chance of having their credit downgraded – of course if Bernanke buys in their junk – that is the 2 in 3 chance!
Stay tuned – but expect more volatility – we may get a continued rally – but not on the back of a stronger economy, but rather hope and optimism.
I started reading the Road to Serfdom (again) last night – has NOTHING changed! Hayek hit the nail on the head – and I really hate to say this because I don’t want to be called some kind of freak (and we forget) – but the world had embraced the NAZI party (prior to the war) for the turning around of their country out of the depression. Socialism became popular across the world. For those of you that didn’t know (and confirmed by my German Partner) the bad word “NAZI” just means National Socialist Party. Not saying we are headed for a crazed military fascist state, I don’t think we are – but Socialism is not the answer in ANY form. Usually people think you are a freak if you bring up the word NAZI – but without studying history – we are doomed to repeat it (well at least the national socialist party – maybe not the crazy Hitler war mongering stuff – but wait we did invade Iraq didn’t we? Funny side note: I was in the Navy when Iraq was our ally and Iran was our enemy – but I guess we all forgot the “Earnest Will” mission in the Middle East in the late 80s! I didn’t – I was there! ).
2 comments:
Most of Europe is arguably Socialist and I don't see any jackbooted stormtroopers, just lots of people with health insurance.
Good point. I KNEW when mentioning NAZI – that I would probably get feedback. I guess I just got a little fired up about the bailout and the Fed buying down billions of mortgages. Of course reading Hayek before going to bed last night – added fuel to the fire. You are right, however I was rather implying that we are on the fast track to MORE socialism that is only further adding to already mounting debt. As I mentioned – I was NOT trying to infer jackbooted storm troopers – but rather that nationalization that usually comes AFTER a massive economic downturn – which this country (the US) is on the brink of. I did add the Iraq Jab as an afterthought. I just remember, when in the Navy, working WITH Iraq against Iran – now the tables have turned.
Sorry about getting fired up – Again – I was not trying to imply that Europe is going to see the rise of another Third Reich – but rather the National Socialist Party (NAZI) became popular (with or without Hitler) because of their national social agenda during their great depression that turned the country around (for the worse I might add). The fundamental problem was that it handed too much control and power to the government as the people became less free to decide for themselves. Who knows, perhaps the NAZI party would of turned out differently if it were not for Hitler and the birth of the Third Reich. At the time (pre-WWII) – many countries – including the US admired Germany’s ability to gather together and overcome their depression.
The “New Deal” was not much different that the early socialist agenda of the NAZI party.
I take issue – with solving the current economic and political problems with coming up with MORE nationalization and social programs – thus putting more debt and burden on the government, or rather the tax payers and the weak dollar.
Thanks for contributing – please feel free to continue to comment. I welcome comments, opinions, and suggestions !
Post a Comment