We rallied up to those resistance levels and are pushing pretty hard against them, today will be a pivotal day as to whether we will break through and move higher or fall back off. The market really wants to rally hard and is sick of the bad news – Black Rock CFO stated that last week, while short, had a ton of bad news that could of marked the bottom of the market (Bear Stearns, rate cuts, top in commodities, and special deals at the Fed Discount window) – however he pointed out we could revisit lows – but said this is a place to buy. I would agree – from only a technical point of view – however the economic landscape continues to see pressure and I don’t think a day or week will clearly delineate the bottom.
My NAZI remarks yesterday did create some feedback – but let me clarify – I was not referring to Hitler – but rather the nationalization and socialism that swept the country and trickled throughout the world. I guess I should have been referring to FDR’s “New Deal” – which wasn’t much different from the NAZI national socialist agenda (minus the Third Reich). The reason I mentioned NAZI was twofold – first I was reading Hayek (which was written from that time and refers to the National Socialist Party) and second I was trying to get a reaction – which I did. Needless to say – I think my point was made – as it did spur reactions. Take a look at this cartoon – which I find is as relevant today as it was in 1933
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Bear Stearns Deal – done?
Looks like Jamie (CEO of JP) is having to fork out MORE money for this deal. I hear many people saying what a great deal it is – their building alone is worth a billion – however people forget that JP has to take on all those risky positions and post their own money to carry them. Several firms that were contacted during that weekend of that emergency take-over wouldn’t PAY money to take on that risk.
Here was the problem – that I think everyone forgets (and WHY the FED jumped in over the weekend to make sure their solvent) – Bear Stearns carries $10 TRILLION worth of positions on their books (credit-default and interest-rate swaps) – since they are the counter party on $10 TRILL (not Bill or Mill – but TRILL) that could decouple the entire world market as far as OTC (over-the-counter) counter party positions. So THEY had to be bailed at some point. That doesn’t even include the $160 billion in structured products that are backed by mortgages.
Now with 2 days to do your due diligence – you can see why many banks and firms said – “I would NOT pay ANYTHING to carry that risk – without being able to do my due diligence!” – two days is not nearly enough time.
Only time will tell if Jamie is the man for making a scoop of the decade and picking up Bear for $10 a share – or the CHUMP for taking on $10 trillion in positions and other debt – without doing his due diligence. People are still wondering if B of A purchase of Countrywide was worth even a penny! Only time will tell.
So remember – while $2 seemed cheap (even $10 a share) – the risk behind it is very uncertain!
NEWS: JPM is also cutting their earnings – by as much as 45% - I don’t think they also have a good handle on how much this Bear Stearns position is going to COST them (yeah they have an idea of the stock price) – but they DON’T know how much of that paper WILL fail!
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Dollar rally and commodity slide halts ?
The dollar is starting to slide again as the EURO and other currencies begin to strengthen again – while last week had some major events and FED injections – was it too little too late? It would seem that it injected a huge pop to the dollar – but now it seems that the dollar is starting to give up again. The EURO was expected by some to drop to 1.50 but it’s currently seeing strength at 1.54, the Swiss Franc is also seeing some strength at 98. I also heard stories in Europe where some currency exchanges have stopped taking dollars! The Euro Money-Market Rates advanced to highest levels (up to 4.7%) as banks are hoarding cash (Euro). There are concerns that Bear Stearns was not the LAST bank to fold and banks are closing their doors to lending and looking to gather assets and cash on deposit.
Oil looking to hold at the $100 mark – and oil consumption (while predicted to drop in the US because of consumer buying power weakening) is expanding in other nations including China. Gold and other metals are starting to see bottoms after the big slides last week. Buyers are stepping back in the commodity market again.
Expect to continue to see HUGE volatility in the dollar and commodity markets. I still think the dollar will continue to slide and commodities will continue to rally over the long haul – but expect huge pull backs as traders in the short-term rush to the exit. Volatility is going to be high – but will continue to move higher.
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B of A getting some selling pressure
Merrill Lynch downgraded Bank of America to SELL from Neutral. There is still concern as to the mortgages and the investments in Country Wide and the viability going forward. The CDO and SIV markets have not been fully transparent YET – as they continue to strip away the paper – peeling back the onion – to see what is solvent and what is not!
Expect some other banks (exposed to the mortgage sector) to see some pressure.
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Futures Pre-Open
The futures in the early session got a good pop to the upside – led by Europe and HOPE that the rally will continue – however going into the opening they are losing their gains fast. The ARB is fairly flat right now – however the futures were front running the cash earlier but have now inverted and are trading below the cash. It looks to be a flat opening – but expect some pressure on the sell basket if the futures remain below the cash going into the opening.
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Support / Resistance
We hit the resistances across the board EARLY yesterday and for the most part remained there for the day. Today will be pivotal as I don’t think we can stay at these levels. There WILL be some sellers stepping in at the resistance – the question is will they step away and will short-covering kick in. There is a strong fight at these levels. This is a place to FLATTEN ALL LONG HARD DELTAS – take long positions with SOFT DELTAS – It is also a place to start getting short! But HEDGE with OTM gamma – incase we rip!
INDU 12000 / 12500 (12750) (As I said yesterday – this is a place to flatten longs and start getting short – if it breaks through the 12500 area SOLIDLY today we could rip fast to 12750 – so make SURE you have some OTM gamma to cover the shorts. I give it 70/30 to the downside today – with the downgrades in the banking sector, the dollar sliding, and more concerns in the credit market. If we rip – it means sellers stepped aside and short-covering will kick in and take us up FAST and HARD! – but I give that 30% - a pop at the opening and then sellers will step in is my educated guess.)
NDX 1750 / 1800 (1900) (We are in a very pivotal area and again will either pull off or rally hard. It will be the AAPL, GOOG, INTC, MSFT, etc – over weights – that will determine if we continue this rally. If you see weakness step in after the opening – expect a serious pull back. Again – there is massive shorts still in the market that could cause a short covering rally – which will be violent to the upside. I give this a 60/40 to the down side – as profit taking and new shorts enter at the resistance level.)
SPX 1300 / 1350 (We closed right at the resistance – and I expect it will be very HARD to continue to drive higher in the short-term. The dollar falling off in the morning and commodities rally – combined with the JPM lowering forecast and downgrades in the bank – will put pressure on the market that will be hard to drive higher. If we break – expect short-covering to make a violent move higher – but I am giving it 70/30 down-side.)
RUT 650 / 700 (We got to resistance again – this will be a hard area to break – again a short area – but MAKE SURE to hedge with OTM gamma.)
ALL investors should hedge 100% and flatten longs – it will be hard to get through this resistance levels!
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Conclusion
We had a good rally out of a very bad week of news – but the economic picture has not changed. There is concerned that another bank/s will fail – and Europe is hording cash as money-markets increase as assets are gathered. The dollar is starting to slide after a good pop and oil is holding the 100 line pretty solidly.
It’s NOT even close to being over – so expect continued volatility!!!
I think we have a better than 50% chance to pull back off these resistance levels – but if we break we WILL move up fast and hard as shorts are forced to cover. Today will be pivotal – so watch the close and action during the day – I expect some volatility as it tries to push through resistance levels!
Investors – flatten positions
Traders – use OTM gamma to hedge hard short or long deltas. We can move hard and fast – in either direction today.
Today is a resistance day!
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