MP 4/30/08

Traders,

Saw a little pressure on the market yesterday – President Bush remarks didn’t cause a spark to get the market to rally (go figure). As the opening act for Bernanke’s Headliner show – he was pretty weak. Oil came off fairly hard during mid-day (-3.00) and the dollar rallied helping to weaken commodity prices. But the dollar rally and oil sell off – (the biggest recently) did NOT get the market to move higher.

Consumer Confidence falls – with the biggest slide since 2001. The Confidence Index fell to 62.3 yesterday, which was fueled by a large drop in home prices (12.7%) – more than forecasted. Clearly – showing that the bottom of the housing market is still rather uncertain. This additionally cause concerns in the banking sector – as the thoughts of “the worse is behind us” faded. Yesterday’s Deutsche Bank write-downs over $4 billion and ramping foreclosures. Citi is also raising money AGAIN in another stock offering – just diluting themselves into the toilet to keep money in the bank. Great!

Today Bernanke is going to have to pull out the Pom-Poms to build up that ailing confidence in the economy. Most believe that we are either in a recession or quickly headed towards one. This market is Bi-Polar for sure, Investors on one side want this market to rally and it would SEEM that confidence has returned to the equity markets – since it has rallied off the bottom and are pushing against resistance. The other-side of that coin? The Consumers are not confident at all – the index clearly shows a pretty significant drop - as gas prices up, house prices down, and inflation continue to squeeze their pocket books.


Investors could push the market up in the near-term – however the GDP relies on consumers and we cannot ignore their lack of confidence and the squeeze in buying power they are suffering. This Bi-Polar relationship is fully detached and the economy vs. the market is more reminiscent of the movie Sybil.

Today, regardless of what the VIX says, the hidden volatility in the market TODAY is greater than .20 on an annual basis!

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GDP remains flat at .6%

No surprise – range in .5 - .7%. The decline in housing last quarter was the worst in 25 years and ADP expectations are for a decline in jobs by 60k – but ADP reported an increase of 10k – this is puzzling from the ADP to the BLS numbers – and economist are scratching their head as to the disparity.

Regardless – this will be ripped apart an more economist and analyst will come out of the wood work to declare a recession or no recession. The game continues to be played.

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Kraft affected by rising food prices

The world’s second largest food maker, Kraft, profits drops 13% on the rise in dairy and wheat costs. Analyst expectations fell short as food costs are taking a bigger bite out of margin lines. Analyst had expected that since Kraft had raised prices on several of their major product lines that it would off-set rising food prices – however it was too little too late. Inflation is outstripping the price increases that Kraft is passing through on its product line and they are most likely going to raise prices another round.

The cost of wheat more than doubled in the quarter which eroded all profits in their wheat line products (Triscuits, Wheat Thins, and other crackers). Kraft is not the only company seeing trouble with higher commodity prices – Sara Lee and Kellogg are also seeing profit margins shrink and have already started to boost prices to off-set losses.

Kraft had made some acquisitions overseas – and has benefited by expanding into non-US market share. The weak dollar did help offset domestic sales – but Kraft’s deepest trough is still the US. Commodity and agriculture prices will have to be passed through to consumers before too long in order to keep margins positive. Kraft – while suffering – is raising their forecast. Go FOOD STAMPS!

Expect a mix bag in the food makers – while higher food prices will impact sales – being able to pass that through to consumers and expanding into foreign markets will help offset losses.

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GM losses?

As expected GM, the world’s largest automaker, reported a 1st quarter loss of $3 billion after a year-earlier profit. However, analyst had painted a gloomier picture – a saving grace for GM and the shares are up in the pre-market. Blame for the losses was a mix bag – from labor disputes, slowing U.S. economy, and of course more losses in the partly owned GMAC Finance unit.

GM picture is not looking much rosier going forward – a slowdown in the US combined with higher fuel costs – have consumers of their auto line looking for better millage vehicles. GM of course is also charging forward introducing new models to meet this demand, but is back-marker compared to their competition.


Additionally – initial expected strength in China also looks to be in a serious face-off with Chery and Geely (the two China auto-makers) – and GM will have a hard time competing. Chery and Geely sedans start at $2500 per vehicle – and GM can NOT compete with those prices. However, their strength remains utility vehicles and trucks – which they dominated in the Asia-Pacific and Latin American regions – the help of the weak dollar also helped boost profits!

GM is in an interesting pinch – the U.S. economy problems, labor issues, and GMAC is putting the hurt on – they also are behind the 8-ball on hybrid vehicles compared to competition, and finally the booming Chinese market seems to be open to their utility vehicle for the moment – but consumer vehicle line is about to face a serious threat from the Chinese automakers. However – there is a silver lining – their growth overseas in utility vehicles in the emerging markets is HUGE. The weak dollar has helped spurred sales and also boost profits to help off-set domestic issues.

My Nostradamus prediction? GM will probably be a take-over target in years to come by one of the large Chinese auto-makers. May be it would be a take-UNDER.


As Buffet said about the air line industry (NEVER INVEST IN THEM) – I think the same is true for auto-makers. They are just too many risks to make it an exciting investment for growth. Now if they had very LOW volatility and 1-2% growth with a nice 3-5% dividend, well then that would be something to invest in.

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Futures Pre-Open

The futures are trading a little on the lighter side. It got a good pop after the GDP numbers came in flat (or slightly better) – however they have come off from the initial pop. While the futures are front running the cash by a couple of points – I think ARB traders will be sidelined this morning for the most part. Leg risk into the basket with a looming massive volatility charge about to be unloaded is probably not the best thing to do.

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Support / Resistance

If we have been in the center of the range or down near support – I would say – without a doubt start leaning long. Bernanke is probably going to say “Mission Accomplished” as to saving the banks from failing and will focus his efforts on the economy. However, we have been flirting at resistance levels in a fairly narrow band. We GOT the rally already into this announcement and it’s going to take some serious cheerleading by Bernanke to build enough confidence to bust through resistance. Either way – expect volatility and short gamma is probably not the best bet today.

INDU 12500 / 13000 (We fell off from 13000 but still towards the upper band of resistance. Maybe the pull back is the charge needed to send this to and possibly through 13k? I don’t know – other than I will be hedged for a move either way. If we do NOT close above 13,000 today – then expect that resistance has HELD. Maybe waiting to take a stance AFTER the announcement is a better bet than before!)

NDX 1900 (We are still above 1900 and I would say we are a little lofty compared to other indices – mainly driven by HYPE issues that have exploded to the upside into earnings. How big strong are these legs above 1900 – I am not sure – but we are closer to stronger resistance than we are to booming support. The heavy weights continue to push this higher – but for how long. Stay flat for now.)

SPX 1350 / 1400 (We will probably touch 1400 today in that initial knee jerk euphoria when Bernanke opens his mouth. The question is HOW DO WE CLOSE!!! If we pull off from 1400 after his cheerleading routine – well resistance has held. If we close above it we could get some follow through in the short-term.)

RUT 680 / 720 (Again below that resistance – we WILL touch it today – again do we close above it!)

Today is the TEST - resistance will HOLD or BREAK – no questions about that.

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Conclusion

The conflicting information coming in from every source is very confusing. We would hope that Bernanke could bring some clarity to all the data – but other than a little fluff and hug – reading into anything beyond that is just perception and not reality. There is no heads or tails to this market.

Our Bi-polar market:

• Investors are confident, consumers are not.
  
• Companies with overseas exposure are making money, domestics are losing money.
  
• Companies and BLS are reporting higher jobless claims, the ADP is showing increase in jobs.
  
• The market is flooded with money at the discount window, but lending is very tight.
  
• Interest rates are at 2.25%, but mortgage rates are up over 6%.
  
• One economist says we are in a recession, the other says we are not.
  
• Oil is in a bubble, Oil is not in a bubble
  
• Banks continue to write-down more losses, but the worst is behind us.
  
• The housing market has bottomed, but foreclosures are up.
  
• The CPI and “CORE” are showing modest inflation and flat respectively, the man on the street is paying double for everything.
  
• Obama is winning the popular vote, Hillary is winning the super delegates
  

I can’t make heads or tails out of this market or economy. Usually when things are this confusing and NO ONE agrees – well there is a LOT MORE VOLATILITY TO COME!

Best bet – hedge your hard deltas, get some gamma on you sheets, and let others be the Bulls and the Bears!

MP 4/29/08

Traders,

Another charge up to and sometimes through resistance levels only to see it smacked back down towards the close. You have to hand it to those bulls – they don’t lay down or give up. The question is do they have the volume and mass behind them to push through? I am sure we will continue to see a charge against those resistance points until Bernanke sets the tone going forward. Since the decline of the market at the beginning of the year, we have not seen this kind of strength (abet low volume for the most part). It is clearly a sign that confidence has returned and the FEAR has left the market, measured by options premiums have dropped below 20 points (VIX).

The news about the Mars acquisition of Wrigley, with the “Oracle of Omaha” involved – got many investors (and pundits) speaking “the worse is over, if candy companies can merge!” You would think, especially if Buffet is involved. However, it was Buffet that popped his OWN bubble of taking a role in the optimistic center stage, by stating on CNBC today "This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," the multibillionaire said. "This will not be short and shallow. I think consumers are feeling gas and food prices, and not feeling they've got a lot of money for other things." Most people forget he is spending lots of time in China and like others searching for greener pastures.

The Buffet comment, combined with oil hitting another new high, inflation, airline problems, the dollar giving up their small and recent gains, along with speculation that another rate cut (even only 25 bps) is in the cards – pulled down on the market into the close.

They don’t call it a “Resistance” point for nothing!

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Kerkorian, a fool and his money are….?

No doubt Kerkorian is a self made billionaire, his massive acquisition of Vegas Strip land back in the 50s and 60s moved him into the big players league after he sold or leased it to the biggest casinos on the strip. He also became a player in the movie industry after acquiring MGM and building the MGM hotels and casinos spinning them off for $100s of billions later. He got in early and has leveraged his investments in real-estate and entertainment very well, no question. But his love for the US car automotive industry is mind-boggling. First GM, then a shot at a buy-out for Chrysler, and now Ford. Ok, we know he loves American cars, he drives a Ford Taurus. But tossing billions (a majority of his net worth) at this industry is rather confusing – first it is not an industry he is familiar with (he is a land and entertainment man). Second, it’s a huge part of his nut!

Remember when Buffet made a huge mistake getting involved in the airline business, he will tell you NEVER EVER own airlines. The risk to airlines is too great (unions, competition, insurance risks, fuel costs, lease options, etc.) the margins are very thin and to just breakeven is an amazing accomplishment. Buffet licked his wounds and move on. He always learns his lesson – not doomed to repeat them.

However, what is UP with this Kerkorian fellow? You would think after fooling around with GM he too would realize, like Buffet, some industries are just massive money pits and to even keep the company’s head above water is an accomplishment. The automotive industry is not much different then airlines – the margins are rail thin, the union fights are devastating, the pensions and healthcare costs are bankrupting threats, competition is massive, commodity prices eat away at profits, and financing is more about delinquency than generating any profits.

Now he is back – already acquiring 4.7% of Ford motor company. Does he plan on sitting on the board, does he think he is Lee Iacocca reborn, or is he just patriotic with his investments and doesn’t want to see Japan, Germany, and now China become the King of the Hill, or is he afraid that Ford will soon be owned by an Indian company (like Jaguar).

I listen to his interview and he actually says he sees the company as a great buy at these levels and praised the management. He said it was for INVESTMENT purposes only. If I was able to question him, I first certainly would NOT judge his value at buying Ford and he may be right about valuation (who really knows) – my question is simple – Why the HELL would you push ALL IN, again! He wants 7-10% of this company? Hasn’t he heard of a little diversification. Hell, if it’s an investment and not a take-over target – I don’t know what he is planning.

Whatever the case – he is either looking at Ford with rose colored glasses or he has a plan. Since he really didn’t have a plan with GM (other than a letter from a Renault) and his shot at Chrysler fizzled out, my bet is it is time to invest in rose colored glasses. He did marry that tennis player that could have been his grand-daughter for one month and he does drive a Taurus. Hmmm…maybe too much smog living in LA, who knows. However, maybe three times the charm, right?

If you own Ford – hedge it and thank Kerkorian for the pop in stock price. But this is NOT the bus to be “ON”, well maybe the Short-Bus!


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Sizzler’s Night is almost here!

The big rebate is being mailed out and it’s going to be a Sizzler’s Night for the market – abet a pump and dump. Economist predict the $300-$600 checks will probably go into small ticket items at the retail stores – and we might see a dead-cat bounce with a one-two month pop in sales – which is not indicative of the real economy. One analyst pointed out that many are talking about some small stock buying in the big popular day-trading names – like Google, Apple, RIMM, and other hyped names you would see posted daily on many of the small investor websites. However, these may give small boosts to the markets in some issues – it will probably not be enough to see any type of breakout. Remember – $300-$600 only goes so far.

However – expect to see some pops in retail sales – most likely the money will not go to pay a mortgage and it certainly will not go into savings. My guess is more IPODS, Flat-screen TVs, and other “got-to-have-it-now” items. Maybe a short-term play should be Wal-mart and Target.

There are those that may go out for that special “Get whatever you want on the menu, baby! It’s a Sizzler’s Night!” – for now we could see a little pop – but nothing to hang your hat on.

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Deutsche Bank posts a write-down?

With all the talk on the street as to the credit crisis in past tense and the worst is behind us, more banks continue with write-downs. However, it may be true and these are the last of the write-downs, but who really knows.

Deutsche Bank posts its first loss in 5 years, Germany’s biggest bank, which included a $4.2 billion write-down. The stock fell over 1.5% in European trading and is putting some pressure – yet again – on the banking sector. The question is where is the bottom of the write-downs. The CDO paper is still rather a mix bag and what types of mortgages or lines of credit is very uncertain. Write-downs based on mark-to-market is very subjective – additionally if we are talking 2nd mortgages, REITS, or other type of questionable equity supported loans – it gets even more confusing. Deutsche Bank made huge investments in the US mortgage market, along with other Euro Banks – via special lending and structured paper – now unwrapping that paper is becoming a daunting task.

While these recent write-downs maybe the last – and we could hopefully see a light at the end of the tunnel – it has left the banks in need of short-term cash to carry existing positions and borrowing money giving away huge equity lines is more of a life-line than showing a solid foundation. The mark-to-market is still coming into question IF that is the bottom. With Foreclosures RAMPING – (see the news of Lee County, FL – massive foreclosures mounting) – we could see a few more write-downs.

I suspect it will take a few quarters to get to the bottom of this and maybe the third quarter will see some solid bottom in the marks, rather than the murky water we have become accustom too.

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Futures Pre-market

The futures have come off pre-market and are front running the cash by a few points. The news this morning was blaming Buffet’s recession remarks as to the fall in future prices, silly I know, but they need to say something. Additionally, the Deutsche Bank news is not adding any GOOD NEWS. Expect some pressure on the cash at the opening as ARB traders buy the futures and short the cash basket.

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Support / Resistance

We will probably be flirting in the resistance band until Bernanke waves his hand with the final cut of 25bps and the 8 week pause between the next meetings.

INDU 12500 / 13000 (We made a couple of good runs toward 13000, but then retreated at the close. This morning the futures are showing the market come off a little but I don’t think we will see TOO MUCH volatility today – until Bernanke makes his move tomorrow. For now expect to see us in the resistance band.)

NDX 1900 (We continue to rise above the 1900 level – mostly with a couple of heavy weights in this index pushing higher. This is a volatile index – but 1900 – 1950 is the resistance band – and area that we will sit in before Bernanke makes his mark and the market decides to really move one direction or another.)

SPX 1350 / 1400 (We were above 1400 and then the market pushed it back down into the close again. This market wants to rally and we are seeing a good fight here at resistance levels – the market wants to rally – but so far it is an even fight – no side giving up ground.)

RUT 680 / 720 (We are slightly above 720 – and this is a sign that the broader market really has some money coming into it. If this stays above 720 it is a good sign for the narrower based indices and that we HAVE broke. Keep an eye on 720 at the close.)

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Conclusion

The talk on the street is “past tense” as if the banking sector problems have been resolved, but we are still seeing write-downs. However, Bernanke is getting credit (and maybe rightly so) for keeping the banks from imploding during the credit crisis (not saying it’s over – but the seas have calm). Now, Bernanke is moving back towards traditional economic problems – and that is inflation and recession. We are seeing oil prices break $100 a barrel (it did come off pretty good this morning) and the dollar fall. Bernanke will probably focus his speech on focusing on economic and consumer stress, while at the same time say “Mission Accomplished” as to the banking crisis.

No doubt that confidence has come back into the market and while today may not see volatility – if the current confidence remains and Bernanke can convince the market that he is now going to address the inflation and recession problems we COULD break out of this resistance area and RIP to the upside. I think that is a pretty good bet and I would suggest that you make SURE you are fully hedged to an UP or DOWNSIDE move.

Fundamentally – I think the market should probably retreat from this resistance level (technically it looks like it should as well) – however the optimistic perception that the worse is over (and if Bernanke can SELL that message) – expect a massive rally through these levels. Either way – it will be a short-term breakout up or down. I would be really surprised to see NOTHING happen.

For the end of day:

1. Make sure ALL hard deltas (long and short) are fully hedged.
2. Watch your short Gamma positions.
3. Watch your short OR long Vega positions.
4. Expect Volatility (VIX) to move AWAY from the current range (20 in the VIX) fast and hard tomorrow. If we rally it will fall to 15-18, if we drop it will rally to 22-25.

Expect movement tomorrow – today maybe another drifting up or down or up or down day. But get your positions and hedges on by the close.

MP 4/28/08

Traders,

Friday was another day of flirting around the top of the resistance levels again ramping more hidden volatility in the market. The VIX is also below 20 for the first time this year. Fear has generally left the market, even with no changes to the economic conditions. Investors are needing to find a bottom to the bad news – and have pushed aside the systemic problems of the economy – looking for greener pastures. Never forget the market moves on perception, initially, that is until the fundamentals come back to solve for price, when perception wanes.

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Buffet blowing bubbles?



Wrigley rallies in the premarket as Mars in conjunction with Berkshire make a move for a $22 billion bid for the gum maker, significantly above the current market cap. It’s no doubt that Wrigley is a staple in America’s past-time gum chewing and the Wrigley family is part of the old school that has also been a hallmark in everything Americana. They have a corner on the Gum market and with the added name of Wrigley – well it just might be what Mars is looking for. Buffet is a keen investor and knows synergy. Look for some action in this sector – hey what is the symbol for the candy bar index?











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High Noon has past – so what is Ballmer’s move

I was expecting for him to draw his 6-shooter and start blazing – but I am not sure that even Ballmer knows what he is doing. Is it friendly, is it hostile, is it just walking away? Does Microsoft just want the website and brand – or are they looking to the staff as well for a full merger? Do they want to integrate it into MSN? What is the plan?


It seems that the threat of Google has got them in a panic and reaching for Yahoo “SEEMS” like the thing to do…but is this starting to look like another AOL / Time Warner deal? Does it REALLY make sense for Microsoft to buy Yahoo? What about Google and AOL and Murdock?

Maybe this is like the Democrat primaries and Google wants Microsoft and Yahoo to play cat-and-mouse for as long as they can – while Google focuses on bigger fish!

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Bernanke’s Week

All eyes will be on Bernanke this week. Does he cut 25 bps? What is his wording going forward? Is inflation a concern? Are there more Discount Window deals?

Probably more so than at any time during his tenure his wording will be scrutinized. He has cut rates first slow and then dramatically to stop the bleeding at the banks and to shore up the credit unwind in this country. However, by doing so he has unleashed a massive wave of inflation –that is “helping” send oil to new highs and food prices are rocketing like never before. While this is not solely Bernanke’s blame – the cut in rates did help send the dollar lower pretty fast at the same time that does have a rather large affect on prices.

Bernanke is caught between a rock and a hard place. Many economist equate the current situation back to Volcker’s time – when oil prices were rocketing, recession was on the horizon, a weak dollar, and inflation was becoming very hot. Volker of course was not facing a massive collapse of the banking system and massive leverage from homes to hedge fund positions that were going bust. Volcker’s fear was massive inflation – and he took interest rates to 20% to stop the bleeding of inflation. Bernanke does NOT have that option –because it could trigger MORE pressure on the banks – which on the surface seem to have put the worst behind them.

The “Core” is reporting moderate inflation, but with all the changes to methodology in the last couple of decades – we are really measuring the Cost of Living and not inflation (because of Hedonics and Substitution). Based on original method of CPI calculations (before all the changes pre 1990) inflation is running at 7.5%, not 4%. I think the people on main street would agree – after seeing the food prices ramp and filling up their gas tank. You can’t double the price of gas and food without seeing inflation go up – but the “Core” would have us believe otherwise.

We will just have to wait and see what he does. A 25 bps cut is in the cards, with better than 50% that it will happen. He will certainly talk about inflation, but I am sure he will try to smooth it over. It most certainly WILL inject volatility in the market.

This market wants to rally – if he says 25 bps cut and they are done – well we could break through those resistance points. For how long? I don’t know – but we could get a sharp pop.

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Future Pre-Market

The ES and NQ futures are looking fairly flat and the DJ futures are front running the cash by a 8 point (20 above fair value). This is a week of volatility as Bernanke speaks and rate cuts are on everyone’s mind. The Arb traders seem to be taking the sideline – and I don’t expect the cash basket to push too hard one way or another.

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Support / Resistance

We are still just below those breakout points – and have been flirting with a rally. We could yet do it – but we keep retreating back at the close. We may NOT break through them until after Bernanke talks mid-week.

INDU 12500 / 13000 (we continue to move up and down less than 1% as we flirt with touching the 13000 level. The economy is not fundamentally ready for a big rally – but investors need something positive to get them out of this funk. A breakout of the Dow Jones would certainly bring optimism back to the market as a whole – abed temporarily. Bernanke could also be the catalyst to send us higher – if he plays his cards right.)

NDX 1900 (We gapped up here last week and have been above and below the strike. It is a magnet strike for now – as the economy and earnings story unfold. Google, Apple, and a couple of others heavy weights drove this market up, but Microsoft reeled it back in. It’s a mix bag with volatility. The longer we stay at 1900 the bigger the move up or down as hidden volatility loads into this index.)

SPX 1350 / 1400 (The cheerleading to 1400 is helping us get there, so far we have not closed above it. We could see 1400 today – and that could signal a new (short-term) rally or a place to short this market. It’s 50/50 if we close there until Bernanke speaks. Even then any move up or down is still in the cards.)

RUT 680 / 720 (We are right AT resistance for the broader market to head higher. Watch the close on this – as it could be a sign of money flushing into the broader market.)

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Conclusion

We have had a good rally off the lows in this market, in the face of the continual housing problem, oil reaching new highs, food prices rocketing, and the dollar dropping. Fundamentally, as pointed out by Rogers, Ross, Pickens, and others it may be just a calm in the storm – because on the ground the fighting is still fierce and the economy has not made any gains. The big stocks that have moved away from US shores to greener pastures are seeing boosts in profits – however as pointed out by some a boost in profits predicated on a weaker dollar is nothing to cheer about – it just means they have met the burden of inflation and are keeping a neck-n-neck race with it. Yeah, that is good news for those companies - but they need to continue that pace to beat the ailing dollar.


The dollar may have hit a low for now and we ARE seeing some strength return and Gold has fallen off from its previous highs. All good news – but it will be perception and how investors READ into Bernanke’s wording that will boost confidence in this market.

BREAK OUT?


It’s perception and confidence vs. fundamentals, so far optimism perception is winning and we are at the snapping point before round 2. Do we break the resistance levels and go higher. I have to side with optimism perception for now and I think Bernanke will play his “Good Karma”, “Worst is behind us” cards to help with that boost. However, I think Fundamentals will revisit and smack down optimism in the future – unless the economy changes SOON!


This is a pivot point – get ready for anything!


NOTE: As it was pointed out to me last week about the VIX. The new formula does include OTM options, which does take the skew into consideration – but only so far as to boosting the ATM options slightly by the OTM weighting. This goes a long way to get a better reading on Volatility as per the VIX, however it still does not reflect the steepness of the skew or kurtosis. I am going to work on a formula for this – to track hidden volatility.

Thanks to Dan and Brains for correcting me. For more information about VIX visit http://www.cboe.com/micro/vix/vixwhite.pdf

MP 4/25/08

Traders,

We pushed up against those resistance levels again yesterday, the NDX actually blew through - with some help from a couple of their overweight’s - toss in a pull back of oil off its highs and we are seeing some confidence return to the market. There was a significant pull back in the futures after the close - led by Microsoft after it's brilliant run - but the futures look to have rebound in the overnight session after that pull back.

This is the day - that we MAY breakout to the upside from being range bond for a couple of months in this negative area being pelted by negative news one-after-another. And even though the U.S. economic picture looks rather negative for the most part (we did get a boost with lower job loss claims yesterday) - the consumer is still under serious pressure - however the investor community seems to have gain in confidence - Hell - this is America the greatest nation in the world - we CAN rally! right?

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Microsoft looking soft after the close

It's High Noon - MSFT set the date for Yahoo to show up! If they don't it could get hostile - the clock is about to strike 12 noon - Steve gave Yahoo till High Noon to agree to the deal or they walk. Yahoo dug their heals in for a $40 dollar price, rather than the $30 price that Steve offer. Does Steve leave town or does this go Hostile? The soap opera continues....

Regardless of all the goofy stories about the Yahoo, Google, AOL, Murdock stock - Microsoft earnings beat estimates, but their profit did drop and forecast is also looking a little leaner - the stock pulled off over $1 in the overnight session. If they go after Yahoo, in a Hostile manner - including large grabs for Yahoo stock - it could also steer focus away from their core business and use up cash reserves. They will probably get what they want in the end. However - it could put pressure on the stock. Traditionally, the takeover candidate usually drops while the target company usually rallies, but MSFT is not a traditional company and has very deep pockets.

The stock HAD made a good rally touching $32 yesterday going into earnings - but in the afterhours the stock has dropped - currently around $30.50. If MSFT stays down here it will put a slight pull on the Dow and NDX - where it is an overweight.

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American Express Beats but what of the future?

American Express - which had announced building up their reserves because of the ramping defaults - beats estimates as overseas utilization (plus again the weak currency) adds to profits. The stock had made a significant drop over the last 9-12 months as unemployment rose and the housing bubble burst. They had increased their reserves as expectations of defaults would start to climb.

However, they have expanded worldwide which offset domestic issues. Overseas utilization rose 14% coupled with a 27% rise in consumer spending (triple that of the US) - help boost profits. Globalization is a clear indication that companies that have pulled up their roots and diversified into both emerging markets and the EU are off-setting the weak U.S. economy.

The US markets didn't fair nearly as well - uncollectible debt in the U.S. credit-card unit rose to 5.5 percent of loans from 4.3 percent in the fourth quarter. Loans late by 30 days or more rose to 4.1 percent from 3.5 percent.

Even though they beat estimates and seeing a rise in stock price in the pre-market, Moody's has a negative outlook on credit card companies - stating defaults will continue to rise. Consumers are taping plastic credit lines as home equity line access declines. Valitne, analyst with Friedman Billings Ramsey & Co, rates American Express to "underperform", states "Consumer spending is slowing, given employment uncertainty, declining home prices and increasing fuel and food costs".

The stock is certainly getting a boost in the pre-market session and overseas growth is expanding - the question is (which I am uncertain) how much can overseas ramping utilization can offset defaults in the US? I don't know - but I think Mr. Valitne and Moody's are correct - take caution - especially as US home foreclosures increase.

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Treasuries tumble

Short-term treasury paper makes the largest two-week decline since 1982 - as traders bet that the Fed has STOPPED cutting rates. The 2 year note rose 72bps in two weeks and actually popped ABOVE the Fed rate for the first time since 2006. This is a clear sign that confidence has returned to the market and that the worst is behind US as traders stop chasing safe money.

The expectation is still for a one and done mentality at the next meeting - a 25 bps cut and some wording indicating the Fed has won, Mission Accomplished! However, many are not too sure about that - as foreclosures continue to ramp and unemployment is still low. Some economist are indicating this is a pause of brief belief in a much negative market - which could push stocks up in the short-term - as money is pulled from bonds and dumped into the market.

The spread between the 3 month T-bills and Libor rate shows credit cost are still rising - which shows that banks are still in need of tons of money - the difference widened to 1.66% from 1.56% a week ago (TED spread). The spread averaged below 50 bps before borrowing costs exploded late last year as the housing bubble burst. Banks are still not willing to lend to each other because the depth of the problems on their books is still uncertain. They are all playing the Write-down game utilizing mark-to-market systems - clearly if this is on 2nd mortgages the mark-to-markets are NOT low enough. No one wants to lend to the next Bear Stearns - if one were to happen. Mr. Lantz, interest-rate strategies for Credit Suisse stated, "The ten-year yields WILL FALL below 3% later in the year." Inflation is a very major concern - while the Fed may have shored-up the banks by cutting rates and making special deals at the Discount Window - has spurred inflation.

Can the Fed raise rates if needed? Probably not without getting back to the money flow issues - which (via the TED spread) show that money lines are still tight.

Japanese bonds have also dropped fast and hard as concerns about inflations ramp. They actually halted trading for 15 mins as they had dropped fast and hard. That is not necessarily a good sign – inflation could be a Tsunami.

Where we go from here - I am not sure - for now confidence as to the worst in the financials and the Fed is done maybe the story of the day - but the Fed doesn't have much more to cut if they wanted too and 25 bps cut is still in the cards for the next meeting. They are almost out of room and have been offering special deals at the discount window. The LIBOR rates and TED spread clearly indicate that money is still tight and costs of borrowing is ramping NOT declining as the FED and economist would of hoped - thus taking pressure OFF the Discount window. The Discount window is suppose to be a lender of last resort - not the first stop on the lending cycle. Clearly - the banks are still concerned with borrowing from each other. Couple that with AMEX and Capital One increasing their reserve pool as US defaults on plastic increase - well it is not over yet. This may just be a pause in the storm.

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VIX – NO FEAR?

The volatility index (VIX) has a lot of associated myths with it, simply because people don’t know what it is or how it works – other than what they hear on CNBC. A very simple primer. The VIX is simply a measurement of the At-the-money (options) current implied volatility of the S&P 500 index options. So what does that mean? Well – each option has an associated premium (value over intrinsic) – that value is given a number (implied volatility).

Implied volatility is simply the percentage movement over the underlying asset for 1 standard deviation over an annualized basis. Ok – that was a lot of words – so a quick example. If I said stock XYZ trading at 100 per share had a volatility of 20 – that would mean that stock XYZ should be in a range of +/- 20 (between 80-120), 68% of the time (also known as 1 standard deviation) (note: of course there is cost-to-carry and some other items that I excluded for the sake of simplicity – note one of our traders – “brains for math” will read this an roll his eyes – since he works on pricing models – but please “brains” bare with me on this for everyone else – wink wink).

We can surmised what the index S&P volatility is forecasting by looking at the option premiums – in terms of their volatility. When the premiums of options decrease – volatility decreases – and therefore the expectation of movement decreases. Low volatility. Traditionally low volatility equates to a rising market and high volatility equates to a falling market – but in reality volatility does not KNOW direction. If the market pops 100 points or falls 100 points that is still HIGH volatility. It is the psychological affect (there is a math reason – but don’t have the time to go into it) why volatility drops in a rising market – which is investment strategy based – investors STOP buying puts to hedge and start selling calls (covered calls) – which lowers the premium – thus lowers the volatility.
So when you hear that FEAR has left the market because volatility has declined – it is a simple indication that investors have stopped buying puts and started selling covered calls.

However – there are a couple problems with the VIX – first it ONLY measures and weights the near-term at-the-money options – which is fair – but does NOT indicate the SKEW of the options. Meaning when those Out-of-the-money puts increase in value compared to the at-the-money. This is even a better indication when FEAR enters or leaves the market. It is quite possible for the VIX to remain unchanged and the skew to increase or decrease. It is those Out-of-the-money puts that have SO MUCH more value – as those are the options traders REACH fore in the falling market.
Sometimes I refer to HIDDEN VOLATILITY – which is volatility NOT reflected by the VIX – since it only measures current at-the-money premium. Hidden Volatility is the combination of skew combined with a collapsing trading range of a stock or index. There is a hidden ramping or load being injected into volatility that is currently not being measured. When the load is released we see a break out of the index or stock in a violent move up or down.

So let’s review – the VIX is only a measurement of options premium of the ATM in the S&P 500 cash index. It is lease a measurement of actual volatility of the underlying and more of a perceived forecast of what investors are willing to PAY for options based on their belief of movement. Fear and Greed.

The VIX is at 20 – pretty low this year – if it drops below 20 – investors will build confidence that the worse is behind us and the market will rally. However, if you see it hit 10 – then I would say people have forgotten the past and Greed is ruling their investments – time to bet on a BIG pull back in the market.

Watch the VIX +/- 20

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Futures Pre-Market

The futures were down in the after-market session (15 mins after the close) – and have now regained most of those losses. The DOW is above fair-value, but the NQ and ES are right at the number – mainly from the knock down by MSFT and the ramp up by AMEX. Arb traders seem to be sidelined for the moment. Expect a flat to slightly higher opening.

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Support/Resistance

We are up near those resistances and all eyes are on them for a breakout in the S&P and INDU

INDU 12500 / 13000 (1300 is in the cards and we could get above it – will we close above it – that would be a positive sign.)

NDX 1900 (We broke through 1900 which is short-term support a couple of heavy weights pushed it through – but the biggest MSFT is pulling down on it in the pre-market. It is going to be push-pull in this index – expect volatility)

SPX 1350 / 1400 (We keep getting close to 1400 only to pull back off – the confidence is building we could push through- but watch the close.)

RUT 680 / 720 (We might hit the 720 area – but do we close above it)

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Conclusion

We are pushing hard against resistance points and the market really wants to break through – but will it? It could and it may see some follow through – but I think the negative impact of the economy will reel this market back in. So – roll up hedges to lock in gains on big upside moves.
Today IS the test of whether we break through or fall off. If we remain in a close range at the resistance – more hidden volatility will be loaded and we will only get a bigger jolt next week.

I am not sure what the future holds for the market, but the economy remains week. I read a report – I will try to dig it up – by a national agency that mentioned that the NATION may not feel a recession and it could be a state-by-state basis. Interesting – but how many states need to move into a recession for the whole country to be in recession.

My gut keeps telling me to pay attention to inflation and the consumer – which make up the majority of the GDP in this nation. True there are some very good segments in the market that have position themselves in the emerging markets and are benefiting from the dollar – but what does the future hold for them. The dollar DID see some good strength as Gold and Oil pulled back – but is that a short-term reaction to the fall in the bond market and confidence that the Fed has STOPPED cutting rates.

Time will tell – but just as we are uncertain about the Democrat nomination – we are equally unsure as to where this market and economy are heading. Expect MORE volatility not less!

MP 4/24/08

Traders,

The market had a slight rally yesterday – but was rather mixed as a whole. Seems that with a few surprise earnings the market didn’t want to carry a short position over-night. Additionally – volume was on the lighter side. The news also seems to be a washed with FOOD shortage issues – and the news can also create panics when there is probably not a need to panic. Wal-mart and other stores are limiting rice purchases – which is not helping and adding more concern. From my limited research the problem SEEMS to be emerging markets and third-world nations and NOT a shortage in this country. Those types of headline stories and Costco (and the like) limiting food purchases can create a horde mentality. Now doubt that commodities are going higher, especially in rice and corn – however lets be a little more realistic – and not cause a panic. Sometimes the evening news seems more about sensationalism or making a mountain out of a mole-hill. So far there is no cause for concern – but no doubt we need to keep an eye on it, but don’t go out and buy 3 20lbs bags of rice – that is only contributing to the problem.

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Jobless Claims unexpectedly dropped?

The initial jobless claims decreased by 33,000 to 342,000 in the last week of reporting. While still fairly high it has contracted – something that economist had not expected, the forecast was for an increase of 3,000 not a decrease of 33,000. Additionally – people staying on benefits declined to 2.934 million from the 4 year high of 2.999 a week earlier.

Jobless claims have been averaging 352,600 so far this year, compared to 321,000 per week in 2007. Additionally – the financial sector have announced in the last month huge job cuts moving forward by as much as 25,000 and have already cut close to 50,000 in the last year.

However, if you have read my essay “The Government’s Modest Proposal” – you would realize these job numbers are very convoluted and the methodology has changed from administration to administration – that any year-over-year measurement or for that matter administration to administration methodology has made such a Hodge podge of calculations that it is fairly hard to get an accurate picture of the actual employment / unemployment measurement.

Regardless how accurate these numbers are or if they will be revised – they are giving a huge boost to the futures in the pre-market which are now flat from being down about .5% Let’s see if that rally is sustainable.

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Ford has unexpected profit

While Ford for the most part has fallen off everyone’s radar as it flirts around the $7 range and continues to lose ground against other automakers and tango’s with the unions – they managed via cost cutting and YES – overseas sales make a profit. The weak dollar – yet again – comes to the rescue of an ailing company that has benefited with the Euro rallying against the dollar. Expect to see a little pop in Ford this morning – but that doesn’t mean to go nuts and start getting long it. They are still on a very bumpy road. I think of the automotive industry in the same lines as the airline sector – a need industry with little to no margins, lots of risk, tied to oil prices, and union threats. Why would you ever invest in these companies? If they never moved and paid 5% dividends yeah maybe – but to bet on this stocks making huge rallies with their business risk factor – I think not!

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APPLE has amazing results – the MAC is BACK

Their earnings fully beat and they are selling IPhones and MACs faster than a polecat in a hen house. I have always loved the company and was an earlier adopter using the Apple ][ back in the 80s. However, they have struggled for decades, until they welcomed back Steve Jobs – who is NO DOUBT a visionary. They continue to set the bar for technology and their designs are almost ART. Their business model is genius by limiting upgrades, battery replacement, and partners – while that is not necessarily good for consumers – it really looks GREAT on the balance sheet. Also by adopting INTEL processors and allowing their computers to run Windows has now allowed them to FINALLY compete with the PC. They are overpriced – but hey it’s APPLE and it is F’n Cool!

They also know how to market their stock expectations – they pull back on forecasts so they can ALWAYS explode with a surprise. There is most definitely two sets of forecasts – one for public consumption and one for how they are really doing! They continue to manage their expectations as well as they design products.

However, that leads to HUGE volatility and should Apple really be trading at these levels? Probably not – the stock rallied 40-50 points since March into earnings – but come on that is perception and hype. The stock took a smack down after the close – but has retraced into the opening – because it’s F’n Apple man and you HAVE to own it. If you ever read those day-trading message boards and stock investing clubs online it is filled with a couple of stocks that everyone seems to trade – and the leaders are Apple and Google.

It is going to help boost the NDX this morning if it can hold – but it looked like it took a smack down in the pre-market after the close. It could and probably should pull off a little since the hype is over. Buy the rumor, sell the news.

Apple and Google and NOT for investors but for traders. Apple can easily trade $100 or $200 and still be priced correctly and we could argue that fair value is $250 or $100 – it’s perception not fundamentals that drive these companies and don’t let ANYONE (including myself) tell you what the fair value is for a hot commodity like Apple – it is what it is! Enjoy your IPhone or Air Book – however don’t buy into the hype you read on message boards about the stock.

BTW: The Airbook is F’n Cool – my partner has one and if I had not bought a laptop before it came out I would probably have one too – granted they are priced at a 50% premium - but who cares it’s a F’ Air Book!

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Futures Pre-Market

The futures were getting hit with the concern about food shortages (being hyped in the media) coupled with some more credit problems announced by Credit Suisse – the crisis is still in full swing. However – the jobless claims shocked everyone and hey it’s not as bad as we thought – the government told me so. The futures got a nice kick in the pants to the upside and are getting close to unchanged. The spread if flat – so don’t expect ARB traders to play this at the opening – I would say the pressure on the basket if fairly neutral.

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Support / Resistance

A little pop back up in most indices – with a solid pop in the heavy tech NDX has got us to some resistance areas as well.

INDU 12500 / 13000 (12750 is a pivot point in the resistance range of 12750 – 12900 – it wants to go up – and some of these earnings could push it up – but a good pull back in oil would also make a good push on the equity side higher. If we start dropping below the 12750 range and close below it we could revisit the 12500 area. I would treat 12750 as the straddle strike in the resistance range. If we breakdown below 12750 start leaning short – if we get back up towards the 12900 area get ready for a break out.)

NDX 1900 (This is a key area – if we snap above and close above 1925 we may of broken out of this – otherwise it’s below 1900 – straddle strike for sure)

SPX 1350 / 1400 (1375 is the straddle strike)

RUT 680 / 720 (700 is the straddle strike)

We have been in the resistance range and not going up or down. The longer we stay here the more HIDDEN volatility loads into this range – meaning when we DO move it could be violent. We are now going to move on perception – the market is starting to build confidence – people are calling for a market rally and the worst is behind us. If the market has enough money on the sidelines, oil drops, and confidence builds – the SELLERS and SHORTS WILL step away and this market can and will RIP to the upside fast and hard. If we can get that confidence build and sellers and shorts step back in – well back down to supports. This is a KEY area in the upper band of resistance – the futures were down and now back up – it’s too hard to call – but the market WANTS to rally – I am 50/50 – so these are fore SURE a straddle strike period.

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Conclusion

The economic landscape continues to look fairly bad – oil is pulling off some – but still well above $100 – gas prices are up and home foreclosures are ramping. Add in the rice shortage headlines and commodity prices and it would seem that things are looking very bad. However, several of the big companies are making huge gains and their earnings are reflecting this – and that is because they have bailed the US for green shores overseas where the economy is strong and so is the currency. It is a tale of two cities – the local economy SUCKS and the global economy and foreign currencies are very strong. The companies placed in those areas are doing very well.

What does this mean for the market? This market WANTS to rally – and if it does – it is perception and confidence returning. Can the global market carry the US, I don’t think so. The dollar needs to strengthen and the consumer needs to have money and buying power.

We can and could rally – but I would make damn well sure I am hedged. These are very volatile times.

My gut says we will go down in the near-term maybe not today.

MP 4/23/08

Traders,

There was not enough “hope” to drive us through those resistance levels and while some of the earnings did look good (with their overseas exposure) – it all comes back to the financial problems and the very weak dollar. The EURO also broke the 1.60 level which is not a good sign for our economy, couple that with rising commodity prices and it’s causing more pressure.

The big rally we had last week was additionally fueled by options expiration – where hard delta short covering helped push stock higher. We are getting back down to the mid-range “straddle points” in these indices – but it is more cause for an increase of volatility and not a clear sign if we will test resistances or supports. Expect more movement.

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Bond Insurers – they need their own insurance

Ambac, which reported a $1.66 billion loss (wider than estimate) – after $3.1 billion in charges. The second-largest bond insurer dropped in pre-market trading. Additionally new revenue dried up because of the failed bond auctions - which they didn't have the money to cover if they wanted too. The company had placed it’s AAA stamp on over $500 billion of securities it insures – its primary business - last year. However, they need money and in March they raised a paltry $1.5 billion in a stock sale (tripling the outstanding shares) and failed to raise outside funds. Of course they maintain their AAA rating from Moody’s and S&P, which is almost a joke at this point. They are struggling in a wave of losses and barely have enough to keep them treading water – they only managed to insure 1% of the muni bonds sold in the 1st quarter.

The biggest crack in the financial system is also one of the major problems that has not been addressed and will continue to put pressure on the financials. The Credit Rating agencies continue to maintain AAA credit ratings on the bond insurance companies!!! Why – it makes no sense? The bond insurers have failed to cover many positions already, Merrill Lynch had to take ADDITIONAL write-downs since the bond insurance failed. However, Ambac and MBIA continue to maintain their coveted ratings?

Well – here is the scary reality – which I think is more alarming then the actual write-downs. Many bond holders, such as pension funds and other large state and local government investment funds have a charter that does NOT allow them to hold bonds below a certain rating and further more they HAVE to be insured. If these bonds fail in rating, or God forbid lose their insurance coverage they are NOT allowed to hold those positions and depending of their charter MUST sell those positions within a certain allotted time.

It is clear that these bond insurers MUST maintain their rating in order to cover these bonds, for if they lose their rating they are no longer allowed to insure those highly rated bonds – then as you can see the house of cards comes tumbling down.

The rating for these bond agencies at this point is not because they are AAA worthy, but rather that they NEED to be AAA rated to keep massive force selling by pension funds and the like at bay.


It reminds me of the little Dutch boy with his finger in the dike – like that is going to stop anything from happening!

At least mumbling Barney Frank (not my favorite U.S. Representative) told Moody’s it had a month to change the way it rates Ambac and others or face legislative intervention. While Barney is RIGHT, if he presses the issue with Moody’s and forces the rating of Ambac down to B or C (where it should be) – it may be Barney that knocks over this house of cards!

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Boeing riding the weak dollar wave – beats estimates

Boeing another company that smashed first qtr. Estimates and profits rise 38%. Their sales and deliver in the jetliner segment rose 8.5% with two-thirds attributed to overseas sales. However, they are seeing some issues with some delivery dates pushed out next year. Boeing traditionally moves in fits and starts – as they continually face delays. Competition with Airbus has pushed them hard to shorten delivery schedules – but when we are talking about the latest technology jetliners and their complexity – it is hard to imagine that problems will not arise. The good news sales over-seas are ramping and the weak dollar is the silver lining.

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MSFT, GOOGLE, YHOO, AOL – and Murdock?

If these economy issues and the political race was not stealing all the headlines we would be focusing on this Ego-Power Play. MSFT makes a bid for Yahoo, Google earnings beat, Yahoo refuses the bid, AOL wants to team up on one side or another, Yahoo may strike a partnership with Google advertising, but MSFT wants to compete against Google so needs Yahoo, but Steve doesn’t want to pay any MORE, and Murdock wants to have MSFT’s baby – oh wait I think I got this confused with a Day Time Soap Opera.

Well – that is what it seems like. I don’t even think THEY know what is going on. To have 4-5 major companies and Murdock in the mix, it is going to take weeks if not months to untangle this Dickens tale.

Anyway – don’t get involved until the picture is clear.


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Futures Pre-Market

We are seeing some serious volatility in the pre-market in the tech sector and some pressure on the broad market. The futures continue to expand and contract vs. fair value and it will not be until about 5 mins before the opening to make heads or tails out of the Arb traders positioning – we could see Buy or Sell programs at the opening after the flip-flopping action.

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Support and Resistance

The indices fell off from their resistance ranges without being able to break-through. Surprising that last week when the first way of banking news was bad with MORE write-downs and forecasting a slowing economy the market ripped up almost 3%, then this week with better than expected earnings from many players who have moved over-seas the market sells off around 2%. It is clear this market is NOT moving on fundamentals – but rather fear and greed. This spells MORE volatility!

INDU 12500 / 13000 (The 12750 level – while a short-term support area is NOT a place to get long hard deltas, but rather flat with gamma. We could easily move higher or lower from here. Think of 12750 as a straddle strike – we will not stay here long. It seems that as we move to resistance or support areas we hang around before retracing. Expect a move away from 12750 – it looks like it maybe up based on futures – but watch the close – staying above 12750 will be key for building support.)

NDX 1850 / 1900 (While we HAD been above 1900 it was more about a handful of issues that made a radical move that pushed us through there. The 1900 area is resistance – but with the huge volatility in this index we could easily revisit 1850 or 1900. 1875 area is the straddle strike!)

SPX 1350 / 1400 (We never did spend time above the 1400 area before we eventually pulled off. Again we are at the straddle strike and the futures are pointing to a higher opening – but after that – who knows – other than we are NOT staying here.)

RUT 680 / 720 (We visited the 720 level only to drop back to 700 – we will NOT stay at 700 for long and the opening is looking UP – but where we close will be more indicative of the index.)

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Conclusion

The Ambac and credit rating agency issues are still playing this game. We have watched the failure of the mono-line auctions and several large firms write-down losses that the insurers could NOT cover. Yet the game is still played – pretty much to keep the dam and a possible WAVE of forced selling to take place. Barney (Mr. Mumble) Frank is taking action, and while I am not inclined to agree with his politics – I cannot deny that he continues to point at the stress issues in the financial system and correctly they need to be at the very least addressed. My concern is that he may not be fully aware of what is behind this dam. Ambac just diluted themselves by 200% in a stock sale and still failed to raise outside money – they can no longer afford to insure bonds at auctions – proof that they only insured 1% of the mono-line auctions last quarter. That could ALSO be the reason of the autcion failures – if the bond insurer cannot or will not insure them – do you think Citi, Merrill, and other banks want to BUY those bonds at their traditionally LOW rates? No way!

Clinton won – but I am wondering with all this in-fighting and money spent between two candidates of the same party – are they NOT wasting money, time, and causing a riff within their own party? The money they are spending is crazy and the attack ads sound like the Republicans vs. Democrats. Hillary’s attack ad with BinLadin looked more like something that Bush would of used. I saw some recent polls that clearly state that Obama supporters if he lost would vote for McCain and Clinton supporters if she lost would vote for McCain, that is crazy! The only person that is enjoying this stupid fight is McCain – who hopes it continues to late June – which by then the party may have imploded. Most Democrats I talk with want the race to end and are starting to become disenfranchised with their party. The Republicans I talk with want it to continue and are enjoying the sport of Dem. Vs. Dem. viciously attacking each other. This can ONLY help McCain at this point.




We may rally at the opening and possibly get some follow through – but stay hedged and don’t take long or short hard deltas without some method of hedging those positions.

MP 4/22/08

Traders,

Yesterday was very light volume and flat for the most part – a couple indices up and a coupe down. These are critical times if the confidence can return and push us up through that resistance levels. The earnings are come in with two different stories – those with LARGE global exposure and those without. The financials last week came in with MORE billion dollar write-downs and the market ripped up. Yesterday and this morning several companies beating expectations and the market doesn’t move. It is clear that the market has disconnected with reality – it is opportunistic perception and restored confidence that will send this market higher.

We are living in a time of a huge shift in economic balance and history is forever repeating itself. The Sun did set on the English Empire at the turn of the last century. They were the world’s super power, controlled the seas, had colonies around the world, and the pound sterling WAS the currency. That had shifted and the U.S. took that torched and dominated – companies expanded and wealth was created. It seems now we are passing that torch again – to the emerging markets China, Brazil, India.

These countries with vast populations, a new consumer vertical market, are going through several revolutions simultaneously, manufacturing, service, and technology. It is apparent from the earnings coming in – that the companies that have moved the majority of their resources into these economies are doing fantastically well – while the U.S. suffers a mass consumer fall out and ramping inflation. Coke, IBM, CAT, McDonalds, and others have moved a majority of their operations, marketing, sales, manufacturing, and focus off our shores and are now reaping those rewards. The weak dollar has also helped these companies – McDonald’s reported that $.05 of their earnings increase was from repatriating the dollar as their sales rocket in the Middle East, China, and elsewhere. We are in a global economy – don’t fight it – look for opportunity. Do make your investments on Patriotism, but rather opportunity. Leave politics aside – investing in the market is about making money – simple.

However, it is the U.S. consumer – unless invested in these companies – that is seeing the hardship – higher prices, job losses, housing slump. While companies exposed to overseas expansion will do well – we in the U.S. need to get ready to ride the storm out.
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McDonald’s profit beats!

McDonald’s who has been expanding rapidly in emerging markets as well as Europe has benefited in both expansion but also the weak dollar. Europe sales increase but a large boost came from the weak dollar against the Euro. Combined currencies gave an added boost of $.05 to the number – that is a huge profit – just from the falling dollar. Interesting to note that sales in the U.S. were “slightly negative”, according to the CEO Skinner. Clearly showing that it is a Global company.

McDonald’s U.S. sales were unchanged in December, the worst report in 5 years. However, sales rose in the U.S. in the first quarter. Some economist are reflecting the slight increase sales in Jan. and Feb. in the U.S. reflects a shift in spending – as consumers lower their standard of living. As job losses mount, consumers are tapped in their credit lines, and inflation rising – looking for savings anywhere is going to reflect in these discount companies. We saw similar results in Wal-mart sales figure as people are downgrading their spending habits.

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SunBUST – more money, please?

If you had been reading the Market Preview for any length of time or have talked to me about SunBust – you know how negative I have been on this company. They are seriously exposed to 2nd mortgages in the state of Florida. They had ramped their 2nd mortgages in 2006 and 2007 – only to have it bite them seriously in the A$$. They already started selling their OWN real-estate in lease-back options to raise cash.

SunTrust income dropped 45% to $.81 a share down from $1.44. They said the real estate slump in Florida has forced them to boost reserves for bad debt. The problem again is the write-downs on the 2nd mortgages – even writing them down by 30-50% doesn’t help that at foreclosure auctions in Florida – most 2nd mortgage holders are lucky to even get $.10 on the dollar, most are getting NOTHING. That means that write down should be ZERO and not 50%. They raised its provision for long losses 10x to over $500 million as they expect MORE defaults on mortgages and home equity lines.
SunTrust announced 2,400 job cuts or 7% of their work force to shore up losses and reduce overheads as they continue to ride this storm out. The stock is down 4-5% in the pre-market.

I continue to hear rumors that more problems are to come to this bank as they went ALL-IN on mortgage writing in 2007 – how those 2nds looking now?

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INFLATION – Oil, Dollar, Gold, Food

As earnings come in for the multi-nationals beating estimates and domestic reliant companies suffer, along with the financials – the U.S. consumer is stilling feeling the inflation heat as Oil hits new highs daily and the Dollar flirts with breaking the dreaded $1.60 mark against the Euro. While many companies are benefiting from the weak dollar it is the consumer that is going to continue to feel the pinch.

Food prices are hitting new highs – Wheat is up almost 150% in one year, Rice has made some of the biggest jumps on record, and Oil is above $117 heading into the driving season. The question is how does this affect the consumer – but also the stock market.

Here is the problem I see with the commodities heading higher and impacting the consumer. The stock market – no doubt – moves on perception – but NEEDS money to fuel any and all rallies. As prices heat up in the commodities market they drain capital on the sidelines that could enter the market. The problem with commodities is that they are expendable assets – or a constant sink hole – you don’t profit from eating food or filling up your gas tank. You just HAVE to spend that money. As the prices increase the money that goes into investing starts to dwindle.

If money is being drained on the sideline or WORST people need to get liquid cash because other costs are rising they MAY BE forced to sell even SOLID fundamental companies to realize the liquid cash. This is when fundamental decouple and the flight to cash is needed to off-set rising prices. Now this may not be a large amount of the sideline money or current invested money – but couple that with the deleveraging going on and the already tapped credit (margin) lines and it could keep any rally from getting solid legs.

At the end of the day – cash is king – and if you NEED cash you might even sell that company that has solid fundamentals and doing very well in the global market – because at the end of the day you NEED money to transact your daily business. The market – therefore is in an interesting state – that EVEN WITH better than expected earnings you could see some of these companies fail to rally or even fall off as cash is sucked out because of inflation pressure.

Take the time and do your own inflation check. How much does it cost to fill up your tank NOW compared to a year ago at 50% less? How much is your grocery bill as compared to a year ago – with prices rallying as much as 50%? Add that to the fact you CD is now paying 3% instead of 6% and your return of money can’t even keep pace with inflation.

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Futures Pre-Market

The futures are getting hit after some better than expected earnings – other than SunBust – but the economic landscape has NOT changed for the US Consumer or the rate of inflation (which is higher than what the CPI would have us think.). The futures are front running the cash by about 3 points – so expect pressure on the basket at the opening.

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Support / Resistance

We had light volume and went NO WHERE yesterday – do we break out or go down – the longer it takes the higher the odds we retreat – in my book. 70/30 downside is my bet from the resistance.

INDU 12500 / 13000 (We could visit 12750 today – but that is not a support to get long at all. I would of thought with a couple of the Dow components reporting better than expected we might of hit the 13000 number – but the futures are not showing that story.)

NDX 1850 / 1900 (We are above 1900 – but I am still saying 1900 is resistance – the problem with this index it only takes one or two heavy weights that are over 1:1 ratio to drive this index up or down greater than it’s whole. It’s volatile for sure – but I expect a retracement to the downside.)

SPX 1350 / 1400 (We pulled off 1390/1400 area the resistance – it seems very hard to get up and through that number. If we can build some momentum and confidence we could – but even with better than expected earnings we are not getting off the mat?)

RUT 680 / 720 (We pull off a little from the resistance – it did rip through it – have we lost momentum – keep an eye on the close.)

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Conclusion

We are in going through an economic evolutionary (or creative design) change. The tipping point in alternative energy and the global expansion with the shrinking U.S. consumer market is a catalyst for a massive shift of economic power. It will be great for some and very difficult for others. The average U.S. consumer will feel the pain no doubt. Prices are rising faster than the CPI is reflecting and the consumer is tapped out of credit lines. The financials have not found a bottom to the credit problem.

But the picture is not that bleak – if you are in the multi-nationals, commodities, and foreign currency you have been making money this year. Additionally – if you are NOT a bottom picker but play from the short side you are also benefiting.

Expect MORE volatility – tonight may see the Democrat leader – but I doubt it and it will drag on into June.

MP 4/21/08

Traders,

We are at a resistance area and are pressing up against it. The indices have pushed up against it and WANT to break through – the earnings season so far has delivered a mix bag – those companies doing well with the weak dollar and large overseas revenues are seeing a boost to profits when they repatriate their currency – on the other hand financials, banks, lenders are continuing to write down billions of dollars. Google also surprised, after internet advertising data stated a huge slow-down in growth in the US – but Google has expanded to relying on overseas.

The picture is clear – companies, like those smart billionaire investors, have moved off-shore and relied on overseas sales to keep money flowing. Those that are handcuffed to the US or rely on US consumers are the ones that are suffering and will continue to do so. It’s a mass exodus in search of profits – running from the dollar. Commodities continue to rally – and those companies in commodities or with oversea sales have been the strength to this market. Unfortunately they are not enough to keep the overall fundamentals of the economy from turning around – rather just a index or two.

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Bank of America – profits fall 77% and more write-downs

It’s becoming questionable whether the decision to take on Countrywide and its massive debt was a wise decision – only time will tell. Now BAC has become the largest mortgage company after its acquisition. We saw in the 4th quarter a change in leadership in the financial sectors, promises of turning it around, and that the worst was behind us. Now the story is repeated again in the 1st quarter – more write downs, more layoffs, and more promises.


It may be true – it could be the worst is over – but I doubt it. In March California reported over 23 thousand new home sales, but then also reported over 70 thousand of homes in some state of foreclosure (notice of hearing, notice of default, etc). Analyst predict that 80% of those will be foreclosed on (over 55 thousand) over the next 3 months. Additionally – at foreclosure auctions over 95% are reposed by the banks with no bidders – homes are going for 25-60% less at the auctions. It’s clear that we are going to see MORE foreclosed homes and that delinquency is ramping. Add in that 2008 will be the largest resets in mortgage ever – over $450 billion and the majority coming in August of 2008 – well the picture is clear.


The problem however is the length of the process – while the market moves sec. by sec. and min. by min. where we can see a optimistic rally of 300 points or a panic sell off of 400 points – it takes time for the housing market to move through the system – very slow. I know – I am renting a home now that has been going through that process since last October. I am even trying to buy the mortgage or home (50% discount) – however the paper is so mucked up that I am not even able to get to anyone that CAN even make a decision – even the lawyer for the plaintiff doesn’t even know who I should talk too.


The reality – we have a long way to go and if California numbers are indicative of the market – then expect to see foreclosures to start out pacing sales and for the foreclosure process continue to ramp.

The bottom line – when you are MARKING down (write-down) a 2nd mortgage on the books to .50 on the dollar – it sounds big and you MIGHT convince some people that IS the bottom (sure it is a huge discount). Here’s the kicker – at foreclosure they might not even get .05 on the dollar at the auction. Specially if homes are going for 30-60% less than the paper on them. That will take the MARK to an ACTUAL loss of 90-100%, not the 25-50% marks that they are currently stating.

Good luck BAC, specially now becoming the large mortgage holder in the US - soon to be the largest home owner!

Check out http://www.foreclosureradar.com/ for a little dose of reality.

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Lilly and Merck a tale of two drug companies

It seems that when a drug company has a weak pipeline and their top sellers are in the competition stage of their life cycle with generics – well it doesn’t paint a rosy picture going forward – we saw that last week with Pfizer.


Merck has new drugs in their pipeline and is expanding their partnerships. The beat 1st quarter estimates and their newest products Gardasil and Januvia are paying dividends – they are also early enough in their life cycles not to be threaten by generics – so expectations is for a fairly decent year on the profit lines. Additionally their partnerships in for other drugs is showing returns as well. Being the number 3 drug maker means making partnerships – but while that might cut down on possible profit returns it also reduces the risk exposure.

Lilly – which did have an increase in profits – fell short of expectations. Additionally – several of their top flight drugs are getting closer to their window of competition in the life cycle – meaning it will be force to start lowering prices to compete. Another story in the life cycle of a drug is competition if the drug is successful and NOT from generics. Cialis and Cymbalta – while flag ship drugs – are already facing some competition. Additionally – only a few weeks ago Lilly announce layoffs and also STOPPED making quarterly estimates – and backed off to only making annual estimates. This has caused not only confusion among analyst – but concerns as the company will no longer reflect qtr-to-qtr projections which means there is more volatility – since this industry is already volatile with FDA approvals, competition, patents, and other risks. Analyst will have a harder time forecasting qtr estimates.

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Futures Pre-Open

We are seeing some volatility in the pre-market, BAC news put the smack down on the numbers, but Merck gave it a boost. The futures, while down are also significantly below fair-value. The Futures are front running the cash by 3-5 points (30 mins prior to opening) – so expect the Arb traders to step in to close that gap – if the gap remains wide going into the opening – expect pressure on the cash basket forcing the market down at the opening.

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Support / Resistance

We bumped our heads against the ceiling – the question is can we PUNCH through. The market wants to, investors want to, but is there ENOUGH money to do so. The short-covering has been large – lots on Friday – which contributed to the rally. If the short covering is down – it COULD create renewed pressure as they MAY step back in at the ceiling again.

INDU 12500 / 13000 (We busted through 12750 – and if we revisit that area I would not call it support as much as a pause. 13000 is a psychological area to get to and could help build confidence. However – staying above 12750 is the key. The futures are showing a 50 point decline at the opening – however that could be short lived – if optimist increases and sellers step aside. The volume has NOT been great to the upside – which is a little alarming.)

NDX 1800 / 1900 (We closed at 1900 – a very key area – a place that longs should of flatten their deltas, rolled up hedges, and for those that short – to start shorting. We could get some follow through to the upside today – but futures are the opening are showing a lower opening by 15 points currently. The rally was on the back of Google and it is IMPORTANT to remember that this index is really driven by the top 10 which either pull up or push down the rest of basket. Keep an eye on the big names in this index – if that start giving up the ghost – expect a retreat. This is not a place to get long and not a place to get short, without fully hedging. 1900 is a straddle strike – which should be given 70/30 down vs up.)

SPX 1350 / 1400 ( We almost closed at that 1400 number on Friday – it was in the cards – but after the opening it was relatively a +/- 5 range for the day around the 1390 area. The volume lightened after the opening and I am not sure how much was short covering – but the little birdie told me there was a lot at the opening – especially since it was expiration Friday and it blew through strikes. It is important to remember that there are OPTION shorts that converted to short hard deltas on Friday that needed to be covered as well that helped fuel the rally after it blew through strikes at the opening. That is probably what caused the narrow band trading for the rest of the session. Confidence will return IF we close above 1400 – otherwise expect our short friends to revisit.)

RUT 680 / 720 (Again we are at the top of the range and just hanging there – the futures are showing a pull back. To build confidence we NEED to have these indices close significantly above the resistances. If that doesn’t happen quickly – then the shorts may start to re-enter this market.)

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Conclusion

This market is pushing hard to break out of the 1st quarter range and bust through this resistance. If it doesn’t do that quickly – the reality of the economic slowdown and problems will move from the back of peoples mind to the front and confidence will be lost. The rally will only be on optimism and confidence returning. The VIX showed on Friday that FEAR has left the market – and that is concerning as it clearly shows that people are getting LONG with OUT hedging their positions – hoping, rather than taking caution.

Investors focus on ONE good earnings (KO or the like) failing to realize that SOME companies will profit on a weak economy, weak dollar, and large oversea exposure. Maybe it’s time to think of KO as a global company and not a US company. It is clear if they had focused on the US market the company would be facing serious problems. These companies (KO, CAT, IBM, etc.) are running as fast as they can for the border, building factories, expanding business, spending money, hiring staff, etc. overseas. The US economic picture is a lost cause (for now) – consumers do NOT have money, home foreclosures continue to ramp, higher commodities prices are seeing oil, food, and energy ramp. A smart company would pull up their roots a get into China, India, and other emerging markets as FAST as they could – if they cared about profitability.

So how does that leave the rest of the market. Well – financials are seriously under weight for because of several factors – lending (mortgages), weak dollar, forward lending of foreign currencies, leverage, to name a few. US retailers – are getting pinched on three sides – shipping costs, weak dollar costs them buying overseas to sell locally, and the consumer is tapped out.

We are in the painful shift that we are NO LONGER the center of the universe. Smart money and companies realize that! If the Democrats win and shut down free trade (or what we believe is free trade) and introduce any protectionism – we may see the system crack even worse. Some companies may fully LEAVE the US in search of profits. That would mean instead of a reduction of jobs – you may see NO JOBS.


If the FED continues to serve the financial institutions solvency issue rather than the economy and consumer – which is currently forcing companies to sell abroad and squeeze the consumer – we will continue to see the likes of KO and CAT continue to expand overseas and leave our shores – at the same time see the consumers lose MORE buying power as the dollar fall and commodity prices rally. This is not a political thing that the Republicans or Democrats can solve – but rather a monetary and economic philosophy that people have to cut away their patriotic and moral compass to solve. It’s not about saving jobs, as much as it is about saving the dollar and economy. As soon as we get off that horse and start facing the economic and monetary problems then and only then can we get back to our dog and pony show which makes up 90% of the Republican and Democrat rhetoric.

For now – invest in those that have abandon the US dollar – hedge as we rally – expect MORE volatility.

Do NOT be patriotic with your investments – you invest to make money not to support the economy. It’s the FED and the administration that needs to solve that problem – not you with your investments. They have to MAKE it attractive to invest in the US – until then – stay away from dollar risk securities.