We had a decent rally and then some pull back into the close – but still closed up on the day. The combination of the quarter end marking and Paulson’s Plan may have injected some upside move. However – it was a rather unusual day with the strength loss going into the close. It does look from the futures in the pre-market that we may get some follow-through to resistances – but….who knows in these volatile waters.
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Europe Banks up on writedowns? UBS and Deutsche Bank with MORE writedowns
Ironically a friend called about the security of having funds at UBS last night – I thought it would be rather safe, regardless of the institutions ongoing issues in the credit market. It has a couple of additional advantages over its brethren across the pond – first it’s a Swiss Bank (meaning that I don’t think the Swiss – with their pride of the banking system – let it fail. Of course that is an opinion) – second – being a Swiss banks the assets (for the most part) are priced in Euros and Swiss Franc – with the weakening dollar – being in Euro and Swiss Franc does have advantages. Regardless – if you are concerned about stocks – you can always have the stock taken out of the street name and receive actual certificate (if you plan on holding the issue for a long time). Remember – you may THINK your stock is safe – but if you have a margin account you pretty much have given up your rights of control of that asset. Make SURE to always read the fine print.
UBS takes $12 billion (US) in writedowns and another CEO bites the dust, as Ospel steps down. It had raised already 13 billion (SF) from Singapore and the Middle East – and is looking for another 15 billion (SF) to replenish capital.
Deutsche Bank reported $4 billion (US) in writedowns – but the CEO remains intact for now….
Strangely enough – the spin doctors in Europe do a hell of a better job than here in the US – because they have managed to spin (yet again) that the worse is behind us as these companies are moving forward to profitability. The investors have bought the spin (hook, line, and sinker) and the stocks are up in Europe after the writedowns. I actually heard one analyst report – “the writedowns were already priced in” – I was laughing because how do you price in a $10s of billions of losses to where the company needs to borrow $10s of billions more to stay solvent. How is that priced in? Silly talk that is.
The stocks are up on optimism that the worse is behind them – it is perception at this point – nothing more. For if it was on fundamentals and I told you X company had billions in losses and needed to borrow billions more to stay afloat (or go bankrupt) – you would not take that as GOOD NEWS. However – after the Bear Stearns bailout, the Euro and FED pouring liquid money into the system, and the sovereign funds tossing good money after bad (see Citigroup) – well it’s the belief that we CAN NOT and WILL NOT let these firms fail – that is sending optimism back to the market.
So for now – ride the wave higher – but realize it predicated on optimistic perception and nothing more – and that means HEDGE YOUR BETS!
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Lehman – looking for money
As you may know I was full of laughs when Citi upgraded Lehman last week, I even went as far as to say that Lehman would reciprocate by upgrading Citi. They did, in a sense, as pointed out by a reader of the blog.
An analyst (from Lehman) PRAISED Citi for their reorganization effort (rearranging the chairs on the Titanic) of their credit card division . “The US unit is very profitable….This is a good effort to transfer expertise from the US to outside the US” – making these statements as if Citi is trying to expand operations – rather than trying to manage unmanageable risk - thanks Lehman. I can’t believe anyone would make such a statement about their faulty credit card division they are trying to spin-off to reduce the credit risk exposure – as if to expand their VERY SUCCESSFUL US credit card unit into new markets – haa haa haa.
After that upgrade to “buy” from Citi – Lehman is now on the hunt for money – to stay liquid. They are going to issue MORE shares to raise at least $3 billion (convertible preferred shares) that they will SPIN into “an endorsement of our balance sheet by investors”. You mean to say – “We NEED money and we are going to give our convertible preferred shares at discount to raise money”. The spin doctors are sure earning their money.
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Futures in the Pre-Market
The futures are seriously front running the cash (30 mins before the opening) as the banking sector is getting a solid boost in Europe – after the news of raising more money and spinning (the worse is behind us). The spreads are 10+ but expect them to narrow at the opening. I would expect the futures to pull back into the opening as Arb traders turn on the buy-programs.
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Support / Resistance
The market made a decent move to the upside and in the AM will look to get a follow through. The optimistic perception has clearly indicated that investors are looking for a bottom and we will probably retest those resistance levels (AGAIN!) – only time will tell if we can break through.
INDU 12000 (12250) / 12500 (We are at the interim support area of 12250. We could test the 12500 area very easily today – this is a place to get flat and for those that get short – make sure to hedge hard deltas. Watch the close.)
NDX 1750 / 1800 (We may test resistance today – a place to flatten ALL HARD deltas and look to get short.)
SPX 1300 / 1350 (We are in the middle of the range – the futures are showing strength and we could test resistance a place to flatten hard deltas – and for those traders to get short – hedged)
RUT 650 / 700 (We could test 700 AGAIN – make sure to get FLAT up there. If we can NOT break through or go higher – then this will be the key to the narrower based indices above. A good shortening area – but hedge)
Getting short at the resistance area may be in the cards today. What you have to WATCH OUT for is the sellers stepping away and SHORT COVERING kicking in. A full hedge of SHORT positions is a must at these resistance areas is a must – because IF we break through we could move up FAST and HARD. You may OVER hedge to profit to the upside – using ratio spreads to give yourself extra bullets and gamma.
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Conclusion
Today is a banking RELOAD day – several banks have/are raising capital to move forward after another round of writedowns. Goldman had mentioned to expect more – and so far Goldman has been right on almost every call. This is the first day of the new quarter and many are looking for optimism that the 1st quarter was the bad quarter and now things will be all fine and dandy. However – the economic landscape has not really changed. There could be more BEAR STEARNS issues to raise their head and banks are looking for more capital. Again – it would seem that people want to flush the 1st quarter down the toilet, forget about it, and move on.
It will still be prudent to hedge your positions, flatten deltas at resistances, and use soft deltas for short-term directional plays. Expect MORE volatility and while we may have a good bounce – it may only be a short-term rally in a bear market. I am not convinced that the economy has changed or that the worst is behind us. If Goldman is expecting another 10-20% drop in home prices and more write-downs to come – then I think I will stick with their outlook rather than jumping in with both feet.
Side Note: I have received some emails from readers (blog and email) that sound VERY socialist in nature. I understand your concern – I also think Bernanke has not necessarily made the best decisions or maybe too little too late. However – let me clearly state that these are precarious times. Should Ben let Bear fail? Many would said yes (including me) – then after peeling back that onion and seeing $10 TRILLION of counter party trades on the books – this was no bailout of Bear Stearns – but more like keeping the dominos from falling and a run on the banks. I don’t know what the answer is – but I don’t think the market (economy) could of handled $10 trillion in counter-party trades coming into questionable solvency. The bailout was NOT for shareholders (remember they were only going to get $2 a share - until they revolted) – the $30 billion from the Fed was to make sure the bigger problem didn’t happen - credit problems. If Bear Stearns was alone in this – I would say LET THEM FAIL – but I don’t have enough information (other than the counter party trades and the mortgages backed structured notes) to say – doing nothing could of sent the dollar dropping very fast (which we got a glimpse of in the morning on that rumor when we saw an unprecidented move in the EURO) and then a run on banks (like Northern Rock) – I don’t think anyone wants that.
So – read those socialistic anti-market newsletters, blogs, and websites with a grain of salt.
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