MP 4/15/08

Traders,

We continued to hover around the short-term support area after more bad news in the financial sector with Wachovia put pressure on the financial sector. The INDU still holding in the mid-range above the 12250 area is showing that the market is resilient and continues to “hope” that good news will prevail and move this market higher. The RUT is also above 680 – showing that while sideline money may NOT be flowing into the market – the sellers have at least reprieved from hammering on it. However, we are still not seeing any signs from the dollar, oil, and other commodities giving this market any boost to the upside.

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OIL heading higher !

Oil doesn’t seem to want to retreat – and every time it does it is just a basing area to go higher. It’s as if the nation has become numb to the pain and have accepted filling their tanks with $3.50 + gallons. As that continues – consumer spending can only slow – as they have less money to spend at the store. It seems that there was MORE pain when oil went broke $50 a barrel.
We are hitting record highs as the demand continues to rise and the risk on the supply side sees issues around every corner. The latest disruption came from both Nigeria and Mexico.

Nigerian’s production halted following some explosions near some wells – sabotage is to blame – costing 5,000 barrels per day. In Mexico (third-largest supplier to the US) – shut down its export terminal due to bad weather.

As I had stated in previous Market Previews – the war for oil is on – and as China grows at an accelerated rate the demand is increasing at exponential rates. We are not going to run out of oil any time soon, but we are currently at maximum extraction vs. demand.

Oil prices will affect not only consumers – but also several industries – including the airline industry – which leads to the next story.

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Delta and Northwest merge

It was just recently when both these airline carriers came out of bankruptcy. Additionally – they are facing continual problems on all-sides. From union disputes, higher oil prices, discount competition, foreign competition, and plenty of regulation issues. While Delta and Northwest may have had recent spurts in revenues – it’s the future that is driving this merger.

It’s one sector I could never see as a great investment – the risks are too high and the margins to narrow. They have traditionally shown that bankruptcy is always in the cards and just around the corner.

This is a merger of survival in the future based on my limited assessment – it is nothing to cheer about or for that matter go out and get long either of these two gas sucking companies. However – for traders – there will be some arb opportunities over the next 6-12 months. Investors stay away.

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PPI – higher than expected – can you say INFLATION!

As we are continual told by the FED that inflation is at bay or moderate (based on the “core” readings) it’s indices like the Producer Price Index (which should be called the Producer Price Increase) that tell a different story. The PPI rose twice as much as forecasted to 1.1% gain (with only a .3% gain the previous month).
The rapid rise in commodity prices coupled with a rise in fuel prices in crushing profits as companies continue to eat the costs, rather than pass the increase onto consumers.

However, these companies can only hold on so long before they will have to pass those increases onto consumers. There WAS “hope” that companies could eat the high costs for a quarter and look forward to the dollar gaining strength and prices to come back down. However, they are not seeing a reversal in prices yet and many commodity prices continue to make new highs.

Food prices are also on the rise – and rose as a group by 1.2%. However, several sectors are seeing huge rallies – rice made a 8.7% gain the biggest in 5 years. How much of this gets passed onto consumers at this point is unclear – companies will be visiting their balance sheets and returns – trying to estimate how long they can ride the storm out without passing those increases onto consumers – whom already are in a serious pinch with their buying power.

This pressure will put pressure on Bernanke (and wrongly in my humble opinion) to cut rates again. Forecasts are rapidly changing and expectations for shrinking margins and a massive drop of profits is on the horizon (at-least through the 3rd qtr). It will take a while before these companies can get in front of these problems.

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Foreclosures JUMP 57% as owners walk!

Foreclosure filings made a massive unexpected jump by 57% and banks repossessions doubled in March (from a year earlier). About 250,000 homes foreclosed in March or for a more staggering number 1 in every 538 homes in the US (according to RealtyTrac Inc.). The top three states of foreclosure are Nevada, California, and yes Florida. Additionally over $450 BILLION of Adjustable-rate loans are scheduled to reset this year – according to Citigroup.

The results is that rising foreclosures will add MORE inventory to an already glutted market! Bank seizures increased 129% from a year earlier and foreclosure filings in February rose 60%.

Nevada had the highest foreclosure rate in March (1 in every 139 homes), California was second (1 in every 204 homes), Florida 3rd (1 in every 282 homes).

``We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. ``The foreclosure process will accelerate throughout the year.''

``The continued increase in new foreclosures implies an even larger drag on prices in 2008,'' Goldman Sachs Chief U.S. Economist Jan Hatzius.

Needless to say – we are NOT even close to seeing blood run in the streets.

Additionally – there are NO LOANS available for many looking to refinance or purchase homes – as banks horde much needed cash to keep them solvent. If banks are NOT willing to even lend “safe” money on mono-line or muni bonds (which are defaulting) – they sure as hell are not going to lend it to an individual.

Money is ridiculously tight – because of the massive leverage positions that banks continue to hold.

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Futures Pre-Market

The futures are up, but still lagging the pre-market cash baskets and should see a little pop at the opening. Arb traders may leg into the long side and sell the basket if the spread remains inverted at the opening. Currently about a $2 point lag. This could create some pressure on the basket after the opening pop.

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Support / Resistance

The futures are showing a little pop at the opening – however we still remain slightly above the short-term supports – again a place NOT to get long – but to remain flat with gamma – we are in the middle of the range.

INDU 12250 / 12500 (We are slightly above 12250 and while futures show a little pop at the opening – I would be concern that oil, PPI, and foreclosures may put un-needed stress on the market. Continue to watch the 12250 area – stay FLAT.)

NDX ***1800 *** (We are slightly below it – but it remains a pivot point in this highly volatile index. It’s more about gamma and curvature – then trying to call a direction – but expect more down-side pressure.)

SPX 1325 / 1350 (We are slight above short-term support – do NOT get long at 1325 with hard deltas – it’s ONLY a long SOFT delta play. Get gamma and expect to move away from this short-term support area. We could rally – but don’t bet the farm on it.)

RUT 680 / 700 (Again we hover above 680 and the market didn’t push down through it – but watch the close to see were the broader money is flowing or not flowing.)

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Conclusion

The housing story is far from over and seeing the massive jump in foreclosures is pretty alarming that we have not even see the bottom in this housing market. Additionally – housing price drops do NOT include foreclosure prices – my guess is real values are closer to being down 25-50% range and not the 5-10% range that reality firms are reporting.

Additionally – oil and other commodities are trending higher – putting serious pressure on the market, margins, profits, and consumer spending. The FED will continue to cut rates – to flood the system with more money – but that will not only keep the banks solvent for another day, send the dollar lower, and inflation higher.

We are in for a long rough road and I have not seen a bottom yet – any rallies are based on optimistic hope and not fundamentals changes in the economic landscape.

We do we go from here – I am not sure – but make sure to hedge long hard deltas that are exposed to U.S. economic forces.