MP 4/16/08

Traders,

We saw a slight rally yesterday but are still at the pivot point ranges. Earnings season is well on its way and we are seeing some fairly decent earnings in the mist of the financial and credit problems. However, once we peel away the layers we see that some of these better than expected earnings are based on the weak dollar as some of these companies revenues are generated overseas and patriot to the US dollar shows larger returns. It is possible for a company to have flat sales but increased profits from the falling dollar.

The foreclosure numbers yesterday and the housing starts this morning are showing things still remain rather bumpy. Expect to see some volatility – however a couple of good earnings are really giving a boost to the futures in the pre-market.

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JPM – riding the storm out!

JPM is surrounded with concern with taking on Bear’s problems – however even with another $5 billion in write downs and NET falling 50% it would seem that they are managing fairly well given the problems. Coming in line with analyst expectations is sometimes better than we could hope for – which is actually pretty sad. They have a big black hole on their balance sheets called Bear and the depth of the problems is still rather uncertain. The CEO (Jamie Dimon) didn’t have a rosy picture to paint for the economy or JPM going forward – other than he is manning his post and steering his ship through a very rough storm. At least he is grounded in reality and is doing what he can to get to the bottom of these issues.

``Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress,'' CEO Jamie Dimon

I guess the bright light is that no bad news could be construed as good news. To see a stock rally because it didn’t have any Bad news – other than what was expected – is a sign of the times that “hope” is the optimistic trade of the day.

I have faith that Dimon has a grasp of the problem and JPM will face a bumpy road – but able to ride it out. The concern however is how well have they got a handle on the Bear books? That would be the ugly surprise that COULD raise its head.

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Housing starts drop MORE than forecast – down 12%

It seems that we are not even close to finding a bottom as the housing starts slide to the lowest level in almost 20 years – showing that construction is still on the down trend. Work began on 950k homes, below the 1 million mark which is more of a psychological affect – however the slowdown is increasing. New building permits fell even lower to 930k.

Analyst expect the housing starts to continue to fall through the rest of the year – as foreclosed homes add to an already large inventory. Many economist did not expect housing starts to drop below the 1 million mark and the number clearly shows that the slowdown has accelerated faster than the survey average.

Mark Vitner, senior economist at Wachovia stated, ``While we see a bottoming in sales in 2008, we really don't see an improvement until later 2009, early 2010.'' – a clear sign that equity values will probably not increase for some time.

The larger concern is the amount of new homes adding to the already massive inventory. The fact is – there are more homes than there are families to live in them and adding millions to the already massive inventory is only going to keep prices down.
Who is buying a second home?

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Inflation moving higher!

The CPI (Consumer Price Index) climbed .3% in March – driven by higher food and energy prices. Even looking at the “Core” after extracting food and energy showed an increase of .2%. This is putting a little pressure on the Fed to NOT lower rates as inflation is a real concern. Add in the continuing fall in housing prices, rise in fuel and food prices, jobless claims increasing, and spending power slowing – the reasons for lower interest rates are no clearly to keep liquidity flowing at the banks and financial firms. More drops in interest rates will only put MORE pressure on inflation – not less.

However – the FED has shown “No Fear” and I am sure he is sharpening his axe regardless of inflation concern. He focus is still on the credit problems and keeping the banks solvent – most certainly not concerned about inflation. Interesting though – if the banks were not having problems and the housing bubble didn’t pop – he would be raising rates – not lowering them.
Expect the CPI to move higher – but as you know my feeling about the CPI it may not be reflecting the REAL picture – essay about CPI http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html

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Coke is UP!

Coke is benefiting by the weak dollar as 75% of their sales are from overseas. The currency exchange (when repatriating back to the US dollar) is showing large profits as the dollar continues to slide. They have also penetrated more into emerging markets and getting their brand further into hard to reach regions. However – it becomes questionable if soda is a staple commodity or not. Caffeine addiction and the NEED to have your bubbly soda may not be affected by a recession – we can’t do without it? At one time it was considered an expendable item when times are tough – but it has become the staple of many meals from fast food chains to a snack at home. Coke will probably not suffer in a global recession as it HAS become a pseudo-commodity and if the dollar remains weak – expect profits.

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Futures Pre-Open

The futures are up in the pre-market, two Dow components are up in the pre-market (JPM and COKE) additionally we are seeing some strength in some of the tech sector. However – is it a rally on optimism – well sort of – it was rather that the news was not WORST than expected and a few companies with oversea exposure are doing fairly well. The foreclosures and housing starts will be forgotten in the short-term this morning. The futures are front running the cash on by a couple of points. So I don’t expect to see the ARB traders too much pressure on the buy side of the basket – which will already see a pop at the opening.

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Support / Resistance

We have been hanging at the short-term support area for a couple of days and the boost by two Dow components in the premarket along with a couple of techs is sending this market higher. The support seems to be fairly solid – for now.

INDU 12250 / 12500 (We could get a good jolt at the opening and if the shorts/sellers step aside – waiting to re-enter – we could get a good follow through after the opening. 12500 is a short-term resistance to flatten long deltas – a break through there is the 12750 area.)

NDX *** 1800 **** (We are still below the pivot point but I expect a break through this morning – by 15-20 points the question is does the 1800 level become again the short-term support – only if we can close above it – watch volume levels and the WHOLE index – if it is the heavy weights that carry this higher – there could be a drag by the best-of-the-rest.)

SPX 1325/1350 (It’s a narrow band and we could get another good jolt up to the short-term resistance at 1350 – a good place to get flat. If we close above that watch the 1375 area)

RUT 680 / 720 (We are getting to that 700 pivot point and have been in a narrow range. A good rally in the broader market will show some money flowing back into the market. This will be key if we get to 720 – if there is any drag here expect the narrower indices rally to be short lived.)

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Conclusion

No bad news is good news? I guess so – it’s like we are settling for crap in my humble opinion. “Hey they only wrote down $5 billion this quarter – it could be worse!” that kind of thought process is silly by any stretch of the imagination. To get behind that with solid money as a bottom picking trade is not only foolish – but you have casted aside any logically reason why you would buy a company. Of course you might be on the train to ride the short-term rally on the back of those “hope” traders – just remember to HEDGE any and all HARD DELTAS.

There is a silver lining outside of commodities (food and energy) and that is COKE and companies like them – that are seeing huge profits with a falling dollar – as 75% of their sales are from overseas. These companies will shine – on nothing more than a falling dollar. Keep an eye on these companies who’s revenue is primarily in stronger currencies.

We are going to see a good rally today and we may even see some follow through to the resistances and through to the secondary resistance levels. However – don’t even think that you can say today is the day when all the problems have been solved. All you have to do is look at the dollar, oil, food, energy, housing starts, foreclosures, and bank write-downs to realize today’s rally is about optimistic perception and not fundamental shifts in the economy.