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.
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