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.