MP 4/29/08

Traders,

Another charge up to and sometimes through resistance levels only to see it smacked back down towards the close. You have to hand it to those bulls – they don’t lay down or give up. The question is do they have the volume and mass behind them to push through? I am sure we will continue to see a charge against those resistance points until Bernanke sets the tone going forward. Since the decline of the market at the beginning of the year, we have not seen this kind of strength (abet low volume for the most part). It is clearly a sign that confidence has returned and the FEAR has left the market, measured by options premiums have dropped below 20 points (VIX).

The news about the Mars acquisition of Wrigley, with the “Oracle of Omaha” involved – got many investors (and pundits) speaking “the worse is over, if candy companies can merge!” You would think, especially if Buffet is involved. However, it was Buffet that popped his OWN bubble of taking a role in the optimistic center stage, by stating on CNBC today "This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," the multibillionaire said. "This will not be short and shallow. I think consumers are feeling gas and food prices, and not feeling they've got a lot of money for other things." Most people forget he is spending lots of time in China and like others searching for greener pastures.

The Buffet comment, combined with oil hitting another new high, inflation, airline problems, the dollar giving up their small and recent gains, along with speculation that another rate cut (even only 25 bps) is in the cards – pulled down on the market into the close.

They don’t call it a “Resistance” point for nothing!

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Kerkorian, a fool and his money are….?

No doubt Kerkorian is a self made billionaire, his massive acquisition of Vegas Strip land back in the 50s and 60s moved him into the big players league after he sold or leased it to the biggest casinos on the strip. He also became a player in the movie industry after acquiring MGM and building the MGM hotels and casinos spinning them off for $100s of billions later. He got in early and has leveraged his investments in real-estate and entertainment very well, no question. But his love for the US car automotive industry is mind-boggling. First GM, then a shot at a buy-out for Chrysler, and now Ford. Ok, we know he loves American cars, he drives a Ford Taurus. But tossing billions (a majority of his net worth) at this industry is rather confusing – first it is not an industry he is familiar with (he is a land and entertainment man). Second, it’s a huge part of his nut!

Remember when Buffet made a huge mistake getting involved in the airline business, he will tell you NEVER EVER own airlines. The risk to airlines is too great (unions, competition, insurance risks, fuel costs, lease options, etc.) the margins are very thin and to just breakeven is an amazing accomplishment. Buffet licked his wounds and move on. He always learns his lesson – not doomed to repeat them.

However, what is UP with this Kerkorian fellow? You would think after fooling around with GM he too would realize, like Buffet, some industries are just massive money pits and to even keep the company’s head above water is an accomplishment. The automotive industry is not much different then airlines – the margins are rail thin, the union fights are devastating, the pensions and healthcare costs are bankrupting threats, competition is massive, commodity prices eat away at profits, and financing is more about delinquency than generating any profits.

Now he is back – already acquiring 4.7% of Ford motor company. Does he plan on sitting on the board, does he think he is Lee Iacocca reborn, or is he just patriotic with his investments and doesn’t want to see Japan, Germany, and now China become the King of the Hill, or is he afraid that Ford will soon be owned by an Indian company (like Jaguar).

I listen to his interview and he actually says he sees the company as a great buy at these levels and praised the management. He said it was for INVESTMENT purposes only. If I was able to question him, I first certainly would NOT judge his value at buying Ford and he may be right about valuation (who really knows) – my question is simple – Why the HELL would you push ALL IN, again! He wants 7-10% of this company? Hasn’t he heard of a little diversification. Hell, if it’s an investment and not a take-over target – I don’t know what he is planning.

Whatever the case – he is either looking at Ford with rose colored glasses or he has a plan. Since he really didn’t have a plan with GM (other than a letter from a Renault) and his shot at Chrysler fizzled out, my bet is it is time to invest in rose colored glasses. He did marry that tennis player that could have been his grand-daughter for one month and he does drive a Taurus. Hmmm…maybe too much smog living in LA, who knows. However, maybe three times the charm, right?

If you own Ford – hedge it and thank Kerkorian for the pop in stock price. But this is NOT the bus to be “ON”, well maybe the Short-Bus!


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Sizzler’s Night is almost here!

The big rebate is being mailed out and it’s going to be a Sizzler’s Night for the market – abet a pump and dump. Economist predict the $300-$600 checks will probably go into small ticket items at the retail stores – and we might see a dead-cat bounce with a one-two month pop in sales – which is not indicative of the real economy. One analyst pointed out that many are talking about some small stock buying in the big popular day-trading names – like Google, Apple, RIMM, and other hyped names you would see posted daily on many of the small investor websites. However, these may give small boosts to the markets in some issues – it will probably not be enough to see any type of breakout. Remember – $300-$600 only goes so far.

However – expect to see some pops in retail sales – most likely the money will not go to pay a mortgage and it certainly will not go into savings. My guess is more IPODS, Flat-screen TVs, and other “got-to-have-it-now” items. Maybe a short-term play should be Wal-mart and Target.

There are those that may go out for that special “Get whatever you want on the menu, baby! It’s a Sizzler’s Night!” – for now we could see a little pop – but nothing to hang your hat on.

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Deutsche Bank posts a write-down?

With all the talk on the street as to the credit crisis in past tense and the worst is behind us, more banks continue with write-downs. However, it may be true and these are the last of the write-downs, but who really knows.

Deutsche Bank posts its first loss in 5 years, Germany’s biggest bank, which included a $4.2 billion write-down. The stock fell over 1.5% in European trading and is putting some pressure – yet again – on the banking sector. The question is where is the bottom of the write-downs. The CDO paper is still rather a mix bag and what types of mortgages or lines of credit is very uncertain. Write-downs based on mark-to-market is very subjective – additionally if we are talking 2nd mortgages, REITS, or other type of questionable equity supported loans – it gets even more confusing. Deutsche Bank made huge investments in the US mortgage market, along with other Euro Banks – via special lending and structured paper – now unwrapping that paper is becoming a daunting task.

While these recent write-downs maybe the last – and we could hopefully see a light at the end of the tunnel – it has left the banks in need of short-term cash to carry existing positions and borrowing money giving away huge equity lines is more of a life-line than showing a solid foundation. The mark-to-market is still coming into question IF that is the bottom. With Foreclosures RAMPING – (see the news of Lee County, FL – massive foreclosures mounting) – we could see a few more write-downs.

I suspect it will take a few quarters to get to the bottom of this and maybe the third quarter will see some solid bottom in the marks, rather than the murky water we have become accustom too.

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Futures Pre-market

The futures have come off pre-market and are front running the cash by a few points. The news this morning was blaming Buffet’s recession remarks as to the fall in future prices, silly I know, but they need to say something. Additionally, the Deutsche Bank news is not adding any GOOD NEWS. Expect some pressure on the cash at the opening as ARB traders buy the futures and short the cash basket.

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Support / Resistance

We will probably be flirting in the resistance band until Bernanke waves his hand with the final cut of 25bps and the 8 week pause between the next meetings.

INDU 12500 / 13000 (We made a couple of good runs toward 13000, but then retreated at the close. This morning the futures are showing the market come off a little but I don’t think we will see TOO MUCH volatility today – until Bernanke makes his move tomorrow. For now expect to see us in the resistance band.)

NDX 1900 (We continue to rise above the 1900 level – mostly with a couple of heavy weights in this index pushing higher. This is a volatile index – but 1900 – 1950 is the resistance band – and area that we will sit in before Bernanke makes his mark and the market decides to really move one direction or another.)

SPX 1350 / 1400 (We were above 1400 and then the market pushed it back down into the close again. This market wants to rally and we are seeing a good fight here at resistance levels – the market wants to rally – but so far it is an even fight – no side giving up ground.)

RUT 680 / 720 (We are slightly above 720 – and this is a sign that the broader market really has some money coming into it. If this stays above 720 it is a good sign for the narrower based indices and that we HAVE broke. Keep an eye on 720 at the close.)

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Conclusion

The talk on the street is “past tense” as if the banking sector problems have been resolved, but we are still seeing write-downs. However, Bernanke is getting credit (and maybe rightly so) for keeping the banks from imploding during the credit crisis (not saying it’s over – but the seas have calm). Now, Bernanke is moving back towards traditional economic problems – and that is inflation and recession. We are seeing oil prices break $100 a barrel (it did come off pretty good this morning) and the dollar fall. Bernanke will probably focus his speech on focusing on economic and consumer stress, while at the same time say “Mission Accomplished” as to the banking crisis.

No doubt that confidence has come back into the market and while today may not see volatility – if the current confidence remains and Bernanke can convince the market that he is now going to address the inflation and recession problems we COULD break out of this resistance area and RIP to the upside. I think that is a pretty good bet and I would suggest that you make SURE you are fully hedged to an UP or DOWNSIDE move.

Fundamentally – I think the market should probably retreat from this resistance level (technically it looks like it should as well) – however the optimistic perception that the worse is over (and if Bernanke can SELL that message) – expect a massive rally through these levels. Either way – it will be a short-term breakout up or down. I would be really surprised to see NOTHING happen.

For the end of day:

1. Make sure ALL hard deltas (long and short) are fully hedged.
2. Watch your short Gamma positions.
3. Watch your short OR long Vega positions.
4. Expect Volatility (VIX) to move AWAY from the current range (20 in the VIX) fast and hard tomorrow. If we rally it will fall to 15-18, if we drop it will rally to 22-25.

Expect movement tomorrow – today maybe another drifting up or down or up or down day. But get your positions and hedges on by the close.