Saw a little pressure on the market yesterday – President Bush remarks didn’t cause a spark to get the market to rally (go figure). As the opening act for Bernanke’s Headliner show – he was pretty weak. Oil came off fairly hard during mid-day (-3.00) and the dollar rallied helping to weaken commodity prices. But the dollar rally and oil sell off – (the biggest recently) did NOT get the market to move higher.
Consumer Confidence falls – with the biggest slide since 2001. The Confidence Index fell to 62.3 yesterday, which was fueled by a large drop in home prices (12.7%) – more than forecasted. Clearly – showing that the bottom of the housing market is still rather uncertain. This additionally cause concerns in the banking sector – as the thoughts of “the worse is behind us” faded. Yesterday’s Deutsche Bank write-downs over $4 billion and ramping foreclosures. Citi is also raising money AGAIN in another stock offering – just diluting themselves into the toilet to keep money in the bank. Great!
Today Bernanke is going to have to pull out the Pom-Poms to build up that ailing confidence in the economy. Most believe that we are either in a recession or quickly headed towards one. This
market is Bi-Polar for sure, Investors on one side want this market to rally and it would SEEM that confidence has returned to the equity markets – since it has rallied off the bottom and are pushing against resistance. The other-side of that coin? The Consumers are not confident at all – the index clearly shows a pretty significant drop - as gas prices up, house prices down, and inflation continue to squeeze their pocket books. Investors could push the market up in the near-term – however the GDP relies on consumers and we cannot ignore their lack of confidence and the squeeze in buying power they are suffering. This Bi-Polar relationship is fully detached and the economy vs. the market is more reminiscent of the movie Sybil.
Today, regardless of what the VIX says, the hidden volatility in the market TODAY is greater than .20 on an annual basis!
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GDP remains flat at .6%
No surprise – range in .5 - .7%. The decline in housing last quarter was the worst in 25 years and ADP expectations are for a decline in jobs by 60k – but ADP reported an increase of 10k – this is puzzling from the ADP to the BLS numbers – and economist are scratching their head as to the disparity.
Regardless – this will be ripped apart an more economist and analyst will come out of the wood work to declare a recession or no recession. The game continues to be played.
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Kraft affected by rising food prices
The world’s second largest food maker, Kraft, profits drops 13% on the rise in dairy and wheat costs. Analyst expectations fell short as food costs are taking a bigger bite out of margin lines. Analyst had expected that since Kraft had raised prices on several of their major product lines that it would off-set rising food prices – however it was too little too late. Inflation is outstripping the price increases that Kraft is passing through on its product line and they are most likely going to raise prices another round. The cost of wheat more than doubled in the quarter which eroded all profits in their wheat line products (Triscuits, Wheat Thins, and other crackers). Kraft is not the only company seeing trouble with higher commodity prices – Sara Lee and Kellogg are also seeing profit margins shrink and have already started to boost prices to off-set losses.
Kraft had made some acquisitions overseas – and has benefited by expanding into non-US market share. The weak dollar did help offset domestic sales – but Kraft’s deepest trough is still the US. Commodity and agriculture prices will have to be passed through to consumers before too long in order to keep margins positive. Kraft – while suffering – is raising their forecast. Go FOOD STAMPS!
Expect a mix bag in the food makers – while higher food prices will impact sales – being able to pass that through to consumers and expanding into foreign markets will help offset losses.
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GM losses?
As expected GM, the world’s largest automaker, reported a 1st quarter loss of $3 billion after a year-earlier profit. However, analyst had painted a gloomier picture – a saving grace for GM and the shares are up in the pre-market. Blame for the losses was a mix bag – from labor disputes, slowing U.S. economy, and of course more losses in the partly owned GMAC Finance unit.
GM picture is not looking much rosier going forward – a slowdown in the US combined with higher fuel costs – have consumers of their auto line looking for better millage vehicles. GM of course is also charging forward introducing new models to meet this demand, but is back-marker compared to their competition.
Additionally – initial expected strength in China also looks to be in a serious face-off with Chery and Geely (the two China auto-makers) – and GM will have a hard time competing. Chery and Geely sedans start at $2500 per vehicle – and GM can NOT compete with those prices. However, their strength remains utility vehicles and trucks – which they dominated in the Asia-Pacific and Latin American regions – the help of the weak dollar also helped boost profits!
GM is in an interesting pinch – the U.S. economy problems, labor issues, and GMAC is putting the hurt on – they also are behind the 8-ball on hybrid vehicles compared to competition, and finally the booming Chinese market seems to be open to their utility vehicle for the moment – but consumer vehicle line is about to face a serious threat from the Chinese automakers. However – there is a silver lining – their growth overseas in utility vehicles in the emerging markets is HUGE. The weak dollar has helped spurred sales and also boost profits to help off-set domestic issues.
My Nostradamus prediction? GM will probably be a take-over target in years to come by one of the large Chinese auto-makers. May be it would be a take-UNDER.
As Buffet said about the air line industry (NEVER INVEST IN THEM) – I think the same is true for auto-makers. They are just too many risks to make it an exciting investment for growth. Now if they had very LOW volatility and 1-2% growth with a nice 3-5% dividend, well then that would be something to invest in.
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Futures Pre-Open
The futures are trading a little on the lighter side. It got a good pop after the GDP numbers came in flat (or slightly better) – however they have come off from the initial pop. While the futures are front running the cash by a couple of points – I think ARB traders will be sidelined this morning for the most part. Leg risk into the basket with a looming massive volatility charge about to be unloaded is probably not the best thing to do.
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Support / Resistance
If we have been in the center of the range or down near support – I would say – without a doubt start leaning long. Bernanke is probably going to say “Mission Accomplished” as to saving the banks from failing and will focus his efforts on the economy. However, we have been flirting at resistance levels in a fairly narrow band. We GOT the rally already into this announcement and it’s going to take some serious cheerleading by Bernanke to build enough confidence to bust through resistance. Either way – expect volatility and short gamma is probably not the best bet today.
INDU 12500 / 13000 (We fell off from 13000 but still towards the upper band of resistance. Maybe the pull back is the charge needed to send this to and possibly through 13k? I don’t know – other than I will be hedged for a move either way. If we do NOT close above 13,000 today – then expect that resistance has HELD. Maybe waiting to take a stance AFTER the announcement is a better bet than before!)
NDX 1900 (We are still above 1900 and I would say we are a little lofty compared to other indices – mainly driven by HYPE issues that have exploded to the upside into earnings. How big strong are these legs above 1900 – I am not sure – but we are closer to stronger resistance than we are to booming support. The heavy weights continue to push this higher – but for how long. Stay flat for now.)
SPX 1350 / 1400 (We will probably touch 1400 today in that initial knee jerk euphoria when Bernanke opens his mouth. The question is HOW DO WE CLOSE!!! If we pull off from 1400 after his cheerleading routine – well resistance has held. If we close above it we could get some follow through in the short-term.)
RUT 680 / 720 (Again below that resistance – we WILL touch it today – again do we close above it!)
Today is the TEST - resistance will HOLD or BREAK – no questions about that.
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Conclusion
The conflicting information coming in from every source is very confusing. We would hope that Bernanke could bring some clarity to all the data – but other than a little fluff and hug – reading into anything beyond that is just perception and not reality. There is no heads or tails to this market.
Our Bi-polar market:
- Investors are confident, consumers are not.
- Companies with overseas exposure are making money, domestics are losing money.
- Companies and BLS are reporting higher jobless claims, the ADP is showing increase in jobs.
- The market is flooded with money at the discount window, but lending is very tight.
- Interest rates are at 2.25%, but mortgage rates are up over 6%.
- One economist says we are in a recession, the other says we are not.
- Oil is in a bubble, Oil is not in a bubble
- Banks continue to write-down more losses, but the worst is behind us.
- The housing market has bottomed, but foreclosures are up.
- The CPI and “CORE” are showing modest inflation and flat respectively, the man on the street is paying double for everything.
- Obama is winning the popular vote, Hillary is winning the super delegates
I can’t make heads or tails out of this market or economy. Usually when things are this confusing and NO ONE agrees – well there is a LOT MORE VOLATILITY TO COME!
Best bet – hedge your hard deltas, get some gamma on you sheets, and let others be the Bulls and the Bears!
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