MP 4/4/08

Traders,

It would seem that after the ADP jobs report and the 400 point rally we have been sitting up here flirting with going higher through resistance levels – everyone waiting with baited-breath for the government jobs data this morning. The futures made a early move higher as many “hoped” for a neutral or less lower number. But then the number came out…..

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US lost 80,000 jobs in March

Economist had projected 50,000 job losses as the economy continues to struggle. Many were hoping that at the VERY least that it would come in line with forecast – and in some cases positioned themselves expecting a NEUTRAL number – but it came in lower than expected. Initially the futures pulled off pretty fast, but are now on the way back up fairly quickly.

February saw 76,000 jobs lost and now with 80,000 jobs lost – unemployment (after all the governmental methodologies) is showing 5.1% unemployment. The highest since 2005. Of course we had the ever expected revisions – which no one is talking about – and that is 67,000 jobs have been subtracted from the originally reported figures for January and February, that’s over 50% revised to the downside. That has me concerned – because I wonder how the March number will be revised when April numbers come out. Meaning that the 80,000 job lost (if we use the current revised track record) would really be around 120,000 jobs lost. Keep an eye on it.

The futures initially reacted pretty negative to the news – but has popped pretty well and holding strong. Maybe the market has expected worse than expected already – which I find that rather alarming since people are tossing fundamentals (job numbers, oil, dollar, etc.) and saying we don’t care about recession – just get long. Well – please feel free to do so – but HEDGE – PLEASE!

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UBS - Breaking up is hard to do!

As Lehman predicts over $400 billion MORE in write-downs for 2008, many firms are looking to raise capital and maintain their positions. Bear Stearns deal came under-attack yesterday as Ben and others testified as to why the help and how much could we lose? These remain precarious times and while I don’t believe we should be bailing out banks – letting Bear Stearns ($10 trillion in counter party trades and $100+ billion in subprime paper) fail could cause a ripple effect and send the dollar lower and a possible run on banks.

Well – UBS just received a “strong suggestion” from former President Arnold called for a breakup of the biggest Swiss Bank – selling off its asset-management unit to raise capital – after $35 billion in write-downs. This would reduce risk of certain units of the bank and secure the banking deposit side. Investors in Europe saw this as a positive and the stock rose.

If UBS takes this approach and is successful as other firms watch from the sidelines – we could see others follow-suite. Citigroup – the world’s largest (mess) I mean bank has some many different units that you really can’t call it a bank. Citi could easily spin-off brokerage, debt securities, and banking – this would give consumers that just use the institution for savings/checking/and CDs more security as the solvency – but the task is daunting and with the Middle East investments on the heavy side – well they need their blessing for sure. The secondary risk is that you spinoff one unit and a majority of the risk to the unit – we could STILL see MASSIVE failures. A spin off doesn’t get rid of the risk – it puts it into a separate entity.

For now it seems like a positive move – based on market reaction. Let’s see if UBS sets the stage for a new wave of shuffling their business into something maybe a little more manageable.

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Futures Pre-Open

We are seeing slight whip-saw action in the pre-market. The Futures were pumped going into the Job Reports and then backed off HARD AND FAST with the lower number – then they rallied back up and as of now starting to slide again from those gains. I would guess that ARB traders will probably sit side-line until after the market opens – not willing to leg into a futures position before the opening (with all this whipsawing).

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Support / Resistance

Well we stayed at the top – weighting for the Job Numbers this morning and the futures are pretty flat to slightly up. The numbers did come in lower – but it’s really up to the market after the opening and the willingness to push higher in the face of slowing economic data.

INDU 12250 / 12750 (We are still flirting with the resistance area and have a little room to move up to test it a little. It’s an area you SHOULD flatten hard deltas – also an area to look to short – with OTM call gamma to hedge against a short-covering rip to the upside. The market seems to be holding strong so far on the bad news – so the market holding these levels is a short-term good sign that it CAN absorb bad fundamental news. Only time will tell.)

NDX 1800 / (1850) 1900 (We are right at the resistance area and CAN rip to 1900 pretty quickly if the sellers step the to sideline. With the current strength the sellers MAYBE gun shy for now – but if it gives up the gains and starts going negative – expect them to step in and start pushing this lower. It’s a momentum market for sure.)

SPX 1325 / 1375 (Again we are at a testing resistance area – just below it – and we are holding after the negative news – so the market is fairly strong. I think the sellers are WAITING to see if we CAN get another euphoric rally or if the market start losing ground here before they jump back in.)

RUT 680 / 720 (We are just off the resistances here as well – so it’s an interesting time.)

The sellers seem to be waiting for momentum to make the call this morning. The fundamental news and economic outlook pretty much sucks – but the market seems to be holding fairly well. It’s like everyone is waiting for the other to blink. If we move up to the resistance levels – which we are just below and can get our head through them – the sellers could step away and get another massive rally. However ANY show of weakness will bring that back in and could send this market lower.
While it is a resistance point – it is also a serious pivot point as well. Probably best to be flat with gamma. But don’t load up on Vega or juice today – before the weekend.

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Conclusion

More writedowns, more expected, lower job numbers, lower revisions, dollar weak, and oil higher – but the market is still hanging at the resistance levels? The market is “hoping” and has tossed fundamentals to the wind. You have to admit American tenacity and resolve in the face of economic crap is either very brave or extremely foolish. Naked long buyers are taken a serious bet that things WILL change very quickly and some believe the weak dollar will bring a rush of foreign money into this country to take advantage of the cheap prices. However, those cheap prices are backed by NO EQUITY – only MASSIVE DEBT – so it’s a fairly risky gamble – until a bottom is found.
Well – true this might be an area to get long and ride the euphoric fantasy train that ignores the economic picture – it would be prudent to FULLY hedge that bet at this juncture.

We also have LOTS of room to go down still – so stay vigilant and while gamma maybe expensive it COULD save your butt when the chips fall either UP or DOWN.