MP 4/7/08

Traders,

Last Friday we continued to hang around the resistance areas – waiting. I briefly talked with a colleague after the close and his assessment? Toss fundamentals out the window in the short-term – this market wants to go up! He further elaborated that short-term investors (or what he calls “Market Reactors”) are always looking for a news item that THEY can point their finger too and say “SEE!” and that is enough for them to start buying. Additionally, he further stated 95% of all retail investors only do ONE THING – that is BUY STOCKS. No doubt he is right. I think he was hammering this on me because I am NOT a retail investor.

However, he concluded is that there is NOT the kind of money sitting on the sideline as there use to be – and don’t forget a majority of positions were leveraged one way or another (borrowed money or margin). Additionally – positions (regardless of if the stocks are performing well) have been sold to raise additional funds.
So the question – I guess – would be even if optimistic perception is calling for a bottom and the market wants to rally (regardless of fundamentals) is there enough money (leverage) on the side line to get it to go up. And if so – will it be a “Dead Cat Bounce” before the fundamentals return us back to reality. Oil, Dollar, Gold, and commodities are still high and in other cases going higher. The economic landscape has not changed – YET.

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Interest Rates – bottoming?

While Bernanke has been cutting interest rates faster than a Gatling-gun in a Client Eastwood movie and ignoring Inflation (because he is doing modified math with his “Core” readings - see essay ) – the bond market has begun to show that interest rates MAY BE bottoming. Treasury yields rose .3% on average from the year’s low of 2.49% (reported by Bloomberg). It’s the first increase since December. Additionally – after all the noise of the JPM bailout of Bear Stearns (with the Fed’s help) – confidence in the Fed’s ability that they have finally grabbed this bull by the horns – is taking shape. Target Rate forecasts STILL expect a rate cut – but this time only 25 bps.
This all seems like rather good news, and it is to a point. The Fed is willing to step in and not let the dominos fall (of course we could have a healthy debate on if the Fed should help a firm like Bear Stearns or not – and that should be left for academic debate) – for this is no doubt (regardless of your political stance) that by saving Bear Stearns from collapsing – we avoid a possible HUGE domino from falling that could of impacted the dollar and possibly every bank that had connections to the trouble company.

However, even though the Target forecast is only looking for a 25 bps additional cut and Treasuries rose slightly – AND that we have avoided a serious issue – we must ask ourselves is the problem over? I think not – we continue to only view the market from its highest level and forget what continues to turn the wheels of the economy and that is this nations citizens.
The consumers are still struggling – their credit lines are tapped and the recent news of the both Capital One and Amex doubling up reserves is a clear sign that things are NOT over with the consumers. Additionally there is (as reported by the Economist) a second round of homes foreclosing – and those are the ones that people CAN afford paying the mortgage but elect NOT to because the house is underwater. They call it “jingle mail” since people are mailing in the keys and walking – yeah these are people that CAN afford to pay – but since they are SO DEEP underwater they would rather just walk.

Side story:
In my neighborhood a home foreclosed (owned by people who COULD afford the mortgage) they tried to sell the house was for 4.5 million – but they couldn’t . They walked. It was foreclosed – and before it could even be listed – it sold for 2.4 million. I personally believe there is some inside baseball going on – so I will be checking the court house papers to see if it was picked back up by the same group of owners – that just saved themselves $2 million.

Regardless – the consumers will dictate the future of how this nation moves forward economically. Without consumers the wheels of the economy will slow.
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Washington Mutual rallies

In recent weeks both Credit Unions and Savings and Loans businesses have also been suffering for the credit unwind – many of these firms had initially expected to be fairly stable and not to entrenched with the sub-prime issues. However, many of them have also begun looking for additional capital to shore up reserves. Washington Mutual, the largest savings and loan company – is trading higher in the pre-market because of the rumor they may be infused with $5 billion from a private-equity firm.

Washington Mutual lost 74% of its market value in the last year – gained 17% in the European session as news of a possible funding deal is about to close. Last month Washington Mutual was cut to BBB by S&P credit rating agency (only 2 steps above junk).
While this is good news to shore up the troubled company – and it may create some upside bias to this sector – any long hard deltas should be fully hedged.

Expect some upside volatility in the financials this morning.
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Futures Pre-Open

The futures are rallying fairly well in the pre-market but are now giving up a little going into the opening. Exxon, Newmont Mining, and Washington Mutual gained in the European session and are looking strong in the pre-market. Additionally – we are seeing a little strength in the financials. The futures are currently front running the cash by 3-4 points – expect a little rally on the stocks as the futures pull back to meet them at the opening.

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Support / Resistance

We are still flirting with the resistance levels are have not made a definitive move in either direction.

INDU 12250 / 12750 (We are just below the resistance levels and have been there the last 3 trading sessions with little movement. This is a pivotal point – if we break through 12750 and we CLOSE above it we are in new territory and we could be putting the worse behind us (as far as the index is concerned) in the short-term. Investors should remain FLAT and not take directional stance unless something is determined. Traders may want to start leaning short – and over hedge with OTM cheap gamma – incase we rip. A break through 12750 could spell a HUGE short-covering rally – but it has to break through for that to happen. It is possible to head up there and stall as well. This is a pivotal point. Watch 12750 closely)

NDX 1800 / 1850-1875 (We are in a resistance range – pretty much anything below 1900. It is too call a definitive area in this index – but between 1850-1875 is fairly resistance range – 1900 will be the second stage and a hard place to get through. Again – be careful as this index has HUGE volatility a can easily make a move to 1900 as it could to 1800. Play shorts with SOFT deltas and gamma. Don’t take hard delta positions – one way or another in here.)

SPX 1350 / 1375 (This is more definitive in its resistance range. Expect additional resistance here – see INDU for trading notes above.)

RUT 680 / 720 (720 is the measure for the broad base market if we got out of this hole – watch the close!)

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Conclusion

We have had a 1st quarter of volatility and running for cover. The 2nd quarter lead a huge charge to the upside and resistance areas and we still don’t know if it was an April Fool’s joke or not. Is there enough money on the side-lines to push us through – probably – but for how long? When does the fundamentals come back and bring us back to reality. Jimmy Rogers and his gang continue to march to their own beat and have sold the dollar, bought commodities, and pulled out of most of the US based companies. They continue to preach their story and are less likely to react to Knee Jerk rallies. Are they right? So far they have been.

While some of the recent news sounds good and maybe Bernanke is done cutting rates – only time will tell. There is still too much fog-of-war to really make heads or tails out of what is going on out there. I am still wondering where consumers are going to get lines of credit to start buying anything?

Stay hedged!