MP 4/8/08

Traders,

Well we tested those resistances – and just could not break through. It seems reality again is raising its ugly head and the optimistic euphoria either doesn’t have the “balls” or “money” (or both) to push through those resistance levels.

Additionally – I had an interesting observation yesterday. I was listening to the housing numbers (the price at which they have come down) – depending on what state you are in the numbers are between 5-10%. However, here are some interesting points that I want you to chew on. First – Those numbers do NOT include foreclosure prices – which are significantly lower – in my neck of the woods – lower by 30-60%. Also – we have been looking around at houses – here is the next problem. It would SEEM, without further investigation, that home prices are NOT falling that much.

Well – I found out the reason why. The sellers can NOT lower the prices and cause a short-sale without taking on the debt of the additional mortgages AND their approval. So the house prices CAN NOT come down. The home owners choice – walk or continue paying. So I have come to the conclusion that home prices (in many areas – particularly mine) are STILL artificially high – since they CAN NOT lower. Case in point – (from yesterday’s market preview) the house that had been for sale at $4.5 million (which could not come down any lower because of the mortgage) – foreclosed and sold for $2.4 million after being relisted. So if you were just looking at home prices – you would have made the INCORRECT observation that prices are not falling anymore and have found a bottom – WRONG – they just could not come down any lower because the mortgages (collectively) would not allow a short-sale! So I think there is a hidden risk of a BIG drop in the housing market that COULD happen – and unexpectedly.

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Earning Season off to a bumpy start!

Well the company that traditionally kicks of the earnings season, Alcoa – has put a damper on the start. It trailed analyst estimates and is pulling down the on the futures pretty good in the pre-market session. I would of thought the world’s 3rd largest aluminum company would of done rather well in this commodities driven market – however I am not tracking aluminum or where a majority of their revenue and market share exposure is coming from. Assumptions would have been that they benefited from a weak dollar – if sales are heavy in the overseas market. However, reading over the report it seems like they too are being bitten by the oil bug – Energy prices are cracking into their margins big time and is eroding profit lines. I don’t know enough about Alcoa’s business or industry – but this is not good news.

AMD the second largest CPU manufacture also saw a huge slide in profits and has announced a 10% cut in staff this year.

Expect to see the INDU get hit with Alcoa and the AMD news will probably put additional pressure in the tech sector and the semi conductor indices. Watch INTC as they are 1st in market share for CPUs.
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Freddie Mac and Fannie Mae – upgraded?

OK – this has to be a joke, troubled Lehman brothers (after getting the “nod” from Citi as being a “buy”) is now on the back-scratching circuit. They upgraded both Freddie Mac and Fannie Mae. Now I call this a joke – first because it came from Lehman – read previous Market Previews to understand why.

But more importantly both Freddie Mac and Fannie Mae are not even REAL COMPANIES. The reason I mean real is that they are so entrenched in the government that they are more nationalized money printers and black holes. Bad paper continues to be dumped onto their books – in recent years they went through a massive accounting scandal (to the tune of billions) and no one REALLY knows the depth of their risks or debt.
They are continued to be used as a back-stop for bad debt - as the companies get a free-pass to dump the crap paper (defaulted loans) into these black-holes that are called companies.
One thing is for sure – since they are really nationalize companies – you KNOW they are on the permanent bailout cycle.

Think of these companies like Social Security – they can, could, would, and will run massive debts, continue to lend money, and know the government will continue to guarantee the paper – just print more.

Your bet – when you buy these companies – you are just buying the dollar and the faith of the US government – these companies are on the permanent bailout plan. You never need to buy a put – because Bernanke is the PUT when you are talking about any of these companies.

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Futures Pre-Open

The futures are getting hit in the pre-market with the Alcoa and AMD news – additionally not getting through that big 12750 number and retreating at the end of the day has some traders feeling we gave it the good college try (like Memphis) but hey – maybe it’s time to stop buying and hoping. The futures are front running the cash – so we might see some additional sell pressure at the opening on the basket.

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Support / Resistance

We touched those resistances but could NOT break through – we had a good retreat off the top and looks like we gave up steam. The start of the earnings season is putting a drag on things.

INDU 12250 (12500) / 12750 (We visited the 12750 area – the place to get short (but over hedge to the upside) now we are pulling off. 12500 is NOT a place to get long, but rather a place to watch – if we break to the downside through 12500 then it’s 12250 and it could be QUICK. Let your shorts run. Longs NEED to be fully hedged on hard deltas.)

NDX 1800 / 1850 (1875) (As I said this is a resistance RANGE rather than a pin-point spot. The reason is that we have great volatility in this index with the over weights- an AAPL or INTC can push the avg slightly higher or lower. So it is rather harder to call a flattening or shorting area. However, leaning short up near the 1850-1875 range is the resistance. 1900 is the (load up the downside bullet truck) area. With the AMD news (which is NOT in the index) but has many brother companies that are – we could see some selling pressure. 1800 is an area to get flat – but be careful getting long.)

SPX 1325 (1350) / 1375 (We are still at resistance and the place to get short – but hedged with OTM gamma. At 1350 I would NOT get long – but rather flatten deltas. We could pause there – but it’s not a good place to make a call either way – flat with gamma at 1350 is probably the best bet.)

RUT 680 / 720 (What can we say about the broader market? It needs to see a bust through 720 to drag the rest with it. This would show money flowing into the market on a broad spectrum. It didn’t happen, hasn’t happened, and it has been given lots of opportunity. If we visit 700 – do NOT get long but rather flat.)

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Conclusion

I was up late, with my father who is visiting – actually learning to splice rope and other nautical things (getting stuff ready for my sailboat) as we watched the FANTASTIC game last night. Very exciting – to bad about Memphis not having their star player in OT – cause it may have had a different outcome. Regardless – it was fun to watch.

My father – (who lives on a boat with his wife for ½ the year) is out of touch of what is going on in politics and economics for brief windows (it’s hard to get a paper or watch the news when you are out at sea.) Anyway – we had some interesting conversations and one thing we both realized from the conversation is that my generation (30-50) crowd has viewed their home completely different than his generation. My fathers, and his father before him, viewed a home as the family estate – ROOTS were common. You would build a house and the family (and extended family) would continue to live for generations around the home, the home would be passed down generations. But the first and most important thing was to PAY OFF THE MORTGAGE. The home was NOT a place to tap for needed money or assets. It was Not an investment to REALIZE money, but an INVESTMENT in the family. The home was PART of the family.

We have changed SO MUCH in a generation that we have looked at the home as a investment of monetary value, rather than family value. We look to leverage that asset and find a bigger one. Used it as an ATM thing. We have certainly not treated our home as a member of the family that we wish to pass on to the next generation. Maybe part of the problem is we, as a nation, no longer have a solid definition of family unit. I know in my family I moved away, join the Navy, moved across the US and lived in San Francisco – as my family was in Northern Michigan. I am not saying that was wrong, nor that my family didn’t want that to happen. But maybe from the separation of family unit – the moving and spreading out – we have forgotten what the word HOME meant and have become the transient generation.

We have certainly treated our homes as ATM machines. Maybe we as a nation have to learn this lesson.