MP 5/13/08

Traders,

We got a decent rally yesterday – but on the lowest NYSE volume this year. “Sell in May and Go Away!” – don’t know if the volume is lighter than normal because we are entering the summer season or that investors really cannot make heads or tails out of this bi-polar market (economy vs. financial markets). Be that as it may – the volume was very light across the board – so the legs to the rally could be construed as very weak.

The earth quake toll in China is rising, over 12,000 reported dead. My wife, who has been to China and a geologist (by degree and USGS work) – said the magnitude was massive and that area of China with an unusual fault activity (something about tectonic plates and stuff I do not understand) typically not built to withstand massive earthquakes – from her experience in China and understanding of geology – she stated yesterday (when the first death toll of less than a 100 was reported) – stated that it will reach 30,000 (not to mention China’s state controlled media may also fool with those numbers as well). On the financial front – I have been trying to do some investigation as to the industrial and service sector in this area. It is highly populated with over a 100,000 million in the area. There are some manufacturing and some industrialized areas – which will be affected – but I have not gathered enough knowledge. No doubt the rebuilding effort in this area will be substantial. Let’s hope for now that my wife’s prediction will fall far short of estimates.

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HP to Buy EDS for $14 bill

EDS is an interesting company – true they are one of the biggest IT consulting companies – but the stock had some funky times from recent past. Several years ago they needed to raise money, the CFO decided that selling NAKED out-of-the-money puts was a way to raise lots of money for the company, believing that the stock would never drop below a certain point. (I think he took one of those late-night infomercial courses – “Get Rich Quick – by Selling Puts!”) – needless to say that the stock broke down through the strike that they had sold massive amount of puts. Forcing the company to either (A. come up with vast sums of money to buy their own stock at higher prices or B. Sell the stock short to wash the long stock being put to them.) They elected B – which fueled the fire sale of the stock and drove it down fast and hard. They had lost so much money from that transaction that they had to raise MORE money to both make up the losses and get back to raising the money before this debacle of a trade. The stock never really recovered from that and has been floundering around in the mid to high teens for years. Maybe this buyout by HP – will erase that black-market from their past. The stock is currently up in the pre-market to $24.

This is an interesting move for HP – because it puts them into a new space – similar to where IBM has moved to. IBM had started their consulting firm and realized the bulk of their profits were NOT from building computers (which has huge costs associated with it) – but from the service side (consulting). Eventually – IBM sold off their computer division to China and is now just an IT consulting firm for the most part. Is this the same road that HP going to follow? Will HP sell off their computer division and become a strictly service company?

We could see the tech and IT consulting services get some pop in the AM.

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Futures Pre-Market

The futures have moved higher into the opening after seeing pressure all morning. They are front running the cash slightly so expect to see the ARB traders short futures and buy the basket into the opening.

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Support / Resistance

We had a good move up to those resistance levels – but on very weak volume. Still in this resistance band with no clear picture if we break up or down from the band.

INDU 12750 / 13000 (We came down to the support area 12750-12800 held for the day and moved back up on light volume. We could flirt in the resistance band a while before seeing a break out either way.)

NDX 2000 (We are at the top of that resistance band again today. The tech sector is a little mix today – after the rally yesterday. Could we break – sure – but we need to see some serious volume to confirm anything in any direction.)

SPX 1400 (Again up at that 1400 area – is it support or is it resistance? With mix trading and light volume – it seems more about drifting than anything else.)

RUT 700 / 740 (We moved up again yesterday in the broader market too – but I am unsure if it had any legs to break out)

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Conclusion

Bernanke talked this morning in Georgia and pretty much said the market is still pretty unsettled, but have improved. He will also continue to make the Fed available to help (“bailout” more discount window special deals?) – regardless the economic picture – specially on the financial side is pretty weak.

Wal-mart earnings rose – but sees pressure in the second quarter. Wal-mart maybe the flag waving recession stock to own as the higher-end retailers get hit as consumers “down-grade” their limited buying power spending habit. Wal-Mart, Costco, Sam’s Club, and Target should be able to weather the storm – yeah the company may see slower growth – but that is better than no growth or worst negative growth.

BofA is also showing some forward looking issues (thank Countrywide) as home-equity losses increase – as consumers are tapped out. Expect no lifting on the credit crisis for now. It also looks like Bear Stearns will shed 60% of its workforce as the JPM merger moves forward – as reported yesterday.

Expectations of a U.S. recession towards the end of 2008 is rising – as more economists look to the shortfall of buying power by consumers and increased of job losses.

Continue to expect more volatility. I really think the VIX at 18 is pretty cheap – the market has moved up and just flirted around with these resistance levels and yesterday’s low volume rally and smack down on VIX is not indicative of a solid follow through. I could be wrong – but it would be good to hedge those long hard deltas.