MP 5/14/08

Traders,

A very mixed market yesterday – the tech sector saw some whipsaw action with the HP news and a couple of earnings reports. However it was again a rather light volume day. What really seemed to get the market stirred up was Bernanke’s speech in Georgia – while he said that the turmoil in the financial markets has eased “somewhat”, the situation was “far from normal”. He went on to say, “We’re going to go through a period where the markets are going to focus on the macro-data, and any adverse piece of news about the credit markets. It will be a trendless market until the uncertainties about a contraction in the economic activity are resolved.” – I can sum that up for you – EXPECT MORE VOLATILITY!

The Fed is engaged and additionally Bernanke said in his speech about “Federal Reserve Liquidity Measures” – is that there is going to be MORE money available – the problem is far from over. Obviously – since they announced only a few days ago they would boost the TAF (Term Auction Facility) to $150 billion per month – up from $100 billion. You don’t up the TAF auctions by another $50 bill per month unless the money is needed. Sometimes you have to cut through the “fluff talk” and get to the numbers.

What is strange is that you would THINK that Paulson would of vetted Bernanke’s speech – since Paulson just said the worst is behind us and the credit crisis is over – then Bernanke says there is still problems in the credit market and we are upping TAF by another $50 bill. I guess Ben didn’t get the memo!

_________________________________________
MBIA and AMBAC in the news again – what?

I thought Moody’s and their gang of Credit Rating agencies said that everything was fine and they will keep their AAA credit ratings….but wait….a month has past and the picture has changed. Moody’s announced in the late trading session yesterday that MBIA and AMBAC has “meaningfully” higher losses on home-equity loans and CDOs – raising concerns (yet again) – why in HELL do they have AAA credit?

“The losses elevate existing concerns about capitalization levels relative to the AAA benchmark”, said Moody’s yesterday. Is this just another slap on the wrist and they get to keep that coveted credit rating? Again – as I had pointed out in the past – it is the “finger in the dyke” that is keeping mass selling on charted investments (pensions, state, and other types of funds that need both a certain rating and insurance to hold investments.) – man if that finger is pulled – expect a massive amount of selling or losses – take your pick.
Both stocks got hit pretty hard in the late trading session yesterday – which also put pressure in the banking sector – as the two largest insurers have not seen any light at the end of this tunnel – and after raising money – the losses are expected to mount. Fitch went one step further than Moody’s or S&P and CUT the ratings to AA – they stated that they need about $3.8 billion MORE (after they just raised a bunch of money) to keep that coveted AAA rating. Hey – no problem for the holders of the paper – they can just ignore Fitch and pay Moody’s to make sure they AAA rating stays in place.

When will this joke end?

________________________________________
Freddie Mac – following Fannie Mae’s footsteps

Just when Bernanke and Paulson offered words of comfort that the Congress mandated and regulated mortgage companies have improved (after a massive accounting scandal and then billions of losses in the sub-prime mess) – Freddie Mac (the 2nd largest mortgage finance company) announces a $151 million loss for the 1st quarter – as home prices fall and foreclosures mount – however not as bad as some predicted (I guess that is the good news). The company (of course like the others) is in NEED and plans to raise ANOTHER $5.5 billion. While the loss is not as bad as their bigger brethren (Fannie Mae) with a $2.19 billion loss in the 1st quarter (they too raised MORE money $6 billion) – it is showing that the mortgage problem still has not found a bottom.
These combined companies own or guarantee close to $6 TRILLION in U.S. residential mortgages outstanding.

Analyst point to the mounting foreclosures (largest jump – last month) that take 3-6 months to process – will not run through the system and be realized until the 3rd or even 4th quarter. Add in that most foreclosures (some accounts are as much as 90% of the auctions) are going right back to the banks and turning into REO (real estate own) by the banks. They then have to turn around and sell these properties. I have read some commentary that the NEXT shoe to drop in the housing market is when foreclosures die down and then the banks start selling even LOWER all the REO properties (which cost them money to hold – interest, insurance, and taxes). When will that happened? Some are guessing not until early-to-mid 2009 – which could send home prices down lower – depending on how desperate the banks want to unload that inventory. Back during the S&L problem in the 80s, some REOs went for pennies on the dollar to just get the reoccurring costs off the books. I guess it will depend on how healthy the banks are in 2009 – whether they a desperate to get that cost OFF their books and realize some hard money?

For now – expect more right-downs as foreclosures continue to mount – some est. have the foreclosure bottom not until 2009 – since there is another large round of resets happening then. I suspect a slow-down by the end of 2008 in the foreclosure process – but that is just my guess.

_______________________________________
Futures Pre-Market

The futures popped in the pre-market after the CPI rose a paltry .2% - less than economist had forecasted (which seems fairly low). The Arb traders will be shortening the futures into the opening and buying the cash basket. Expect some upside pressure on the indices at the opening.

______________________________________
Support / Resistance

The indices are still in the upper resistance band – and the futures look like we may test the upside a little more at the opening – based on the CPI report.

INDU 12750 / 13000 (We are still in a resistance band which is hard to get long or short hard deltas as a breakout is looking either through 13k or down below 12750. Stay nimble in this range.)

NDX 2000 (We are at that resistance level and will probably break through at the opening – follow through? Only the close will give us clarity.)

SPX 1400 (The same here – while we have been above and below the 1400 level – we haven’t confirmed if it is support or resistance at this point.)

RUT 700 / 740 (The 740 number is the place to get a continued rally out of here.)

_______________________________________
Conclusion

The CPI number and the focus on the “CORE” and the headline number indicating that WE (the consumers) are NOT feeling inflation is so far off base that there is something not right. As I have pointed out the methodology (substitution, hedonics, new weightings, etc.) keeps the CPI low – since it is NOT measuring a fix basket of goods. Since both Jack Bogle (Vanguard) and Dr. Granger (Nobel Prize winning economist) agree with my assessment (have read my essay) – we have to realize that the CPI is not giving us a REAL picture of inflation. At some point the consumer (and maybe too the investor) are going to say – WHY is there such a disparity between what the government is reporting and what we are feeling in the REAL world? Until that happens and the “Nods” continue to agree and believe the government data – the gulf between reality and fantasy will only get bigger.

The VIX remains VERY low – and the market still has much hidden volatility in it. After the news about AMBAC, MBIA, Fannie, Freddie, and BofA concerns of more write-downs and gas going up – the volatility is just loading into the market in this narrow resistance band.

I would keep hard (long or short) deltas on a very short lease and not get to much exposure in this market until a confirmation is realized.