MP 5/20/08

Traders,

Another interesting day – a weak opening, a rally, and then strong sell off into the close. The INDU got above the 13k market and stayed there most of the day – then FLUSHED back down to the 13k area at the close, at one point it was up over 100 points. The broader based RUT is having trouble with that resistance band (740-750). The tech heavy NDX gave up all its gains and finished down on the day. No doubt this market had a nice strong rally to recover most of the losses over the last month – when it looked like Bear (being the negative catalyst) had been resolved – also with Bernanke taking creative and drastic action.

We are heading for a bumpy year and this roller-coaster is far from over. We probably will not see stability return until after the new president takes office – even then the uncertainty of how economics progress is very uncertain. Iraq, Health Care, the dollar, oil prices, inflation, credit crisis – they will all still be looming over the administration. If the new administration is unable to resolve these big issues – expect a 1 term presidency. Whether it is their fault or not – the people can only tolerate economic stress for so long before they start pointing fingers.

Of all the years to become president, I sure do NOT envy any of the candidates and what they are about to inherit. Sure – it is easy to blame Bush for getting us into this mess – but this goes way behind Bush, the Republicans, or Democrats. We are facing economic global evolution and either we evolve with it or become the mudskipper. <– no offense to my intelligent design friends.
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U.S. Supreme Court rules Muni Bond Tax Exception Upheld



As if they would rule against it! Yeah, let me see let the $2.6 trillion dollar muni bond market already facing serious interest problems and NOT let them take the local state tax exception? Hmm……. With muni-bonds (rather none risky) already losing almost a full 1% in the first quarter – this ruling brings a sigh of relief.


Even with the ruling expect to see further issues based on both the Credit rating agencies ability to keep the high rating coupled with the Bond insurers (need for maintaining a high rating) to insure these bonds.


Regardless – the 30 day auctions need to be watched VERY closely. I think once property tax expectations are reported in the coming months – the dominos could start to fall – as the purchasers are concerned with the ability to pay the interest, then the credit agencies down grade, and the bond insurers have to come up with MORE money.

The good news for now is that at least they don’t have state and local tax issues – which would of put more pressure in a already struggling market.

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PPI increases more than forecast


The Producer Price Index rose more than forecast, even the “CORE” (which excludes food and energy) – at .4% (expectations were .2%). It is clear that the rise in global (HARD) commodities (steel, copper, cement, etc.) those raw materials has forced many companies to raise prices to protect margins (profits). The concern that many economists have pointed out is that as prices continue to rise on raw materials – at SOME point those companies will have to pass prices onto the already strapped consumer. The weak dollar – while helping some sectors that are selling overseas – is still affecting the bottom line as the raw materials (commodity) prices increase. This goes beyond the concern that we are already seeing in OIL and FOOD (rice, wheat, etc.) – where prices continue to rise.


The BRIC (Brazil, Russia, India, China) along with the other emerging markets are building at an exponential rate. Last year Donald Trump had commented on that increase cost of cement (being shipped overseas and prices going up) – which created budget concerns for several projects he had been working on here in the U.S. It is clear that we are in a commodity bull market – as not JUST Oil is rising - but all commodities.


As the emerging markets start building faster and city populations boom – many of these countries are slowing moving from exporters (of commodities) to importers.



Pickens was on CNBC this morning and Becky’s first question was “Oil is above $127, where is it going?” Pickens responded “It’s going up!” - $150 this year. He said forget all the speculation and other talk about oil, the answer is very simple we are very close to maximum extraction 85 million barrels per day and current consumption rate (and climbing) is 87 million barrels. It is just that simple – Supply vs. Demand. Becky asked “Are we running out of oil?” No, said Pickens – it is just extraction vs. consumption. Nothing more, nothing less.


He said that Bush’s visit to Saudi Arabia was a waste of time – they are already running at maximum extraction and Russia extraction rate is on the decline. The Middle East is just trying to get as much money as they can before the extraction decline becomes more serious. He said the shocking thing is that $600 billion per year leaves this country because of oil, but not a single Presidential candidate has talked about it – either they don’t KNOW or they don’t KNOW what to say. He said we need to move to natural gas (ASAP) to get off the Oil nipple – which would reduce Oil dependency by 40% in this country. He also building wind farms, is pro-solar, and also clean burning coal solutions (one of our biggest natural resources). He thinks ethanol is a joke – because it could only address about 5% (maximum) of oil needs.


Interesting note: Saudi pumps millions of gallons of seawater to keep pressure up in order to pump OUT the oil – they actually extract MORE seawater than oil on a daily basis. According to Pickens they are NOT able to increase production since they are already running very close to maximum extraction rates.




Expect the commodity bull market to continue to put pressure on all sectors – food, energy, and hard commodities (steel, cement, copper, etc.)

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Liquidity vs. Credit Crisis


I have heard lots of talk that the Credit Crisis is over, but I would argue that the Liquidity Crisis is over, but the Credit Crisis has a long way to go. There is a big difference between Credit and Liquidity – which I think a lot of talking heads and reports are confused as to the difference. The Credit Crisis CAUSED a liquidity problem last year as losses mounted at the banks (and lending firms) – but Bernanke via cutting the rates, injecting capital, and opening the discount window to investment banks made MORE money available. He HAS addressed the liquidity problem.

However –that is not the same thing as addressing the credit crisis. Many of these firms still hold positions in the housing market, bonds, and other assets where the default and credit risk is still rather high and in some cases increasing (foreclosures). The mistake people are making in not being able to tell the difference is that just because more money is being tossed at a problem (via lending by the Fed) doesn’t SOLVE the problem – it just allows the company to buy time to sort their mess. It is like operating in bankruptcy and getting the creditors off your back. While you are still able to function as business (or city – like Vallejo, CA) – it sure doesn’t mean that the problem is solved.

For now the liquidity problem is solved – the FED as POURED money into the system – and while helping SOLVE the liquidity problem for the lenders the FED has created another problem – called INFLATION. You cannot just pour MORE money into a system without expectation of inflation (or that the FIAT “Faith Backed” currency) will lose value.

Think about this – if a bank takes $100 billion in losses and the Fed loans them $100 billion (because it can “print” more money) – what is that $100 billion now really worth? Pouring liquidity into the system may have given the banks time – but they STILL need to solve the Credit problem.

For now we all have to live with inflation and the PPI this morning is proof that a weak dollar may help a couple sectors via the trade balance – it is certainly hurting the bottom line of everyone. The ECB, London, and now Australia have all talked about raising rates – that will only put the hurt on the dollar more and yes – send commodity prices HIGHER!

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Futures Pre-market

The futures were weak coming in this morning and the PPI news put MORE pressure on the opening. The futures are front running the cash – so expect Arb traders to leg the position and put some selling pressure on the basket at the opening.

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Support / Resistance

We had a pretty solid rally over the last two months into this resistance band – the SPX and NDX broke through but the INDU is struggling with the 13k area and the broader RUT is also having issue with the 740-750 band. The bi-polar market vs. economy is clearing pushing and pulling on this market. The stocks have been rallying on optimism that the worst is behind us, but the commodity market and consumer confidence is spelling a different picture. I have never seen (in 20 years) this much divergence between the market and the economy. It clearly shows that we are moving into a GLOBAL market where some sectors will do VERY well and others will get hurt. We are no longer living in a closed border economy and market – that is the only certainty!

INDU 13000 (This is a very tricky area – we rallied yesterday to pull back to 13000. The PPI is putting some pressure on. If we can NOT close this week above 13000 I think we may have just reached the short-term TOP and will start to head lower.)

NDX 2000 (This is volatile index and the futures look like we will be at or below 2000 at the opening. Keep an eye on the overweight’s in this index (AAPL, MSFT, etc.) they will give you an idea where this index is going.)

SPX 1400 (This IS short-term support but I would NOT get long here. Yesterday we scratched the 200 day moving average and I am hearing lots of talk that we need to close above that to see this continue. If we do NOT close this week above 1400 then I think that 200 day moving average will be looked back on as a sell signal.)

RUT 700 / 740-750 (The resistance band on the broader market is very strong and we have not been able to get through it like the NDX and SPX – this is showing that the broader market is struggling as a whole since no single stock is overweighed to drive this index through.)

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Conclusion

The VIX is slow low it is a joke, fear has left the market, and euphoric optimism is driving the equity markets higher (granted there are some solid sectors out there) – however the commodity market is sucking out margins in all sectors – food, energy, and now raw materials (as reflected by the PPI). Companies are going to pass through the HIGHER costs onto consumers – who have tapped out credit lines and already have lost buying power with a weak dollar. Expect a VERY slow economy through 2008 if this continues.

I am also sick of hearing “The worst is behind us, the Credit Crisis is over!” – clearly the liquidity problem has been solved – but we are still seeing MASSIVE write downs (granted they can absorb those now since the discount window is opened to anyone and everyone – plus we can expect MORE injections of capital). However solving the liquidity issues if far from solving the losses on these massive illiquid positions.

I additionally think the muni-bond market is going to be in for some SERIOUS hurt once the tax estimate come out in the next couple of months – the SHOCKER of the short fall of revenue will serious put the credit rating agencies to the test. For now they have lost ALL creditability (save Fitch) as Moody’s and S&P continue to give AAA credit to MBIA and AMBAC – who really don’t have a pot to piss in and have asked their clients to extend them lines of credit and are selling stock to raise money. How that equals AAA credit – well I have yet to hear anyone explain that one – we KNOW why they are doing it and that is to keep the levee from breaking – that Led Zep tune is playing in my head. Expect MORE volatility – that is something you can take to the BANK!