MP 5/21/08

Traders,

Yesterday the market gave up its fight and oil seemed to be the focus of the day, of course oil has been above $100 for some time now – but it seems as if it has been put on the back-burner why the “worst is behind us” talk has taken center stage. I guess it was Pickens interview yesterday morning when asked, where is oil going and he said HIGHER – that had the financial industry talking and refocusing back to oil. His point as to why was well taken and he personally is making huge investments into coal, natural gas, and yes a massive wind farm in Texas – that is not to say he has also been long oil since the mid 20s. I think the big shocker of his interview was that he pointed out that $600 billion is leaving this country per year in oil revenues – that is a lot of dollars and more than the cost of the Iraq war on an annual basis.

This morning – oil touched the 130 mark. Sure – I think it is probably over priced up here as well – but do technical’s mater. This isn’t a stock – but rather a commodity that is consumed faster than it is extracted. Sure it could and probably should pull back to $100 – but will it? One thing is for sure – the massive growth in the emerging markets and the increase in all commodity consumption is something we cannot overlook. Many of these countries are shifting from exporters of raw materials to importers – and THAT will continue to push commodity prices higher.

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Moody’s has a BUG? The Block Buster Story of the Summer

You probably know that I have been complaining about the credit ratings by Moody’s, S&P, and to a lesser degree Fitch. They continue to give AMBAC and MBIA – AAA credit rating while those companies have pretty much failed. They gave tons of AAA credit ratings to CDO (collateralized debt obligations) of these wrapped mortgages and also to questionable bonds. Remember – AAA credit rating means they should be as safe as U.S. treasuries with NO CHANCE of defaulting. Certainly there is something amiss with these credit rating agencies. At first I through it has to be conflict of interest (I still do) – like paying your teacher for grades. How do you expect them to be objective. But the Financial Times broke a rather big story…..a computer bug is to blame!

According to the FT story a computer error was responsible for the AAA ratings being assigned to complex debt securities that have dropped in value (and in some cased defaulted). Banks had been receiving the highest coveted ratings for these debt obligations for a couple of years and then sold these products in Europe – that used borrowed money to speculate based on these high ratings. The sub-prime blow-up caused many of these AAA rated products to lose as much as 90% of their value and in some cases fail.

Many European banks are up in arms about the quality of these products which have cost them billions based on AAA credit ratings. Obviously something was wrong – and FT dug deep to find the answer. FT found internal documents at Moody’s that show that some staff KNEW about the problem and that these products should have been rated at LEAST 4 levels lower – but instead adjusted some assumptions to avoid the lower grades. This is pure FRAUD!

Punnet Sharma, Barclays Capitals’ Head of investment-grade credit is worried, ``If it is true, does that mean other products haven't been rated correctly? Will they be downgraded? It could lead to turmoil.'' Other banks are making similar comments.

The integrity of the biggest investment sector by capital is now being called into question (HELLO – has anybody been reading my Market Preview – I have said there is NO WAY that AMBAC and MBIA should have AAA credit!!!!) Heads of European banks are now discussing options and are looking for different methods to analyze current credit positions on their books.

Moody’s is no doubt in a sh*t-storm and so far it is ONLY the European banks that are squawking – it is amazing how this story is not getting more coverage in the news. But when you are talking about the biggest credit rating agency and ratings on trillions of dollars worth of paper – and fraudulent practices – well I don’t know how they are going to sweep this under the rug!

Finale note: I call BS on the computer error <- that is the scape-goat for the flood of AAA ratings they have been handing out to those that pay for them. Of course MBIA and AMBAC will keep their coveted AAA rating – for now. Unless Moody’s can explain away this story – expect it to be the Block Buster story of the summer coming to a financial news station near you! This will create pressure on the banking sector if anyone picks up the FT and bothers to read probably one of the only decent business papers – since the WSJ has been converted by Murdoch into an Op-Ed piece that is “fair and balanced”

http://www.ft.com/cms/s/0/0c82561a-2697-11dd-9c95-000077b07658.html?nclick_check=1

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Dollar slipping – again

Last week and earlier this week Australia, the ECB, London, and several other nations mentioned that inflation was their chief concern and they would not be lowering interest rates, and in some cases raising them. That has put more pressure on the dollar and NOT what protectionist in this country want to hear. While Bernanke cut rates to inject liquidity into the banking system to keep them solvent – but that sent the dollar lower and inflation higher. Some Senators have been “pleading” and in some cases “blaming” the ECB for the weak dollar because they will NOT lower their rates.

Low rates in the U.S. means that fewer foreign assets are pouring into U.S. treasuries – so while Bernanke is printing money in the basement he is unable to raise more money – ad more money injected into the system just means more inflation.

Think about this – when a bank writes-down $10 billion and then goes to the Discount Window to borrow $10 billion from the Fed – what is the money really worth. If the Discount window is just a copy machine and if Freddie and Fanny also have an endless supply as a back-stop for mortgage relief – where does all the money come from. We are sure not selling that many treasuries to keep up with the pace of money supply.

M3 numbers (which the government doesn’t look at any more) is showing a flood of dollars into the system.

Inflation is way higher than what the CPI would have us think.

Unless something changes expect to see the Euro, Franc, and other currencies (depending on what side of the carry-trade they are on) to rally against the dollar.

No offense to any religious people that read this – but the U.S. dollar (being a fiat currency and not redeemable for anything) needs global Faith to keep it strong. So far foreign nations are losing faith. They have just lost it with our largest credit rating agency and as Bernanke’s biceps get bigger from cranking on the printing press – so too will the dollar’s faith wane.

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Futures Pre-market

The market had a fairly decent sell off yesterday and oil hitting 130 earlier this morning and now the Moody’s story which really has NOT made the U.S. press yet (just the FT) is already trickling into the market. The futures are down slightly and unless optimism can turn this around expect some pressure from the Arb traders in the morning as they buy the futures and unload on the cash basket.

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Support / Resistance

We have given up some ground and but a couple of indices still remain at or above that short-term support area. It will be interesting to see if they can remain above them into week’s end.

INDU 12800 / 13000 (The INDU pulled off HARD back down to very short-term support at the 12,800 level. If we break below that the next pause will be at 12,600. The INDU really needs to get above that 13k level and stay there to prove that the 2 month rally has any real strength.)

NDX 2000 (We pulled back to the 2k marker and looks like we might dip below that at the opening, but it is the close and weeks end that will make a difference going forward. This index is driven by the over weights AAPL, MSFT, and their brethren. Watch these stocks to get any indications.)

SPX 1400 (We are still above 1400 and that is good for the bulls for now – but it really needs to hold.)

RUT 700 / 740-750 (The 740-750 resistance band held and the index has pulled off – not that hard though. Could there still be some strength in there?)

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Conclusion

I thought I may have been a little on the fringe calling Moody’s and the other credit rating agencies a joke – specially with their handling of the bond insurers. I know WHY they do it – because they are trying to keep the large holders of that paper from “forced” selling. Pension funds, state funds, and other credited investment companies can ONLY invest in high grade paper AAA and they NEED bond insurance – that is written in their charter. If they can NOT get insurance they can NOT buy the paper. The bond insurers need to be rated AAA to insure the paper. It is that simple. No AAA rating for bond insurers, no bond insurance, and bang billions of paper being held at these large funds are force to sell. The joke is how does a bond insurance company that doesn’t have any more money and has asked to insurance relief at the big investment banks who they insure continue to maintain AAA credit? When there is a bug in the computer system! Not – you have to know at this point something was going on. Thanks Financial Times – I don’t feel like a lone wolf anymore.

Expect more volatility and the VIX is still too low to give any true reflection of the market. If the dollar continues to slid and oil continues to see strength at some point the market is going to give up some of the recent gains. Getting long at these levels requires a FULL HEDGE – nothing less! Yeah the market can continue to go higher – but do NOT take the naked delta risk!