But wait, did I forget to mention that there is a bunch of oil in tankers and we could not unload them fast enough (because of weather)? So there is really MORE oil, but it couldn’t be added into the inventory numbers because it is actually on tankers! Then as fast as oil ripped to $133 it came crashing down to $126. I heard an oil trader yesterday on Bloomberg saying he has never seen this kind of action in his 20 years of trading. The whipsaw in directions and the sizes of the move is unprecedented. It’s as if each story is sending jolts up and down into the price of oil and one thing is for sure – volatility is expanding not contracting.
Yesterday economist and analyst could not agree as to the supply issues as the report added additional confusion with not being able to unload tankers. This morning oil has already had a range of 125 to 128 in an hour.
No doubt the oil whipsaw is moving everything and I would have to say the band of volatility is widening – expect to see oil to trade easily between 140 and 120 in any given day. At these plus $100 prices – big dollar moves are to be expected.
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U.S. Consumer Spending Rises
No doubt we are facing a slow down and the U.S. consumer spending slowed in April as income gains weakened – indiciative of a slowdown, but the question is how bad is it?The .2% rise in April has decreased from the .4% rise in March – but incomes grew by .2% - partly due to the billion dollar stimulus and tax rebates. Economist argue that the April numbers may not be a good measure that the economy is recovering due to the stimulus package with artificially increased incomes and boosted spending – even with the stimulus checks the spending slowed more than the government (Paulson) had forecasted. The .2% rise was expected by the economist forecasts.
The report shows that consumer spending rose at 1% pace last quarter, the smallest gain the 2001 recession.
I am sure this report will arm both camps (recession / nonrecession) and the bar debates this weekend will show no victor, just like the Democrat Primaries.
Of course the report shows that Core inflation eased – don’t ask me to do the math on that.
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Dell Surges and pushes futures up in the pre-market
Dell – which had been struggling against Hewlett-Packards recent surge and also seeing general PC market share being taken away by Apple (since they have added Intel Processing power to their lineup) has surged as their report shows sales had beat expectations. There turn around strategy is making a difference.Last year they introduced a sleek notebook (ultra-light) to compete in the market place – the new look and colors has changed the boring black/grey note book look and is borrowing some of the Apple philosophy. Additionally – after seeing that gaming computers (top of the line in the $2500 - $3500 range) is another segment that has grown. They have been increasing their gaming rigs and are taking a fairly strong stand in that sector as well.
However, probably the biggest strategy that has benefited them was selling through retailers and opening their own Dell kiosks in malls across America – this has helped them make large strides against their larger rival Hewlett-Packard.
It is the lap-tops that are their big mover and make up 2/3rds of the consumer business – that market rose 22%.
Additionally they are looking to expand in Asia as that sector continues to be the leading growth area in sales for them – and the weak dollar has helped boost sales in the Asia/Pacific region.
Dell shares up strong in the pre-market $2 points – pushing the futures up.
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Moody’s “implied” ratings lab reveals Ambac and MBIA as JUNK
Surprise, Surprise! With credit ratings being questioned daily as structured financial products rated AAA have failed – credit rating agencies look to new methods to rate credit based on risk. Moody’s new unit, Moody’s Analystics, use credit-default swap prices and actual market liquidity and pricing as an alternative system for grading debt (probably a better one). The surprise – these ratings differ SIGNIFICANTLY from Moody’s official ratings. These ratings show (based on price, liquidity, and markets) that these structured products have inhertiantly more risk than the typical credit ratings – at the end of the day you can’t argue price.So how do the two largest bond insures (Ambac and MBIA) rate based on actually pricing and liquidity, rather than the typical Moody’s credit ratings? Well – based on Moody’s Analytics they rate Caa1 or you could call it what it is “JUNK” – just above default. Remember – these companies had lost a vast majority of their reserves, failed on some insurance, and have been actively rasing money or selling their own stock to build cash reserves – but Moody’s has maintained AAA ratings on them (as if they were as good as a U.S. Treasury).
However – the only reason they maintain the rating of AAA is to keep them from default – but even the bigger picture is to make sure that many of the AAA bonds they insure also do not default. 100s of billions of investments in the bond market by Pensions and State Funds need the coveted AAA rating and the insurance that comes with that – it is part of their charter – otherwise they would be forced to sell. Ambac and MBIA need AAA ratings in order to insure AAA products. These two companies insure trillions in bonds!
``The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.
However, Moody’s is sticking to their AAA credit rating of MBIA and Ambac regardless of what their OWN Moody’s Analytic department rates them – which is at the opposite end of the field. It looks to be more of a political game as they don’t want to budge.The big surprise was that they didn’t manage to keep this from going public, but talks about the measuring risk via price and liquidity has been lighting up the phones on most swap traders desks. There was no way to keep this a secret – not with the pricing and trading in an already trumblant market.
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Futures – Pre-Market
The Futures are getting a good pop from the great news from Dell. The futures are out-pacing the cash by a couple of points – so expect some upside jolt to the market as Arb traders buy the basket against the short futures. As long as you see 2-3 points vs. FV – expect the upside jolt at the opening. However – it seems to be getting squeezed a little as oil starts a rally again.
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Support / Resistance
What a week – we had a big sell off last week, a short stabilization and now a new rally. Oil has pulled back and the dollar strengthen. A couple of indices broke through and a couple are just shy of resistance. Can we stay above it – if the futures in the opening are an indication – then yeah.
INDU 12400 / 12800 (We had a good run yesterday and then a pull back into the close, we did break the 12600 short-term resistance and stayed above it – a good sign of short-term support. Now let’s see if we can move up towards that 12800 level. 12600 is the pivot point – it would be nice to see it close above it today to see strength going into the weekend.)
NDX 2000 / 2050 (We are back above that 2000 level and DELL will be pushing it harder. The tech sector has been a mix basket of late – there is AAPL and GOOG which have driven this index hard – but AMZN, EBAY, and MSFT have all been weak to down in this rally. This is really about the over weights out running the rest of the index by a long shot. Expect more volatility not less.)
SPX 1380 / 1400 (We almost got to close above 1400 and I thought we were going to, but the pull back into the close took us back down. Can we get above it – well DELL is going to help and the futures show that we will. Watch the close!)
RUT 720 / 740-750 (We are up in that resistance band between 740-750 again – this showed serious strength in the broad market. Let’s see if we can get through 750, or at least stay above 740.)
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Conclusion
Oil made a significant pull back yesterday and the day before – however in each of the last 4 pull backs in oil (since Dec of 2007 all between 5-10%) it was just a launching pad for another huge run to the upside. Pickens, Rogers, and the rest are buyers on every pull back. Is this just a short-term pull back like the other moves before another run, or is oil now in a Bear slide. I don’t think a couple of days will be indicative of a Bear move, I also think we need to see it get BELOW 120 before we say there is a correction in the cards. Also that oil inventory report was confusing and shocking at the same time. The action in that 30 mins down-up-down was just crazy.
The credit rating story I think will continue through the year – why I am still skeptical about the economy turning around, well if credit rating agencies are keeping AAA ratings on companies that insure trillions in bonds, while their own new analytic’s depart based on PRICE has them rated as junk – it still seems that the transparency is foggy at best. What happens if Ambac or MBIA fail or default? The write-downs continue – so I don’t think we are out of the woods yet.
Play the bull side but be careful at resistance, take some off, and make sure to hedge those hard deltas! I have a feeling that the summer is generally going to be the calm in the storm.
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