MP 5/6/08

Traders,

Sorry, I was out yesterday with the family – (son’s birthday). Interesting however that last Friday was very weak and the confirmation of NEW “supports” was not confirmed and those resistance levels remained resistance levels for the most part. Monday saw some pressure across the board and reality of the U.S. economic landscape bubbled to the surface – as the market retreated.

However, what really stuck the fork into it was Buffet’s comments at his annual shareholders meeting over the weekend (over 30,000 people attended). He stated we ARE in a recession already – (by adding in the population growth rate the GDP would be flat to negative). Additionally – he stated the write-downs, credit problem, and housing problem are far from being over. His less than rosy picture of the state of the economy was printed in every major news paper over the weekend – everything he stated was pretty much at odds to what the government was reporting. That sure didn’t help the market on Monday – which gave up over 80 points.

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Fannie Mae the government backstop?

Fannie Mae, the largest U.S. mortgage finance company (a Congress created and mandated company) – loss another $2 billion dollars and is looking to raise over $6 billion. The analyst expected a $.64 per share loss, not the whopper $2.57 per share loss they reported. Isn’t this semi-nationalized company not suppose to lose money? Great - more socialism!

Expectations are that the additional $6 billion they plan to raise will still fall short of what is need – estimates are for over $15 billion to cover capital issues involved with delinquencies and foreclosures. Again – the mark-to-market write downs are still on the books! But the real questions are still not being answered. Have they separated out the 2nd from 1st mortgages? What is the REO expenditures and turn around? Do the write-downs include ALL TYPES of equity lines? – until we have a better picture of what these write-downs are – they will continue until the bottom is found.

As the U.S. foreclosure filings more than doubled last quarter and payments ROSE after resets of adjustable-rates continue to put MORE stress on homeowners in an already ailing housing market. Don’t let anyone tell you that the FED (Greenspan) caused the housing bubble – Fed target rates are back down to 2% - where are mortgage rates? – Back when Greenspan lowered target rates to 1% - fixed mortgage rates remained between 6-7% - they sure DID NOT come down to 1% or even close. Same is true with the resent cut in interest rates! Real estate agents and mortgage companies love to tell people how rates are tied to the Fed funds rate – that is pretty far from the truth.

Regardless, Goldman is recommending investors to “SELL” the stock – which is putting pressure on the company in the pre-market. One thing is for sure – Freddie Mac and Fannie Mae – do NOT have to far to go to raise that extra money – they have a direct line to Paulson and Bernanke. Remember – these are Congress created and mandated companies. The government sure knows how to run a business.

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UBS – more losses and job cuts

UBS plans to cut 5,500 jobs and said losses have expanded. They plan on making an exit of the muni-bond business as well and are looking for cash in all arenas as losses mount. The company took a $17 billion loss in the 1st quarter and said that clients withdrew more than $12 billion during the quarter. The news is putting more stress back into the banking sector, just when we thought “The worst is behind us” after the Bear Stearns fall-out. I guess Buffet is right?

Interesting side note: Buffet mentioned over the weekend that he was interested in an investment bank (investment) – however after reading the 270 page quarter report – he could not make heads – or – tails out of 25 pages that pertain to investments or risk. He concluded – that he didn’t invest in the company.

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Yahoo – falls out of bed.

In a rather surprising move by MSFT , Ballmer pulled the offer off the table for Yahoo! Yahoo quickly fell. I am sure at this point the Yahoo board is getting an ear full from shareholders wondering why they did NOT take the deal and tried to milk MSFT for a few extra dollars in share price. At this point – it would be rather funny to see Ballmer make a new bid, slightly LESS than the previous – “Can you hear me NOW?”. That would certainly sling mud in their face and show that MSFT is done playing games with the ailing search engine.

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Oil & Food prices – continue to rocket!

Just when we were told that Oil was heading back down – it RIPS to 120. Is it becoming painful again? Well – the candidates think so and the gas tax issues and every other convoluted government control (even as far as a nationalization of fuel prices) has been touted by one candidate or another. Obama and Clinton are making the gas tax the key issue to win voters. It’s like they are grasping at straws and promising voters cheaper fuel – when they have very little control over it.

Additionally – food prices have increased to very serious levels. Some commodity futures in India and other countries have HALTED trading – as prices are reaching levels that are creating devastating affects in emerging markets. Riots are breaking out in several countries as wheat, rice, and other grain products are either to0 expensive or no longer available and shipped to placing that CAN afford the higher prices.

As commodity prices continue to move higher – the impact on inflation, even if the dollar can gain ground against foreign currencies is going to put MORE pressure on U.S. consumers.

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Futures Pre-Open

Monday was a weak day – with more banking concerns and Buffet’s statements – with OIL hitting $120 a barrel and news of some foreign exchanges halting some commodity future trading – more concern has entered the market. Futures are front running the cash by a couple of points – expect Arb traders to buy futures into the opening and short the basket – which will create some opening pressure.

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Support / Resistance

We had that leg up last week – but Friday didn’t see in confirmation of strength – once we busted through those resistance levels. We are now retreating a little and the INDU is back down below 13,000. Was that the last hurrah? Who knows – but UBS, Fannie Mae, Legg Mason, coupled with Oil and Food prices are sure not making it easy to rally.

INDU 13000 (It is still a questionable area – is it Support or Resistance? I would argue still Resistance – while we did break out on Friday and closed above – it was rather a weak day. The economic landscape – according to Buffet – and what we are seeing is not looking like we have found a bottom. Many companies that have overseas exposure are reporting greater than expected profits – but that is only positive piece of the puzzle.)

NDX 1950 / 2000 (Very mixed market yesterday pushed-n-pull this index around – Yahoo down, Apple up, Amazon down, Google up. It is still a fight with the leaders – but this index is also at some lofty resistance levels.)

SPX 1400 (This is another key area – we are still above it as of yesterday – but today’s news is pushing us down through 1400 at the opening. Watch the close for any clear indication.)

RUT 720 (Again – like with the INDU and SPX – we are still above it – but the futures are showing some pressure. Can we remain above 720? – watch the close!)

The market has made a very good rally off the resent lows in the face of all the economic hard ships this country is facing (higher oil, weak dollar, housing bubble, credit bubble) – the optimistic resilience has push us up to some good resistance levels and we popped through them. But it doesn’t look like we are getting any follow-through. The economic pressure to the downside is still strong.

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Conclusion

We continue to see write-downs in the financial sector, but then are quickly told “the worst is behind us”. Some day that will be true – but for now it is too hard to see the bottom. If Buffet cannot make heads or tails out of a financial statement by an investment bank – to a point that he is not even willing to risk the investment – are we any wiser? Lots of questions in the write-downs are still unanswered and that IS a concern.

The increase in foreclosures last quarter hit levels that were far beyond expectations. California had 3 times as many foreclosures as new home sales. However, we are being told that home sales are only down 8%, but that does NOT include foreclosures – since they are considered a distress sale and an anomaly (not the norm). I would argue that if foreclosures are 3 times as many new home sales – that foreclosures are NOW the NORM. They SHOULD be counted into those home sale prices. It’s a sale right, regardless if you buy it in a foreclosure, REO, or via a real estate agent.

I had not realized how serious the Food problem (shortage and price) was – until reading the article in the Economist and hearing about futures being halted in some overseas markets. This very well could put more pressure on U.S. consumers as increased prices will be pushed through – so that companies can remain in the black (or pink).

Friday, Monday, and today are probably good times to flatten out long deltas and keep long Gamma in your positions.