6/30/08 (Qtr. End Marks, ECB hike?, Oil bubble?)

Traders,

Last week was pretty weak and not reflecting that things are getting better. I had a couple of emails (as well as a conversation with my father) who said – the Market Preview has been pretty depressing to read. I do not deny that is the case, I wish I could say we should just ignore and “HOPE” that things get better. I have spoken to both some retail investors, brokers, and financial advisors (one even said – I don’t want to talk to you because I while I KNOW you are right – this is just too depressing to talk about!). WHAT? I ask – get off your lazy butts, get focused, and get a hold of yourselves. There is NO TIME for the PITTY PARTY. Get solid and start hedging those positions. If you feel you don’t know what to do, then ASK your financial advisor or broker – if you are not happy with them – find one that CAN help.

There are traders and investors that are NOT losing money. There are traders and investors that are actually making money. 99% of all investors trader with one strategy – pick a stock and get long! They don’t hedge, they don’t trade other products, they are pigeon holed into one strategy and one product. As Jimmy Rogers said – this is the greatest bull market in decades (in commodities).
So if you think the Market Preview is depressing and don’t want to read it – it’s no skin off my back. I start writing this (not for the public) but for my partners and some traders on the floor that wants a “one pager” on news, futures, and indices – I am NOT a talking head that is going to blow smoke up their butts to make them feel good. This is not the Bull Preview or the Bear Preview – it’s just what it is – if you can’t figure out how to make money or hedge your positions – then go get some education or a good financial advisor.

Sorry – I just hate getting the pity party emails or people that are “hoping” – hunker down – get real – and be ready to fight!

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Oil, ECB, Holiday week, and Quarter End = Volatility

Oil is heading higher, hit 143.50+ in the early trading session. The dollar got hit pretty good after Bernanke’s bluff was called. The ECB MAY raise rates if they are concerned about inflation. It’s a holiday week – short week – light volume ! AND – it’s Quarter End, which usually means marking UP positions! All this spells more volatility this week.

While the VIX index didn’t get up to the 30 level, which I would of thought would have been the case with the market selling off – we nevertheless did see some huge volatility.

The skews on some of these indices are pretty steep. The problem with the VIX is that while it DOES use the OTM options – the weighting is significantly less than the ATM – thus the skew IS considered – but it is still hard to determine if the VIX is reflecting a higher at the money or higher skew.

Example of what I mean. Since we are only look at a single number when we review the VIX and not looking at the skew it is possible for the following to happen. The VIX is at 25, the ATM is actually at 22 but the skew is VERY steep which pushes up the VIX to 25. OR the VIX is at 25, the ATM is actually 24.5 and the skew is not steep. The above is to simply illustrate that without doing further investigation the VIX number is just scratching the surface of what is actually going on with the premiums and market expectations.

I think we may see some pressure to try to get the market up today – to mark these quarter end positions after a very bad week. I don’t know how well they will be able to do that or how much they can commit to such an endeavor. They DO have a light volume trading week working for them. However, the higher oil prices and the possibility of the ECB raising rates could put enough negative pressure to keep the quarter end mark up for happening.

One thing for sure – expect some volatility.

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ECB and rates

There is division in the European Central Bank, while they all agree about the increasing inflationary trend, some want to leave rates unchanged (to keep money flowing at the lending firms), while others want to fight inflation NOW.

President Trichet is seeing a huge split and now has to choose sides. The oil and food prices are putting serious pressure across the globe, but a strong EURO to fight off inflation will probably hurt exports. I personally think that Trichet is not caught between whether he SHOULD raise rates or not, I think he knows he will be doing so and not just one. I think his problem is if he should do it NOW. The U.S. Fed had their tough talk about strenghten the dollar and hinting they would raise – a bluff – it was called (Bernanke can NOT raise rates without hurting the financial sector). I am sure that President Trichet, like many here in the US, expected Bernanke to actually raise rates, even a paltry 25 bps to show they are serious about fighting inflation.

Now, the burden falls squarely on the ECB shoulders. The ECB is now having to be the global leader in fighting inflation, the US currently cannot carry the burden. However, he has to get his own members in line. The division is clear, almost as if some of them would rather let Bernanke take the lead and do nothing and “wait”. Others want to charge in and fight inflation now. Thus taking the lead and let US play catch up.

Many analyst at financial firms are surprised as well. There was a belief (or perception) that Trichet and his group had some level of cohesion and that decisions (based on the mutually agreed observation of higher inflation) was unanimous. The problem with the ECB is that inflation is NOT affecting all countries the same. Germany the largest producer and exporter in the ECB is seeing signs of slowdown in the export market and also seeing inflation pressure.

The split and pressure has made what seemed like a sure thing – now not so certain. I think Trichet’s press conference will be observed and analyzed – to see if it is a one and done rate hike (if there is to be one) or if he indicates that a rate hike cycle has started. If the later be the case – expect more pressure on the dollar – until Bernanke is able to play catch up.


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Commodities going higher – a bubble ? or just the new reality?

When the NASDAQ mark rallied in the 90s and then the Dot.com bubble gave it an additional boost – many had called it a bubble. Eventually it was, but only in the Dot.com sector for the most party. Once the Dot.com bubble popped – the market had made another rally – this time no one called it a bubble. Why not?

No doubt the commodities have moved parabolic to the up side. Not just oil, but many hard and soft commodities. The talk of speculation in oil prices is starting to wane, as more are beginning to see (or realize) the massive increase in demand in the China, India, and other emerging markets is GROWING and not a little trickle rate – but compounding. Until demand eases – oil prices will remain high – but THIS HIGH?

I am not sure – I think we will see a significant pull back in commodities – but not a crash like in the Dot.Com market. I consistently get asked why I don’t think commodities (and oil) will come crashing down. To me the answer is obvious – we ALL use OIL, we ALL need to EAT, we ALL need commodities. You didn’t need Pets.Com, Webvan, or many of the other internet companies. Try living without food, oil, and other commodities for a month! You can easily live without Dot.com stocks for the rest of your life.

I think Jimmy Rogers is right. The world has and always will live on commodities. We don’t take notice and have become not only dependant, but just expected it to be there. The world’s foundation is built on commodities. Now in the last decade India and China (and others) are growing – faster. People are building cities (not one but many). These are big cities. Companies are opening up in these countries daily. Billions of people are moving from a 3rd world life style to a 1st world life style. They want cell phones, TVs, cars, etc.

So here is what I see…..(IMHO)…..we are going through serious growing pains – Commodities (including OIL) will be high for some time. Sure OIL may hit $200 and/or pull back to $100 - but it is NOT going to $20 or $30 any time soon. The same for other commodities. Eventually – things will begin to settle – people will stop panicking and realize the world is not coming to an end – but is just changing. We will see global contraction. When the dust settles China, India, and others will be the world’s largest consumers. The AAPL, DELLS, NIKE, etc. will figure out how to sell and market to these growing populations. Those companies that move into a global roll and embrace globalization will do well and prosper. Those that fight it will suffer. This global growing spurt is not going to be easy and will hurt – don’t fight it – just accept it. It is happening with or without us.
Expect OIL and commodities to come off – but don’t expect a crash. It is possible when they come off it just creates another buying opportunity. This is nothing like the Dot.com bubble.

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Futures Pre-market

The futures have been down for the most part, but is seeing some volatility this morning. The spread is pretty narrow. Don’t expect the ARB traders to drive the opening this morning. This is a short and light volume week. Additionally the ECB, commodity prices, and Quarter End marking could inject more volatility, thus leaving the ARB traders side lined.

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Support / Resistance

We may find support today for no other reason that if there was ever a time for quarter end marking, today is it. Firms need to show something for the quarter and anything to help reduce those nasty hits last week will help.

INDU ????? / 11500 (we really haven’t created a support – since we broke. We are in what is known as “free fall” there are no supports until the market can consolidate somewhere. We may get a pop today – with some marking – but don’t bet the farm that if that does happen it was the bottom.)

NDX 1850 / 1900 (We are still a ways up from the March lows (unlike the other indices) and we may be able to get a short pop today if the marks come in. However, this index is still very high (VXN at 28) – but I don’t want to call this a bottom.)

SPX 1275 / 1300 (We are AT support (March lows) we need to hold here. The INDU could not and the NDX is still way up from their lows. However – this is a broader index (500 stocks) and we are at a key area. Watch 1275!)

RUT 700 (We a just below 700 – we need to close above it to bring any “Hope” back. We may get a strong Qtr. End close today – but don’t buy that as a support. However, 700 is a key area).

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Conclusion

I am sorry that I am not able to bring good news every day for those equity investors (or long and wrong crowd). Most of the readers of the email are traders and make money regardless of direction – however some financial advisors, brokers, and retail investors read this as well. They want some bit of “hope” or good news. For investors out there – these are the times about protecting PRINICPLE first – and be happy with not losing any. It is a tough time and retail brokers and financial advisors are now earning their keep to the down side. When the market goes up – you are looking for a good financial that can beat the S&P – those that do earn their fee. Now those same financial advisors earn their fee when they can principal protect those positions from losses. If you end there year flat (with no losses) I would be very happy to pay the financial advisor his fee. Good brokers and financial advisors should be also measured by how much they can save you in difficult markets (I think even more so than winning in a bull market).

I wish I could point to good news and be a cheer leader for the economy, like many talking heads on TV. However, what good would the Market Preview be – if it just blew smoke. I don’t believe ignorance is bliss. It is time for us to toughen up and take a proactive roll. Toss “hope” into the trash can and get in front of this. If you are a broker or financial advisor – pick up the phone and call your investors (don’t wait till they call you). Get some non dollar ETFs on those sheets. Get some commodities on those sheets. Get some different bond holdings on those sheets. Get a annuity on those sheets. Don’t try to pick the bottom in the financials or housing – that is a crap shoot. I know Citi is trading $17, but who knows – it could go to $10. Why not? Remember – it is NOT about price it is about VALUE! Don’t be fooled by low price stocks as being good values. Low Prices does NOT always mean good value. Avoid dollar cost averaging – unless you understand value!

Good news – 4th of July is coming up – enjoy the BBQ, Friends, Family, and Fireworks! At the end of the day it’s family, friends, and your health that is all that matters!

6/27/08 (Oil Up!, Spending Up!, Banks Down?)

Traders,

I guess the plug DID get pulled yesterday. None – not one support held. The market saw pretty serious suck out. Yesterday, after seeing the market come off and realizing the economy has lots of difficulty going forward, I heard that Kudlow start talking. It just drove me nuts, we watch (investors) CNBC for helpful information, news, and to help make sense of what is going on. We don’t need Kudlow’s cheerleading, or Cramer’s flip-flopping, or Dennis Kneale calling a bottom every day. These dolts do nothing to help make heads or tails out of the market and those that DO follow their advice have suffered enough. It got me feed up enough to put a little tribute to these dolts (http://marketpreview.blogspot.com/2008/06/three-market-stoogies.html) enjoy.

We have some serious work to do and we need to stay AHEAD of our investments (or positions). Proactively hedging positions, not reactively hedging positions. I was once told, by a wise trader, hedge your position when you CAN, NOT when you HAVE too! This is so true – we watched the market slip day after day and I get email or phone calls – “What should I do?” – are you kidding me. If you are long HEDGE that position! It’s simple, but people wait and HOPE! There is no room for HOPE – that is an oxymoron strategy. Do you wait till you are sick before buying health insurance? Do you wait till your house is on fire before buying fire insurance? Do you wait till you get in an accident before buying auto insurance? Of course not, that would be foolish. However- you buy stocks and HOPE they go up and wait until they have dropped before doing anything – THEN you ask ME what to do! STOP – calm down and hedge your position. There is no such thing as making it BACK. Take your losses and move on.

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Oil going higher

Oil and other commodities can and will go higher. Whether you want to believe in conspiracies or speculators the bottom line is supply and demand. The problem is that even if demand remains constant or contracts, when there IS concern about supplies – over purchasing will force prices up. Just like when something goes on sale at the store, you may not NEED it you may only NEED one – regardless you end up walking out with 3 or more. Same with commodities – hedging against future price, demand, and supply helps drive prices higher.

Oil broke $140 and $150 or more is in the cards. We are facing a real oil crisis in this country and the problem is that it trickles into every sector of the market – travel, shipping, retail, etc. Any good that needs to get from point A to point B will be affected. This will force companies to raise prices on goods – to keep margins in line.

What did NOT help was what I am calling the Bernanke Bluff – we (or us skeptics) KNEW he was not going to raise rates – so all that TALK about raising rates was to shore up the dollar and people believed. The dollar found a bottom, be it fake, and started to rally because people BELIEVED that Bernanke was going to raise rates – he pretty much said he was going to. It even pulled back commodity prices and we saw a pull back in oil. Well – we saw how tough that talk was – he can NOT raise rates – if he did it would put the brakes on the Financials that are barely treading water. I am sure Paulson, who I think could take Bernanke easily in a cage match, gave him the evil eye as to raising rates (Remember, Paulson is the ex-CEO of Goldman – and KNOWS that the money needs to continue to flow) – and of course Bernanke backed off the rate raise. Of course this is just a little joke – but no doubt the banking and financial sector does NOT want to see rates go up and NEED that Discount Window tap flowing!

Well – not raising rates sent the dollar lower and oil back up! Expect this trend to continue.

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U.S. Consumer Spending Rose .8% - Hurray!

The futures saw a 5 minute pop before retreating back down as the Consumer Spending rose – more than forecast (as people filled their tanks with rebate checks). The Commerce Department said incomes grew 1.9% (the most since Sept. 2005) – but here is government math for you – they added in the rebate checks. Yeah – that is not REALLY income is it?!?

However – this pop maybe a onetime deal – unless we get ANOTHER rebate check. What is the government going to do, subsidize the entire population? That only means MORE taxes and MORE inflation.

I am already hearing talk on Bloomberg from talking heads saying the U.S. Consumer Spending Rise is showing the economy maybe struggling, but the is fundamentally strong! What? I am sure you will hear Dennis Kneale, who loves to quote government data, state this is the bottom (again!).

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Investment Banks – Merrill and Lehman


CEO of Lehman will forgo their 2008 bonuses – after the firm reports its first quarterly loss after going public. He is setting an example and will probably start cutting his staff bonuses. He was paid $40 million last year and over 90% of that was from bonuses. So yeah, it is a big chunk of money – but probably not enough to save them. I guess better late than never. I predict MORE write downs to come. He wouldn’t be doing this NOW if he thought they were at the bottom and things are getting better.

Lehman now points the finger at Merrill Lynch and predicts they will write-down more money (up to $5-$6 billion more). Other’s predicted less, in the $2-$3 billion range. Regardless – expect these banks and firms to write-down MORE. Remember – this is just paper money and mark-to-myth! As long as Bernanke keeps the Discount Window open so these guys can take write-downs on these positions and HOLD them and HOPE – they can continue! That Discount Window is keeping these firms from facing a Bear Stearns situation. They problem is they can NOT sell this paper and only take write-downs. No one wants to buy these positions – so they continue to take a GUESS as to what the value is. It’s just like you trying to sell your home, you can tell your neighbor over cocktails that your home is worth $1 million, but until you find a buyer it is just talk!

Expect the game to continue until September, when Bernanke is going to have to figure something else out. Because he is only allowed to keep the Discount Window open to Investment Banks as an emergency and September it closes. Then where will these banks borrow money? I am sure Paulson and Bernanke will force some Coup de grace. Paulson has already laid the foundation (in speeches and meetings) to give the Fed MORE power. I am not sure a Democratic Congress will agree.

Expect to see some of these investment firms look to partner with a Bank (ASAP) before that window shuts to secure more funding and continual access to the window.

One thing is for sure – when all is said and done – Bernanke is going to have some serious biceps cranking on that printing press!

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Futures Pre-Market

We saw them up, down, Consumer Spending released sending them back up, then back down as it was just the tax rebates, then it is back up as talking heads are talking it up. The whipsaw action should keep Arb traders sideline and not taking a big stance on a leg into the futures at the opening. I don’t think they want to get legged out. Expect a mixed opening.

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Support? / Resistance

The breakdown yesterday was ugly – as expected if we didn’t hold that we would of slid. There is really no support at these levels – they will have to be created after investors come out of their hidey-holes and feel safe.

INDU ?????? (It’s a crap shoot to get long or short these levels – the market really has to figure it out – watch volume at price and volatility to come in before trying to make any decision.)

NDX 1800 / 1900 (Who knows – in la-la land between here. Don’t take a stand – expect volatility up or down.)

SPX 1275 / 1300 (We are still above the lows in March – but not by much – we could bounce off those – but I am guessing it is a dead cat bounce at best.)

RUT 700 (We are just below 700, it would be nice to see it above 700 to show any confidence or a bottom across the board. It is still above those March lows)

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Conclusion

For the sell off yesterday the VIX did NOT pop as much as one would of thought. Maybe there is still NO blood in the streets YET. I drove home and went out to dinner with friends (Roy’s) and people seemed like everything was just fine. Of course financial advisors and brokers were probably not out last night having a nice meal. But I didn’t see or hear any real panic from people. Maybe everyone just expects this market to continue to slid. Gas prices are up, but not at prices that people are freaking out yet. Sure there is some talk – but nothing crazy. Europe has been paying these prices for years (they pay per liter – remember) – we are just not use to it. I think the consumers haven’t been squeezed enough to see blood in the streets yet. That means we have more room to go down.

Unless…..for some reason FAITH returns. The Faith is built on Consumer Confidence and Global Confidence in the Dollar. Living in a society with a Fiat currency (faith backed) we need not only our citizens to have confidence, but also the global community to have confidence. Once confidence returns, perception changes and we can find a bottom. However – fundamentals trump perception. So before we see any confidence return, the banking system and the Fed need to shore up their problems – which we are NOT seeing. Once they unload or just take 100% losses of that garbage paper – then we can say “The Worst is behind them!” at that point the fundamentals are resolved and perception can again rule the market.

It is very hard for technical traders to do well in this market, because fundamentals continue to trump technical’s. That is making it hard to pick spots to take long hard deltas.

It is still going to be a long road.

The Three Market Stooges!

The market is going through some rough times and so is the economy. It doesn’t take a genius to figure that out. However, it sure doesn’t help when these three dolts pour gasoline on the fire.

They have been knighted the:

Three Market Stooges!

Larry “Quotable” Krudload, Jim “Booyah!” Cramer, and Dennis “Knuckle-Head” Kneale

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Larry "Quotable" Krudload

Those damn Krudload of Quotables. Trying hard to get one right, as if it will be referred to for generations as genius! He just talks out both sides of his mouth,

"I am for a free market, buy AMERICA!"

"Those that short the dollar are not Patriots!"

“Those Housing Bears are wrong again!”

His never-ending butt-smooching every Bernanke decision. He is nothing more than a Fed Cheer Leader!

"Rah! Rah! Cut those Rates!"

"Rah! Rah! Raise those Rates!"

"Gooooooo Ber-Nak-KEEEE!"

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Jim "Booyah!" Cramer

After hearing the "Booyah!" for the billionth time and all those stupid bells, whistles, and noises, it sounds MORE like a radio morning “Shock-Jock” show aimed at middle age men that still think Fart jokes are funny, rather than a financial show! Buy, Buy, Buy, Buy, the Financials, only to tell his audience the next day that he said to SELL!

The Master Of Flip-Flop

http://www.youtube.com/watch?v=_nkZ3eHeXlc

After calling a Top in Oil and a Bottom in Home Builders over and over and over and over.
After telling viewers "Bear is Safe, they are NOT going out of business!" The week they went out of business and retracting what he said.

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Dennis "Knuckle-Head" Kneale

After hearing this Knuckle Head say "The worst is behind us!" over and over. Thinks Pickens, Rogers, Ross, and Buffet don't know what they are talking about (they have only made Billions!). Quote Government Data as Gospel and continues to say we are NOT in a Recession, but are TALKING ourselves into one! Calling a bottom in housing and financials - every day!

Herb Greenburg, "Dennis, you just want to think about this as subprime, and it's not, its prime mortgages too!"

Dennis, "You just want to think it's more, because you hate America!"
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"Oil is ONLY up because of SPECULATORS!"
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"We're talking ourselves into a Recession!"
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To Pat Buchanan, "Stop worrying about the economy and sell the hope!"
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"We're looking to lift consumer spending, NOT U.S. Production!"
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"Fear of defaulting is WHAT our problem is, NOT actual defaults!"

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Warning: Listening to them could be EXTREMELY hazardous to your brokerage account!

6/26/08 (North Korea?, Euro Banks Hit, Citi Again?)

Traders,

Well Bernanke was drawing dead, as expected. His “Three Week Raise” talk about inflation was nothing more that to TRY to keep the dollar from falling. However, there was NO WAY he could even attempt to raise rates as continual stories come out of the financial sector. So what did we get this time? More talk and more talking heads trying to decipher the talk. Rick Santelli (CNBC) said traders left the sound off and pretty much went golfing – they knew he was bluffing and called his bluff. As I mentioned the time to load up on those inflationary hedges (calling his bluff) was before that river card was revealed. Now the dollar is getting hit again.

So I wonder what kind of hand Bernanke will be dealt in the next hand. Only time will tell and we will have to see how this continues.

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North Korea ?

What is Bush doing? It’s like he is flopping around trying to create some type of Legacy after 8 years of procrastination. One thing we could rely on is that Bush was a stubborn SOB and stuck to what HE THOUGHT was the right thing. However, that is not that case anymore. I am sure if Kim-Dong-Yong-Song-Bong (forget how to spell the last name) knew that all he had to do was supply a piece of paper with some information to get dropped from the “Axis of Evil Doers” list, he would of done it years ago.


I don’t know how this is going to affect the market today – but so far the futures are not liking it – if there was to be any correlated conclusion to be drawn.

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Euro-Banks taking a lead from U.S. Banks

More dividend cuts and special share sales to raise capital. Fortis (Belgium’s largest financial company) has scrapped their $2 billion cash dividend and is snow selling shares to raise capital, just after Barclay’s did the other day. Many Euro banks have bought CDO debt paper from the U.S. based on that coveted AAA credit ratings (now garbage). They also began duplicating many of those same strategies in their own country – repackaging debt paper and selling it.




Unfortunately the EU doesn’t have a EU version of Freddie or Fanny (the toxic waste dump) to unload some of that paper on. Expect to see a continued ripples of more write-downs, dividend cuts, and fund raising – as the wave hits the shores of the EU. Kind of reminds me of the 97 Asian Flu when the currencies started unwinding in South East Asia, then headed West to Russia and Europe, made the hop across the “pond” and hit the Americas.

I think this time the US was the epicenter and it is now spreading to Europe as they catch the Credit Bug!

Expect to see pressure in the banking sector.

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Surprise, Surprise, Surprise….More write downs at CITI

Pandit, the new CEO that had sold CITI his Billion Dollar hedge fund that later collapsed and told us they would not cut their dividend, fire any more people, and the worst-is-behind-us, is no probably going to have to get on his soap box and say ok “Now, FOR REAL, the worst is behind us!” after he writes down ANOTHER $8 billion.

Goldman Sachs, after looking over the convoluted massive reports, is saying they are going to have to write-down another $8.9 billion (most likely). Goldman lowered their rating to Neutral (instead of “Get Short NOW!”, in fear of Citi doing the same to them). The turnaround promised in the 1st quarter by Pandit, then the 2nd quarter, and now the 3rd quarter – may not even happen in 2008 for Citi, according to Goldman.


I suspect they will be also cutting the dividend AGAIN and more lay-offs. Pandit had to announce 13,000 layoffs earlier this year, something he didn’t want to do when he first took the helm after the first round of layoffs.

The problem is Citi is just a monster of a company with too many departments that are reliant on debt obligations. From credit cards, mortgages, and other types of equity loans to insurance and margin. They are less of a bank and more of a massive giant DEBT company. Kind of like the U.S. government. They are thanking their lucky stars that they are one of the larger shareholders of the Fed and have the Bernanke Bat Phone at the ready.

Another reason to see pressure in the financial sector!

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Futures Pre-Market

The market called the Bernanke Bluff and now is getting WHACKED after oil, commodities rally and the dollar slides! Expect a gap down opening. Hope you weren’t planning on “Dollar Cost Averaging”! The spread is fairly wide in the pre-market so expect some BIG selling pressure at the opening from the Arb traders.

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Support / Resistance

I think this could be it and the market “PLUG” is going to be pulled and we will see a SUCK out at the support levels. If the pre-market futures are any indication today is going to be a BEAR!!!

INDU 11750 (That is the only number to look at – we will probably break down through that at the opening. Unless euphoria is going to step in at drive it back up – we have broken support! There is NOT a next stop on this elevator down – no supports below.)

NDX 1900 (We got a good rally which is going to be fully sucked out at the opening – 1900 needs to hold, otherwise grab your chute!)

SPX 1300 (It is in the cards at the opening – needs to hold)

RUT 700 (We didn’t STAY above 720. As I said that was the signal that money was going to get sucked out of the market. Now it’s all about 700)

The opening looks REALLY ugly – not that it is a down opening – it is a DOWN opening at the BOTTOM SUPPORT levels. Where or When will the buyers step in?

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Conclusion

Value trumps euphoric perception – today could be marked as the day that the supports failed in 2008. It will be about the close. Do NOT be a bottom picker on a day like today. This could get very ugly very quickly very fast. We COULD have one of those late session euphoric rallies – but it would have to be on “hope” because the fundamentals and Bernanke’s Bluff and tough talk look like serious weak sauce.

Where is the bull market? It is right here – but you are looking in the wrong direction. As Rogers said this is the Greatest Bull Market Ever (in commodities!!!). It is also a great bull market for NON DOLLAR BACKED securities. Stop being patriotic with your money – invest to make money not to show that you are a “Made in the US” fool. Vote at the ballet box not in the market. Look at what IS in a bull market and stop trying to pick bottoms in the equity market.

Remember what I said in January – this will be the Year of Volatility. The VIX WILL get back up to 30 – expect it. Rallies and Sell-Offs will be followed by more Rallies and Sell-Offs. The problem – we do not have enough MONEY to cover the leveraged positions. Until these banks can find a bottom – the credit crisis is with us and inflation will only mount!

The credit problem was always here, but we ignored it. Banks borrowed 5:1, 10:1, 20:1 against deposits. As long as they didn’t lose greater than the deposit amount – they could play that game. Now they are writing down (mark-to-myth) these losses (and NOT taking them) to keep themselves opened for business. Bernanke is the back-stop and is pouring money into the system faster than a pole-cat in a hen house. The inflation spickets are Wide Open Throttle (WOT). We never noticed it until the banks started to lose.


Expect some crazy action today – another GREAT DAY for traders and a PUKE DAY for those long-term dollar cost averagers!

Gamma is your friend!

6/25/08 (Bernanke Bluff?, Barclay needs $, Durable's unchanged!)

Traders,


Ok….didn’t mean to come down so hard on Hillary, Pelosi, or Barney – I agree something needs to be done, just disagree on what. Giving two government mandated companies that have massive accounting problems, billions in losses, and billions more in liabilities a blank government check backed by debt (tax payer) and “HOPING” they will do the right thing is not what I call the best idea. But let’s just move on.

The really bad news from a money flow technical issues is seeing the broader index (RUT) get the axe and break down 720, I guess remaining above 700 is something. Toss in the very low Consumer Confidence numbers and it almost makes you want to puke. It did nothing for signaling any health for the economy.

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The River Card – Bernanke Bluffing?

To day we come to the River Card. We will see if Bernanke drew out that inflation flush and will raise rates. I think he is just drawing dead and bluffing. His raise talk was to give confidence to the dollar to keep it from sliding. Bernanke can NOT raise rates. The river card will reveal his dead hand and again he will talk tough about inflation and talk about raising the NEXT hand.

Most economist surveyed predict rates unchanged. Bernanke really can’t do anything – he is getting the squeeze, on one side inflation, weak dollar, higher commodity prices and on the other side credit remains tight, more write downs to come, and the need to keep special deals at the discount window open. What can he do?

Yesterday I came up with an interesting idea. He leaves the leaves the Discount unchanged (or even lowers it) and raises the Target 25 bps. It’s an ugly hand to play for sure – however he keeps the money flowing OUT of the Discount Window and at the same time the target raise may give strength to the dollar. It’s really kind of a fools game because smart money will see that it for what it is – a bail out at the discount and injecting a false bottom to the dollar. However – I really don’t know what option he does have.

I think (too) that he will keep rates unchanged till probably after the election in November. Even then I am not sure what he does at the Discount Window. He has to do something by Sept. with the special lending deals to the investment banks. Congress may step in at some point and put MORE pressure on him if he decides to finagle some method to keep that window open, against the Fed mandates.

Today will be about the talking heads dissecting what Bernanke said and they will all begin to read the Tea Leaves as to what the future holds. The problem is that I don’t even think Bernanke knows what the future is.

I my short history and experience in the market (about 20 years) – usually we are able to see a bottom, a solution, a HOW or WHAT will get the market to turn around. However, even the smartest and wisest people I know don’t (this time) see that HOW or WHAT, let alone WHEN. And that is not something that sits well with me. I think Bernanke’s ship is in “Irons” and until he figures out a Halyard from a Sheet, we will continue to flop around.

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Another Bank with their hand out!

This time Barclays (UK’s 4th largest bank) is looking for some coin. Selling about $8.9 billion in shares to Middle East investors (for the most part) should allow them to ride things out, for a while at least. Of course the spin (again) is the “Worst is behind us!” and the money raised gave the perception boost and the stock saw a big rally in London trading. Confused? Yeah, so am I. Like moths to a flame – I just don’t get it.

No doubt that all these banks will see a bottom and one day the “Worst WILL be behind them!”, but I think that will be predicated on their debt to capital on deposit ratio. I agree with Buffet, the continual use of Mark-to-Myth of illiquid assets and other liabilities so far has clearly shown they have NO CLUE as to the bottom. We are running out of CEOs to fire, now CFOs are getting the axe. Maybe it’s time to SELL those assets and write down the REAL losses. However, I feel for them – they CAN NOT sell them. There is NO ONE to buy them, or at least for the Mark-to-Myth values they believe them to be worth.

Citi is trying to unload almost $400 billion of this paper over the next 3 years. Good luck, it is like trying to sell Confederate dollars for face value – yeah right! I am surprised that we have not seen more Bear Stearns, however if the Fed had NOT opened the Discount Window to Investment Banks we might have seen MORE than one, possibly several.

Here is the rub, as I see it. A bank has $1 trillion on deposit (measureable by one of several M numbers), however they leverage that capital (via the carry, swaps, and other methods) to $10 trillion in OTC paper (not really measureable by M numbers). What happens when the bank takes losses of $1 trillion? Do they really have any money on deposit left, or are these based on Mark-to-Myth write-downs? Why do you think the EU and the FED has dumped $100s of billions into the market and opened the Discount Window to Investment banks? There is NOT enough money (even at the M3 level) to come even close to covering the leveraged positions. They need to hold these MASSIVE positions and can’t as they losses mount. They mark-to-market these paper losses to keep ANY capital on deposit. As long as we play this game we really do NOT know where the bottom is. It is a very serious problem.

Looking back, I believe Bernanke didn’t bailout Bear for the sake of Bear, he saw “behind the curtain” at the trillions of counter party trades on these massive leverage positions that would send a ripple across the entire global banking sector that COULD of collapsed the dollar! He had to do something. Now the FED is in the game and PUMPING massive amounts of money into the system to allow these banks to carry these massive positions, and these banks are “HOPING” to find a bottom in these illiquid positions and looking to unload them to SOME ONE. So far there is no one left to buy this junk.

Just like the housing market (and the JP Morgan story – when he went to the exchange and the shoe shine boy gave him a stock tip, he decided to sell everything before the crash, because if the shoe shine boy is giving you a stock tip there is no one left to buy), in the housing market when the guy working at Star Bucks is giving you real estate advice, who is left to buy? When my local hospital CFO is getting involved in the credit derivative market (because he thinks he understands arbitrage) there who is left to buy? I think CEO Pandit is finding this out - there are no more idiots left to buy that garbage mark-to-myth paper he is trying to sell. Except one – Bernanke!

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Durable Goods Orders Unchanged

Orders for durable goods remain unchanged in May – showing that companies are tightening up and battening down the hatches – expecting MORE slowdowns. The revised numbers showed a drop of 1$ in April, larger than previously estimated.

We are in a holding pattern, companies are holding on to capital and reducing liabilities, they are NOT buying and are trimming jobs. They too are not able to see the “How” or “What” will signal a bottom. I don’t think (as many analyst predict) that we can set a celestial date on when the economy turns around, something needs to change. This is not a cyclical thing!

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Futures Pre-Open

The futures are getting a pre-opening pop – expectations for a rates to remain the same? Who knows. At this point they are front running cash – expect a small pop at the opening if this remains.

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Support / Resistance

Ug – We are slopping around the bottoms right now. Some are calling it a bottom and looking for a rally. We may pop out of here, but that (in my book) is just a dead-cat bounce. I can’t get seriously behind anything without a good hard delta hedge.

INDU 11750 / 12250 (We are still above those ugly early year bottoms – and while we may bounce in the summer, I think we will not only revisit the 11750 area but we will break DOWN through it and find some new lows. Don’t ask me when, but it IS coming – I think this year.)

NDX 1900 / 1950 (Again hanging on by our nails. Where is that AAPL $10 euphoric rally when you need it? Oh, it already rallied 80 points in a couple of months. We can’t ask AAPL and Jobs to continue to hold up the entire market.)

SPX 1300 / 1350 (Yuck – we may yet hold 1300 and get a rally – but these are not the time for long (and wrong) investors to come stampeding in.)

RUT 700 / 720 (This was the WORST indication of a further drop. I could almost hear the SUCKING sound of money leave the market yesterday as the RUT was down 1.65% and broke down through 720. Will 700 hold, don’t bet the farm!)

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Conclusion

The dollar is seeing volatility in these levels – Bernanke has been playing the Bluff card and now he has been called. He is NOT going to raise rates (I would be shocked). If you didn’t buy gold, silver, Euros, Franks, etc. do it before he opens his mouth! I think the dollar confidence on a global stage is not seeing ANY signs of strengthening. Talk is cheap and it can give you a short-term rebound. I am SURE he will talk tough AGAIN after NOT raising rates – but I am not one to listen to the boy who cried wolf. If he talks TOUGH and the dollar rallies – time to start backing into inflation hedges AGAIN. Reload! Yeah – true – he may raise the target in Nov – but if the banks can NOT get a handle on their problems that is NOT going to happen.

Didn’t Kudlow tell us in January that the Fed SHOULD cut rates and that would SPUR the economy? That didn’t do any good. Now he is calling for the FED to raise rates and that should SPUR the economy? Kudlow needs to go back to Econ 101 and Cramer needs to revisit the loony farm.

Today should be fun for Traders and a nightmare whipsaw for investors – expect some volatility!

6/24/08 (GM done?, Job Losses, Government Puts!)

Traders,

Yesterday we continue to flirt with this delicate support area, we are back down close to Feb lows in the INDU and the SPX is also getting down there. The RUT has stayed above 720, but yesterday it stuck it’s head just below that line. It needs to stay above it to show the money flow is not coming out of the broader market. So far serious hits have only been targeted by sector and they have not been sweeping. Keep an eye on the Rut!

I received some feedback about the Cramer video from yesterday – thankfully no one that receives this email in the morning is a supporter of that truly mad man. Video’s like that goes to show these people are to provide entertainment only – they really don’t know up from down anymore than the rest of us. Truly, their jobs are hard, because they daily have to come up with reasons why the market is doing what it is doing – when 90% of the time they really have no idea. It is just a guess – the problem with Cramer (unlike the other talking heads) is that he creates serious damage by recommending stuff to people. The flip-flop video is proof of the danger of listening to him. Anyway – it was good entertainment.

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GM getting the one-two punch

As energy prices are rising GM sales are dropping and fast. Their regular auto-line (none-trucks) are down 17%, but the big crush ARE the truck sales down over 40%. While gas prices are hurting sales, along with the weak dollar and consumers tapped for cash – the big second blow is commodity prices (STEEL) – which has been going up.

We don’t usually talk about or hear about commodity prices that do not DIRECTLY affect us – because we don’t have to shell money out for them. Steel, Cooper, Cement, Pot Ash, etc. are all what I would call secondary commodities to the consumer. Consumers don’t go out and buy steel, so they never think about the costs. However, GM has to buy steel to build their cars. The “TRICKLE” down affect is that car prices will have to go up and that is exactly what GM has done – even if they don’t want too.

They have already raised prices on their 2008 vehicles to off-set the higher commodity prices (like steel), however since the sales are SERIOUSLY down and 2008 models are just sitting on the lots – they are offering 6 year / 0% financing to get them moving. Some of them are even offering guaranteed fuel prices for the next couple of years. All kinds of incentives to get them moving. GM dealers got more bad news – a memo went out from GM saying that they will be RAISING prices on the 2009 models because of higher commodity prices. Dealers are not happy – no one wants to buy a truck with gas prices this high and those looking to buy cars are tapped for cash and are starting to look at hybrids. GM doesn’t have a deep vertical market on Hybrids OR Small cars with higher gas millage. No doubt they are scrabbling.

This does not paint a good picture for GM, or for that matter Ford or the other auto makers. This is not the time to be bottom picking auto makers – they are facing the squeeze on all sides (higher gas prices, consumers with little money, weaker dollar, and higher commodity prices). You could say it is a perfect storm.

This sector has been pulling down on the indices – and GM in real dollar share price terms is close to a 30 year low ($12.91). Yeah, $13 sounds like a low price – however one of the most important thing about investing (which 90% of retail people don’t understand) – is that it is NOT PRICE it IS about VALUE. Dollar cost-averaging and bottom picking only work if you understand value. However, retail people never understand that – they simply look at price.
Expect this sector to continue to be a drag.

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More job losses expected

According to an article by Bloomberg – the financial firms have already announced about 83,000 job cuts since last year – however it would seem that they continue to announce more cuts daily. Expectations according to the article is for 175,000 jobs in financial related services as deep cuts are to be expected.

That’s not all – NPR reported this morning that United Airline is the latest to announce up to 15,000 job lay-offs and several other airlines are also trimming the fat. Airlines are getting squeezed with higher fuel prices and they too are looking to cut costs anywhere and everywhere.

Several shipping companies (FedEx and UPS) are also expected to cut jobs as schedule high-speed routes maybe consolidated as fuel surcharges are putting pressure on sales. UPS is expected to see a slower quarter and job cuts are predicted.

The problem with the employment data coming out of the Government has several issues. 1st it only counts the unemployed that ARE receiving benefits, however if those people do NOT find work in 18 months they are lumped into a new label called “Discouraged Workers” (the government believes they have given up) and they are NO longer counted. This keeps the unemployment looking lower than it actually is. Additionally, several additions have been made to the employed data over the last couple of decades – including those part-time or temp workers into the regular labor force. Going back to traditional methods of unemployment measurements we are in the range of 10-13% unemployed in this country according to some economist, not the 5% the government reports.

I found it interesting that over the last 6 months as companies are announcing lay-offs (in some cases massive lay-offs) and I didn’t hear ONE company in the US announce they were going into hiring mode, that the government job numbers remained relatively flat or in some cases more new jobs (what?). I continued to scratch my head. Well, at least the recent data has finally caught up with them – you can only revise some many times.

Regardless which numbers you wish to believe – the reality is that there ARE more lay-offs and less new jobs.

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The beauty of government PUTS!

Those concerned politicians granted new powers to their beloved government-charted (nationalized) companies, Freddie Mac and Fanny Mae – allowing them (of course government backed) to buy home-loans (jumbo loans). Our Congress believed that this would help relieve the stress of the market and they could take the risk of these failing loans (of course backed by the government) and keep the housing market and loan market from further collapse.

Critics of this REDICULOUS proposal (myself included) stated that giving those government-charted companies the ability to purchase jumbo loans and repackage them into securities is just giving them a loaded gun and they will look to take care of themselves. They are just nationalizing the mortgage industry and putting the government further behind the 8-ball – with more risk and government sponsored debt – to shore up their OWN books.

Not that I want to point the finger at one party or another – but damn the champions of this ridiculous endeavor ( Hillary Clinton, Barney “mumble” Frank, and Nancy “Nationalize” Pelosi). They actually believed and convinced their party and told the American people that if we grant these government-charted companies to purchase more loans (debt – on the government/tax payer’s nut) that they would go out and purchase debt and help free up the lenders and those allow the American people to still be able to refinance, get jumbo loans, keep mortgage rates lower, and reduce the burden to the banks.

However, what most expected and what happened – is that these government-charted companies are doing with this new found power is ONLY cleaning up their OWN books and buying down their OWN losses and writing it off! Freddie Mac and Fannie Mae will be sending the Tax payers a nice big Thank You card this holiday. Everything that we were told is NOT happening.

You wonder why Socialism and Nationalization of companies don’t work? Absolute power corrupts absolutely! Remember – these companies had massive write-downs (Billions), they just came out of one of the biggest accounting scandals (book cooking and manipulation), and now they have been granted free access to buy MORE debt on the tax payers back. Great! – It’s funny how when the government wants to make an example out of a CEO of a crooked company – they never go to Freddie Mac or Fannie Mae.

Expect your taxes to get raised more to pay off more debt at Freddie and Fannie – thank you Barney (I wish he would stick to wearing that purple dinosaur outfit and dance around – he has no place in politics or economics).

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Bernanke’s Bluff?

Bernanke has been hinting and talking about raising rates as inflation rises – but can he REALLY do that. Is this just cheap talk – the days are ticking away to the next meeting and Fed Fund Futures are predicting one. However, economist are predicting that Bernanke is in the Perfect Storm – jobs are being lost, dollar is weak, commodity prices are going up, consumers are tapped – how CAN you raise rates?

However, I think he does have an Ace in the hole. He could do the following – raise the Target Rate, Lower the Discount Rate, and work something out (prior to September) to keep the Investment Banks coming to the Discount Window. Doing that might appease everyone (for the most part). His problem is he can’t control LIBOR, as much as he would like to.

Bernanke is on a Lower Inflation Flush Draw, the turn is coming up and he has 18% chance of getting that lower inflation card to make his flush. The probability is low and he has talked “Raise”. Good luck!

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Futures Pre-Market

The market is seeing pressure before the opening. The commodity story has spread beyond just oil as several companies are talking about getting the pinch on higher prices (and not just fuel), Dow Chemical, Auto Makers, Builders, etc. We are seeing a little bit of a hit in the futures. They are front running the cash small – if the spread remains expect the Arb traders to put some pressure on at the opening.

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Support / Resistance

We saw the RUT pull back some (just a tad below that 720) – the INDU and the SPX remained in their low bands and NDX seem to come down and join them. If you listen to Cramer (depending on the day of the week) he might be saying BUY BUY BUY – it’s a crap shoot and the news is trying to keep the beat down on.

INDU 11750 / 12250 (We are very close to those previous lows – it’s a psychological area that is making many investors sick to their stomach as they can’t hang onto this roller coaster ride and just want to get off and get into to supposed “SAFE” treasuries (yeah right). Others are looking for the big bounce (Cramer) and the mother of all rallies. Whatever the case – don’t play it stupid with naked hard deltas because it is true we will NOT be sitting here long – a move either way is coming!)

NDX 1900 / 1950 (We are getting close to the 1900 area – while the other indices have fallen to their previous lows this monster remains near the top. Those euphoric high flying tech stocks with new gadgets have everyone running to them. However – can that euphoria hold. Watch the RUT to get confidence at 1900.)

SPX 1300 / 1350 (Not as sick as the INDU – it is still looking ugly. I think 1300 is in the cards before we make a move further – but we could get a massive rally on the back of short-covering and euphoria. Expect more volatility.)

RUT 720 720 720 720 720 (Can you say 720!?!?!? This is puppy needs to tread water and get above that area. Think of the RUT as a river of money flowing in and out of the broad market. If you see this thing head down below 720 – then you know in the broader sense that money is exiting the market. 700 is the next support area. If it holds above 720 then we can say that the river is not really flowing and the dam seems to be holding. Watch this!)

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Conclusion

Sorry about my rant on Freddie Mac and Fannie Mae – I just can’t believe the latitude that these companies get. Not to mention they have a permanent PUT built into them because the government will continue to through more money after them. I agree with Hillary, Barney, and Nancy that something needs to be done to help the people struggling in this economic time, however giving MORE power and MORE money to Freddie Mac and Fanny Mae was one of the worse decisions they could of made. They made an economic decisions based on HOPE, hope that Freddie and Fannie would do the right thing with this power granted to them. You can’t give companies access to unlimited funding, that have billions of dollars of losses, and billions more of risk and expect them NOT to use it to pay off their own problems!

Socialism works great at the local level – when we as citizens become socially responsible for our community and neighbors. It doesn’t work when you apply that to companies in a capitalistic market! Everyone wants to try to solve this economic problem we are having – no one wants to admit that maybe some companies have to go, some borrowers will have to face bankruptcy, that there WILL BE losers. We can NOT save everyone. There will always be losers – not accepting that is the fast track to communism. Let us stand on our own and fail own our own. Don’t keep propping up bad decisions with more bad decisions.

We have a rough road ahead – let us make smart decisions and not put our faith in companies that have made poor decisions and give them access to MORE money.

6/23/08 (Oil Pow-Wow, Citi in "Irons", Supply/Demand)

Traders,

Expiration, as expected, was rather volatile. We blew through many strikes – the whole week saw serious up and down moves and the open interest was spread across the board. The INDU has given back all the gains (almost all) from the low that was visited in Feb and March and is now again testing them a 3rd time. The SPX is also getting close (about 40-50 points). But the NDX is still significantly above the 1700 lows and the RUT as well. The NDX is a volatile beast and with some heavy weight (over weights) driving it higher – it could see more volatility and drive lower. It seems like one of the few places that some have rushed too for cover, don’t know why. The one bright spot is the RUT holding in at the 720+ area. The broader market has not seen the suck out that the INDU or SPX has seen. Will it hold? For now we will have to see.

Hopefully you do NOT watch this fool that blows more smoke than a 3 alarm fire: http://www.youtube.com/watch?v=_nkZ3eHeXlc (Tom, thanks for sharing!)

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Oil leader’s weekend Pow-Wow

Well – news that the Saudi’s are going to push out a little more oil initially got oil to slightly retreat – but then it started back up again. The conference was full of talk and looked more like a political election with promises and tons of rhetoric. The reality, according to oil and commodity investors like Pickens and Rogers is that Saudi Arabia is already at maximum extraction or very close to it. They pump out MORE sea water than actual oil now days at the biggest field in the world to keep pressure up. Pickens doesn’t think they can increase extraction much more – he’s been there and been in the oil business for longer than most of us have been alive (no offense to his age). OPEC president said prior to the meeting that any increase promises of more supply is not going to curtail oil prices – he was right so far.

Most of the talk was to ease the Nigeria supply concerns – between surprise attacks in the regions at deep water facilities and pending strikes – all of which interrupted supply – has cause more concerned. Additionally – the Israeli military exercise and show of force has also brought increase instability to the region. Major world players, CEOs, Heads of State, and others attended the meeting. China mention their growing concern about the need of regulated supplies (as their cities are growing and demand increasing). However, China’s spin was about REGULATED supplies not MORE supplies. I think they are equally concerned about volatility and supply disruption – however what was not said is that they have cut a deal with almost every oil producing nation (regardless of politics) – unlike the U.S. that will not deal with Iran, Sudan, and other non ally countries. It will be interesting to see how long we remain that course if and when demand out strips supplies.

So far oil has not seen the big sell off that many expected after the meeting and some analyst say that ANY sell off will probably trigger more buying opportunities and not necessarily the Top as others predict.

The oil story is far from over and now we are entering the driving season!

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Citi continues to clear the decks

Citi, which promised not to cut the dividend, did. Citi, which stated the worst was behind us in January, was wrong. Citi, which said they will only be shedding about 6,000 jobs, now states that it will probably double that number. When will we get to the bottom of this behemoth?

CEO Pandit, (the new CEO who had sold his now defunct hedge fund for almost a billion dollars to Citi before being hired – where do they come up with these people?), is now talking tough (didn’t he already do that?) and is looking to lower costs and shed assets after they have reported two straight quarterly losses over $15 billion. So far everything that Pandit has said has NOT been the case – no dividend cuts, the write downs are done, we are done with the layoffs - doesn’t seem to be holding any water. The stock has now broken in the teens.

Pandit so far has not steered the ship around and so far it is still hemorrhaging as it continues to take on more water. Expectations are for more write-downs to come by several analyst. One analyst indicated that Citi is just too big to get out of its own way – it has too many divisions that rely on credit and mark-to-market. Many of these divisions have illiquid positions and to ascertain a relatively accurate mark in an illiquid asset is near impossible. As Buffet likes to call it “Mark to Myth”.

To be fair to Pandit, he is trying to shore up those losses, cut costs, and unload $300 billion in positions over the next few years. The problem is that he has very little control on unloading $300 billion in assets – he may WANT to do that – but he must find a buyer and even if he can he will probably not get the price he wants. It’s like all those real-estate speculators that tell you their house is worth X and they have X amount of equity – the reality is that is only true if you can find a buyer. Equity doesn’t mean anything if no one is willing to buy. Pandit is in the same boat. He can SAY he wants to sell off $300 billion and that is what his “Mark-to-Market” may tell him what it is worth – now good luck finding a buyer! So he must fall back on what he CAN control – and that is costs. Expect more layoffs, cost cutting, and dividend cuts – that is the only thing he can do.

Remember just because the price of a stock SEEMS cheap, it doesn’t mean that it IS cheap. Retail people consistently make the mistake of dollar cost averaging when they have no concept that price doesn’t necessarily equate to value.

I think Citi still has a long and tough road ahead. I wonder how long Pandit will last if he keeps telling shareholders one thing, but we see another?

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Futures Pre-Market

The oil prices have seen some action, first down and then up and then back down after the big oil meeting in the Middle East and now every talking head has speculated on what it actually means for oil prices. The futures are not front running the cash and we are seeing the spread begin to widen going into the premarket. If it remains wide expect a pop in equities at the opening.

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Support / Resistance

Well we hit some bottoms and also some low end supports after Friday’s blowout. It looks like the futures are getting a little pop as the bottom pickers, again take a stab at it. I wonder if retail people will ever make the connection between price and value, probably not.

INDU 11750 / 12000-12250 (What can you say – we are 100 points off the earlier lows this year. The market got hammered in less than a month and we are starting again from this area a third time. I am just wondering if it will hold this time and as there is no light at the end of the tunnel and no one can put a finger on what WILL help this economy recover – I think any bounce is probably a dead-cat bounce.)

NDX 1925 / 1975 (We are just off the short-term support. However, this index is still up in the high area and nowhere near the previous lows of earlier this year. Can AAPL, GOOG, and their brethren be the safe haven? I wouldn’t beat the farm on it. It could mean it just has more room to go down – who knows at this juncture.)

SPX 1300- 1325 / 1375 (We are actually below a support area and hanging right between the 1300-1325 area. Kind of a unknown – we need to close above 1325 or get to 1300 to get any clarity.)

RUT 720 / 740-750 (The beast is strong and has stayed above 720. The broader index is NOT showing the running for cover that we are seeing in the INDU and SPX. Is this a sign that we have bottomed? Maybe – but watch that 720 line close – if it breaks and then break 700 – the INDU and SPX will most assuredly not hold the low supports and go lower. If it holds 720 – well we could see a good rally in the SPX and INDU.)

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Conclusion

More oil? Well even if we get more oil from the producers and see oil prices come off some – we are still well above the $100 mark and gas prices probably will not fall enough to give consumers a break. Additionally the increase in supply only narrows the ever increasing gap between consumption vs. extraction. At the end of the day we can speculate on why oil prices are this high, speculators, OPEC, big oil companies, etc. We can point the finger at everyone, believe that Obama or McCain have an answer, look for alternative fuels.

However – while all that might have some impact on the price it comes down to economics 101 that has not changed since the birth of civilization, it is rather simple and we never learn, everything has to be a conspiracy or more complicated. That simple economics 101 rule (which might as well be a scientific law) is that when demand out strips supply expect prices to rise. No one can argue that the world is using more and more oil. China, India, and many emerging countries are become more and more reliant upon that nation’s black blood to keep their wheels turning. No one can argue the physics of extracting oil, we may not run out of it, but we can only get it out of the ground at a certain rate (give or take a little). If you just look at the math – it is as clear as the morning is bright. Unless demand begins to wane the supply lines eventually can NOT keep up. All the rest is just the premium fluff in the price that traders in the commodity work to build better models to squeak out their edge. The fundamentals spell oil prices rising. It’s funny that no one believed Hubert back in the 60’s about a looming oil crisis in the 70s as the US hit maximum extraction and would have to rely on foreign oil. Many geologist are calling between 2005 – 2015 as the global extraction vs. consumption peak. Are we there? It would seem like it.

We are facing some interesting challenges and it is going to be tough for all. Commodity prices affect everything from the consumer at the pump, shipping costs, food costs, retail numbers. Everything – we cannot escape the economic building blocks of society, which are the commodities we live off of.

I saw an interesting show on Discovery about mining for Pot Ash, I didn’t realize the importance of it. One of the largest mines for Pot Ask in Europe is already 5000 feet deep and now 10-15 miles under the North Sea. I was wondering in order to keep up with production and mining of that very important ingredient for fertilizer, how much further do they have to continue to dig. When I saw miners driving trucks 5000 feet underground 10-15 miles down a tunnel to get to the latest vein of pot ask, I was wondering when that vein runs out how much further do they have to go. That mine runs 24 hours a day, 7 days a week. It just gets you thinks about the earth’s resources and what we need to maintain society. While I think we can always discovery new methods, sources, etc. – It does show the cost involve in order to get the commodities we need to keep the wheels of society going and how prices can rise as demand rises or the cost of extraction increases.

6/20/08 (MBIA done! Sun Flush!, Bond Sales!)

Traders,

We seem to hold those very important shot-term support areas yesterday, but the future action this morning (if they stay in this range) has seriously cracked down through them. That is not very comforting, especially for those that decided to get long in there. Oil’s pull back yesterday helped the market, but now Oil (again) is rallying back.

I was asked the other day about RBS (Royal Bank of Scotland) article that appeared in a UK paper http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml , where they expect a very “nasty” period and warned that the S&P would hit 1050 (down 300 points) by September. The news about RBS’s prediction made it rounds the other day and did send ripples through the market. They asked me if I thought the bank was sensationalizing how bad it could be. I personally don’t think a bank wants to sensationalize bad market conditions – it is not good for business, I think they are calling it like “they” see it. I do believe they have a point and are (unfortunately) probably fairly correct that things will get worse before they get better. They are not alone, if we look at the IMF (International Monetary Fund) they are expecting over 900 billion in write-downs and the John Paulson went as far as $1.3 trillion in write-downs. If they are both right – we are not even half-way through the write downs.

So RBS forecast (IMHO) has a fairly decent probability of being correct – I think we have yet to see a real shakeout and I cannot ignore what is going on with MBIA, Ambac, the IMF forecast, and commodity prices. It’s not that I want to be Bearish, I try to think of myself as a realist and would rather be prepared – than to take crap shoots at bottom picking and “hoping” (Hope, by the way, is an oxymoron strategy).

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MBIA and AMBAC – stick a fork in it!

Ross is calling it a Strike! He said they are not going to maintain or get back their AAA credit. Pretty much stick a fork in them, their done. This is a pretty bad situation, because we are talking over $1 trillion in insurance. Ross, along with Buffet, were suspected to buy MBIA and/or AMBAC – but I think they would rather start their own than take on those kind of liabilities at ANY cost.

This is going to have a trickle-down effect in the next 30-60 days, as many investment funds that have certain requirements in their charters, like they HAVE to have insurance for their investments are obligated to sell assets that are no longer covered. This will affect many pension and state run funds. However, they face a problem – these investments are becoming more and more illiquid - no one wants to buy them. These supposed AAA credited investments (as safe as Treasuries) are failing to perform and in some cases are losing principal – NOW they may not be REALLY covered by the insurance. Sure there is insurance (according to the contract), but if AMBAC and MBIA don’t have any money the insurance is worth – well nothing.

Expect these institutions to start holding emergency meetings and look to rewrite their charter to be able to hold no insured assets or lower grade paper, otherwise in the next 30,60, and 90 days there is going to be some selling. Hey, if Bernanke can change the rules and allow investment banks to borrow from the Discount and shore up risk by pledging $30 billion – then it shouldn’t be too hard for a pension program to amend their own charters.

Something is going to have to happen – selling or holding uninsured paper. Only time will tell. Maybe RBS’s forecast in September is not too far off!

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Sun Flush – almost Sun Bust

If you have been reading the Market Preview for a while, you know I have been extremely Bearish on this joke of a lending firm. Sun Trust was the largest writer of 2nd mortgages in the state of Florida in 2007. Great, not first mortgages – seconds. After I had attended many foreclosure auctions in my county and not one second got a dime – well that means the 2nd are not just non-performers – they are FULL DEFAULTS. They are not getting a dime.

Further- I got some inside local baseball –that there was a new group of accountants trying to figure out ways of keeping those 2nds from default. But that was too late and too little. I couldn’t see how that bank was holding value when Citi, BofA, Countrywide, and many others were getting hit and some sent down into the teens.
Sun Flush managed to avoid the headlines – but now as 5/3rd and others are getting the whack – Sun is not able to avoid being lumped in with the rest. The stock is heading south bound and fast from the high 50s it is in the 30s very quickly. I think it’s heading to the teens and quickly. They are not going to get any money on those 2nds and they are going to be seriously in the hurt.

Disclosure: I have/had, along with partners and others – short-positions in SunTrust.

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Bond sales are ramping in Europe

You want a sign that companies are planning for more write-downs and tighter money going forward. Just look at the investment-grade bond sales in Europe as companies are borrowing money hand over fist and paying an average of 6.4% for that money. Up to almost $400 billion in the first quarter. Companies are planning for rates to go higher in Europe and additionally want to be flushed with cash now, before they may have to get cash later (when rates could be higher – or lending tighter, which also would force up rates.) It is the second highest quarter for bond raising since the founding of the Euro.

And something further interesting to note this is all investment-grade paper, as the market for junk bonds (or low grade paper) has been shut to new borrowers.

``It's difficult to predict what will happen in the markets,'' Les Winnister, treasurer for BT in London, said in an interview yesterday. ``In this current credit crunch it really makes sense to come when investors want to lend and when we have a genuine funding requirement.''

Companies are concerned – I think the IMF, RBS, and Paulson’s forecasts of more write-downs and the market getting hit going into September has given them cause for concern.

If companies are hedging their bets by raising funds (even if they might not need it now) – wouldn’t it be prudent to hedge your own investments.

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Futures Pre-market

The futures are getting hit pretty hard going into the pre-market and breaking the support areas – not a very good sign. They are front running the cash, but I think many Arb traders will stay sideline – since a major support is broken and they may not want to risk the leg of getting long the future – hoping to get the cash basket off for a decent price at the opening. If you see the spread narrow going into the opening – it may be a sign that support could possible hold – if not expect a fairly big gap down at the opening.

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Support / Resistance

EK! That support area is looking weak in the INDU – while the other indices are still above it. However the INDU is the big physiological index and if it breaks 12k then we could see some panic in the other indices. As I said earlier this week expect more volatility than traditional expiration weeks.

INDU 12000 / 125000 (A break in 12000 is in the cards at the opening – if we can’t get above it – then it will bring a negative physiological impact to the general market.)

NDX 1925-1950 / 1975-2000 (The big volatility index is expected to see some big movement. If 1950 doesn’t hold in the cash then 1925 is in the cards. This is a big area!)

SPX 1325 / 1375 (We are still in the middle – but is looks like some pressure is coming to the market at the opening. Watch the close.)

RUT 720 / 740-750 (There is still hope for the Bulls if the RUT can hold the 720 line – if it does than all the noise in the narrow based indices are just that. A sign of support is to see the RUT hold 720 and the SPX hold the 1325 line. If not – it’s time to get ready to jump.)

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Conclusion

I am getting a bad gut feeling about the economy and I can’t put my finger on anything that spells the bottom or recovery. Usually in a Bear market you can see not only the WHY but WHERE the bottom is and look to other areas that offer support to take up the slack.

The Dot.Com debacle was just one of those events. While it was bad – we knew that it was a sector of the market that was really pulling everything down. There was no real larger issues with money, inflation, or credit lines. The banks and lenders were ok and the non-tech stocks held their own. There was no need to panic out of the market, just sectors. However, this is different – it is harder to find sectors that will do well, because it is the whole economic landscape that is getting a serious squeeze. The consumer, and I can’t repeat this enough, it’s the consumer that needs to find a bottom and needs financial security. Think of the consumer as the foundation to a sound economic environment.

The consumer has been robbed of buying power via a weak dollar. Even if the consumer DID have access to credit lines (credit cards and home equity) their buying power has been seriously curbed, tack on higher commodity prices that is just the one-two blow. The consumers are having a harder and harder time hanging on as they have no more places to go for credit lines to continue to spend. Add on top the credit crisis and seeing a CEO a month get the axe, large institutions borrowing money from foreign sovereign funds, selling stock to raise money, or going to the Discount window because they can’t borrow from each other – and it doesn’t spell a healthy economy by a long shot.
Recession should not concern us as much as the dollar strength, consumer, and sound financial institutions. We can ride out a recession – how do we ride out a failing banking and dollar?

Ok – where is that coin dealer? I am going to buy some more silver today!

I really hate to be the bearer of bad news – but I would rather call it like I see it than be another smoke blower!

6/19/08 (The Fed keeping the Door Open?)

Traders,


The market pulled back again to near support levels. Traditionally this would be a place to start getting long, and it might – for short-term traders (rather than long-term investors). However, as we get to the support area we can’t help but ask ourselves that overly repeated phrase “is the worst behind us?”, well nothing has really changed on the economic landscape and most data and news in recent weeks have pointed to slowing economy and more (rather than less) negative economic pressure. So as you consider to get long at support levels – look at long gamma as your aid, in case this support becomes the new resistance.

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When the Door Closes….

The FED made an unprecedented move a few months back, by letting investment banks borrow over-night money directly from the Fed via the Discount Window. That option was intended as a last resort for non-investment banks that were members and the rate at the Discount is traditionally set significantly higher than the Target rate to discourage borrowing from the Fed. Banks traditionally never wanted anyone to know if they had to go to the Discount window – because it reflects negatively on the firms leveraged capital. However, going to the Discount has now become standard operating procedure. Even Lehman has gone to the Discount Window.

When Bernanke opened the window to investment banks and changed the rules of the system, to ease everyone’s concerns he stated that the window would only be open to investment banks in the short-term, to help them through the credit crisis (note: He was not allowed to change the statue without an act of Congress, but does have the power to make temporary changes without Congress). The plans were to only leave the special arrangement open until September, but there are now talks about what to do to continue to offer money to these investment banks, which look far from recovering.

Additionally, there is MORE concern about Fed control and making these special deals available, from being able to dictate capital, leverage ratios, and rates. Paulson in his latest speech wants to give the Fed MORE control rather than less. Giving them a broader role and extending oversight beyond banks – and further into the financial system. The speech was geared toward “Protecting the System”! No doubt the system has needed protecting, but to what extent should the Fed offer protection. Should that include brokering deals and offering to insure failed positions (like Bear Stearns)? Maybe give the Fed mandates about redirecting debt obligations to the like of Freddie Mac? The Fed’s role has been fairly limited, but it has actively played a bigger and bigger role.

The special system they set up, Primary Dealer Credit Facility (PDCF), that allows the investment banks access to funding is schedule to be shut-down in September, but as the talks increase they push for making the PDCF permanent is a serious possibility. Interesting that the PDCF program was launched the same day that the Fed agreed to lend against $30 billion to collateralize Bear in the JPM take-over. However, by statue, the Fed can ONLY lend to nonbanks in “unusual and exigent circumstances.”

The meetings are focused on measures to continue this program in some form or fashion WITHOUT action by Congress. I suspect that Congress at some point may step in and begin to review these programs, especially after the Bear Stearns deal.

An economist had already pointed out one observation, when the PDCF and the Bear Stearns deal was announced – it only put further pressure on the dollar as foreign nations (investors) became concern about the credit worthiness of the investment banks, but additionally the lending of money by the Fed creates more inflation as more money is being forced into the system to cover losses.
I am sure more eyes will be on the FED and the PDCF in September – it could put more pressure on the dollar, not less. If that be the cash – expect more inflation and rising prices.

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Futures Pre-Market

The futures were up and then down. Additionally it is expiration week – so volatility is in the cards as most indices and securities have ripped through strikes – so Pinning may not be in the cards. The fluctuation in futures spread pre-market has Arb traders pretty much sidelined going into the opening, especially if they got caught out on the pull off. Expect a mix opening.

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Support / Resistance

We are down at the support ranges – will they hold? Should we get long? Time to blow on the dice before the roll!


INDU 12000 / 12500 (We finally got here and we may punch down through 12000, however if we close above it with a little strength we might see a short-term buy area of a soft rebound. But don’t expect anything more than a dead-cat bounce.)

NDX 1925-1950 / 1975-2000 (We are at the first band of support a place to get flat, but not long (unless 1:1 with gamma). This is a monster volatile index and we could easily see a 50 point move in it. I think 1925 is in the cards before any pop – but going into expiration it might be wise to trade flat – rather than take a stand.)

SPX 1325 /1375 (we are not there yet so I would not be getting long here – we could see some pull back yet.)

RUT 720 / 740-750 (The broadest market is still holding up well and not even at support yet. We are not seeing the rush for cover and many are staying in. As long as we stay above 720 the short-term supports in the narrower indices should hold. Keep an eye on 720!)

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Conclusion

Well Kerkorian is picking a bottom again, first GM (then he bailed), a stab at Chrysler (gone), recently a big purchase of Ford shares, and now a “double-up to catch-up” has he rebuys in at Ford for another $40 million increasing his stake to 6.5%. I know Ford isn’t selling trucks and while the stock price is low, don’t EVER be fooled by price – it is all about value. What may look like a buyer’s market may secretly be a sellers paradise. It is never about the price, but rather the value. Something that most retail investors never understand. Good luck Kerkorian, but I think I hear “new roller, coming out!”

Expiration week usually curtails volatility when pinnage is a high probability, but that doesn’t look to be the case this cycle. So I continue to expect to see volatility right into Friday close. That is not a good thing because many forget options load MASSIVE amount of Deltas into the system on Friday. Talking about millions and millions of shares that NEED to be traded as stock rips through strikes. A good move through a strike can create additional selling or buying of shares and we are talking in some issues 5 million shares for a simple 5 cent move in the stock from it moving above to below a strike.

It is a time for caution and keeping a close eye on your hard deltas.