6/10/08 (Libor adjust, Trade deficit widens, triple down turn?)

Traders,

Yesterday saw strength in a couple of sectors, but for the most part it was rather weak. A dead cat bounce? could be. There was expectations that there would be some bottom picking after the fall on Friday - but it looks like the technical traders are not willing to believe. I remember Ross saying back in the 90s, Fundamentals always trumps Technical’s. I think he is right, no matter how good it looks - if the math doesn't add up then it is going to have a hard time getting off the mat.

Lehman CFO is taking a lot of flack, just last week (doing the business talk show circuit) she was saying that they do not NEED to raise money. She never answered Enihorn’s questions. She could be the scape-goat for the CEO, since she has been making the rounds and being the “face” of the company. I think her number is up.

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Libor Adjustment

Libor is the most widely used number for setting interest rates in the world, estimation of over $350 trillion is set to the Libor. After the credit unwind implosion lots of criticism of Libor has been hitting the streets – speculation is that the few big banks that participate were not giving accurate readings of their rates. Additional criticism has been that it was leaning towards Europe as it is set in London and not during U.S. market hours.

So the British Bankers Association is going to TRY to appease all the nay sayers – by increasing the number of banks that set the London Interbank Offer Rate (Libor). Additionally they will also add a second survey of members to reflect U.S. trading hours when it sets the global benchmark rate. By adding MORE banks and taking two surveys (to include the U.S. trading hours) – these should help bring better resolution to the rate that skeptics have claimed that it is not accurate. Of course more could be done and many are not happy with these changes. Regardless - by adding more members, it should bring down the volatility from larger outliers.

At the end of the day – however the number is determined, averaged, and disseminated – it still accounts for over $350 trillion (not billion) in Global interest rate financial products. That is nothing to sneeze at and should be taken as deadly serious – continue to watch the Libor number!

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U.S. Trade deficit widens?

After all the talk about lowering interest rates, helping the bank, injecting capital and this is GOOD for the economy and reduce trade deficit and strengthen the companies and bring prosperity – all the pundits (like Flip-Flop Kudlow) are NOW changing their tune. He just said last night – a Strong Dollar is a Strong Economy and the Fed will tighten. Wait – wasn’t he just saying we should cut rates and that would narrow the trade deficit and bring strength the economy? I never could figure out what side of the fence Kudlow sat on – he dresses to impress – but beyond that he needs to go back to Econ 101.

As the U.S. is seeing a massive gain in exports on the weak dollar and in the last quarter we saw several multinationals doing extremely well because of exports and the dollar conversion rate – many forget that the majority of world commodities are also tied to the dollar. No matter how you slice-n-dice it companies have to pay for the increase cost in commodities, whether that be energy, shipping, raw materials, etc. It DOES affect the bottom line – no matter HOW LOW the dollar goes. Sure they may see a sales boost, but if the margins squeeze is out pacing the exchange rate at the end of the day it affects the bottom line. Going back to business school basics – it is NOT the REVENUE, but the MARGINS that determine profit. Seeing knuckle-head pundits on TV boast about increase revenue – but fail to mention margins makes little to no sense. GM last year had record sales, but it doesn’t matter at the end of the day if you sold $1 billion worth of cars, if it cost you $2 billion to make them – did you make or lose money?

The steady rise in energy prices and other commodity prices are slowly creeping in and taking their toll on even those darling multi-nationals that cannot outpace inflation rates. Regardless if the weak dollar is boosting exports – the rising costs will eventually push prices higher. The dollar would have to make a significant drop (from here) and oil would have to cease heading higher for the spread to keep profits inline.

At the end of the day – the weak dollar affects all – the gap in the U.S. trade deficit widened 7.8% to $60.9 billion – not something Kudlow expected – nor did all the Pro-Interest Rate Cut Weak Dollar Supporters. Just like Murdock – when he said invading Iraq will bring oil prices down to $20 a barrel, Kudlows prediction on a weak dollar narrowing the trade deficit and bringing strength to this country was false hope. Knowing one piece of the puzzle does not necessarily allow you to see the big picture!

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Futures Pre-Market

After a mix day yesterday – the market is back on the slide again and getting whacked in the pre-market. The fall off in Asia and Europe with Bernanke warning about inflation (he seems to be a day late and several interest rate points short) is not helping. The futures are getting a smack down and are front running the cash. Expect the Arb traders to be cautious getting long futures to leg into the short basket. It will be a big gap down opening and any Arb trader taking the long leg in the futures is only going to ADD downward pressure on the basket at the opening.

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Support / Resistance

We are flopping around some support areas and saw the INDU try to make a break for it off the 12200 line but the rest of the market was weak – the RUT, which I continue to point out as the big flow indicator, was very weak – not a good sign at all.

INDU 12000-12200 / 12500 (If that short-term support 12200 does NOT hold – we are on the quick slide to 12000 and I sure wouldn’t start loading up my long delta boat there either. Bottom pickers ONLY use soft deltas and look for gamma to save your butt if the slide continues.)

NDX 1950 / 2000 (Ouch – I guess APPLE did NOT release the iBond or iDollar – Bernanke could use the help. This is the big volatility mover – expect lots of action the futures are looking ugly at the opening – we could see 1950 today – do NOT get long there – just flat with gamma.)

SPX 1350 / 1375 (I have a bad feeling that 1350 will NOT hold and if that is the case 1325? I don’t like that either. If you are long do NOT stare like the deer in the headlights – hedge your positions – which they should have been already!)

RUT 720 / 740 (This was serious weak sauce yesterday and did not reflect well on the money flow coming back into the market after the big drop on Friday. It was a tell tale sign of this morning’s smack down!)

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Conclusion

Can you say ugly? They don’t want to buy bonds, they don’t want to buy the dollar, and now they don’t want to buy the market. My prediction we are heading into the same economic landscape as Japan in the 80s-90s called a Triple Down Turn, bonds, currency, and the market all take a dump. You can’t have a strong economy on the back of a very weak dollar and rocketing commodities. Those two things (dollar buying power and commodity prices) are the building blocks of any economy. Taxes, Politics, Banking, etc aside – unless the dollar gets some serious strength (Bernanke stops printing money and lending over night to failed banks and institutions) and we can get a handle on commodity pricing (via a strong dollar) – expect more pressure across the board. Who wants to own U.S. treasury bonds at 2% or even 3% if inflation per CPI is over 4% (actually I think it is more like 8%). Who wants to hold dollars if Bernanke is printing money? Who wants to hold stocks that rely on consumer spending when the consumers are tapped?

Now is the time for your brokers and financial advisors to earn their keep. Looking for commodity, metal funds, hedging products, etc. Stay liquid and stay loose. This is going to continue to be a very rough road.

Hedge those positions – paying a little premium can allow you to sleep at night!


The probability of a “Triple Down Turn” is increasing by the day – we may yet miss it – but remember it may be improbable but not impossible. Better hedge against the black swan – she maybe flying by sooner than later.