Traders,Another knocked down yesterday and through all the short-term supports, nothing held. The volatility we are seeing in the market (all sectors) is unprecedented. The VIX is clearly not reflecting actual volatility but rather premium and on those huge up days the VIX gets crushed, which would lead us to assume that volatility is decreasing, which is NOT the case. Volatility does NOT know direction, a 100 up move or down move is the same amount of volatility from the mean. The difference in the VIX is premium and the way that options are traded – the panic buying of OTM puts causes premiums to increase and the selling of covered calls and naked put selling pushes premiums down. It is better to say that the VIX is the measure of premium and nothing more nothing less – since it clearly doesn’t give a accurate representation of volatility – specially the intra-day action.
So how do we measure the impact of real volatility? I mention frequently about the hidden volatility – which really is actual intra-day volatility (not just close-to-open). The market (futures) are showing a strong pre-market opening – a huge move to the upside will definitely spell lower premiums (lower VIX) – but that doesn’t mean that volatility has left the market.
Expect continual volatility in the market – regardless of what the VIX says.
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Citigroup shutting down another hedge fund
Citigroup has been taking hits on all sides – (lending, bonds, interest, funds, etc.). The problem with Citi is they are just too big to get out of their own way. They move like molasses and one hand has no idea what the other is doing. Probably the best bet is to break the company up into banking, lending, investment banking, brokerage, and who knows what else. Since they are so big in many different divisions – it only takes one big hit in one division – which we are seeing with the credit unwind that sinks the whole company.
The biggest bank in the world is now trading in the teens, down from the mid 50s only a year ago – and it has room to go down more. The problems have not been solved and they continue to carry huge leveraged positions on their books, the write-downs (in different business sectors) are expected to continue, and the decision making over there is slow. If the CFO of Lehman (a narrow based investment bank) can’t do the math – imagine a CFO of a company that has many different businesses – no doubt their head is about to explode.
The most recent molasses move is to shut down their Old Lane fund that they just bought a year ago for almost a billion dollars, (I think this is the 5th fund they own that is getting the axe in the last 6 months). This one was started by none other than their own NEW CEO. What? OK, we know they fired the last dude (Prince) because he couldn’t handle the sinking ship. So then they brought on Pandit, who just happened to have sold them a billion dollar hedge fund (???) and now that hedge fund is going into the crapper! Note, Pandit (their new CEO) was paid over $150 million for the sale of his hedge fund to the company he is now the CEO of.Of course he has said that Citi will be dumping about $400 billion of assets over the next 3 years – obviously those assets (100s of billions) are liabilities – probably a good thing. But it is a massive company and dumping $400 billion takes time and you got to find people that want to buy it. I am just concerned because Pandit’s own fund has pretty much failed. What does that say about him?
Citi is getting hit a little more in the pre-market. I sure wouldn’t be bottom picking a company that is trying to dump $400 billion of assets and the new CEOs own fund has just got the axe! Sure it might get a pop in the stock – but fundamentally we really don’t know what kind of crap lurks in the books.
We need David Enihorn to go through the paper – David where are you!?!?
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The dollar, is this the bottom?
The dollar has seen lots of volatility in the 1.50-1.60 vs. the Euro range. One day it is down and the next it is up. When the ECB said they would NOT be cutting rates and even hinted at RAISING rates the dollar plunged, but then the dollar got a rebound as speculation on retail sales (after the stimulus check) showed a surprise increase. However the volatility across the currency swap market is HUGE. Any day we are seeing massive moves in currencies that traditionally only move a penny are moving tens of cents. This volatility is not good (for either side of the transaction).
Volatility shows uncertainty and the problem is that the dollar is a fiat currency (or as I call it FAITH BACKED). That means that people have to BELIEVE that it holds value and are willing to use it for transactional purposes. But as confidence erodes inflation rises. Eventually inflation rises so high that people no longer want to receive dollars for services and goods. This has already shown a few times in Europe, where currency exchanges had refuse to exchange dollars for Euros (happened over the Bear Stearns collapse weekend). That is a pretty scary thought – not being able to exchange your dollars. But we really do NOT see that in this country as we earn and spend Dollars – we don’t use other currencies – however it still affects our purchasing power.
The dollar continues to bounce around the 1.50 – 1.60 level and I expect that to continue. I don’t know if we have found a bottom. If we BELIEVE the “strong dollar” talk coming out of Paulson and Bernanke’s mouth it indicates a raise in interest rates in the coming months to fight off inflation. However, I think they are seeing some very serious pressure from the financial banks and lenders who are still struggling as money is tight and banks are STILL not lending to each other. Even with all the money injected into the system – the leverage is MASSIVE in most cases banks are 5:1 and in some cases 20:1 on deposits – meaning they have a lot more room for write-downs that will eat up deposits. Why is money still tight with lower rates and billions injected – because we haven’t found a bottom. If the banks had taken all the losses they could (fully de-leveraged) then we would find a bottom. But they banks continue (even now) to chase yield on borrowed capital. Just like the muni-bonds borrowing now from the tax-payer to float their paper as they are invested in illiquid bonds, CDOs, and other structured products - chasing yield means you need money.
I don’t think (right now) Bernanke could raise rates without pulling out plugs in the banking sector. Something I don’t think he is willing to do. That being said – if commodity prices continue to remain at these levels or climb – no doubt the dollar will get squeezed.
We may see some pops in the dollar on the retail numbers or “tough talk” but unless policies change or commodity supplies give demand the smack down – this could just be a short-term support in the dollar.
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Lehman – CFO GONE!
Damn, did I call that or what. She either doesn’t know how to do math or was lying through her teeth. Enihorn called her out and she gave him the cold shoulder (either she didn’t know how to answer the question or knew and didn’t want to answer). She was touted as a rock star and was doing the business talk show circuit. No doubt she is well spoken, attractive, and smart – but she really didn’t have a grasp of the situation that she was managing. The news has sent Lehman into the toilet this morning – the stock is trading down at 22.50 right now (down another $1 in the pre-market). It does not spell confidence in the company.
Expect more pressure in the financial sector.
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Futures Pre-Market
The futures are pretty volatile this morning- up down up. Currently on the rise -0 based on Retail sales numbers rising. However, they are front running the cash by a fairly decent margin. Expect the Arb traders to short futures and buy the basket going into the opening. However, I am not sure how much they want to risk in this volatile market. If the spread remains going into the opening – expect a good pop in the indices as Arb traders buy the basket.
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Support / Resistance
We busted down the support levels like butter yesterday – now they become short-term resistances. Expect more volatility.
INDU 12000 / 12200 (12200 was short-term support and we could test it as a resistance this morning. Watch the close and do not get sucked into bottom picking. Be careful shorting at the 12200 level if we get above it, because it could easily become the short-term support again.)
NDX 1900 / 1950 (Bang 1950 was snapped – we are seeing a good pop in the futures in the pre-market, but don’t expect to see volatility decrease – expect this index to continue to make big up and down moves. It’s a gamma index for sure. Good news (I hope) – Apple officially said that Jobs had a virus or bug for the last couple of weeks which caused him some short-term health issues. I pray that it is not his cancer returning or anything else.)
SPX 1325 / 1375 (We broke 1350 level and it could be considered resistance – but not an area I would be comfortable getting short.)
RUT 700 / 740 (We broke that 720 area yesterday – it would bring confidence back if we closed solidly above 720 – but if we don’t than we are just range bound.)
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Conclusion
There is lots of volatility in oil which is just shaking the crap out of the market even more. It’s like the market has a tire out-of-balanced and the faster we go the more violently the car shakes. It needs to get fixed but the mechanic’s garage is a 100 miles down the road. So as the car speeds up and slows down the violent shaking will continue.
All those that said oil was driven solely by speculators and there was plenty of supply – I think got a little wakeup call with yesterday’s significant drop in inventories (down over 7%). Many forget that Congress already voted to STOP the 70k barrels per day going into the SPR (through 2008) to help meet supply demands. Oil in the 120-140 level will probably continue to see violent up and down moves – this morning it’s down $3 - after rallying more than that yesterday.
The housing market is also still in the dumps and only getting worse. We (in my county) continue to break monthly records on foreclosures (over 800 last month – a year ago we were at around 200). As it continues to ramp banks take on MORE REOs, not less. So now the homes just get RELISTED – instead of the homeowner it is now the bank that is trying to sell (and at bigger discounts). Do NOT expect this picture to change any time soon.
The more I read the more silver and gold coins I want to go out and buy. We still have a long way to go before Obama, McCain, (and maybe Hillary) is President – and we still don’t know what any of them will really do. (Note: I still think Hillary is in the race – until the DNC convention – which could still issue a shocker – her army is strong and has not really gotten behind Obama.)
Expect 2008 to be the year of volatility – so far it has been.
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