6/18/08 (FedEx, Morgan and Lehman, 5/3rd ?)

Traders,

The market continues to grow weak even after the slight rebound we have. The pressure from oil is affecting many sectors of the economy and we continue to see problems surface – so far that light at the end of the tunnel is not so bright. While you may get sick of hearing it – the economy and the consumer needs to find a bottom before we can see broad strength in the markets. We will continue to get violent up and down moves – as news continues to create HYPER moves in the market. High volatility is never a good thing for investors, however it does make for some great trading opportunities. However, traders need investors – they need each other.

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FedEx – a loss? !

Many have been told or expected that the carriers where and are passing on fuel surcharges. We are seeing that in both the trucking and general freight arena. But ARE those fuel surcharges enough? Many believe they were – but now FedEx’s report is showing that the higher fuel cost may have a broader impact.

They report a loss of $241 million (important to note includes a write-down from the Kinko’s unit). The net loss was 78 per share, compared to a $1.96 a share profit last year. While revenue did rise, it’s the margins that mean EVERYTHING. The problem is the rapid rise in fuel costs. They have not been able to raise their fuel surcharges fast enough to pace the fuel costs. Maybe they should be hedging with MORE energy futures? Additionally they are seeing a fall off of their premium shipping options – obviously companies and people are looking to save money as credit lines tighten.

The forecast is not rosy – they continue to be faced with several issues, from higher fuel cost to their consumers selecting the lowest cost shipping methods.

According the Bloomberg report – shipping companies (FedEx and UPS) have a 2 month lag in recovering fuel expenses via surcharges. This means they need to accurately predict future fuel prices or they better get their hedge on! However, how much CAN FedEx pass through to their clients a surcharge before shipping is curtailed even further? That as well is a fine balance.

Regardless –the outlook is not good and this report means the whole sector should see pressure. FedEx is down in the pre-market.

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Morgan Stanley Profit’s drop 57% and Lehman on the ropes!

While Goldman is the standard that others strive for, they had problems and that means bigger trouble for those below the Gold standard. Morgan (2nd biggest securities firm) saw their profits drop 57% (.95 a share). Their position has higher exposure in the liquid debt market and their traditional revenue lines fell short of curtailing those losses. Morgan is expect to continue to see pressure, they have already eliminated 3,000 jobs since last October and are expected to shed another 5%.

Banks have written down about $392 billion, expectations are for over a $1 trillion according to John Paulson (founder of Paulson & Co). Their estimates are for $1.3 trillion in Global write downs and losses from extreme leveraged positions. Banks have anywhere from 5:1 to 20:1 leverage positions over deposits. While some of these positions may not lose money, they may be forced to liquidate some to cover others – thus creating a more pressure on the down side. His forecast, exceeds the IMF’s prediction of $945 billion. If these are be correct – we are nowhere near the middle of this credit crisis or the write downs.

Added to this – Lehman can’t stay out of the headlines, just when the head of Blackstone said the “Worst is behind Lehman!” – justifying their massive investment – rumors today is that there is unrest at the firm. Some board members see the writing on the wall and their only options is to be taken over and quickly. If they can’t – they will need to lay off 20% of their work force and look to raise even MORE money. Even after their bad news and demoting their CFO – they are still on the Bear Stearns fast track. CEO Fuld, is facing growing pressure to find a buyer – but he prefers to remain independent. Gasparino’s article this morning spells continual problems at Lehman.

Side note: That bank with the name 5/3rd (note: I could never do business with a bank that can’t even do basic math!) saw a good knock down and is also scrambling from their write-down exposure.

The financial sector still has a way to go to find a bottom.

Expect MORE pressure in the financial sector – and don’t go picking bottoms because you THINK the worst is behind us.

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Futures Pre-market

The futures are not looking good after yesterday’s sell off and the news from FedEx and Morgan this morning. The futures are front running the cash, if the spread remains expect pressure as Arb traders buy the futures and short the basket at the opening. A gap down is in the cards at the opening.

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Support / Resistance

We are still range bound but have come off from those resistance areas. The RUT didn’t get through that 740 resistance area and saw the biggest weakness among the indices covered. That is a clear sign that the narrower based indices may not stand up as well.

INDU 12000 / 12500 (we slipped down and it looks like we may see last week’s lows at the opening. The question, does 12,000 see any support. I wouldn’t bet the farm on it, but from a tech look it is a place for short-term traders may want to take a delta stand. We are getting to that support area – the question, is it Support?)

NDX 1925-1950 / 1975-2000 (As this index has more volatility – I decided to list support and resistance bands. A couple of heavy weights can really drive this index up or down and it really driven by the top 10 or 20 issues. Therefore expect more volatility. I would use the inside prices 1950/1975 as places to get flat and the outer bands 1925/2000 as a place to take hedged deltas. This is a Gamma index in these market conditions.)

SPX 1325 / 1375 (We are squarely in the middle of the range – don’t take a stand until we get to an area)

RUT 720 / 740-750 (We struggled at 740 and saw weakness the futures are showing some downward pressure.)

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Conclusion

If the IMF and others are forecasting $1 trillion dollars in global write downs and we have only seen about $390 billion – then we are not half way there yet. The light at the end of the tunnel - well there is probably no light. Every time we think the worst is behind us, then it just comes back to bite us again. How many times can Lehman tell us that was the bottom – before we realize they haven’t got a handle on the problem. Talk is cheap and once we do the math we realize there is a more to this puzzle. Lehman is going to sell to another firm – I think they are past the point of no return. They maintain risk on their books and now have brought in another CFO, since the last one couldn’t do the math. However, what concerns me is that if a narrow focused firm like Lehman can’t get a handle on it, what does that mean for a Citi that has many different vertical business models, many of them relying on credit in some capacity – well they need an army of CFOs to get a handle on that mess and I hope they can do math.

The oil prices at any price above $100 is really starting to take its toll on companies and not just the consumer at the gas pump. FedEx cannot keep up with their fuel surcharges and are seeing more downgrades in shipping options. I don’t think that story is unique to FedEx, but could be the same story played out in all types of shipping companies. Connect the dots and those retail firms that are selling goods are going to be paying MORE via those shipping surcharges – which means at some point they need to juice their prices to keep the margins in the black.

I think the economy will continue to see pressure well into the beginning of 2009. Don’t expect it to change this year.