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.
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.______________________________________________
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.
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