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!