6/27/08 (Oil Up!, Spending Up!, Banks Down?)

Traders,

I guess the plug DID get pulled yesterday. None – not one support held. The market saw pretty serious suck out. Yesterday, after seeing the market come off and realizing the economy has lots of difficulty going forward, I heard that Kudlow start talking. It just drove me nuts, we watch (investors) CNBC for helpful information, news, and to help make sense of what is going on. We don’t need Kudlow’s cheerleading, or Cramer’s flip-flopping, or Dennis Kneale calling a bottom every day. These dolts do nothing to help make heads or tails out of the market and those that DO follow their advice have suffered enough. It got me feed up enough to put a little tribute to these dolts (http://marketpreview.blogspot.com/2008/06/three-market-stoogies.html) enjoy.

We have some serious work to do and we need to stay AHEAD of our investments (or positions). Proactively hedging positions, not reactively hedging positions. I was once told, by a wise trader, hedge your position when you CAN, NOT when you HAVE too! This is so true – we watched the market slip day after day and I get email or phone calls – “What should I do?” – are you kidding me. If you are long HEDGE that position! It’s simple, but people wait and HOPE! There is no room for HOPE – that is an oxymoron strategy. Do you wait till you are sick before buying health insurance? Do you wait till your house is on fire before buying fire insurance? Do you wait till you get in an accident before buying auto insurance? Of course not, that would be foolish. However- you buy stocks and HOPE they go up and wait until they have dropped before doing anything – THEN you ask ME what to do! STOP – calm down and hedge your position. There is no such thing as making it BACK. Take your losses and move on.

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Oil going higher

Oil and other commodities can and will go higher. Whether you want to believe in conspiracies or speculators the bottom line is supply and demand. The problem is that even if demand remains constant or contracts, when there IS concern about supplies – over purchasing will force prices up. Just like when something goes on sale at the store, you may not NEED it you may only NEED one – regardless you end up walking out with 3 or more. Same with commodities – hedging against future price, demand, and supply helps drive prices higher.

Oil broke $140 and $150 or more is in the cards. We are facing a real oil crisis in this country and the problem is that it trickles into every sector of the market – travel, shipping, retail, etc. Any good that needs to get from point A to point B will be affected. This will force companies to raise prices on goods – to keep margins in line.

What did NOT help was what I am calling the Bernanke Bluff – we (or us skeptics) KNEW he was not going to raise rates – so all that TALK about raising rates was to shore up the dollar and people believed. The dollar found a bottom, be it fake, and started to rally because people BELIEVED that Bernanke was going to raise rates – he pretty much said he was going to. It even pulled back commodity prices and we saw a pull back in oil. Well – we saw how tough that talk was – he can NOT raise rates – if he did it would put the brakes on the Financials that are barely treading water. I am sure Paulson, who I think could take Bernanke easily in a cage match, gave him the evil eye as to raising rates (Remember, Paulson is the ex-CEO of Goldman – and KNOWS that the money needs to continue to flow) – and of course Bernanke backed off the rate raise. Of course this is just a little joke – but no doubt the banking and financial sector does NOT want to see rates go up and NEED that Discount Window tap flowing!

Well – not raising rates sent the dollar lower and oil back up! Expect this trend to continue.

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U.S. Consumer Spending Rose .8% - Hurray!

The futures saw a 5 minute pop before retreating back down as the Consumer Spending rose – more than forecast (as people filled their tanks with rebate checks). The Commerce Department said incomes grew 1.9% (the most since Sept. 2005) – but here is government math for you – they added in the rebate checks. Yeah – that is not REALLY income is it?!?

However – this pop maybe a onetime deal – unless we get ANOTHER rebate check. What is the government going to do, subsidize the entire population? That only means MORE taxes and MORE inflation.

I am already hearing talk on Bloomberg from talking heads saying the U.S. Consumer Spending Rise is showing the economy maybe struggling, but the is fundamentally strong! What? I am sure you will hear Dennis Kneale, who loves to quote government data, state this is the bottom (again!).

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Investment Banks – Merrill and Lehman


CEO of Lehman will forgo their 2008 bonuses – after the firm reports its first quarterly loss after going public. He is setting an example and will probably start cutting his staff bonuses. He was paid $40 million last year and over 90% of that was from bonuses. So yeah, it is a big chunk of money – but probably not enough to save them. I guess better late than never. I predict MORE write downs to come. He wouldn’t be doing this NOW if he thought they were at the bottom and things are getting better.

Lehman now points the finger at Merrill Lynch and predicts they will write-down more money (up to $5-$6 billion more). Other’s predicted less, in the $2-$3 billion range. Regardless – expect these banks and firms to write-down MORE. Remember – this is just paper money and mark-to-myth! As long as Bernanke keeps the Discount Window open so these guys can take write-downs on these positions and HOLD them and HOPE – they can continue! That Discount Window is keeping these firms from facing a Bear Stearns situation. They problem is they can NOT sell this paper and only take write-downs. No one wants to buy these positions – so they continue to take a GUESS as to what the value is. It’s just like you trying to sell your home, you can tell your neighbor over cocktails that your home is worth $1 million, but until you find a buyer it is just talk!

Expect the game to continue until September, when Bernanke is going to have to figure something else out. Because he is only allowed to keep the Discount Window open to Investment Banks as an emergency and September it closes. Then where will these banks borrow money? I am sure Paulson and Bernanke will force some Coup de grace. Paulson has already laid the foundation (in speeches and meetings) to give the Fed MORE power. I am not sure a Democratic Congress will agree.

Expect to see some of these investment firms look to partner with a Bank (ASAP) before that window shuts to secure more funding and continual access to the window.

One thing is for sure – when all is said and done – Bernanke is going to have some serious biceps cranking on that printing press!

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Futures Pre-Market

We saw them up, down, Consumer Spending released sending them back up, then back down as it was just the tax rebates, then it is back up as talking heads are talking it up. The whipsaw action should keep Arb traders sideline and not taking a big stance on a leg into the futures at the opening. I don’t think they want to get legged out. Expect a mixed opening.

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Support? / Resistance

The breakdown yesterday was ugly – as expected if we didn’t hold that we would of slid. There is really no support at these levels – they will have to be created after investors come out of their hidey-holes and feel safe.

INDU ?????? (It’s a crap shoot to get long or short these levels – the market really has to figure it out – watch volume at price and volatility to come in before trying to make any decision.)

NDX 1800 / 1900 (Who knows – in la-la land between here. Don’t take a stand – expect volatility up or down.)

SPX 1275 / 1300 (We are still above the lows in March – but not by much – we could bounce off those – but I am guessing it is a dead cat bounce at best.)

RUT 700 (We are just below 700, it would be nice to see it above 700 to show any confidence or a bottom across the board. It is still above those March lows)

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Conclusion

For the sell off yesterday the VIX did NOT pop as much as one would of thought. Maybe there is still NO blood in the streets YET. I drove home and went out to dinner with friends (Roy’s) and people seemed like everything was just fine. Of course financial advisors and brokers were probably not out last night having a nice meal. But I didn’t see or hear any real panic from people. Maybe everyone just expects this market to continue to slid. Gas prices are up, but not at prices that people are freaking out yet. Sure there is some talk – but nothing crazy. Europe has been paying these prices for years (they pay per liter – remember) – we are just not use to it. I think the consumers haven’t been squeezed enough to see blood in the streets yet. That means we have more room to go down.

Unless…..for some reason FAITH returns. The Faith is built on Consumer Confidence and Global Confidence in the Dollar. Living in a society with a Fiat currency (faith backed) we need not only our citizens to have confidence, but also the global community to have confidence. Once confidence returns, perception changes and we can find a bottom. However – fundamentals trump perception. So before we see any confidence return, the banking system and the Fed need to shore up their problems – which we are NOT seeing. Once they unload or just take 100% losses of that garbage paper – then we can say “The Worst is behind them!” at that point the fundamentals are resolved and perception can again rule the market.

It is very hard for technical traders to do well in this market, because fundamentals continue to trump technical’s. That is making it hard to pick spots to take long hard deltas.

It is still going to be a long road.