6/4/08 (Airlines, Credit Crisis, Obama wins?)

Traders,

More downside pressure across the board, even with the rebound, has shown that the legs to the recent rally have weakened. The Lehman news (following in Bear Stearns footsteps) did not lend any confidence – not to mention they are still in denial about having to raise more money. The bottom pickers in the pre-market yesterday got their butts clearly handed to them as the stock dropped more than 10%, dragging the entire financial sector down – putting more weight across the entire market.

It is clear that the financial sector really needs to get some solid legs underneath it before we can see the market as a whole see continued strength. Bernanke’s speech “Strong Dollar” policy was clearly satire (in the vein of Steven Wright) – because 6% to 2% rate cuts, narrowing the spread between the Discount Window and the Target Rate, changing Fed policy by letting Investment Banks borrow from the discount window, and offering billions in special short-term government lending is clearing not a “Strong Dollar” policy. If that is his “Strong Dollar” policy – I would hate to see the “Weak Dollar” policy.

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Airlines – never a good investment

As Buffet learned after losing million investing in U.S. Air – the airline industry, even though it has clearly lost a lot of ground in the market, is really no place for speculation – specially with the increase in fuel prices. United is expected to ground up to 70 more planes and cut over 1000 more jobs. Expect this news to put pressure on the entire airline sector as more companies may have to follow United’s play.
Didn’t most of these companies just emerge from bankruptcy?

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Credit Crisis far from over

As we are seeing the downgrades from S&P in the financial sector, Wachovia CEO getting the boot, more write downs, the NEW MATH accounting, and also the increase in OTM put skew – it is a clear sign that more problems are expected in the financial sector.

Interest-rate derivative price action is additionally showing money LENDING tighten add in the LIBOR rate and it looks like Bernanke has to head back down to the Paulson’s Home Inflation Gym and start cranking on the printing press again. No matter what Bernanke said yesterday (to ease dollar and inflation concern) they don’t have the room to raise rates if the banking sector is still in turmoil and unable to borrow money outside of going to the Discount Window.
Remember the Discount Window (usually) is higher than the target rate by 100 bps or more to DISCOURAGE borrowing directly from the government and force them to borrow from each other – however the LIBOR rate and additional over-night lending is still very tight. Just think that the ECB and the FED flushed billions into the system ON TOP of lowering the rate and that is STILL not enough.

We are clearly seeing a credit leverage unwind. The M3 and other “M”s do not indicate one of the most vital statistics in currency – and that is LEVERAGED positions. If a bank has only 100 billion on deposit – how do they actually cover their 1 trillion dollars in positions? It is called massive leverage and as those leverage positions lose MORE than what is in deposit, well it spells trouble. While I like looking at the M3 (which is the broadest report on Money Supply), I can’t help to think about JP Morgan, which had 7 trillion in leveraged positions BEFORE taking on Bear’s positions. That is a MASSIVE leveraged position.

The question is if Lehman needs a bailout (which the probability is increasing), what bank out there has room to take on TRILLIONS more in counter-party trades and leverage positions?

This Turkey is still in the oven and far from being cooked.

Expect more volatility – Lehman OTM put options are trading in the 150% volatility range – that clearly spells NO CONFIDENCE by market markers – or for that matter investors over paying for them.

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Futures Pre-Market

Another whack to the down side in the pre-market. No doubt the futures are front running the cash by a few points – the problem is after the last couple of days – do you REALLY think the ARB traders want to take a long leg to “hopefully” short the cash basket into this? I think we will see the spread stay fairly wide into the opening and the ARB traders will wait for the final minutes – if they dare – to close that spread.
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Support / Resistance

Well we are still in the range and have NOT hit any of the short-term supports yet. Last week was all about being in the resistance band and not breaking through – this week has been dropping down to the short-term support bands – but we are NOT there yet.

INDU 12400 / 12800 (As I have been mentioning the last couple of days that 12400 has been the short-term support area – we closed RIGHT there yesterday. However it is looking like serious WEAK support and I would NOT be getting long here – but rather would take a flat delta – long gamma position if you were unsure as to direction or thought we could bounce. If we don’t hold 12300 is in the cards – but don’t be surprise for a revisit down to the 12k area if those don’t hold.)

NDX 1950 / 2000 (That 2000 point was pivotal for sure – and we have ripped above it and then back below it – as if it is a magnet strike. The over-weights have made HUGE moves to the upside – but I am expecting weakness in AAPL and GOOGLE to pull down on this index. Last night on G4 “Attack of the Show” they reported that the new Black Berry out-paced the iPhone by 2:1 customer demand – iPhone also saw sales drop and is clearly the number 2 choice. I think AAPL is ready to give up a little of that huge rally it has had – expect some pull down in this index.)

SPX 1375 / 1400 (How long can YOU tread water? The SPX will have to do some serious treading today to keep its head above the 1375 line. A pull back to 1350 is in the cards this week if it can NOT hold.)


RUT 720 / 740-750 (We are still just below the resistance area and have some room to fall to get to short-term support. Surprising that the broadest of indices is still looking strong. If it can remain in the 740-750 band it would show strength in money flow and can give hope to the short-term supports of the other indices above. This is the clear signal – if RUT breaks 720 do NOT expect the short-term supports in the other indices to hold – however if it stays up in the 740+ range – then these dips in the narrow indices may only be knee jerk down moves.)

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Conclusion

Hillary is NOT going down and as Chris Mathews pointed out she has an army of 18 million and she is in the driver’s seat when it comes to negotiations – she wants Obama to come to her – she is NOT going to him. And whatever the outcome she will be leading her 18 million voters into the November election (regardless if she is on the ticket or not). Stubborn does not even begin to describe her. Her hold out will continue to create a large gulf between Democrats and the longer she holds out the more damage it does to the party. I have to say, while I am not a Obama supporter – he is one excellent speaker and for the first time I think he delivered his message, beyond the “We want change!” Regardless if a Democrat or Republican wins – the road for the next president is going to be very bumpy. If they can NOT get a handle on the economy (the most important issue) then they will only be serving ONE term. While I understand the desire and strong message the Obama has about CHANGE and creating healthcare reforms and offering new socialistic policies – all which can be fairly argued for or against. I worry that if he is elected that his policies will NOT address the Big Picture – which is the economy and rebuilding it. I am not saying that McCain has the answers – but Obama has clearly focused on the Social needs of the people – all fine and dandy if you are FOR Socialism and may work ok – but before you introduce any MORE social programs you can NOT do it in the current economic landscape of this country – we are devaluing our currency, deficit spending, and hemorrhaging billions out of this country on a daily basis. Any MORE social programs means printing more money and if Bernanke doesn’t stop cranking on the printing press he will EXPLODE!

One thing is for sure – I think both Obama and McCain are responsible people and can deliver their message (unlike Bush and his public speaking problems). The main focus should be FIRST the economy before any more programs are addressed. I look forward to the debates. However – what may be most interesting is the DNC convention in Denver. If Hillary doesn’t back down do you think we could see another Chicago 1968? Imagine if she took it to the floor and DID get the Super Delegates – talk about a disenfranchised African American population in their own party. Hopefully we will not see a repeat of 1968! The party would just implode. While I am not a Democrat (nor Republican) we can’t have any party just fail – we need to always have balance in this country. There are some great Democrats and Republicans – we need them both.

As per the market – hedge those long hard deltas if we do NOT hold the short-term supports.