6/5/08 (Credit Cards, ECB unchanged, Wal-mart)

Traders,

I will be the first one to say – I am SHOCKED by the ADP numbers (and less so by the ISM)– in the face of all the economic news and layoff announcement. The HUGE pop in hiring’s took everyone off-guard up to 40k from 13k last month, while this is NOT the same as the employment number released by the government, as an indicator it is showing job strength – which I find rather puzzling . Where are these jobs coming from, after the financial industry, auto industry, airline industry, homebuilders, and retail have been announcing layoffs? I am scratching my head on that ADP number for sure. I’ll bite on the ISM number up slightly from 51 to 51.7 seeing all the exportation that is going on based on the weak dollar. Needless to say the news was just what the market needed to get a violent knee jerk rally. Even Lehman rallied huge – as the financial sector got a boost from some speculative buying.


However – the volatility was heavy as the indices flipped back and forth multiple times between positive and negative in the early trading session before the euphoria (the worst is behind us – just look at the ISM and ADP) kicked in. Even a few analyst jumped back on the band wagon with ``The economic numbers are OK, it looks like we may if we're lucky avoid a recession!” – Time to buy! This market definitely wants to rally and it is just looking for one tidbit of news that it can pin its hopes on. I will remain skeptical and expect more volatility to come, not less. Not saying this is a Bear or Bull market – however it IS a one volatile one.

However – after the news was absorb the market came crashing back down and the indices were mixed from up to down.

It is just a roll of the dice – what the next news will bring us. Continue to expect volatility

_____________________________________________
No more credit line in your house – how about some plastic?

American Express is seeing record profits – or are projecting them in their fancy PowerPoint presentation in New York – with some fancy charts expecting to earn between $3.51 - $3.61 per share, higher than the Bloomberg survey of $3.32 a share avg. You cannot deny the POWER of a impressive PowerPoint presentation to boost investor confidence and get your stock to rally. The CEO also (in some excellent double speak I might add) said that their business model differs from their competitors because they focus on FEES not lending. What? Someone bought that hook-line-and-sinker cause the stock rallied. Granted there is a HUGE difference between Credit Cards and Charge Cards (Credit Cards have a revolving credit, while Charge Cards are short-term loans that have to be paid back). While you may be able to stipulate the difference between loan and revolving credit – the fundamental fact that you are giving out money doesn’t preclude the risk regardless of how it is paid back.

However, American Express HAS moved into longer-term loans for larger purchases that are being paid off over time and have also introduced interest components to those longer term loans. Just because it’s a loan and not a revolving credit line does NOT mean it is without risk.

My sarcasm aside, I still think American Express is a better business model than say credit cards – since they SHOULD be able to see problems arise quicker, than say a massive revolving credit line that is barely receiving its monthly interest payments.


Credit Cards are the new interest only loans – as people keep pushing the limit and just paying the juice. American Express is better – but payments are not guaranteed and they do still see customers not make the payment in full, on time, or at all. Sure they can charge their standard 5% late fee, but is that really any different than a 20% APR credit card? It’s interesting that American Express has also started the longer-term loan for larger purchases – was this THEIR idea, or was it that they saw more and more delinquent payments and decided to add this as a feature because it HAD to added?

It would be nice to get a closer look behind the curtain – than to take the face value that EVERYONE is making their payments in full at the end of each month – they sure didn’t make those mortgage payments in full!

American Express is in a support area at in the 40-45 range – get long if you must – sure they will be collecting more fees because more people will be going to plastic. However, I would hedge those hard delta bets if you are speculating that consumers are going to be paying down that debt going forward without trepidation. That is what you are speculating on!

______________________________________________
Inflation still top concern in Europe

The ECB left their rates unchanged – even though most analyst expected to see them follow suit and start cutting. However, I would argue that the ECB (because it IS a collective) is less pressured by any single company or sector – since it is a combination of many nations. It is a little harder for Bernanke (and Paulson – who had been the CEO at an investment bank) not get swayed by the financial problems. Additionally, the Bank of England kept its key rate at 5% and also did not indicate that they would cut.

As the ECB continues to put inflation as their primary concern they have kept the interest rates unchanged – thus working to keep the Euro strong. Which was predicted by most economist – based on their unwavering policy (which has not been compromised to bailout banks that have suffered in the sub-prime explosion).

Growth is not just slowing down in the U.S., but also in the Euro region and they are in a pinch for sure. While inflation is rising and they would LIKE to raise rates the slow growth may keep them from doing just that. The push-pull between growth and inflation may force them to remain unchanged for some time. It MAY get to a point where one side creates more concern, but while growth is slow – it is still inflation that is playing the trump card and as long as that continues do NOT expect them to cut rates.

_____________________________________________
U.S. Initial Jobless Claims fell (unexpectedly)

The number of people filing first-time jobless claims unexpectedly fell by 18,000. Some economist indicated that the weekly numbers may be affected by holiday weekend, as government offices were closed on Monday. However, the level does initially indicate that while there is a severe slowdown – it is not collapsing.

So far the jobless numbers being reported still look bad, but are not indicative of past recessions or massive slow-down. The continuing claims however decreased and many pundits are pointing to that as is the economy is not that bad. But they fail to take in the simple fact, it does NOT mean they got jobs, it just means they are no longer collecting unemployment benefits. It would be interesting to see (after the 18 months on unemployment) how many of those people found a job vs. just falling off being counted – Damn those “Discourage Workers!”.

Initially the numbers gave a huge boost to the futures in the pre-market, but now they are coming off from their highs. I think short-term investors/traders are looking to tomorrows numbers to see if we can get off the mat and move higher or if it just is another nail in the coffin of the looming slowdown.

_____________________________________________
Wal-mart, Costco, and other discounters doing well

The retail market is separating between the survivors and the suffers. Discount retailers that have also expanded their product lines (groceries, pharmacies, fuel, and other services) are doing well – Wal-mart, Costco, etc. However, Sears and more traditional retailers (durable goods, fashion, home décor) that are pigeon holed are suffering.

Wal-mart and their like are becoming the one stop shop as gas prices are forcing consumers to reduce the frequency of their trips to different stores and would rather visit just one to get all their needs (and wants?).


No doubt in this slow down Wal-mart has been the darling of the INDU – bringing must needed strength as the economy slows.

The futures got a good boost on this news prior to the Initial Jobless claims – however Wal-mart (and their brethren) may continue to do well – do not expected them to solely shoulder the entire market.

If you are in the retail sector you can do better than Wal-mart on the long side. The suffers are short candidates.

_______________________________________________
Futures Pre-Open

The futures got a double pop in the early session – first from the large discount retailers follow-up by the fall in initial jobless claims. However, now the futures seem to be pulling back off that pop. They are front running the cash by a few points – but the spread is narrowing and the Arb traders do not seem to have a problem taking the short-leg going into the opening. We may see a pop in cash baskets at the opening if the spread remains wide at the opening.

_______________________________________________
Support / Resistance

What a whipsaw day yesterday – anyone saying there is no volatility in the market just had to be in the market yesterday as we moved up hard and pulled off big. The indices were also mixed – some down and some up. We are still in the bands with no real indication going forward – except to expect MORE volatility.

INDU 12400 / 12800 (We remain at the short-term support that for traders is a place to get long with soft deltas and gamma, but long hard delta player should hedge their positions. It will be important to hold those levels going into the close. I don’t expect too much until Friday.)

NDX 2000 / 2040-2050 (We climbed pretty strongly in this index and didn’t give back to much of the rally, unlike the INDU and SPX – showing a rather mixed market yesterday. It’s a volatility monster so expect anything!)

SPX 1375 / 1400 (We are at short-term support again a place for traders to take a possible long soft delta position with gamma – but again hard deltas should be hedged 100%. Make sure to have Gamma because if this doesn’t hold the 1375 level you want your deltas to get flat FAST and to start generating short deltas at the 1370ish area.)

RUT 720 / 740-750 (The good news for the bulls yesterday is the confirmation that the broadest market held up in the resistance bands as the INDU and the SPX pulled off to short-term supports. Here is the catch – the RUT needs to stay in the 740-750 band or break out higher to confirm those long soft-delta positions in the INDU and SPX. If the RUT comes down and starts hitting on that 720 level do NOT expect the INDU or SPX to hold.)


My gut feeling is that tomorrow the economic data could surprise everyone and we could rip to the upside. I don’t know WHY I think that - but for some reason that is what I am feeling. That being said – I think it is a short-term jerk to the upside and I think the economic slowdown and the weak economy is far from recovering. The indices were mixed yesterday at both short-term supports, while others at BIG resistance areas. This market WANTS to rip, regardless of the fundamentals. So if we do get a leg-up hedge those positions. I still see the VIX at 30 sometime in Sept-Nov. This will continue to be a volatile year. Of course some of that has to do with the NEW math and Government methods to continue to paint a rosy picture – expect revisions – they always do.

____________________________________________________
Conclusion

Well it looks like AMBAC and MBIA got another whack yesterday – as Moody’s (probably forced by their new analytic division) to put them back on “Review” – even though they maintain their AAA rating. AMBAC and MBIA have tapped out every favor and every method to raise money, from borrowing, selling stock, issuing paper – they are just done. They probably couldn’t raise money if they wanted too. The question now, does Moody’s or S&P step up and do what they SHOULD and cut their ratings? And if so will the dominos fall?

Lehman is avoiding questions about the 10k and rumors are they are still in trouble and have to raise more money. We know that the Fed will not let them fail – but for now the stock could still be significantly over valued. Bear and Lehman are now bringing a skeptical eye to the other investment banks.

While – I think we may get a jerk to the upside from tomorrows economic data – I don’t think it will be long lived, but rather euphoric optimism that the market wants to rally. The short interest in the market of recent times clearly indicates a short-squeeze is NOT out of the question. Any big pop would be a place to roll-up your hedges on long hard delta positions – but I also think (depending on the JERK) a place to enter in short delta positions (depending on sector).

However, I could be wrong and we could finish unchanged or down. The beauty of Gamma and Soft Deltas is that you can play both directions and not really be stuck with naked long stock in a dump or short stock in a squeeze – both horrible feelings.

Traders this is only about GAMMA trading – nothing more, nothing less. Shot-takers (long or short) and unhedged – one of you will pat yourself on the back, while the other is going to have to reload!