6/9/08 (Lehman Clueless, Corn Prices, Inflation)

Traders,

Friday was no doubt a kick in the pants as oil prices rocketed, the employment numbers were less than weak, and the credit crisis is still with us. I suspected (a gut feeling) on Thursday morning that we would rally – we did on Thursday, which I didn’t expect. But Friday was K.O. Blow! Sorry for no Friday report – had some personal business to attend too - was AWOL!

The weekend was about pins and needles as to how Asian markets were going to react – and so far, of course, it has been negative. Additionally we saw the end (maybe) of Hillary’s run and now she is (supposedly) tossing her support to Obama (yeah – I still skeptical, because IF he doesn’t pick her as his second – well we could see the Democrat boat rock some more).

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Lehman – the CFO doesn’t have a clue!

It is quite obvious that the CFO of Lehman, who has been doing the business talk show rounds since Jan, doesn’t really have a clue what is going on in her own house. After hedge fund manager (whistle blower), David Einhorn, called out Lehman’s 10k filings asking “Explain this, it doesn’t make sense and DIFFERS from what you SAY!” – he continued to get the cold shoulder. Well – NOW WE KNOW – Erin Callan (CFO) – doesn’t know a liability if it bit her on the ass. Another write down of $2.8 billion – and YES the need to raise MORE capital ($6 billion). Einhorn called it – as he stood alone and other criticized him for being short Lehman and spreading bad press. But – as I say – if the math doesn’t add up – you need to question it, just because the CEO and CFO SAY it is OK, it doesn’t MEAN it is OK. – Thanks David!

Good luck Lehman raising $6 billion – either they will sell shares to dilute the company, bend over and let the sovereign funds rape them of equity with guarantee payments, become another investment banks ugly step-child, or it’s a family reunion over to uncle Ben Bernanke’s place for more special deals at the discount window!

Note: If you see that Einhorn is going to be on CNBC or Bloomberg – he is worth watching. Numbers guy and doesn’t let New Math fool him.

Expect MORE pressure on the financial sector – unless Lehman is able to spin it (again) “The worst is behind us!” – I wonder when that story is going to get old. It is funny how they keep saying it (since last August) and the investing public keep buying it. But then again this is a nation of people that thought their $200k home, 1500 sq. ft, cookie-cutter, track-home was going to be worth $1 million by the end of the year!

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Flooding hurts food commodity pricing

The U.S. is seeing some horrible storm and flooding activity and with pressure on food commodity prices already from a rapidly growing industrial emerging markets (BRIC) and the cyclone that wiped out a major rice distributor – all we need was some flooding in the U.S. to send prices higher.

Corn jumped to a record high – because of concern about flooding – but corn has another pressure point – Bio fuels – which is already putting pressure on the corn futures. Additionally Wheat, Soy Beans, Rice, and other harvested agriculture goods are being affected by the increase cost of fuel (needed to harvest them). Expectations is price increases in Corn (and other harvested) will trickle over to Beef and (other meats) that rely on grains for food supply.

Eventually rises in agriculture prices will trickle into food suppliers both retail and distribution. These companies will either have to eat the margins or pass prices onto consumers. Either way it will pinch the bottom line – from less margins to decrease in consumer buying. Pre-packaged food companies are going to see several blows from higher price in their core product, shipping, and also energy costs in manufacturing – expect more inflation not less.

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Weak Dollar, Strong Talk, and Real Inflation

The massive chops on the interest rates has send the dollar into the toilet – while Bernanke is talking tough he is doing little and even if he WANTED to raise rates – with the recent Lehman news he will be hard pressed – unless he wants more Bear Stearns blood on his hands. Goldman is expecting that two-year yields will fall below 1.9% by year end, even though the Bloomberg economist survey expect 2.24%. So far Goldman’s track record since last year has been correct. Economist expect (academically correctly) that with inflation looming that the Fed needs to raise rates to restore strength in the dollar and help fight the inflation plague that has been known to destroy economies. However, Goldman knows something they don’t (maybe Ex-CEO Treasury Sec. Paulson has been the little birdie telling Goldman what is going on behind the curtain) – regardless of HOW Goldman is making their expectations – they have been right.

So far Bernanke has been servicing the banking sector trying to shore up it up before more collapses – it is hard to argue with that strategy after reviewing the counter-party trillions in risk worldwide, however he has done it at the expense of sending the dollar to very low levels and laying waste to the economic landscape in this country for consumers. Sure – several sectors are seeing HUGE profits because of the weak dollar and that they are able to sell overseas – but what about commodity prices (oil, food, energy, etc.) eventual all that bites EVERYONE in the end – just not consumers.

We are facing a difficult road ahead – I don’t envy Obama or McCain as they may only end up being one-term presidents in the worst economic crisis this country has seen since 1930s – unless we avoid it by a miracle. I hate to say it – but it may seem that socialism is on the horizon.

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Futures Pre-market

We are getting a good pop in the futures in the pre-market, after a massive sell off. They are front running the cash – expect ARB traders to bring in that spread –but they may be skeptical getting too long into the opening – after Lehman news and more economic pressure.

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Support / Resistance

We came off pretty hard on Friday and are in more of a mixed market with negative pressure. These are not bottom picking times – while we may see spikes – stay hedged.

INDU 12200 / 12500 (We need to hold above 12000 – traditionally this would be a place to get long – but after Friday, Oil, Lehman, ECB not cutting but talking about raising – well I don’t think ANY long-term bullish or bearish strategy is something to hang your hat on. Stay hedged lock in gains and avoid shot taking.)

NDX 1950 / 2000 (We may visit 2000 today and if we stay above it rally further up into that 2030-2050 resistance band – one of the many APPLE conferences is on – and you never know they may be releasing the new iDollar or iBond product which could save the economy. Either way – AAPL is a big volatile issue which as an overweight in this index could send it higher or lower in a blink of the eye.)

SPX 1350 / 1400 (Short-term support at 1375 was taken out like it was butter – we could get above it today and yes euphoria “the worst is behind us” could get us off the mat again. However – take everything with a heaping spoonful of full contract hedging (short or long))

RUT 720 / 740-750 (The one saving grace is that the broadest of the indices is still in the resistance band of 740/750 after it poked it’s head above 750. This is showing to be more resilient than the narrower based indices – if money is not pouring into the weak sauce treasury market – could what little money that is left be pouring into the general market? – who knows – but even if you take that bet – you better hedge. Watch 720 and 750 to get a indication of what the market as a whole is going to do.)

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Conclusion

This market saw a very strong 2 month rally in the face of a bad economic landscape – pretty amazing. However, we can only ignore the fundamental economic landscape for so long. While true, several firms that are multi-nationals in benefiting from the weak dollar from selling overseas – most of those firms are still affected by energy prices – it eventually catches up to them as well.
Don’t buy into the talk about the trade deficit and that it is expanding or shrinking – yeah it IS important and while it has increased because of the weak dollar – how exactly does that help the economy? Yeah – it helps the firms – and some would argue that means MORE jobs – we know that is not even close to being true (as jobs have been shipped and expanded overseas). True a couple of firms may hire some people – but with gas and food prices going up (with the help of the weak dollar) – it is not really helping anyone! Great – you got your job paying $10 an hour – but when gas and food continue to outpace income that is called INFLATION.

No nation in the history of civilization has devalued themselves to prosperity! That is exactly what we have done – devalued our currency to help kick start spending and bailout banks. Devaluation = Inflation.

This story is not over yet!