7/31/08 (GDP shrinking, Exxon, Discount Window ???)

Traders,

Yesterday we saw another big run in the INDU and the SPX – but the NDX and broader based RUT didn’t really get the same kind of rocketing move to the upside. Then we saw a massive gain in oil after its fall from the 140 level as the surprise that we are still outstripping supply with demand. What really gave this market a jolt to the upside was more government intervention – rather than a shift in fundamental solvency. The SEC extended its short ban until August 12th, which was set to expire the other day, the FED extended the Discount Window to non-members to January 2009 and increased the loan period to 3 months from 30 days, and the President signed into law the first of probably many bailouts – extending Freddie and Fannie’s debt leverage ratio.


While on the surface having the government riding into the rescue might seem like a good idea, the reality is that it means things have yet to find a bottom, may get worst, and have made it less transparent as to which companies are solvent and which are not.


I have been asked, recently more often, why I make such a big deal about the Discount Window being open to non-members – so I wrote something up on it last night and attached it to the end of the market preview. It’s a very simplistic view of the situation – but should lay out the big picture as to what is going on.

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GDP - contracting – go figure!

Don’t hold your breath that we are out of the woods yet – you’ll pass out. The economy grew at 1.9% for the 2nd quarter, less than expected. What was also alarming was the revision of the last quarter in 2007 – which showed a significant contraction as well. While that doesn’t sound so bad on the surface, being the economy is in a very weak state, the estimates from economist had already included the billions of dollars in stimulus distribution for the 2nd quarter in their 2.3% gain (average). Thus the 1.9% gain fell far short of expectations – which has some economist very concerned. What would the 2nd quarter look like – without that massive stimulus check? I even heard one economist yesterday – when talking about his estimate – that the stimulus distribution is artificially propping up the GDP, because it is just a massive loan that tax payers will have to pay back anyway.

The revisions to the downside are also rather concerning – the 1st quarter was revised down to .9% from 1% - a clear sign of contraction and giving elevated levels of the probably of a recession (if you want to measure recession by government math). Spending is very clearly slowing down and while we still may yet see positive growth (while contracting) in the GDP numbers – it’s clear that Main Street is feeling the pinch.

The news has sent the futures down fast and hard – as even the economist who predicted conservative increase from the stimulus checks were wrong and contraction was bigger than anticipated.

However – you will probably hear some talking heads “Kudlow” – say stuff like – "Hey, this economy is strong – we are still growing! I don’t see recession anywhere!" Ignore the spin on TV. You are the best judge of economic conditions. Look at your wallet, your savings account, your home equity, interest rates. Then go to fill up your gas tank, go buy some food, go to the store. It really doesn’t matter what we label it, recession, contraction, etc. It doesn’t matter what the numbers are. The reality is simple – regardless if we are in a recession or not – we are contracting and deleveraging. Keep it simple!

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Exxon profits less than estimated.

While they are still seeing healthy profits, they came in lower than estimated. While oil prices have been going up, consumption has been going down. Important to remember that consumption maybe going down in THIS country on the world stage we are still pushing a very narrow spreads between consumption vs. extraction (supply and demand).



Still the numbers are impressive $2.22 a share, up from $1.83 a year ago. That’s almost $12 billion for the quarter. Don’t tell Maxine Waters – she’ll want to take some of that money (the excessive profit tax). What people don’t realize is that while the revenues seem massive – the costs are going through the roof as well – squeezing margins for the oil companies.

Exxon is spending $52 million a day in searching for new oil reserves and even more in R&D. So while their revenues are going higher, so are their costs – and thus shrinking margins. Top that off with consumption contracting (for now) on our shores. Well – that is why they missed estimates.
Please do NOT support ANY excessive profit taxes! Once that door is opened – it will never shut. You want to force companies to move overseas, start putting a cap on profits and tax them more.

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ImClone get’s bought out.



While Martha Stewart served jail time for selling a small amount of shares of this stock based on insider trading and the ex-CEO is starring through the bars of his cell – the company they tried to dump shares in is now a takeover target by Bristol-Myers! The stock is up big in the pre-market, 30% higher than yesterday’s close. Bristol-Myers have been a large share holder and partner of the company for some time. The deal is to consolidate an already strong strategically relationship.



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GMAC – stick a fork in it.

GM a long time ago started seeing their profits (margins) shrink to almost nothing. The costs of building and selling cars stop making sense and they needed to figure out something NEW to keep profits rolling. GMAC was born – let’s FINANCE our own cars to the public. The problem is – it looks REAL GOOD on paper – but the reality is there IS RISK. Accounting gets a little funky too. When you sell a car via financing – do you book the sale as a profit today? Not really – since you just gave someone the car and you are collecting money on a monthly basis. If financing cars is easy money (or so they thought), why not houses? And now what started as a Car company has turned into a finance cars company, has turned into a mortgage company. What? How did that happen?



Now here is the big problem – what happens when people stop paying! Opps – didn’t think about that. Add to that their RELATIONSHIP with GM (yeah – remember they make cars!) and the 0% financing of vehicles just to get them off the lot. Guess what, at 0% finance you just gave away a car for free and expect the buyer to pay you pack with NO interest! That means NO PROFIT!

To sum up GM and GMAC – I can’t put it any better than what Mr. Habeeb (Manager of Calvert Asset Management - $8 billion dollar fund) said, “It’s a disaster!”

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Futures Pre-Market

Well they were up and looking good until the GDP missed estimates (even after the stimulus check). Ouch – we are seeing a good smack down in the pre-market. Spreads are pretty wide and the whip-saw positive to down negative reversal probably has some ARB traders on the sideline to close the fair value spread at the opening – rather than trying to leg in from the futures side. Expect a gap down. But this will be a volatile day - we could close up or down big.

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Support / Resistance

Well we visited those resistance levels even pushed a little through them – but now we have given up (based on futures pre-market) and heading back down. We could get a knew jerk back up to. Expect BIG volatilty today.


INDU 11,500 (We close above it after a good 2 day run – but now we are looking to head back down through 11,500. Even though we are above 11,500 I don’t know if you would call it a support area – but rather more of a straddle area. If we can’t close at or above 11,500 well – that means it is resistance. Otherwise treat it as a straddle strike – NOT support!)

NDX 1850 (This is a rough resistance area – but could also be a straddle strike. The futures are pointing to a 20 point lower opening. Watch the close.)

SPX 1275 (More volatility – treat 1275 as a straddle area – both 1250 and 1300 are in the cards. But don’t get long or short hard deltas.)

RUT 700 / 720 (We didn’t get the kind of rally that the INDU or SPX did yesterday – volume has been a little lighter of late too. Keep an eye on these two levels.)

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Conclusion

I was recently asked about the Fed and The Discount Window lending money and why it’s a bad thing. First, I am not an expert so I recommend anyone that IS interested in the inner workings of the FED (well there are some good books so read up on it). However – (from a Keeping It Simple, Stupid = KISS view) – there are TWO RATES.

One is called the Target Rate; this is the one that everyone traditionally pays attention too. It is just that a TARGET! The FED set a “suggested” rate for the banks, only members of the Federal Reserve, to lend each other from their reserve pools. It is important at this point to remember two things – banks NEED to have X amount of capital vs. their debt to meet regulation requirements (to remain in good standing as members of the FED). All the banks have posted money to a Reserve Pool that is used to lend to one another.

The Discount Rate, on the other hand, is the ACTUAL rate that you can borrow money DIRECTLY from the FED. This is has been called "The Lender of Last Resort" – since you are now borrowing from the Government (or Tax Payers). Traditionally the Discount Rate is HIGHER than the Target Rate – to discourage banks from borrowing from the FED. See the FED wants the banks to borrow from each other – not from them. When banks do borrow from the FED it is a clear sign the bank is having problems. Why? Well first you have to ask, why would you pay a higher rate (at the Discount Window) if you could just borrow from other banks at a lower rate (at the Target Rate). Banks are embarrassed to go to the Discount Window because it is usually a sign that there is something wrong.

Now here is the big issue, when Bear Stearns went BUST that Friday and the FED brokered the bailout they did something else, something unprecedented. They enacted a special rule, only in case of emergencies, to OPEN the Discount Window to NON MEMBERS. That’s right the FED Opened the Discount Window to lend money to non-members. This is rather shocking; he didn’t even get Congressional Approval to do so. He just DID it and he may of had to. Of course in recent testimony he felt he had no choice because the entire monetary system was at risk. Mainly because of the trillions of counter party over-the-counter trades (private transactions between banks – that are based only on their credit) at Bear Stearns. Additionally – there COULD BE more Bear Stearns out there.

Now remember this – these banks are holding questionable illiquid positions (CDOs collateralized debt obligations, SIVs structured investment vehicles, etc.) These are trades that do NOT trade in the traditional stock market - but are rather (for lack of a better term) just like “Office Pool Bets” – you are trusting that the other bank has the assets to pay you when the time comes. Well a large portion of these bets were backed by – you guessed it – mortgages (prime, sub-prime, sub-subprime, etc.) – The banks trusted that these were GOOD bets (based on the implied credit was good) – because companies like Moody’s gave them AAA credit rating. (It’s important to note at this point that AAA credit means as SAFE as a Treasury bond). Well we all know good those ratings are.

So the FED has argued the NEED for keeping the Discount Windows OPEN to not just the members, but also these non-member firms (investment banks) that have been granted access to borrow money. The FED can NOT keep the window open indefinitly and stated it would close in September 2007. The recent Congressional Hearings were to establish if that was ENOUGH or if the FED required more power or changes to its mandates. Note: Yesterday the FED announced the window will be open until January of 2008.

These write-downs are on these CDO/SIV type positions. These positions are VERY illiquid there is really NO market for them – unless a buyer shows up. These positions are also MASSIVE. So the banks use a formula (a guess) as to what the values of these positions are. It’s not like the stock market where you can just look up the price, they have to (like a home) appraise the value and come up with a price. Well just like the housing market – the price doesn’t mean much if you can’t find a buyer. These arbitrary prices are called “Marks” the method is generally referred to as “Mark-to-Market” – except there IS no market. Buffet likes to call it “Mark-to-Myth!”

What does this have to do with the Discount Window? Well these banks are holding these positions – that are suffering losses (write downs) and they NEED money to hold them. So they need to borrow money from someone – hey let’s go over to the Discount Window to borrow money. When the Window was open there was a MAD RUSH and we are talking not millions being borrowed to carry this stuff, not 100s of millions, not even billions, we are talking 100s of billions of dollars in loans to float these banks to carry these positions.


So HOW much is being borrowed? Sometimes a picture is worth a 1,000 words.

http://goldmoney.com/en/commentary-print.html

Now in the Congressional Hearings one of the Senators pointed out that the FED has lent out over $200 billion. Bernanke’s response, remember we are not BUYING or INVESTING – these are only short-term loans. He further reminded the Senator that not ONE loan has failed. Well – that is not too comforting. It’s not comforting because the money being lent is used to back those very questionable positions that these banks are writing down. It’s not like the FED lent $200 billion on some secured tangible hard asset that is transparent, he is lending money to the banks and investment firms that have installed a turnstile in door of the CEO office where even the CFO’s don’t have a handle of the risk or positions they are holding.

So there is some scrambling going on, first – those that are NOT members of the FED, like Merrill Lynch, Lehman, etc that currently going to the Discount Window know that it will be closed (now) in January. So if they want to keep drinking from that well – they need to merge with a bank that IS a member or else look elsewhere.

The reason that it is HARD to believe that the worst is NOT behind us is the following:

Why, yesterday, did the Fed extend the Discount Window from September to January for none members?

Why, yesterday, did the SEC keep the ban on the shorting these same firms in place through August 12th?

Why are these companies selling their shares to raise money and continue to go to Sovereign Wealth Funds for additional capital?

Why did the President sign the emergency bailout plan on 400,000 mortgages – for the government GSEs to take over and tax payers to back – bailing out these lenders?

Why are these banks continuing to warn of MORE write downs?

We have seen Indymac fail; now two more large regional banks have also failed this last week. Rumors are there is a behemoth in the works that is about to crumble (no names – sorry).

While true, none of these loans have failed – as Bernanke has pointed out – the concern is that while they may NOT have failed (YET) – we should NOT just ignore the risk.

These Congressional Hearings are rather interesting (you have to weed through many STUPID questions or little lectures by some of our less informed Congress members) – but these are the times that the entire future of our country – its heart – the economy – is pumping hard and the arteries are clogged in a mire of Political Favors, Socialistic Agendas, Nationalistic Plans, and Government THINKS they know best decision making.

We may have an endless supply of paper – that doesn’t mean we should continue to print Ben Franklin’s picture on it!

We are on a very precarious road to hyper-inflation. We laugh at those over in Zimbabwe printing 10 million dollar bills, we laughed at the Mexico’s NEW pesos, we laughed at that (once) worthless Canadian nickle, we laughed at the Russians in the 90s wheel-barrels full of rubles crossing the border to turn in for just a loaf of bread, we blame the ECB for our inflation because they will NOT lower rates, we blame the Chinese for pegging their currency. We need to stop laughing and pointing fingers. Those Congressional Hearings are ANYTHING but funny. We ignorant fools have borrowed our way to prosperity and now the Piper has come to town and needs to be paid.

Remember this….
“No nation in the HISTORY of civilization has DEVALUED themselves to Prosperity!”
We are on the fast track.

I am not trying to scare you or even some doom and gloomer – this is just reality – Fiat Currency COULD work – only if the Government is transparent about inflation, money supply M3, and NOT on the Bailout campaign.

It’s in the government’s hands now – we have relied on mommy government over and over again to get us out of problems. They still can – but we have a polarizing Congress, a hated Administration, and election year that is ripe with Socialism. Those are not helpful signs of getting through these problems easily or quickly.

The market WILL find a bottom. We are a tenacious lot. We have and will survive worst things. However –until we are ABLE to see the bottom, it's very muddy and uncertain.

As we continue to prop up share prices and bailout mortgages and companies - we will not KNOW the full extent of the problems.

People talk about a transfer a wealth all the time. What about the talk fo the transfer of losses from the risk takers to the government to the tax payer?

Where is the bottom? Currently there is none - because we will NOT let anyone fail.

DON'T BOTTOM PICK - this market will rally hard and also sell off hard - until we work through these problems.

7/30/08 (No Shorts, Moody's FFF, Bailout, ADP shocker)

Traders,


The head snapping movement in this market is a little crazy - down a couple of hundred, up a couple of hundred. Some serious volatility is the only thing that we know for certainty. It seems that the talking heads latched onto the Merrill Lynch raising money through their $8.5 billion sale of shares and their selling some of their illiquid debt paper for 20 cents on the dollar, finally means - yeah you heard it here - "The worst is behind us, finally!" - please note the slogan has changed and the word "finally" has been added. Maybe that means this was the bottom. Of course the euphoric optimism bought that story hook-line-and-sinker again and Merrill along with the rest of the bank stocks lead the charge and the market rallied strongly. CEO Thain needs to make sure to send a Thank You card to the SEC for that short-covering rally created by the ban on shorts.

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SEC extends protectionism


As I just mentioned the SEC extended their short ban issue on the selective protective 19 financial firms until Aug. 12th. At which time, just like last time, they promise to repeal it. These stocks got a jolt yesterday from the news - along with the belief that the "worst is behind us!" talk coming out of Merrill Lynch. Don't buy these stocks (as long-term investors) - we really don't know what their value is. They have all announced more write downs, they are selling their own shares, getting propped up by the SEC, and are at the Discount Window nightly to borrow money.



Until these companies are free to stand or fall on their own balance sheets - we will NOT know their true value. When companies are selling their own stock to the public (to the tune of billions) to raise money because they can't get loans for decent rates (or at all) in the private or public market - things are not rosy. True - the worst COULD be behind them - but since we can't determine value and have heard that story over-over-over-over again since last November. Well fool me once.... Traders come and play, investors stay away.

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Moody’s FFF their new rating!

Well this company has sort of turned into a joke to a certain extent. Their AAA credit ratings (remember this rating is suppose to indicate that they are as SAFE as US Treasuries with NO risk of default), on the bond insurance companies (which have all but failed), CDO/SIV/ and other structured notes (most of which now are rated junk), and the many of the financial institutions and mortgage companies (many which are now borrowing money or selling their own stocks) – well in hind sight that AAA rating was pretty worthless.

What is even MORE interesting (and rather ironic) is there new model for rating risk has indicated that many of the products they rate AAA should be rated several levels lower. However, that is a new model they are testing and therefore it is not used to issue ratings.

So – of course demand for ratings on CDOs and other paper products of NOW questionable value has fallen sharply. Their 2nd quarter profit fell 48% or 54 cents per share. Investment firms are trying to dump this paper and are not looking to rate more paper as every firm is in liquidation mode. Additionally, many have said the ratings are worthless if the paper is defaulting. To show how bad (or worthless) these AAA ratings are – remember Merrill just said it is selling their CDO paper for 22 cents on the dollar, for your information that paper WAS rated AAA.

Even the CEO of Moody’s is “cautious” about a chance of a rebound in the credit markets this year. He has already cut expenses by 10% and has announced more lay-offs. And while the estimates had exceeded analyst expectations and the stock has not suffered as bad at those it has rated AAA – many are suspect that it will see a quick turn around and the bottom in the company’s share price is still an uncertain.

Goldman has rated them a neutral and says this is the worst quarter in terms of earnings performances. They don’t expect any rebounds soon.

Moody has a big marketing campaign ahead – and that is earning back the TRUST that their AAA credit ratings mean more than just being the first letters in the alphabet.

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It’s official the first of the bailouts has been signed!

Bush was up early this morning signing into law the biggest home rescue plan. This new legislation will help more that 400,000 home owners technically refinance and dump that low yielding paper onto our beloved nationalized mortgage companies Freddie and Fannie. The tax payer are now providing a 30 year (very low yielding and high risk of default) to 400,000 home owners who would otherwise face foreclosure. At the same time it adds another back-stop to those lenders that took the risk and now offers them security of defaulting. Of course it has been spun to restore confidence in Freddie and Fannie – but the reality the Treasury needs to inject even MORE capital to take on MORE debt.

Paulson, along with the Congress – were the chief lobbyist to persuade Bush from his threat to Veto the bill that included grants of $3.9 billion to states to buy foreclosed properties, an addition by the Democrats that was opposed to by the Republicans who have stated this is bill is a bailout of lenders. While many Republicans voted for the bill, adding MORE provisions for spending more money (billions more) to the already very gracious bill – put the administration on the defensive as to not sign the bill.

No doubt there is a struggle going on as to whether we should or should not bailout the housing mess. However the problem is bigger than anyone has imagined and now all sides have realized that a bailout is probably the only alternative as to a collapse of lending system. The problem is that once you get politicians to agree – then the extras start piling on (yeah – more pork barrel spending). Those that have opposed it have caved to the majority of both Houses.
Regardless of who is President – at the end of the day and when this is through another tax bill is coming and it will be a whooper. If your neighbor is one of these so called real-estate 80/20 interest only investors that is getting a bailout – go pop him in the mouth and then send your tax bill to the CEO’s who lent money to these high risk fools! Both are at fault and now YOU are paying for it.

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ADP shocker!

ADP survey showed 9,000 jobs added in July. Which has sent a huge boost to the futures in the pre-market. While this is not the government numbers on employment (which come out later) it is usually an indication of the trend. However if we look at the last 6 months ADP vs. Labor numbers – the ADP has been overestimating the numbers and revising down. They revised the previous month to a drop of 77,000. The Labor reports private payrolls dropped by 94,000, but ADP estimated gains of 11,000 – that is a huge discrepancy.

The shocker was that they reported a gain, any gain. Expectations were for a decline of 60,000 jobs – between the Airline, Auto, Construction, and Financials who have collectively have cut over 100,000 jobs – not a single economist had estimated a gain. The highest estimate was for a loss of 4,000. So I guess the private sector is doing way better than anyone thought!

Economist and analyst are scratching their heads on this one and for now the investors are chasing future prices in the pre-market because any job gains means there is a light at the end of the tunnel, right?

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MBA’s Mortgage Apps Index drops 14.1%

Mortgage applications has now dropped to the lowest level in 8 years. Lending standards have tighten and mortgage rates are going up. As foreclosure ramp last month and median home prices fall over 2% again last month – I guess you could say it is NOT a seller’s market. Housing prices are expected to continue to fall through 2008 as inventories increase – mainly foreclosures and REOs.

Current 30-year fix rates are 6.46% avg, 15-year fix are 5.98% average, and the one-year adjustable rose to 7.25% - the highest since December 2000. Of course a raise in the target rate could push these figures higher.

Currently 1 in 171 homes in the US are in some state of foreclosure – up 121% from the same time last year.

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Futures Pre-Market

Futures were flat prior to the shocking ADP numbers which have sent them higher. The spreads are pretty wide 30mins prior to the opening. Expect ARB traders to step a sell futures into the opening and leg into the cash at the opening. If the spread remains we could see a good POP in the indices at the open.


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Support / Resistance

It’s like watching a table-tennis match in the Olympics – the market is up, down, up, down. Statistical volatility in the last week of trading is 10-20% higher than what the VIX is trading at – Gamma is working – no doubt!

INDU 11,000 / 11,500 (We came down hard from 11,500 area and almost got to 11,000 only to see the market rocket back up. These are times that traders live for – but investors pull their hair out. Keep an eye on the range – we are in the middle and the opening looks higher – but the wind can shift quickly!)

NDX 1800 / 1850 (We were just here the other day before visiting 1800. This seems to be a resistance range – but if we break-out, which we could – 1900 is in the cards. Watch the close we could see some 1875 resistance.)

SPX >>>>1250<<<< (We are clearly in a straddle range were a visit to the 1300 or 1200 level is fairly equal. I wouldn’t want to call this – so Long Gamma and Flat Deltas is probably the best position)

RUT 700 / 725 (We visited the support at 700 and shot off it like a rock, 725 is in the cards. If we break 725 then 750 – but expect more volatility – if we visit 750 in August – I would also expect a visit back to 700 in September. – expect more volatility) ____________________________________________________

Conclusion

More write downs are expected, Thain shocked everyone yesterday – but he sold it well. Selling their paper at 22 cents on the dollar means one of two things: A – Merrill REALLY needs money bad or B – he really doesn’t think the paper is worth ANYTHING if he is willing to sell it at huge losses. I am thinking it is probably more in the A column since they are also reloading up on capital by selling $8.5 billion worth of stock at the bottom (something a company NEVER wants to do) – expect Paulson, Bernanke, and the SEC to be invited to the Merrill holiday party this year.

Top that with Bush waking up early this morning to sign in the massive bailout bill and also the SEC extending the short-ban to mid August – and this market is rallying on WHAT? A combination of euphoric optimism that the “worst is behind us, finally” and government protectionism. It sure isn’t rallying because the fundamentals are looking good.

I think August has seen its big volatility (I could be wrong) – but I am betting that September is really going to see some knee jerky movement.

So far no one can ascertain value – because it is still to foggy with all this protectionism and bailouts. Let these companies tread water and survive on their own merits. Close that Discount Window, Stop pouring money into Freddie and Fannie, and stop with special rules to protect the few that have screwed up – so we can SEE reality. We are just propping up a market that wants to and needs to go down and find a REAL bottom – not this false muddy bottom of bailouts and protectionism.

Don’t drink the Kool-aid!

7/29/08 (Soap Box, Merrill Needs Money, Inflation?)

Traders,

I guess last week’s was as expected, one big fat dead cat bounce – ending in a splat. The euphoric rally was based on government intervention, rule changes by the SEC, and the world’s largest bailout – rather than the kind of legs a traditional rally is built on – SOLID FUNDAMENTALS. The economic landscape in this country remains poor at best and every day brings new revelation as to how far these credit problems extend. But if we just keep the big picture simple – it so easy to see. This country is built on credit, massive credit. It is just not individuals that have borrowed beyond their means – it is corporations as well. Banks carrying 5:1, 10:1, even 20:1 leveraged positions/debt against actual deposits. Congress giving the green light to Freddie and Fannie to increase their debt leverage to 100:1.

The psychology of this country is the fundamental problem that needs to be changed. It’s the “keeping up with the Jones” and the need for materialistic wealth that has taken this country and its citizens to debt hemorrhaging levels. And while all these people have leased expensive cars, credit spend their high-end fashion, and mortgaged their way to prosperity – they NOW do not want to pay (or cannot pay) and it is NOW time for Mommy Government to bail us out.

The citizens in this country also have a serious problem with accountability and responsibility. In corporate America the employees are never given latitude to make decisions – and thus there is no accountability or responsibility. Students are giving free passes in school when they screw up – public schools are lowering their curve to make sure EVERYONE passes – for they cannot have kids fail – because of the way the system is built. For an early age we are subject to societies ways of judging a person by their materialistic wealth and taught early how to “pass the buck”.

Our public school systems are breeding grounds for socialist behavior, and through no fault of the teachers - but rather the system as a whole. Competition is frowned upon and teaching kids how to accept failure, take accountability and responsibility to pick themselves back up is no longer acceptable. Either get them out of the system (drop out) so they are NOT counted as a failure or pass them by lowering the grading curve. The most valuable resource in this country is EDUCATION – our teachers need to be incentivized, they need to allow children to compete, they need to be allowed to FAIL students, they need to be allowed to grade their students respectively (not forced to grade on a ever lowering curve), they need to be able to teach without fear from the administration, government or unions dictating policies that breeds mediocrity. It’s ironic that I come from a family of public school teachers – but I even hear the same from them.

This generation and the generation before and future generations in this country are becoming complacent. And complacency is not what America is about. We need to stop pointing fingers at the speculators, at the short sellers, at the Democrats, at the Republicans, at anyone but ourselves. We need to stand up and take accountability and responsibility. We also need to hold our elected officials to even a higher standard.

We also need to stop giving everyone a free pass – and blame others. Corporations that made bad lending decisions need to fail, borrowers that borrowed to much need to take the losses. A massive bailout does nothing but breed socialism, more government control, massive inflation, and more taxes. A loss is a loss, passing it to the government does NOT eliminate that loss!

I’ll get off the soap box now….sorry. Just was a little fired up this morning.

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Merrill to sell shares?

Companies have a multitude of ways to raise money, the last resort is to sell your own shares into the market. Just like with anyone – buying or selling securities is about a value judgment. Whenever I see companies selling shares to raise money, I ask myself why? Mainly because when a company is selling shares – they are diluting their ownership in the company. Giving up equity ownership is never a good thing, unless you are getting well paid for it. And getting well paid is a value judgment, obviously you think the price is high enough that it should be sold. Thus you think the price is over the value to where you would buy it.

When companies sell stock, it usually means that traditional methods of borrowing are either not attractive, they can’t get any, or they already have so much on the books that more debt and interest payments will just further put them behind an eight-ball. No matter how you slice it – people, companies, investors, anyone never sells their equity ownership if they think things are great an going higher! So don’t read into it for anything more that it is – the Company needs money, bad enough that they can’t borrow or will not borrow because rates are too high (when rates are too high – it’s for a reason, which equals RISK) – plain and simple. Remember – keep it simple, stupid (KISS) – will usually get you the answer you are looking for.

So let’s get to the numbers, Merrill (3rd largest securities firm) is selling $8.5 billion shares to raise money and liquidating $30.6 billion of their bonds (at 20% of their face value – that’s a 80% lower) to shore up their credit exposure. Of course they have found a buyer for a big slice of those new shares (of course a Sovereign Wealth Fund). Additionally – more write downs are to come – it looks to be $5.7 billion in the 3rd quarter.

What gets me is that the new CEO Thain, has been saying (like others) “The worst is behind us!” – that slogan/speech is getting old fast. He is now back-tracking on all these promises and assurances that Merrill has weathered the storm and now a new fresh load of write-downs are around the corner.

I keep saying this – until they write-down to ZERO – it is simply a game of Mark-to-Myth. These are illiquid positions, which most are defaulted, and while Thain and others say they want to sell it – there are just no buyers. It’s like owning a house in this market, you may want to sell it for $1 million dollars, your appraiser might even tell you it’s $1 million dollars – the reality – it isn’t worth a THING unless you find a buyer!

Regardless – while the stock is not seeing too much stress in the pre-market. It is NOT a good sign that the worst is behind us. Expect more write downs and continued more stress in the financial sectors.

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Inflation = exchanging one fiat currency for another?

In Zimbabwe they are printing higher denominations daily it seems. They even have a 10,000 million bill now. Of course it is all worth nothing – but such is the twilight years of a fiat currency. At some point you have to stop printing money, because in the end it is just paper. I find it humorous watching BBC World News – seeing videos of these Black Market Zimbabwe exchanges. These people show up with billions of dollars (stacks of 1 million dollar bills) to exchange them for another fiat currency the US dollar.

As of yesterday the exchange rate for $1 US dollar was $54,209,000,000 – and is inflation is rocketing so fast that it is impossible to measure. Now Zimbabwe is printing the billion dollar bill. That’s right the billion dollar bill (I am going to try to get one – just to hang on my wall).

Let me explain why this is so important to understand. The US dollar is a fiat currency and we NEED to monitor M3 (money levels) because it keeps track of the total money in circulation. Unfortunately the FED, Congress, and the Government do not feel it is important to monitor this anymore. Sure they can give you all kinds of reasons and they might sound good – but the reality – we NEED to know how much money we are printing. Because at the fundamental level – printing more money is a core function of inflation.

The only reason the dollar holds any value is because we BELIEVE it has value. I like to call FIAT currencies Faith Backed currencies, once you lose the faith – well you end up with Confederate Dollars very quickly. Now there is nothing wrong with using this Fiat currency – as long as the Treasury, Fed, Congress, and the Government are forthright about inflation and the printing of money. However, recently (under both Democrats and Republicans) we have changed the method of measuring inflation (CPI methodologies) as well as stop measuring the printing of money (or amount of money) also known as M3. Remember – let’s keep it simple, stupid (KISS).

So where am I going with this – well Fannie and Freddie, as well as these banks are getting access to borrow money at the Discount Window (not part of the rules – but those rules are changing daily it would seem) – by not allowing companies to citizens to fail – the government bailout requires the printing of billions if not trillions of more money (without the selling of more treasuries) – thus the money in circulation increases (M3). This is not a good thing – because it “Cheapens” our money and creates more inflation.

My concern is not the recession as much as it is the fast track road to hyper-inflation, like the 70s. We are heading fast down that road – with this massive bailout and while we might not be printing any billion dollar bills soon. We need to focus on investing and protecting from the standpoint of BUYING POWER, rather than FACE VALUE.

It’s never about how much money you have, it’s about how much buying power you have.

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Futures Pre-Market

The futures are getting a good boost in the pre-market – part of the “worst of behind us” news from Merrill is bringing back some confidence (while skeptical at best). Additionally the British Airways merger talks is also giving some pre-market upside jolts. However the spreads are fairly narrow and after yesterday’s drop, I don’t think you will see too many Arb traders take the risk of legging into the opening. Expect a small pop at the opening.

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Support / Resistances

Well we are getting back down to those support areas pretty quickly – this back-n-forth between the supports and resistances have been driving investors crazy, but traders (market makers) are having a good old time.

INDU 11,000 / 11,500 (I guess that 11,250 area was just butter – is 11k in the cards? Certainly – but don’t start getting long again and hoping for a rally. This is trader country and investors should be paying attention to beating the rate of inflation – not trying to pick a bottom.)

NDX 1800 / 1850 (We are right there – at support – it looks like we are getting some pre-market upside for now. Watch the close)

SPX 1200-1225 / 1250-1275 (It is a little hard to call it – other than to say we are in the volatile middle. Hedge those hard deltas – a move either way is possible.)

RUT 700 (Yikes! We are below 700 – I guess the rush back to treasuries was in the cards. We need to close above 700 to show any support in the broader market.)

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Conclusion

Sorry about my diatribe today, I had 3 conversations this last weekend – mostly that got my anti-socialism hackles up – so I needed to vent a little. These are pressing times and trying to find a scape goat is not what we should be doing. It is also easy to run to mommy (government) to have them solve the problem, but if we judge their ability to manage anything by the likes of Freddie and Fannie (well I don’t want them balancing my check book or making investment decisions). The government is in the process of bailing out its own bailout. Not a good thing.

It’s time we step up to the plate as individuals, take some accountability and responsibility, and roll up our sleeves. Those that took the risk, have to eat the losses – that is the way it has to be. Stop blaming the rich, Wall Street, Short Sellers, Speculators, etc. Those people that borrowed money interest only to buy their McMansion, used credit cards to buy this or that, leased a car, etc. Have no one to blame but themselves. Passing the buck doesn’t solve the problem. Same is true for those companies that lent to high risk borrowers – stop passing the losses and step up to the plate and eat them.

This massive government bailout will force this country into a Socialist State very fast that will be married with hyper-inflation!

Socialism is having no accountability or responsiblity and trusting the government knows what is best for you.

You roll the dice, now pay the piper! End of story.

7/28/08 (Kraft Cheese, Lehman money, Hyrdofarms)

Traders,

Last week was no doubt volatile – the government had move closer to a full bail-out of Freddie and Fannie, foreclosures were up, housing prices continue to fall, and we also saw an increase in credit defaults. While the moratorium on short selling in the 19 stocks ends this week, the likelihood of a continuance is fairly high after these stocks (even with the ban) did suffer to the downside. Clearly, even government intervention cannot keep the financials from falling. At the end of the day, stock price has nothing to do with the solvency of a business model – propping up stock prices so the company can sell it to the public to raise more money (while the financials suffer) – well, if we could all get those favors.

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Kraft – more cheese

Kraft is on the rise in the premarket, as the world’s second largest food maker reports earnings that were higher than estimates. It would seem that they have gotten in front of the higher shipping and food prices, by raising prices earlier and some brilliant re-packaging and marketing. Sometimes it just takes a little sleight of hand to keep the uninformed fooled.

NPR had an interesting report a couple of weeks ago, Kraft (and other food makers) have launched a massive, yet slightly covert, new marketing and packaging campaign. It killed two birds with one stone, first they have very slightly reduced their package sizes (without closer inspection most will never notice). Example, decreasing a 8oz container to 7.5 oz may not seem like a big difference to the buyer (note prices are the SAME), think about this – by knocking back just .5 they are able to sell more as every 16th container is now a free add to their own inventory. A pallet of 1,000 8oz is now 1066 7.5 oz. They just increased their profit margins by 6.6%. In a traditional economy this just boosts profits, but in our now weaken economy this is given them a rather substantial buffer as both food and energy prices are on the rise. The marketing campaign has kicked in on some items as “New healthier serving size” and other obesity fighting slogans. Clearly a pro-consumer health conscious campaign. It’s clearly working as most people either haven’t notice package size shrinking and/or are buying into the new healthier serving size.

This new change in the poor economic environment is clearly doing wonders for the bottom line and keeping them in front of inflation. We all need to eat, we all also need to probably eat less. Of course you will not hear Kraft or others talking about reducing product size slightly while keeping the prices the same, but it didn’t take long for some researchers to figure that out. I am sure you can dig up the story on the NPR website, the guest had a website that had prices and size differences. http://www.npr.org/templates/story/story.php?storyId=92426936

Even in a recession, depression, or just a slower economy – we all still need to eat.


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Lehman paying MORE for money

Lehman is seeing borrowing costs sore for its five-year bonds, rising to 7.7% up a whopping 250bps from just 6 months ago. Clearly indicating that traders of Lehman paper continue to have little faith in the ability for Lehman to get out of their hole. The main problem is that revenues from commissions and fees are not covering the debt or mounting mark-to-market losses. Traditionally, companies can ride out bad times – but as the company continues to borrow MORE money and their existing debt increases, they are just adding debt to their balance sheets, which equal MORE and now higher payments.

I think you can clearly see WHY Bernanke has trouble raising rates to fight inflation, as Lehman is not the only one in this position. Just like consumers, if you have a mortgage payment or credit card payment and it is getting bigger, you sure do NOT want the interest payments to go up. Well these financial institutions are in the same boat and now they are borrowing at the Discount Window. This squarely puts Bernanke in a tough spot, as these firms have now where else to turn to.

So far Lehman and others are doing what they can NOT to issue more debt at these higher interest payments, can’t blame them. But how long can they continue to do so as they are becoming strapped for cash. Several firms are trying to unload their balance sheets, even Pandit (CEO of Citi) said he is planning to unload $400 billion worth of paper, but the question is to WHO? Just like your neighbors planning to sell their home to recover equity, that is all fine and good – but if there are no buyers than it’s just a plan. You need buyers and right now there are none. Just like the housing market, the buyers of this questionable paper to begin with has dried up. Clearly, if Lehman and others need more money – those that are left to lend are going to demand higher interest rates, and may even ask for more (Hard assets, seat on the board, special voting rights, options, warrants, dividends, etc.) who knows. The lenders are in the driving seat – but at some point you can only squeeze the rock so hard before it crumbles.

Don’t expect a huge recovery in this sector for sometime – even with the government intervention – it will take a while to work out of the system.

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Futures Pre-Market

The futures have been slightly up in the pre-market, but also a little volatile as a few earnings trickle out. The spreads are fairly tight and I think ARB traders want to be sideline and see the market reaction first, before taking a big leg on one side or the other.


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Support / Resistance

It was a volatile week, huge upside followed by a huge sell off. Volatility spells uncertainty and we should expect his continue through the election and beyond.

INDU 11,000-11,250 / 11,500-11,750 (As volatility increases so does the resolution on support and resistance levels, one days support becomes tomorrows resistance and then back again. For long-term traders this is a headache and nightmare to deal with, one minute you think you have found the bottom only to be bucked off the bull.)

NDX 1800 / 1850ish (This volatility monster is back to flirting with that resistance level band in the 1850+ range. It only takes one stock an AAPL or QCOM to drive this up or down hard. So stay alert – trading this index means you better have the top 10 over-weights on the watch list!)

SPX 1250??? (1250 was resistance early last week to only see this index almost touch the 1300 line and now we are back to 1250. Is it support or will it again become resistance? At this point I would treat it as a straddle strike, long gamma and flat deltas. Let the volatility masses decide which way to drive it – either way you’ll be a winner!)

RUT 700 / 725 (We had a good bounce on Friday after Thursday’s flush. It kept the index above the 700 line but is that 700 line support if we test it on some serious volume, I would be careful. We saw a flood of money come out of treasuries and rush into equities sending the yield higher. That may start to look attractive again and all it takes is a little loss of confidence to see the run back to treasuries. Watch that 700 line!)

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Conclusion

With energy and food prices higher, I have become rather interested in hydroponics, solar, and wind. I live in Florida, so that means year-round I can grow. I visited a very impressive Hydroponics farm and lab over the weekend and took a course on Hyrdofarming, and it was very impressive. The yield of product vs. the cost was fairly impressive. 1/15th the water used vs. traditional farming, yield per acre at 10x, and no need for traditional soil and dealing with soil nutrients means a impressive business model. These farms in Florida are popping up left and right, and are undercutting the costs and prices to consumers. I meet with a couple of commercial farmers as well as home growers at the facility – which is has a classroom, chemistry lab, and 15 acre farm – which is always testing new crops. Yeah – I saw asparagus growing – something that was NEVER EVER farmed in Florida and many other products. With food prices and energy prices on the rise – and food shortages in many places of the world – these farms are looking like the next big wave. Some of these farms are running off solar power and rain reservoirs. I was sold – enough so that I will probably start a small garden in my backyard. The hydro stack farming is seeing huge moves as farms are popping up all over. None of these hydro stack producers of equipment are public, but I wouldn’t be surprised to see one in the near future become public. They could be the next big agricultural wave, combining wind and solar energy. The place I visited was http://www.hydrotaste.com/

For now expect the market to remain volatile. Hedge those positions.

7/25/08 (Foreclosures Double, Honda Green, M3 matters!)

Traders,


That volatility seems like the only thing we can count on in this market. Those that had the Gamma, even if long, sure cleaned up yesterday. I guess that rally was just the “dead cat bounce”! However, my partner made an interesting observation – usually a “dead cat bounce” comes from over selling into the market –followed by a covering rally – he pointed out that with all this government interference and SEC short-selling ban maybe this is a government intervention bounce, maybe we should call it the Barney Frank bounce? Whatever the case – they are all pretty much the same thing – a rally not based on fundamentals and will usually fall right back down.

The big surprise yesterday was the housing price declines of over 2%. What surprised the analyst was that prices seemed to have flattened in harder hit areas – the shocker was areas that had NOT seen as severe price declines are now starting to see homes prices decline because properties are not moving. The drop of over 2% was more than double what analyst expectations were. However, for those like Kudlow who don’t believe in doing the math, the housing market is not that bad. I will leave you with this morning’s Krudload Quotable, “Average home prices have increased, don’t listen to the media!” – Don’t know where he got that info - unless he is only looking at new home sales which are only about 25% of the market – and that takes us to the next story (of course Kudlow will probably spin that as well).

It’s sad that we are on the same side (free market guys) sometimes it is better if he just doesn't open his mouth – I just think he might have been struck in the head a little too hard with something. At least he isn't Barney Frank.

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U.S. Foreclosures Double

Yesterday saw a larger than expected decrease in home prices just when we thought home prices might of found some stability. Well – I guess yesterday’s data on prices is confirmed by today’s foreclosures report. One in every 171 homes was foreclosed on or default notice. Which is an increase of 121% from a year earlier and a 14% increase from the 1st quarter of 2008.

740,000 properties were in some state of foreclosure the most ever reported. It is obvious from this data, why yesterday’s home price decline report showed an increase. More foreclosures , means more property fore sale, means more pressure on prices – as there are fewer buyers. This is certainly creating a vicious cycle as even MORE homes are now at risk of foreclosure as non-foreclosed homes are rapidly losing equity as prices are forced further down.

To give a real example how bad prices are getting whacked – in my neighborhood homes on the water were going for $2-$4 million and just off the water prices started at $500,000. The only two homes that have sold in my neighborhood in the last year was one on the water for $750,000 (an REO listed at 60% below the 2007 assessment price) and one off the water for $316,000 (40% below the asking price). Now – a home just last week was listed at $198,000. No home has sold for under $200,000 in the hood in the last 15 years. I think that is a clear sign that we have a long way to go, $198,000 – I am still shaking my head. That home was bought in 2003 for $352,000 and was estimated in 2007 at close to $500,000. More houses in the hood are now listed as a short-sale or getting foreclosed on.

What does this mean – well consumers are still getting pinched and do not have money to tap in their homes. They have moved to credit cards – but now we are seeing a increase in defaults and late payments in credit cards. Increased in foreclosures push prices down on homes – and also equity down. Expect more homes to go underwater. That leaves more people that are current on their mortgages in a predicament – if they have an interest only loan and it is going upside down – we may see more people walk – and the cycle continues.

Until we see foreclosures slow down and home prices STOP from falling – we cannot expect to see a big rally in the market. 70% of the GDP is from consumer spending – and if there equity lines are tapped out and they are out of credit spending we will see the GDP shrink. That means a harder time business !

Of course you could decide to ignore the number and the math – Kudlow does a good job at that.

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Durable Goods orders unexpectedly increased

The durable goods orders increased which was rather surprising as most analyst expected companies to have tightened their spending and batten down the hatches. The .8% gain in the bookings for goods was significantly above the .3% drop that the median estimates from economist. However, if we peer into why this is happening we can see that there is some sectors doing well with their oversea sales because of the weak dollar. These companies, like CAT, are still purchasing strong to keep up with overseas demand. So the number is suspect because it does NOT reflect the economic landscape in this country is getting better, but rather that a couple of sectors are expanding their oversea sales and still ordering. That doesn’t mean that ALL manufacturing is doing well, just look at the auto industry and the recent report by Boeing – I don’t think you are going to see them expanding – they are shrinking.


Spot the worker in this photo!

If we look at the bigger picture – instead of pointing to this one piece of government data – the manufacturing sector as a whole is still under stress. This however does point to several companies that have expanded their multinational presence is surviving the economic storm. It means for investors – you need to do a little more homework picking your stocks rather than blanket buying the manufacturing sector.

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Honda - the Green Machine!

While the US automotive companies are on the brink of failure – it is the Honda and their expanding lines of fuel-efficient vehicles that are growing strong. Ford is late to the party and it will take a year to get their major truck factors to convert over to fuel-efficient smaller vehicles. But this is a good sign – it shows that companies that are positioned to sell hybrids and other type of alternative efficient vehicles are doing well. That leaves you with an interesting question – how would GM and Ford be looking if they had several years ago got on board with their own type of hybrid? However – it takes a long time to bring a car to market from the drawing board, I have read between 2-4 years. So is Kerkorian a fool or getting in at the bottom when Ford and/or GM start rolling out their hybrid or electric cars in 2010 or 2011 or 2012?


For now – GM and Ford have to many problems to see the light at the end of the tunnel. Buying stock now still has too many risks to wait until 2010 to see if they can even get in front of the eight ball. Kerkorian maybe just too early to the party.


Good news – is that a hybrid car business model does equal bigger profits. Just think about this – the 100s of millions of cars around the world at some point will all be running some type of alternative fuel, electric, hybrid, etc. That means the company that has made the move earlier with the biggest line to choose from will be ahead of the game – right now that is Honda, but if GM or Ford can get through their problems – there may be a light at the end of their tunnel. For me – I will watch on the sideline – my money can work a lot better somewhere else.

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Futures Pre-Market

We are seeing a boost in the pre-market from the durable good order increase, but I think once we absorb that data we will see that it is because a few sectors are carrying the load because of the weak dollar and their expansion overseas. Right the futures rally on optimism – the spreads are fairly narrow – so don’t expect Arb traders to get legged going into the opening – especially after yesterday – if the spread remains expect a small pop to the upside at the opening.

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Support / Resistance

Well it look like the 725 area was resistance and now the RUT is back to 700 and the INDU really didn’t have support at 11,500. Riding the Bull means you can also get tossed and HARD! Sorry longs !

INDU 11,000 / 11,500 (We might see support at 11,250. However this is clearly Gamma area. We could get back above the 11,500 line – but I would NOT call that support. I would also have gamma at 11,500 and probably lean short 2:1 (gamma/delta) at 11,500 – in case of a surprise rip to the upside you get flat fast and then decide.)

NDX 1800 / 1850 (Well 1850 was resistance and we seem to be range bound in July. A couple overweight’s have driven us both higher and lower – off-setting each other. It only takes one big mover to shake the crap out of this index.)

SPX >>1250<< (This is big straddle strike in the SPX – we will NOT sit here but move violently away from here either up or down. 1300 and 1200 are both in the cards – I would wager 60/40 downside – lean deltas accordingly with gamma.)

RUT 700/725 (Well it looks like we are back at the 700 level and while the futures show a positive in the pre-market – 700 could be tested, if it doesn’t hold expect a breakdown. Watch the close – 700 will either be the support or resistance. My thought is probably resistance again.) __________________________________________________

Conclusion


I watched the Congressional hearing on the dollar and oil prices yesterday, Ron Paul had a very important point (as did John Williams) – we are so focused on Oil prices – that we are NOT paying attention to the weak dollar. I think the Democrat Congressman would have had a point about the dollar has nothing to do with Oil prices – if Oil was the ONLY commodity that is on the rise and inflation was in check. But it is NOT just oil, but every commodity, food, and energy that is on the rise. The dollar is also falling against the world currencies. Since most commodities are priced in dollars (especially oil) to say that the Dollar’s strength has nothing to do with Oil prices – well that is rather foolish thinking.


Unfortunately – the only people that attended really was Ron Paul – Barney the head of the committee had someone sit in to ask the questions and didn’t really want to hear it. It’s too bad that people are not listening to these hearings. It is also upsetting that the FED stop tracking M3 a couple years ago, but economist John Williams still does (using Fed data). It’s up almost to 17%, the last time it was that high – well guess when – yeah 1930! The system is being FLOODED with cash – all you have to do is pick up the paper or watch TV to hear about all the borrowing at the discount window the bailouts etc. Where do you think that money is coming from? It’s call the printing press. The government is already having problem’s raising more money and Treasuries at these levels are NOT what foreign big money investors want. Ron Paul and John Williams are right – unless things change it is NOT the recession you should be concerned about it’s the possibility of a depression that is on the rise!



Ask yourself this question, why did the Government stop monitoring M3 (Money Supply)? Out of site out of mind and now look where we are!

7/24/08 (Lobbyist? Ford F-150 extinct! QCOM Can you hear me now!)

Traders,

Yesterday the upside push slowed down – we had some intraday volatility and more mixed news. All indices did close higher and we saw oil get just below that $125 market – which was the talk of CNBC. APPLE has also made a full recovery from its $16 point slide earlier in within two days is actually higher – (thank the Apple believers as they march on!). The financial sector on the other hand, had a huge rip at the opening but gave up almost all its gains by late trading session.

The big news yesterday – (good or bad – you decide) – the full bailout of Fannie and Freddie. Congress voted in favor of it, now it’s up to the Senate. The plan give Treasury Sec. Paulson the power to inject MORE money into Freddie and Fannie – effectively insuring the entire portfolio. Since all other measures have failed, allowing them to go 100:1 on leverage, access to the Discount Window to borrow money, injecting capital, etc. Nationalization is pretty much right around the corner. Paulson, a Republican, has received a tremendous amount of flack from his party as this means billions and at the end of the day – both inflation, weak dollar, and more taxes will be the result.

Of course on the other side of the aisle you’ll hear quotes like this: ``This is the most important piece of housing legislation in a generation!”, Chris Dodd. However, this (technically) nationalization of these companies is not complete – Senator Jim DeMint wants to delay the final vote to amend the bill – with (what I believe important legislation) by adding an amendment barring Freddie and Fannie from lobbying Congress during the bailout plan. This is important since traditionally Freddie and Fannie (and other GSEs) have been huge lobbyist in Washington, giving out everything from high paying jobs, bonuses, donations for re-elections and even preferential treatment on loans – in order for a “favor”. GSE’s have traditionally top the list as big spenders in the lobbying department – how do you think they got into this mess, to many favors and to many politicians overlooking the implosion about to happen. Thanks !

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FORD – The F-150 on the endager species list?

Think about this for a second – Ford just announced a loss of $8.7 billion dollars and their market cap is $13 billion. That is pretty shocking by any measure – losses at about 70% of market capitalization! The stock is only $6 a share and they reported a loss of $3.88 a share! So where to from here? The CEO – which had early stated that they would be back to profitability by the end of 2008/early 2009 has revised that to – NO DATE, but rather the following statement “When the economy improves!” – could be 2009, maybe 2010 – but at this point it is really a “Who Knows?”

There are MORE expenses to get them into the game again – they are revamping three large truck manufactures into small car factories – another cost and also a loss of time to market. While that sounds good on paper – remember where all the profit has come from for years – it’s called the Ford F-150 (Yeah there truck line) that was the bread-n-butter of this company. If you want a high MPG small car – right now Japanese is where people are rushing to. Again – US automakers are a step behind the Japanese. Good luck playing catch up!

Ford also doesn’t have any more room to really cut – while trying to make any sources of revenue. They have already cut 48,000 jobs in North America in the last two years (YEAH 48,000!!!) – 4,200 employees have accepted buyouts in the 1st quarter of this year and they plan to extend that offer to reduce labor costs even more.

The company is in major overhaul – and they are also sitting on a lot of 1,000s of 2008 trucks that are NOT moving. It might be cheaper to sell it for its metal value.

Wondering how Kerkorian is feeling now, after acquiring 6.5% of the company. GM bit him in the butt, Chrysler didn’t do so well either, now this is number 3. His love affair with American Autos is well – taking a little toll on the pocket book.

There are rumors of Ford being a target for a break/up and sell off of brands or take-over. However, don’t buy it because any take-over would probably be around the current price (or a take-under) since there is also tons of debt on the books.

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Qualcomm - Can you hear me NOW!

Qualcomm is rising in the pre-market and lifting the NQ futures pretty good in the early trading session. The company reported higher profit targets in 2008 as they settled a patent dispute with Nokia. The world’s largest maker of cell phone chips is seeing world purchases on the rise. Many rural areas on emerging markets (primarily India and China) are expanding fasters in cell phone technology than previously thought. Running traditional wires takes time and money – it is much faster to install a tower and give wide spread coverage. In Europe more and more families do not have a home phone, but rather cell phones. This trend is expanding around the world. Expectations are also for wireless internet to expand with the new 4G technology (note there is a current battle between WiMax and LIT) – while technology are similar speeds, business models differs. Whatever the outcome Qualcomm will be in the middle of an ever expanding technology that is taking place on every continent on this planet.

Think about this – rip open your cell phone and chances are there is a Qualcomm chip in there. The long drawn out fight between Nokia and Qualcomm has come to an end – they have both agreed to share each other’s technologies –it’s a win-win – because the PIE they are splitting is enormous. There are still some other litigation against Qualcomm- but it was the Nokia headache being put to bed that has gotten them focused on blowing out more chips.

Watch cell and wireless expansion continue and expect Qualcomm to be there. Stock is up like a monster in the pre-market – pushing the NQ futures (and the NDX cash at the opening up higher).

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Futures Pre-Market

The futures are a mix bag this morning – ES, AB, and DJ futures are all down – but the NQ are up (on Qualcomm) that stock is a 2:1 over-weight in the index. So the pre market $10 pop in the stock is $20 points in the NDX. However, the rest of the basket is seeing some negative pressure – so we are only seeing a pop off $10 in the NQ futures (on one stock). Take QCOM to unchanged and the NQ futures would be down $10 rather than up $10. There is some serious pre-market volatility action in the futures – so expect the ARB traders to be sideline as the spreads are pretty volatile. Expect a slighter weak opening based of the 9 am spreads – unless things change in 30 mins.

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Supports / Resistances

We saw the market move up, pull off, and then rally into the close. The financials started giving up some of their run by late session. The momentum is slowing down and we may be creating a resistance up here. Futures looking flat to down (minus the Qualcomm) and that spells a weaker opening after the terrific run we have had.

INDU 11,500 / 11,750-12,000 (The March lows were in the 11,750 range and we are in-between 11,500 and 11,750 – we could be topping out a little unless we can get another big push in one sector or stock. This is straddle area – expect downside and surprise upsides.)

NDX >>1850<< (The straddle strike – the futures pre-market are showing a huge push-pull in the basket – the basket as a whole wants to go down but one stock is on a massive rip to the upside and is holding the entire index up. Pretty amazing these monster over-weights can really drive this index! 1850 – flat deltas and long gammas. Expect down side since the whole index wants to go down, except for one. But don’t be surprised by upside spikes. That is why we call it the straddle strike!)

SPX 1250 / 1300 (We had an nice rally all day – what happened? The legs got weak and it came back down. We almost hit 1300! So we may be already seeing some resistance. Futures looking a little lower for now – but we are NOT at 1300 – an intraday pop up there again means unload the long deltas. For now – gamma and small leans (1:1)

RUT 700 / 725 (A colleague is calling this the blow off resistance top – we got through 725 and then fell flat on our face. He thinks if you didn’t unload up there you might not get another chance too. I think we still could visit 725 – but odds are dropping fast. How much more money is going to come into the broader market out of treasures and commodities? I think we might see another rotation sooner than later.)

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Conclusion

This is one volatile market and we have been going up as hard and fast as we have been going down. I have heard investors whipsawing hard and tossing money into the toilet. A little over a week ago there was so much capitulation that as a joke I said to get long and we ripped (that was just luck – because I had no idea of the SEC short sell ban being announced that day).

However – the market is ripping hard to the upside on government protectionism, not economic fundamentalism. That should have you scratching your head. Confidence is returning to the market, not because the balance sheets are squared away, banks and financial institutions are making profit, or we are seeing a change in economic policy – the confidence is returning because the government is flushing the system with cash, protectionism agenda, defending share prices, and nationalizing business. To me that doesn’t spell confidence, it spells desperation and emergency measures because things are worse than anyone imagined just a couple of months ago.

This rally – is euphoric perception with a lot of short-covering – that gives me cold feet to switch the entire portfolio from neutral to bullish – so I will remain either front-spread the big window or long gamma when we are at straddle strikes. For investors – don’t get sucked in on stock price if you have no idea what value is. Expect more volatility – we could rip up higher from here just as easily we could revisit the lows – there are too many variables because of the outside influences to let companies fail. The biggest bailout in the history of the world is just starting to happen and we are in the middle of it.

7/23/08 (McD's, Boeing, Oil, Resistance or Support?)

Traders,

An illusion? Yesterday we saw a big break-out through the resistance, especially the RUT – which we have been watching closely. The NDX had lagged – mainly on the AAPL slippage – but even AAPL gained back almost $12 points of its $16 point gap down. The big shocker was the financials – with WHACKovia reporting a massive write-down, AMEX with a profit loss, a few others reporting that the option ARMs will continue to create write-downs, and a trickle-over into an increase in credit card defaults. So why the rally? I spoke to a couple colleagues – all of them were pretty much in the same camp. Follow the money – first we are seeing treasuries come off (Yield going up) – so from the RUT we are seeing an inflow of money, OIL is coming off bringing back some confidence, and the limited ability to short the financials (including some forced buying in) has all but eliminated any downside pressure in that sector. What did have us all concerned? Nothing fundamentally has changed for the better. Banks are for-warning or more write-downs and more resets of mortgages, credit card defaults are on the rise, and credit lines are tightening. So maybe a combination of perception with the oil prices and the limited short ability in the financials has created a line in the sand and brought some bottom pickers into the market.

One of the issues we were talking about is that it has become HARDER to ascertain VALUE. Remember – it is VALUE that we are looking at, not price. We want to KNOW the fundamental stability that the companies can do well. However the increase in the government’s roll from being JUST regulators to market participators has created a FOG and therefore it has become HARDER to ascertain actual value. If Freddie Mac and Fanny Mae were ACTUALLY private – would they have survived? Most certainly they would not be allowed to go 100:1 on leverage. If it were not for the opening of the Discount Window – would Lehman and/or others be the next Bear Stearns. These are NOT to question what the government should or should NOT do (that is a different debate) – these questions are paramount in order to make a decisions whether I should be invested in these companies or short these companies. The deeper the government penetrates the market and creates rules to prop up stocks or companies the harder it becomes to make a valid investment decision. There are two great articles in the Economist this week about Fannie and Freddie – with a small blurb on the SEC Short decision. They can be found in the following links:

Fannie and Freddie http://www.economist.com/finance/displaystory.cfm?story_id=11751139
SEC protection http://www.economist.com/finance/displaystory.cfm?story_id=11751227

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McD’s the place for CHEAP FOOD

As food prices surge, jobless rates increase, and consumers are getting squeezed on money – they STILL need to eat. So where do you go for cheap and fast food? McDonald’s leads that list. I guess you could call McDonald’s an inflation fighting stock – just like we see traditional retail shoppers move down a rung from Macy’s to Target we will see more move down a rung from Red Lobster to McDonald’s. I guess the old argument about Substitution in the CPI is clearly making a case for choice over cost. You remember the argument “People can choose to eat hamburger when steak becomes too expensive!” – an with that we adopted substitution in the CPI. I would argue that statement makes the point that inflation is going up. Thus the CPI is not longer measuring inflation, but rather the choices we make because inflation IS affecting those choice. Maybe that is why the current CPI with those adjustments is running 50% lower than the pre-1990’s model. Hopefully people don’t choose to eat dog food because hamburger gets too expensive. Be that as it may, people are scaling back and moving down a rung because of the 1-2 punch (inflation and less money).

While we might all agree that McDonalds (like other fast food companies) might be a good inflation hedge – they are also getting some good traction overseas. McDonalds had always been a leader penetrating new markets – but with the BRIC (minus INDIA for obvious COW reasons) growing fast – people are moving to a faster life style – that also means faster food. Remember in the 70s when commuting and convince of Fast Food swept this country. It seemed in the 70s like every corner was getting a new Fast Food restaurant – in the 90s it was Starbucks. Well that same thing is starting to happen in these fast paced emerging markets. The population size of these growing cities are increasing fast. People need to eat on the fly and McDonalds is putting themselves in the sweet spot to capture those hungry bellies.

However there are three things dragging on McDonald’s growth that need to be monitored.

1. Gas prices are reducing the driving and less frequent stops at fast food, it also is bleeding into the cost of supplies as McDonald’s is a big shipper.

2. Commodity prices increase – so does their costs – McDonalds has already raised some prices – so far not hurting sales it would seem.

3. Bad Press – Japan already paced a law about waste size and will be fining companies if their employees waste exceed a certain size. Studies in Japan showed that over the last couple of decades the massive increase and introduction of American Fast food is starting to cause obesity in their country and now they are taking action.

See this video: http://www.cnn.com/video/#/video/health/2008/06/23/kyung.fat.busters.cnn

For now McDonald’s is a shining star in the bad economy – it stock is up in the pre-market.

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Boeing – things could get tough


Boeing has a long pipe-line to build – I think it’s 5 years of pre-inventory backlog. However – while some parts of the world are expanding – everyone is feeling the pinch of higher fuel costs. The US market has become a smaller and smaller client as the world market expands. The concern is that if future orders are cancelled – the US while a smaller client of the net – may cancel some contracts and that is a concern.

Boeing is also seeing a shift to the 737s – which are a cheaper and older design then some of their newer designs. I also read an interesting article as to the efficiency of the new airliners vs. ones designed 20 years ago. The surprising and concerning issue (which I know both Airbus and Boeing are paying attention too) is that while the electronic systems and style have increased and become more efficient the utilization of fuel has not increased as much. While cars from the 70s have gone from 10 mpg to 30 mpg on average – we didn’t see that kind of increase in the airline company. I guess no one thought that fuel prices would rocket this fast and that is putting some issues that need to be addressed. New orders are stuck between ordering older vs. new designs – but those newer designs are not showing significantly better fuel consumption that would warrant the cost difference with oil (jet fuel) prices this high. Back to the drawing board?

While their backlog is impressive – the fuel prices could create cancellations and deferred delivery. Which many analyst are indicating that long-term risks (volatility) remain high.

Good news – well the defense contracts have always helped and should continue to help the bottom line. Also the weak dollar (over 20% slump this year) has helped with competition against Airbus (their largest rival).

Right now it is all about the future of fuel prices that will determine if that impressive backlog of orders increases or decreases – long-term risk is high.

Boeing is getting hit in the premarket.

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OIL
We are seeing a good pull back in oil over the last few days down from the $140s to the high $120s. I would think that the 130 range was a good support area, followed by the 120 range. The storm in the gulf had initially looked like it was going to hit Texas and create some refinery issues – but that has sort of steered away – the risk is not over, but for now not eliminated either. The storm is getting stronger – but will it hit Texas? Who knows!

The drop in oil prices has also got the cheerleading if full swing on CNBC – everyone is happy now that it is going down – and that could translate to bullish perception in the equity market. It sure isn’t hurting.

But I think this drop – while necessary – doesn’t mean that we are heading back down into the 50 range any time soon. I also don’t think you CAN see oil crash! Why – because unlike stocks – it is a NEEDED economy. Airlines, Shipping, Cars, Energy Companies, etc – everyone still NEEDS it to function. At what point do one of the big sectors step in and prepurchase a ton of fuel to lock in prices. For now they have stepped aside and are letting if fall. The support will not be determined by investors or speculators – the real support will be when a sector or major company/s step in a say – we are purchasing tons at this level to lock in price as they are concerned about future capacity. What is that price? I don’t know – but I am betting it is above $100 for sure – possibly $120.

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Futures Pre-Market

We are getting some upside movement on the futures from a fall in oil and also seeing McDonald’s showing there is recession stock plays. They are giving up a little going into the opening – but still above fair value. The spreads as of 9am ET are narrowing – but if they remain we could see an upside gap.

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Support / Resistance

It’s not about being right or wrong about direction – it’s about having the Gamma to off-set the deltas when you ARE wrong. I seriously believed those resistances at 11,500 and 700 were going to hold, but as we can see the market is more foggy with the impact of oil prices and government intervention. The RIP in the RUT was surprising – it lead all the indices with almost a 3% run. That clearly shows money flow coming in – probably from commodities and treasuries coming off.

INDU 11500 / 12000 (We broke through that 11500 resistance, which has now become support. We could get a good follow through run up to the 12k area. That would be nice for the long delta holders. Keep an eye on the 11500 area – we could retest it – the question – is IT REAL support? – make sure your gamma is protecting those HARD DELTA positions. Don’t be Long or Short hard deltas in this market without protection. Expect surprises and to be wrong – it is GAMMA that saves your butt!)

NDX 1800 / 1850-1900 (AAPL pulled hard on this index but it got back up to break-even on the close. To give you an example of AAPL’s POWER – when Apple was down $16 points at the opening that was about $21 points in the index. When it rallied back $12 points to close down about $4, that rally was about $16 points of the NDX rally. As you can see one overweight can seriously move these indices. That is why the S&P and RUT are better indicators of the wider market then the INDU or NDX).

SPX 1250 / 1300 (1250 was the pivot point – we got a good rally up and 1300 could be in the cards – a place to unload long deltas and get short – perhaps.)

RUT 700 / 725-750 (WOW – all I can say is WOW. It never got to 650 – March’s lows. Which was a clear indication that the market did NOT panic. We then got a massive rally through that 700 level yesterday turning it into a support. 725 will be the next stalling area. Right now we are in unknown land – a retracement to 700 or a move up to 725 is 50/50.)

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Conclusion

This market has not seen a panic sell off, which is good and bad. The government intervention has kept the stock market from collapsing – the longs would argue that is a good thing – it is from that respect only. However, as I pointed out we can NOT find value when we are unable to know if these companies are solvent or not. The market has not been allowed to work properly and that is not a good thing – regardless of market direction.

The economic landscape has not changed – we have not seen a bottom, we don’t know where the bottom is. Thus this rally is suspect at best. Get long and ride the train – but be damn sure you are hedged – because we have seen what intraday volatility looks like up $300 points can come just as easily as down $300 points. This is a traders market – not an investors market. Be forewarned!