Yesterday started off looking like another strong down day, futures saw huge pressure at the opening and the market starting sliding down right out of the gate. Then in the late trading session the market started to rally and close up on the day. We are starting to rebuild support at these levels, as if the market has just shrugged off the news and has said “enough”! We are seeing some strength in the futures this morning – maybe a little follow through.
However, I hate to be the bearer of any negativity, we cannot deny that the economic landscape has not really changed. And while this maybe a supporting base and we may very well see a rally of these (new and old) support levels – it doesn’t mean that we are out of the woods. While these maybe areas to start loading up on long delta positions – I would do it with caution and hedge those positions.
I am getting a kick out of watching the Kudlow Quotables in the morning, he is usually very well dressed and mild manner, but as the market continues to slide his tone has changed. As if raising his voice will keep this market from sliding. I will leave you with today’s Krudload Quote, use it with care, “We are NOT going into a recession!”
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Company news
Starbucks is up in the pre-market after announcing that it will be closing 500 stores (cost cutting).Yahoo is up in the pre-market as rumors circulate that Microsoft maybe ready to make ANOTHER move towards acquisition.
Circuit City is down in the pre-market after Blockbuster walks from their $1.35 billion bid for the company.
UBS states that they will not need to raise any more funds (after the $29.4 billion)
GM is down in the pre-market after being cut to “underperform” by ML
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More Regulation and Power for the Fed?
The Fed is getting closer to that September deadline to close the Discount Window to investment banks. So far, banks are still making regular visits to the window for over-night lending. Many firms have made HUGE write downs, but are still holding those illiquid positions. That being said they need to borrow money overnight from the Fed is a vital link between treading water or sinking. Some investment banks are already looking for safe havens and may need to partner (or merge) with a bank that is a member of the Fed, so that after the September date they will STILL have access to the window and ALSO have bank deposits to help shore up much needed capital.Come September the Fed will have to pull a rabbit out of the hat to keep the special deal at the Discount Window open, as they are ONLY allowed to open the Discount Window to non-Fed members in case of an emergency (which was declared that same weekend when Bear failed). However – they cannot keep it open indefinitely. There are already Congress members not happy with the Fed decision to open the Discount Window to the investment banks. I am sure there will be more pressure to close it as September rolls around. So what to do?
Paulson (Sec. Treasury) has been on the marketing campaign for NEW REGULATIONS! Yeah, the Ex-CEO of Goldman (who has opposed regulation) is now its greatest champion. I guess you are for it when it serves your interest? What he would really like is to broaden the powers of the Fed and Treasury (really to keep that Discount Window OPEN to investment banks) – why? Because they STILL need it. It’s not like the credit crisis is over and the write-downs have stopped. I am sure you wouldn’t see Paulson on the marketing circuit for more Fed Powers (I mean regulation) if there were not still looming issues.
In his most recent speech in London, Paulson stated: ``We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm.”, “`We will need to give our regulators additional emergency authority to limit temporary disruptions. Any commitment of government support should be an extraordinary event that requires the engagement of the Executive Branch.''
You can almost hear it in his words that he is really against regulation and doesn’t believe in having more – but the situation has really become dire and if it were not for the ability for the Fed to step in with Bear Stearns – we could see a dollar collapse.
Once Paulson and Bernanke got a glimpse behind the curtain – they realized this was a HUGE problem. The problem is simple – there is NOT ENOUGH money in circulation (M3 levels) to cover the leveraged positions at the banks (primarily investment banks). The leverage at these banks are NOT included into any M numbers. When you look at a bank with $1 trillion on deposits and then see a $10 trillion OTC leverage position (relying on counter parties at banks globally) they have quickly realized that after the 1st trillion (deposits are lost) – who is going to cover that $9 trillion of leveraged positions? I guess the Fed?
Looking back on it – they didn’t bail out Bear Stearns for the sake of Bear Stearns – they saw the dollar exchange window shut on Friday and then saw the Bear Stearns leveraged positions OTC counter party positions in the trillions – and the light went on. If they let Bear fail – who would cover the trillions in counter party positions? Exchange windows closed the dollar window over that weekend – we could of seen a massive drop in the dollar if Bear did NOT get bailed out. Bear needed to be saved to keep the dominos from falling. That same weekend the FED opened the Discount Window to investment banks in special emergency measure. However, it could only be opened for a short period of time – without an act of Congress. That window SHUTS in September. Investment banks are scrambling to partner with banks and Paulson is on the MORE regulation campaign – because come September – something needs to happen to keep the access to funds available to these investment banks!
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ADP payrolls down by 79,000
ADP Employer Services have shown that payrolls have dropped the largest since November 2002. Indicating more weakness in the job market.
The report (which does not including government jobs) had OVERSTATED employment by almost 110,000 jobs a month on average for the first five months this year after their upward revisions. I don’t know if you remember me stating in the Market Preview that the ADP numbers don’t make sense and I was scratching my head how we were getting MORE jobs as companies were laying people off – left and right. Today’s report showed a decrease of 76,000 jobs in goods-producing industries and service providers cut 3,000 workers.
The ADP report was significantly lower than the economist survey forecast of a drop in 20,000.
Certainly there are more layoffs and unemployment is going up. Let’s see what the BLS has to say this week with their data. For sure it will add more fuel to the inflation and recession fire. Of course Kudlow doesn’t believe any of it.
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Futures Pre-Market
We had a good rally going into the close and the futures are seeing gains after some rallies in some European sectors. The futures are front running the cash, but the spread is not that wide. We could see a gap up – but the open basket buying may not be that aggressive if the spread remains this narrow. Watch the spread going into the opening.
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Support / Resistance
Have we seen supports? It looks like we may have. The market got a good rally going into the close and have stabilized a little at these low areas from last week. Monday and yesterday held fairly well. Let’s see if we can get off the mat.
INDU 11250 / 11500 (It would seem 11250 might be the rebound support area. It would be interesting to see if we can get back to the 11500 area. For now be cautious getting long any positions – hedge long hard deltas.)
NDX 1825-1850 / 1900 (This is a volatile issue so the support area is vague. This index also rallied way beyond the other indices – so it also has more room to go down and up. Expect volatility)
SPX 1275 / 1300 (We are holding the lows in the 1275 area and we are looking at a stronger opening. This was the March lows – can we hold them?)
RUT 680 / 700 (We saw a massive rally going into the close on the broad market. It looks like we may get a further pop at the opening. Can we get this above 700 and close there?)
We are seeing what could be a bottom – but really watch to see if these hold. It is a time to be cautious if you are a bottom picker or dollar cost averaging.
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Conclusion
Well the two very ugly words were uttered the other day “Socialism” and “Nationalism” - I was watching CNBC this morning and they showed the clip of Maxine Waters questioning the CEOs of the Oil Companies (as if THEY are to blame for the oil prices). You must try to see this video – I am sure it is on YouTube somewhere.She started to say (I am paraphrasing) “This Democrat is for Socialisssssis (she almost said it) ahh ….I mean…what I mean to say….ahh…(she wants to say Nationalize) ….well we would take over the oil companies and run them if you can’t lower the prices!”
Even her fellow Congress members were wide eyed looking at her.
Then the pause and wait for it…the response….. again paraphrasing the CEO, “We have already seen that (referring to Nationalizing Oil) it’s called Venezuela and Hugo Chavez!”
I just lost it and started laughing. I just couldn’t control myself. Look I like Maxine – she is an intelligent and usually well spoken person, I just don’t like those two words uttered in this country or believe that a Democracy should be flip-flopped into a Socialistic state.
Here is my rub with Senate and Congress hearings on business and finance – while these politicians are no-doubt very intelligent people (both Republicans and Democrats) they hold court and question people in business and finance, but they really don’t have any knowledge in these businesses. Their questions are based on ignorance and misinformed. The problem is that our politicians spend a few hours asking questions (mostly the wrong questions – because they really don’t know the right ones to ask). Not being experts in there businesses and finance – they then draw a conclusion based on their misinformed and limited knowledge (after only spending a few hours asking questions). Then they draft legislation and regulations on these businesses. It is crazy.
It's like if I was ask to panel a discussion on Mechanical Engineering. I don't know ANYTHING about mechanical engineering, so I wouldn't know a good question from a bad question. I would ask questions like, is it expensive to build? Does it go fast or slow? Why does it need a piston, can't we just use something else? And after I asked my uninformed questions, I would have to draw my uninformed conclusion, and then create policy based on my very ignorant observations! Of course if any mechanics saw me asking questions they would think I am an idiot!
Just like with these committees (I am like the Mechanic) I see the uninformed questions being asked and the idiotic conclusions they assume. I again do not deny that the senators (both Dems and Rep.) are very smart - they are just not in the market place, economist, traders, or begin to understand how these complex products work. Now they are going to, in a very short time - think they understand and begin to create policy on their "understanding" of the economy and the market. This is the reason that I am against government getting involved in almost all forms of business. They just don't understand and then at the end of the day - they fail (Freddie Mac, Fanny Mae, Welfare, Social Security, etc) - no doubt they have the best intentions - but we the TAX payers pay for it - or worst our dollar suffers!
Sorry for my rant!
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