7/10/08 (Bernanke Paulson Parade)

Traders,

Can you say volatility? This market is showing some great action for traders – but leaving investors blood pressure very high. The market came back off hard yesterday and I think the Freddie and Fannie story was a serious blow to the stability of this economic crisis. While I heard yesterday TV talking head analyst that the Freddie / Fannie issue is not that big of a deal because they are backed by the government – I looked at this idiot and thought – are you kidding?

Traders are correct to price the default-paper down several levels regardless of what Moody’s says – and while that TV analyst was right the government WILL bail them out – it means at that point the system has failed. It’s not like I am trying to be negative, but to have the government bailout the entire (or a majority) of the credit problem means what for the dollar, economy, and taxes? – if you can’t figure that out – well – I got a 2nd mortgage to sell you.

I talked with a few traders about it – and they said yeah Fannie and Freddie can become insolvent – even with government backing. A full bailout is a very real probability. What concerns most traders is the value of the dollar and inflation – a full bailout of that magnitude means we could see a dollar collapse. One colleague said he sees 2:1 to the Euro this year – and if Freddie/Fannie fail? Well – He said you better start buying gold and silver – because you will see a dollar flush and an economic unwind.

Of course many retail investors (and Kudlow) would rather just not hear it or ignore it. Hedge those positions ! This is far from over. I am not liking this Freddie and Fannie story AT ALL! We are talking $1.5 trillion of paper. Sorry to those that are depressed by the news, but would you rather KNOW and be prepared or continue to ignore and HOPE?

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Rohm & Haas take-over

Among all the negative news – Dow is buying Rohm & Hass for $18.8 billion – that is over a 50% premium on stock price. Pretty huge – even in normal market conditions. Expect some volatility in this sector. The deal is done – expect Rohm & Haas to be in the $75-$78 range at the opening.

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Wal-mart raises Forecast

While the Freddie/Fannie story is fairly negative – it looks like Wal-mart is making the best of the negative economic situation. The short-term forecast is raised – expect to see some action in this sector. Add in the consumer spending and retail reports – we should see some volatility in this sector.

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The Bernanke Paulson Parade

The dollar started to see strength again – expecting TOUGH TALK – from the Dynamic Bailout Duo (Bernanke Paulson). They will be testifying before Congress today. Expectations are for more TOUGHT TALK and STRONG DOLLAR PEOPLE smoke, additionally Bernanke will ask (plead) to keep the Discount Window open to Investment Banks beyond September’s deadline. Additionally – they are expected to make a show of it as to getting (asking) for more power granted to the FED. I am not sure about these sweeping powers and the increasing their authority. It just makes me feel there are more issues that Bernanke and Paulson are aware of – but do not necessarily wish to share. Obviously – things are not rosy if they want to extend the Discount Window time period to Investment Banks – nor is the recent default-swap pricing of Freddie and Fannie (which probably will need to get bailed out).

Expect to see some dollar action as these guys talk. However – the fundamental pressure is on the downside – while Tough Talk is on the upside. It’s going to be interesting. I personally think expanding the FED’s powers when he has already taken his eye of the ball on the dollar and inflation is only going to make his decisions MORE difficult.

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Futures Pre-Market

Wal-mart and Rohm-Haas gave the futures a pop, but they are falling back off again. Expect the Arb traders to be sideline for the most part as the pre-open volatility risk is too much to leg into the arb. Expect a mix opening.

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Support / Resistance

This market saw a huge rally and then yesterday get a full suck out and break back down through the lows and supports. We can’t even build support levels – just too much volatility.

INDU 11200 ??? (Can we even close above there and get back to build support? Doesn’t look like it – I guess investors could “hope” that strategy seems to NOT be working!)

NDX 1800 (The over-weights continue to drive this index up and down. Apple has been all over the place and will continue to be a big driver. Watch 1800 – we need to hold.)

SPX 1250 (Can we get above it – or was that it?)

RUT 650 (This is the only saving grace for those looking for a support. It is still above 650 – it needs to stay there.)

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Conclusion

I really don’t know what kind of spin Bernanke and Paulson can put on this credit crisis mess. If you remember I blasted Pelosi and Barney Frank for opening up a check book to Freddie and Fannie back in March – that was a HUGE mistake. Now it is coming back to bite them in the butt! What are they going to do know? If it was up to Paulson and Bernanke – they would want to be turn into the Dynamic Credit Tsar Duo – with unfettered access and power. I think they actually believe they can solve ALL of the problems. They need to get back on focus.

I am currently listening to some analyst on Bloomberg saying that Freddie/Fannie are fully liquid and well capitalized. It is foolish talk to think they need to be bailed out. WHAT? Oh wait – this analyst is one of those “we are not in a recession” guys. Now he is saying he is very optimistic, oil will be coming down and housing will bottom and start rallying at the end of the year. Whatever – I guess we need buyers and sellers.

Expect MORE volatility – if the RUT breaks 650 – look out below. That should be an indicator that the supports are not going to hold. Keep an eye on that!