7/11/08 (Fed Power! Oil Plan? No Red Beanies!)

Traders,

Yesterday - another historical and interesting day. The market got a good boost, yet weak, pretty much on the back of Paulson and Bernanke and the Congressional Hearing. Pretty much they are asking for MORE power via regulation and gave a indication that they have a handle on it. I watched part of this (historical) hearing - since it may determine the future powers of both the Treasury and the FED (I am sure several books will be written on what has recently happened). While the it may be boring to some - these are the times when the ENTIRE financial, currency system, and government powers will be defined for the future (for better or for worst). The problem, that I think both Paulson, Bernanke, and most in the financial system WILL agree - while regulations and defining powers ARE important to insure transparency and security for not only investors but the entire financial system - we NEED to make sure we do NOT stifle innovation and the abilities for business to transact.

The current economic turmoil could have Congress OVER regulate the system and bring it to a halt. These are precarious times (and I will point out again historical) as these decisions will be made. The FED has enacted a special ability (which powers are vague) to handle the Bear Stearns (bailout) and open the discount window to non-banks. That was the primary topic of the Congressional Hearings (do those powers need to be defined? should we give FED free power to act - without Congress? etc.). The decisions by Congress could and probably will change the FED's mandate to include Financial Stability!

One of the most interesting questions, which was not REALLY answered, is when the Congressman from New Jersey indicated (from FED's own June 25th report) that they currently have over 250 billion allocated to private companies (investment banks) as loans via the discount window, with only 22 billion left (not allocated). The question was IF another Bear Stearns situation happened and IF the FED felt it needed to again intervene, they don't have ENOUGH left in their coffers! HOW would they monetize that funding needed for another bailout? (I guess sell more treasuries). While I do respect Bernanke (no doubt a very smart person) the answer he gave sounded more like an investor in Enron as it was falling. He said (I paraphrase), "We are NOT buying these debt, they are loans. Not one of these loans have failed!" - he forgot to conclude with YET! No doubt the FED's well on loans via the special deal at the Discount Window is about tapped out - unless they tap a new well (more treasuries, inflation, what next?). Selling more treasuries at 2% in a CPI inflationary market of 4% on already a weaker dollar - well I don't think too many big players are interested in that investment.

You may not be interested in this, or find it rather boring, but these are the times that will define our future and during a political year - it should be monitored and reviewed closely. It is easy to say "Let the government take-over!", "We need more regulation!" - however blanket statements like that are a cop-out. We need to think and make the hard decisions (which could mean letting some companies fail) to make sure that regulation (even I agree with that) are in place to offer transparency and security without curtailing the ability to do business or stifle innovation.

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Freddie and Fannie - the failure?

Rumors are swirling about the possibility of a FULL bailout and take over by the government (which they technically already have) - which would leave shareholders with nothing. You could say this is a bankruptcy where shareholders get nothing and the government takes it over and pumps enough money into it to cover the $1.5 trillion in crud paper. So far they are just rumors, CNBC is starting to report on the RUMORS this morning - per a NY Times article about take-over talk by the current administration. The stocks are down again in the pre-market - which is also driving the futures down. Many have concluded that the government will NOT let it fail! This is unprecedented - technically a nationalization of the mortgage system in this country.

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GE earnings

GE has 6 business units and 4 out the 6 beat expectations - helping to take the stress off the financial portion of the company. They came in line and the company is reporting better outlooks going forward. The stock is up in the pre-market and seems to be bucking the negative market trend - as the multi-national units are going strong and taking up the slack - the weak dollar is helping increasing the margins for those units. Well not the rosiest of pictures – they are riding the storm out better than most!

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LEHMAN the next BEAR?

Lehman got hit hard yesterday as rumors abound that PIMCO was pulling their assets out of Lehman. Lehman (of all investment banks) have been the one in the target sites of those concerned with another failure. The CFO didn't have a handle on what was going on and was demoted. They have seen money being withdrawn at an alarming rate - which is putting stress on their leverage positions and margins to hold those positions. They have also been a frequent visitor to the discount window and to an extent they are on a first name basis with Ben. That in itself is alarming. However -yesterday's rumor (even with Bill Gross putting trying to put the rumor to rest) sent the stock lower. No doubt there are problems, no doubt there IS a probability of failure, and while I don't necessarily BELIEVE the rumors - there is some truth to the funds withdraw (regardless if it is Pimco or not) - which is putting more stress on the company. Investors stay away - traders come and play!

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Oil – going higher!

Politicians continue to ignore getting organized and putting a total ENERGY plan together and would rather point fingers at OPEC, speculators, and even oil companies. Regardless if the points are valid – there is very little we can do about OPEC, speculators, or even oil companies and so far the holiday oil tax relief (suggested by both parties) is nothing more than a joke. At this point I almost want to put Pickens on the ballet for President, for nothing more than he HAS a plan (regardless if you agree or not) that is more than either McCain or Obama can say. They continue to focus on oil – and while oil is an issue – the energy issue as a whole is bigger.

This morning on CNBC even the CEO of Gulf Oil is complaining about higher oil prices – agrees with Pickens and blasted both the Right and Left for their lack of getting a handle on this. (When you have oil men and companies complaining about high prices and now DEMANDING that politicians get on top of this – well it goes to show that this is well beyond the problem of a few speculators, OPEC, and even the oil companies).

Someone needs to SLAP both those Republicans and Democrats in the face – sit them in a room with Pickens (and others) and start drafting a NATION ENERGY PLAN – NOW! I am getting sick of the Barney Franks and Maxine Waters – offering no solutions (other than nationalizing and socializing the system) and pointing fingers with NO PLANS! MOVE ON! Stop the stupid blame game and let’s focus on solutions! It is getting old and oil is only going higher.

Oil up over $4 to $145 a barrel !!!!

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Futures Pre-Open

The futures are getting the smack down hard – as the Freddie and Fannie rumors are putting serious pressure on those stocks. Oil going higher hasn’t helped . The spread in the fair-value is fairly wide – if it remains going into the opening – expect a good drop in the indices at the opening as Arb traders buy the futures to short the baskets.

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Support / Resistance

We got back above the 11200 in the INDU and the RUT stayed above the 650 line. We could be testing those levels again today.

INDU 11200 (It would be nice to close above the 11200 line for investors – but I think we may visit the 11,000 line sooner, rather than later.)

NDX 1800 (We need to close above 1800 to maintain support. We could test that level this morning as the futures are looking down over 20 right now)

SPX 1250 (Another KEY support area for the S&P 500 index)

RUT 650 (We are 20 points above – but it is important that the broad market holds to show some level of support!)

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Conclusion

No doubt these are difficult times for not only the banks, financial institutions, but also the citizens of this nation. Policies (rightly or wrongly) are in place to keep the large firms solvent and from failing. The two largest mortgage companies in the world (Freddie and Fannie) – are both not only Congress mandated companies, but also have been given huge latitude to take on more debt and are over 100 to 1 (mortgage debt to balance sheet) they are on the brink of failure. While you may hear some analyst say they have capital and are fine – that is only true in respect to Congress LET THEM go 100:1 on leverage (and more importantly if you think 100:1 leverage is "fine") – however we are seeing that decision push those companies to the tipping point of massive failure. We are no longer talking about 100s of millions, billions, 100s of billions, we are now in the trillion plus range.

We have also seen yesterday (by the FED’s own reports) they are lending over 80% of their capital to private companies (over-night discount window lending) and have only 20-25 billion left on reserves and Bernanke’s answer was vague as to how they will monetize another bailout, if one were to occur. Lehman looks to be the next bank to fall – the probability is increasing, as withdraws increase. Rumors yesterday that PIMCO (the world’s largest bond fund) is pulling money out – even when Bill Gross (PIMICO’s respected leader) tried to curtail those rumors – it has not helped much.

Congress is about to make one of the biggest decisions in the economic history of this country, since the Great Depression, and broaden the powers and mandates to the FED. Some of those decisions could help, but if not carefully crafted could also jeopardize the monetary system in this country.

No doubt we are in uncharted waters and I think the best decisions as I repeat every day is to hedge your positions. This is no doubt a resilient country and we have made it through many obstacles – this will be another, but the road will be hard and difficult and the future administration will have to make some very tough (and probably unpopular) decisions. While the easy answer is to RUN to more Government control (Socialism) we have seen what that has done to countries like Venezuela and Hugo Chavez. While it may be easy just to dump that on the Government and let it be our care takers – that is NOT what this nation has been built on. The hard road, and the correct road, is the carefully balance government power and regulation to protect individual rights (security) without severing their freedom. We are all in this together and it might be easy for McCain or Obama to fall prey to MORE Socialism and over regulation – let’s just hope they stay the course of the Constitution and help solve these problems without extinguishing Democracy!

I don't want to have to wear a red beanie!

I will leave you with today’s Krudload Quotables (I guess someone has to remain optimistic?):

“Home sales have flatten, this is the bottom!”

“This country is not in a decline - the country is just in a pause on the road to prosperity!”


My quote – Better hedge, then dead!