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.
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