Traders,
I hope everyone had a happy (and safe) 4th of July. The fireworks here on the beach were great and the skies clear (something that did not always happen when I viewed them in SF). The market was mixed on Thursday with the INDU rallying but the broader based RUT falling off almost 1%. I have received a few emails about the RUT (Russell 2000), which I refer to often, is important as it is a broader measure of the market (2000 stocks) and not necessarily big cap. It also doesn’t have the problem of over-weights – like the NDX or INDU (where 1 stock could make the entire index rally or sell off – when the rest of the stocks are not making a similar move). The RUT has been a good general indicator as to money flowing in and out of equities. While I might not be trading any one stock in the RUT – I continue to monitor it (as with other indicators) to get a sense of money flow, volume, and general direction and support. Note: The RUT March lows were 650ish we closed down 6.5 points on Thursday to 665.
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G8 - Dollar Traction?
The FED has done little to stop the slid of the dollar, it has talked tough but when it came time to
raise rates – they folded and did nothing. On the contrary Europe, Mexico, China, India, and others have raised rates – thus putting MORE pressure on the dollar. Bernanke’s one tool (raising and lowering rates) has be used strictly to keep money cheap and flowing to banks and other lenders when their positions continue to suffer. Since he has only one tool it is kind of hard to fix two things (credit problems and weaken dollar) at the same time. Think of it like a valve for money – remember the saying “Righty Tighty, Lefty Loosy” – he can only turn it one way – and when he does it only serves one purpose. The valve is wide open and money is being poured into the system – creating a flood and inflation is ramping. He needs to keep it open “lefty loosy” keep money flowing to the banks.
I hope everyone had a happy (and safe) 4th of July. The fireworks here on the beach were great and the skies clear (something that did not always happen when I viewed them in SF). The market was mixed on Thursday with the INDU rallying but the broader based RUT falling off almost 1%. I have received a few emails about the RUT (Russell 2000), which I refer to often, is important as it is a broader measure of the market (2000 stocks) and not necessarily big cap. It also doesn’t have the problem of over-weights – like the NDX or INDU (where 1 stock could make the entire index rally or sell off – when the rest of the stocks are not making a similar move). The RUT has been a good general indicator as to money flowing in and out of equities. While I might not be trading any one stock in the RUT – I continue to monitor it (as with other indicators) to get a sense of money flow, volume, and general direction and support. Note: The RUT March lows were 650ish we closed down 6.5 points on Thursday to 665.______________________________________________________
G8 - Dollar Traction?
The FED has done little to stop the slid of the dollar, it has talked tough but when it came time to
raise rates – they folded and did nothing. On the contrary Europe, Mexico, China, India, and others have raised rates – thus putting MORE pressure on the dollar. Bernanke’s one tool (raising and lowering rates) has be used strictly to keep money cheap and flowing to banks and other lenders when their positions continue to suffer. Since he has only one tool it is kind of hard to fix two things (credit problems and weaken dollar) at the same time. Think of it like a valve for money – remember the saying “Righty Tighty, Lefty Loosy” – he can only turn it one way – and when he does it only serves one purpose. The valve is wide open and money is being poured into the system – creating a flood and inflation is ramping. He needs to keep it open “lefty loosy” keep money flowing to the banks. Well maybe it’s time for the G-8 will look to support the dollar – as they meet this week. Since oil and several other commodities are priced in dollars – I guess at some point they are feeling the heat (even when their currencies are rallying against the dollar). But what can they do – other than talk? They can say, just like Bernanke and Bush, “We are strong dollar people!” – but action needs to be taken – talk is cheap (just look at the dollar value!). Trying to get all the others to join the party and start talking “strong dollar” might get people to BELIEVE again in a strong currency. But then are we not just kidding ourselves? I mean we are saying one thing – but it doesn’t change the fact that Bernanke is still cranking on that printing press, interest rates are at 2%, and the discount window is open to investment banks.
The dollar has popped a little, just like when Bernanke hinted he would raise rates, however is this just another dead cat bounce? I would say it is – until we see ACTION and not just talk. The G8 would love to see Bernanke raise rates – they had mentioned as such back a few months ago – however he has not and probably will not. Additionally – with all the concern about oil and commodities and China and India’s growth – the G8 is kind of a joke at this point, since Saudi Arabia, China, and India are not members.
So it they will sit around the table, talk about China and India’s growth (but since neither China nor India are there it is just cheap talk), they will then probably talk about OIL and production (but since Saudi Arabia nor any other large oil producer there it is just cheap talk), they will then bring out the big guns and start talking tough “We are STRONG DOLLAR people1”, but will probably do nothing. In the past the UK has requested increasing the size of the G8 membership to include important countries like China, India, Brazil, etc….but that was shot down – as they continue to be viewed as 3rd world. I think the joke is going to be on the G8 face when China and India (probably at some point Brazil) – continue and will give the G8 a run for their money (or literal dollars) as they expand.
So expect a pop in the dollar against the other currencies – for now it’s cheap talk until Bernanke actually does something. If nothing is done – expect ANOTHER dead cat bounce!
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GM a rally – you’ve got to be kidding.
I have been told by more than one respected investors that GM is DONE – stick a fork in it. It will take years, if not a decade to recover. They are lagging behind in alternative fueled vehicles, their inventory is massive amounts of gas guzzling trucks, their GMAC finance is imploding, their legacy programs have cost billions, they struggle with the unions and the government. I was told that while the stock may LOOK cheap – the VALUE in the company is anything BUT CHEAP. This is not a time to buy and to believe in a fundamental rally. Any returns will take years to see and with inflation rate the way it is – well it would be negative returns for some time.
However, the stock is getting a pop in the pre-market! Why – because the company is rumored that it might be breaking off units and selling them to raise much needed cash. I haven’t checked the credit rating status on their bonds (why bother if Moody’s ratings are a joke anyway – remember they rated Ambac and MBIA AAA all the way into the toilet – they stocks fell from $60 to under $5!) – so even if their credit rating looks good, I would deduct a few ratings from it to get a more accurate assessment of fundamental risk.
Word: Don’t get sucked in a buy this company NOW – it’s too much unknown. Yeah – you could see it rally a point or two. But that is all on optimistic perception, which can turn negative quickly. There are too many other beaten down companies that HAVE money, HAVE revenue, HAVE positive margins, that don’t HAVE debt – that are worth looking at.
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Futures Pre-Market
We are getting a little run of the futures, with oil sliding and the dollar seeing a small rally – the spreads are pretty flat (30 mins prior to the opening) if that remains the same – don’t expect a big pop at the opening.
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Support / Resistance
The market is TRYING to find a support level in what seems to be a muddy bottom (no solid support areas to STAND on). The NDX and RUT still have a little ways to go down to hit those March lows – the SPX and INDU have broken them. I think keeping your eye on the RUT is probably the best general indicator for now.
INDU 11200 (Also long as we base above this area we might be finding a new support – we could even see this market rally back to 12000 if the G8 and others can SELL the “HOPE” – however unless something changes with FED policy, the credit crunch, etc…anything is just a euphoric rally (dead cat bounce).)
NDX 1800 (Another area to see “hope” to be a support area. Many of these companies have a good story to tell since they have multinational exposure and could continue to sell into those country and see some juice in the margin difference between the dollar and foreign currencies. However – they too have to answer to a higher authority called the US Economy.)
SPX 1250 (We are above it and at the March lows – a good place to hold and build support)
RUT 650 (We are just above it – but I would carefully monitor this as a general indicator of money flow.)
We are looking to CREATE supports, rather than meeting them. Some of these indices have broken through or visited them but during a holiday week on lighter than normal volume. That doesn’t spell too much confidence. However – investors could of come back with FIRE in their bellies after watching the fireworks and viewing too many episodes of Kudlow Quotables and believe the “Buy America!” slogan and send this market up. I think Gamma and Soft Deltas are the play!
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Conclusion
The G8 will spin a bottom is near and we are strong dollar people story. Who will not be at the conference that should be? (Brazil, India, China, Saudi Arabia, Mexico – all growing and important countries). The meeting is important and I do make light of it – but for the obvious reasons – we need ACTION not more talk. It reminds me when reading about early WWII, no one WANTED Churchill, but he was NEEDED he took the people and politics by the scruff of the neck and moved the nation forwarded – instead of relying on more treaties, meetings, and talk – which at the time all failed. Ruling by committee is fine – when everyone is playing together in the same sandbox. However, it is obvious that we are not all playing in the same sand box – we need someone to either bring in the outlying nations into the G8 or Bernanke and Paulson need to ACT!
I think we are still in for a very rough ride – we will probably be seeing some good strong upward rallies in this market – do NOT get sucked in without fully hedging those positions. They could come slamming back down when the talk dies.
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