8/29/08 (Mmmm Kool-aid, Spending Slow, Oil ??? )

Traders,

I received a call during “Peak Hours” from my father, unusual as “frugal” is his middle name (the Middle Class Americans could learn from him – maybe we wouldn’t have massive consumer debt), was everything ok? He said he was going to watch the Obama speech. No big deal, I too have been watching the DNC convention. Obviously my response didn’t create a rise, but then (my father not being a Bush fan – who is?) I quickly find out he has drunk the Kool-aid. He is going to see Obama’s speech at a movie theater, but not just any movie theater, a movie theater in Michigan built and owned by Michael Moore. Look, I like Obama, Michelle Obama’s speech was awesome, I even like Michael Moore movies (taken with a grain of salt – great subject matter to much heavy slanted editing). But going to a Michael Moore movie theater to watch Obama’s speech – that Kool-aid has been spiked!

I saw the speech – great speech – but that was expected – as all speeches (Republican and Democrat) is about firing up the audience – nothing more or less. Remember this is not a debate, just a speech geared to fire up the audience. The speech was very good – he does have a way with words, but what kind of got me weirded out was the audience. I mean this looked like one of those massive church rallies in a football stadium, with people crying and waving their hands in the air. It was like Obama was the second coming, you could feel the hatred for Bush as people cling for any change or hope. I can’t blame them the economy looks pretty weak – but that also doesn’t mean we should blindly drink the from the well of socialist reform. I hope people vote for Obama because they believe in Socialism, not because they hate Bush. I thought for a second I was seeing the opening ceremonies from the Beijing Olympics – even the White House Set on stage as if they were walking back into the White House at the end of the speech and then the fireworks go off. Wow, impressive demonstration of theater – like the Beijing Olympics it will probably be decades before a spectacle like that is repeated. Hopefully – my dad will make a conscious choice to vote Obama or McCain because of policies, his belief of what the government’s role is, and not be swayed by the razzle-dazzle.

Sorry for the rant – the market rocketed yesterday. As I mentioned it was NOT based on any news or fundamental shifts in the market – it was just positions wedging into a situation that either the shorts would be force to cover in a break-out or the longs would be forced to dump if the supports didn’t hold.

___________________________________________________________
US Consumer Spending Slowed

The GDP news yesterday was great – however we always need to look past the number, but look at the math on how GDP was calculated. As I pointed out yesterday the GDP was based off the increase in trade by the multinationals because of the weak dollar making US product attractive, secondly the Federal Government pumped billions into the system via the stimulus check , which was quickly turned into to consumption (not savings). However, economist (had predicted an increase – not the much) and even the Fed (based on their minutes) believe that the 2nd half is going to see a bigger slowdown.

The US Consumer Spending report is beginning to show just that. The .2% rise matched forecast and was down from the previous month of .6%. Prices were also reported to rise the most in 17 years. Anyone telling you we are not seeing inflation, obviously is dead and no longer consumes anything or failed math.

The futures got hit after the news was released as reality after the euphoric GDP rally is settling in – we are not out of the woods yet and that GDP number might of just been that last ditch pop (on the back of trade and a massive stimulus check).

Added to this bleaker news for the 2nd half of 2008 was the increase in jobless claims and a income drop of .7% (the first decrease since 2005).

Again – GDP sends the market up, only to have another piece of economic data send it back down. This is NOT a bull or bear market – but a market trying to make heads or tails out of what IS reality and when will this end. Continue to expect volatility.

____________________________________________________________
OIL prices – another big storm

The big yellow cone on those weather channels continue to center right on the middle of the bulk of our oil refineries and rigs. New Orleans is getting prepared and they are already talking about evacuating several districts this weekend. At least they sound like they are getting prepared. However, that is also sending a spike in oil premiums.

Oil has been fairly ranged bound since that massive spike from 120 to 140 (created by the massive fund SemGroups $3 billion loss covering their short position), we are back down to those levels before the spike and have been sitting here. Maybe because Hurricane season is keeping some premiums in oil, maybe because Russia’s war with Georgia (as the world’s second largest pipe-line runs through the region), maybe because supply/demand is still a narrow spread, maybe because of refinery capacity. But probably because of all of the above and more. It looks like we will be living in the $110 - $120 range for a while – unless something happens – if the storm hits expect a pop in oil prices, if the storm is a bust we could drop fast back down to $110 or even lower.

For now oil prices are still injecting volatility into the equity markets and the dollar.

Yeah – you’ll hear it again – more volatility.

_____________________________________________________________
Dude, your getting a Dell?

Dell has been seeing pressure from Levno (the Chinese company that bought out IBM’s PC unit) – unfortunately that puts the squeeze play on DELL – especially in overseas sales which Dell was hoping would pick up the pace on the weak dollar. That’s just not happening. Toss in Apple now competing directly in the PC market because they are running the same chipsets and you know could buy a Apple and run Vista or Windows XP just as easily as any PC. As a matter of fact, the lead programmer and partner of Silexx Financial Systems (our trading software company) has a Eight-Core MAC Computer running Vista - just because it was less expensive than a Dell.
Dell in the pre-market is down and dragging down the tech sector with it.

______________________________________________________________
Futures Pre-market

The futures are getting hit in the pre-market, Dell, the storm and oil prices, weakening dollar, and Dell are not creating any good news. The spread is pretty narrow – but expect a gap to the downside as the market opens.

______________________________________________________________
Support / Resistance

The market hit those spots are broke with a big move. Remember – this is simply driven by positions unwinding – nothing more or less. So don’t read into the big rally as if something fundamentally shifted in the economic landscape. Positions were increasing (long and short), volatility was shrinking, and the market was getting very wedgy – we just broke out of that wedge.

INDU 11,500 / 11,800 (The break-out from the wedge sent a knee jerk hard rally to the upside, short-covering kicked in and fueled the rally even more. 11,800 probably has some GTC resistance in it – but don’t hold your breath. Going into the long week-end it is really going to be about want kind of risk exposure you want to hold over the 3 days with a storm looming and other volatility news items.)

NDX 1900 / 1950 (we didn’t see any big moves here, but again this index was not wedging like the others. It’s seeing pressure and Dell being down in the pre-market is not helping. Watch the close 1900 is a keep area to close above.)

SPX 1275 / 1300 (We snapped up just like the INDU – but then stalled at 1300. Is it resistance – I think it’s a place to get FLAT deltas for sure – if you want to lean short, do it with Gamma. I would NOT be long at 1300.)

RUT 720 (740) 760 (This index which traditionally is a great tool for measuring money flow and over-all market sentiment has turned into a volatility beast. It looks like a Dot.Com stock and the statistical volatility (intra-day) is insane. 720 showed to be support, 760 was a blow-off top. Anything in the middle is a crap shoot. The good news – it went up, the bad news is the hyper-volatility in this index. Big volatility doesn’t NOT spell confidence or certainty. I would keep an eye on that 760 and 720 level. For now that is a MASSIVE band for this index.)

________________________________________________________________
Conclusion

Don’t get me wrong, by trying to read too much into my opening rant. I like Obama, specially his wife after listening to her. I really think he would be one hell of a great candidate in 2012 or 2016. He really doesn’t have any experience, we really don’t know his voting record because he doesn’t have one, he has spent more than half his time campaigning as a Senator (I heard he has spent less time in the House than any other Senator) – obviously he is campaigning. It’s not that I hate Democrats and love Republicans – I certainly don’t. I just find the euphoria behind Obama based on one thing “CHANGE” and “HOPE” – but isn’t that the message of every candidate? I thought Hillary (while I am not a fan of hers) is a better and proven candidate for the Democrats. Not only does she have some political cache and experiences – you know where she stands beyond what she says – why – because she has a record. I hate to say it – but I think Obama is the Flash-in-the-pan candidate because he is New, Different, African American, etc. I have to give him credit – he is smart and made it this far. Should be very proud of all his accomplishments – I think he would be a great friend and neighbor. I think he is probably a great lawyer. I really like the guy. But just because I like him – do I really think he has the political clout, experience, and know how to be the president of the US. Probably not – until he puts some more time in the game. He is an unproven rookie.

If you were going to the Super bowl and had a rookie that looked really good on the practice field but never played in the big game – would you put him in to play the big game, probably not – maybe next year. I have to hand it to the DNC – they sure can put on a concert and big show. I am not saying to go out and vote McCain – DON”T unless you believe in his message. What I am saying – is simple – don’t vote for Obama because of the razzle-dazzle and that he is NOT BUSH. The Change and Hope message is great – but it is NOT policy. Wait for the debates.

Anyway – go out and enjoy the holiday weekend.

8/28/08 (GDP shocker, Sears Fall, Fannie's chopping block)

Traders,


It seems that we are making some good progress getting through the credit crisis on several fronts, consumers are able to absorb the higher gas prices, Freddie and Fannie are making some money on the spread, and even MBIA is reinsuring some muni bonds. And while all these things are a positive step forward, we should not embrace it as if everything has been solved.

We are a long way from finding fundamental resolution to the problems. Additionally – how much of these advances are short-term and/or from government intervention. It seems that we are making progress, but the training wheels are still seriously bolted on – so riding is not that difficult.

We did see a rally in the market across the board – but several markets were rather mixed. The Durable Goods help create a pop, which help keep the gains throughout the day. The support at these levels are building – seeing the INDU close at 11,500 and NDX at 1900 was a fairly good sign .

__________________________________________
The GDP 2nd quarter shocker

The government GDP numbers came in a 3.3% and topped the prior quarter and economist forecasts, surprisingly. The futures got a solid boost in the pre-market when the numbers were released. The increase in growth is being credited to the jump in exports based on the weak dollar and also the billions in stimulus checks. However, as one economist pointed out, what does that really mean for the country as a whole? His issue is that relying on an increase of GDP because of exports and government injections of capital creates a foggy picture as to the true health of the economy. He pointed out the huge increase in the jobless claims and the imbalance on spending (declining sales in retail goods and increase prices in food and energy). I see his point – GDP growth based on exports on a weak dollar and the government giving out billions in stimulus checks to get people to spend – how much faith in a real recovery is that? He concluded that it is just pushing out the possibility of a recession, not eliminating it’s possibility.

The jobless claims however have remain high and are expected to, so unless we get another stimulus check don’t expect consumer spending to continue to ramp. Now only are economist taking a dimmer view of the second quarter (if it remains unaided by the government), even the Federal Reserve staff according to Bloomberg is making the same call, “Federal Reserve staff also marked down the central bank’s forecast for growth in the second half of 2008, according to the minutes of the Federal Open Market Committee.”

But what is even more alarming is the earnings, and this is probably a shocker to most. For the first time in the history of the Dow Jones Industrial Average (INDU) the net earnings for the quarter was negative. The chart at this link spells it out better than any words: http://caseyresearch.com/displayCcs.php?e=true

The reality – the market price is all based on perception, not reality of the balance sheets of these firms.

What continues to concern me is the helping hand of the government and the continual leverage of lending money. If it were not for ongoing bailouts and lending, would many of these troubled companies be in business? GM, Freddie, Fannie, Lehman, MBIA, etc. Helping hand is nice, but unless these balance sheets can get cleaned up and they can stand on their own – how are we to know the REAL solvency of these firms?

____________________________________________
Sears decline in sales

Totally contrary to the GDP numbers, Sears (the biggest US department store) is reporting a huge short fall in profits from a decline in sales. Net income decreased 62% (or 50 cents a share), from $1.15 per share a year earlier. The big reorganization and marketing changes at the beginning of the year has yet to see any help – clearly Wal-mart being a one-stop-shop is stealing more traditional retail business from Sears and Kmart (who are mono-line sales). Competition is getting fierce and Sears doesn’t have a game plan.

Don’t expect to see any gains in mono-sales retail stores. Wal-marts variety of vertical markets has it ready to compete in a tighter market. Until we see Food, Gas, Pharmacies, Banking, and other services at Sears – sticking to selling appliances and clothes is not going to cut it – don’t expect to see big gains in sales any time soon.

The stock is getting hit in the premarket.

___________________________________________
Fannie Mae rearranges the deck chairs!

The top three executives of Fannie Mae are getting the sharp end of the boot! CEO, CFO, CBO, and some others have been shown the exit door. Some of these people have just been in the job for a year or two. Even more comforting is that they are promoting from within, yeah that doesn’t sound to bright – but what do you expect from this government run operation. How a entire new staff of management (promoted from within) will increase their balance sheets and get them out of debt is unknown, it seems more about selling the faith then really addressing the problem, taking on more debt with no money.
Investors seem to buy it as we see the stock getting a good pop in the pre-market. Go figure.

___________________________________________
Futures Pre-Market

The futures were weak and looking lower prior to the GDP news – then the GDP shocker shot futures into positive territory. The spread is positive so expect to see the ARB traders buy the basket against the short future. Expect a gap up at the opening.

__________________________________________
Support / Resistance

We made a good move back to the upside and stalled at some resistance areas – the futures are pushing those indices through those numbers in the pre-market, but it’s not about the opening it’s about the closing and intra-day action.

INDU >>>11,500<<<< (This is a straddle strike – and we are WEDGING – top of the wedge is about 11,600 bottom is about 11,400. If we break 11,600 or 11,400 we will move HARD and FAST. So expect an explosive move if we break out. 2-3% move after a break is very much in the cards.)

NDX 1900/1950 (We are above the 1900 level which is a part of a wider support area – the futures are showing some strength – but it will take a good move to get back to 1950. Watch the close – 1900 or above means building support.)

SPX >>>>1275<<<<< (Just like the INDU we are ready to EXPLODE up or down if we break out of the wedge. 1290 topside and 1260 bottom side. If we see a big move out of 1290 or 1260 we could see and explosive 2-3% move. Volatility is building as the range narrows.)

RUT 720/740 (This index has been in some wide volatility ranges. It has been consolidating between 720 and 740 but if it gets as wedgy as the INDU or SPX – we could see a serious breakout up or down.)

The wedge in INDU and SPX are building and hidden volatility is ramping – if we break from out of the wedge we could get a violent up or down move – which would spur short-covering to the upside or panic selling to the downside. I have a feeling we are not going to be in these ranges long.

_______________________________________________

Conclusion

As I mentioned, we are seeing some good moves forward – but we are still being carried by credit and the government and have not been freed to try to stand on our own. That will not happen until the (earliest) 1st quarter of 09 when the Discount Window closes (which I am doubtful of). The GDP number is definitely a feather in the GOP cap and I am SURE that at the GOP convention that recent GDP number showing a stronger economy is going to be touted that we are getting through this credit crisis. It’s good spin, if you buy the GDP numbers – however the retailers and jobless claims are telling a different story. I think that is why more economist and analyst have been scratching their heads and their forecasts continue to be so far off that you would swear these people failed basic math.

We are also wedging getting ready for a big move – not based on any economic changes but really a loading of positions that will be forced to unload to the downside or cover to the upside. Meaning expect a big statistical volatility jolt to the market – probably higher, but should be lower. The storm building in the Gulf is putting some premiums back into oil – so I am sure that too will build some volatility that will tug on the market. The dollar has also seen some volatility up and down and up and down. As the EU and Asia release some of their economic forecasts.

Get ready for some rocking and rolling – it’s building.

8/27/08 (Hillary Done, GSE Rally?, Durable Goods.)

Traders,

We saw Hillary pass the torch and urge her supporters to vote of Obama, I guess 2012 is not in her plans. Yet – she still demanded a roll call and is meeting with her delegates today – confusing I know. Her prepared remarks were fairly well delivered, but not nearly the kind of “pick yourself up” inspirational as Michelle Obama. Tonight it is President Clinton’s turn. So far no surprises.

The market saw little volatility and hovering at the interim support area. The close in the INDU above 11400 and RUT above the 720 has given short-term confirmation, but nothing to give us any confidence at this point. Volatility (premiums) came in yesterday and the VIX around the 20 level is still too low vs. statistical volatility that we are actually seeing. Hidden Volatility is ramping and that is something to be concerned about. Keep an eye on the Skew – that will give you a better indication of actual volatility expectation.

_________________________________________________
Freddie and Fannie mortgage profits

The irony should not escape you – these GSEs have all but failed, going to the Discount Window to borrow money, getting extended leverage by Congress, and over 1.5 trillion in no performing paper. However, let’s ignore that and just look at the current paper that has been issued yielding 40bps, almost twice as high as traditional 20bps rate against bonds.

While this is good news for sure, is it enough to cover the losses? Not even close, it will off-set losses. Barney Frank has been calling this a success. Is it really – are they not still borrowing at the Discount Window and still have over a trillion in none performing?
And what does these mean to borrowers? It means money is getting very tight – the GSEs don’t collect MORE money unless they are charging HIGHER rates. Someone is paying the extra 20 bps.

Again – this IS good news and a step in the right direction, but we can’t ignore the big picture. Do we really expect MORE mortgages to be issued that are more secure (better credit rating) then sub-prime issued at higher rates? Probably not any time soon.

Remember – it’s a profit based on a spread – they BORROW money at a certain rate and LEND money at another. For those of you that are in the know – this is NOT arbitrage, but rather two different bets with two different risk profiles. The spread right now is favorable, but the fact remains their leverage is EXPANDING – it only takes one side of that spread to fail or falter to see them take several steps back, AGAIN.

The stocks are getting a great pop in the premarket, following yesterday’s rally. This is NOT a place for long-term investors – regardless of the gains – because nationalization, the Discount Window, and increasing debt (liabilities) has not changed.

Expect some high volatility in these issues. Expect many to dump shares and the short-interest (even though they are on the SEC protection list) is still rather large – which could also fuel some short-covering. Stocks are rallying with more optimism then fundamental reality – go figure. Didn’t anyone read the Case-Shiller report yesterday – I guess not.

_________________________________________________
Durable Goods gain!

As we are seeing an economic slowdown, we also saw orders for Durable Goods unexpectedly rise – this has been the story of the multinationals, like CAT – that continue to expand overseas that make up for domestic short falls. Clearly the weaker dollar over the last year has given the trade window for the multinationals a bigger pipeline. But the news yesterday in German’s business confidence falling, which also sent the dollar up against the Euro, combined with China’s increasing inflation and growth slowdown – may see the orders for durable goods over the next quarter slowdown.

Economist had expected the orders to be unchanged, expecting the global slowdown to even squeeze the multinationals – but that has not happened yet. The question is not IF we will see a contraction it is WHEN. The dollar is also going to play a key role - strong dollar will help inflation and domestically but will hurt the trade balance. You can’t have your cake and eat it too.

The futures got a good jolt to the upside from the news – moving from the negative to positive.

_________________________________________________
Futures Pre-market

We saw the futures down prior to the durable good numbers, then a pop from negative to positive. The futures are front running the cash and the spreads did widen a little, however the volatility of the futures to fair value in the premarket may keep some of the Arb traders sideline until the market opens, not willing to take leg risk. If the spread remains, expect a pop in the cash at the opening – but not too big.

_________________________________________________
Support / Resistance

We saw some support in the INDU, RUT, and a little in the SPX. The area has been gaining momentum and volatility is coming off. The means the longer we stay here the more violent the move away from here when it does happen. These are fairly weak support areas – so hard delta is a bigger than normal long risk factor.

INDU 11275-11400 / 11500 (This is a tricky area, with many variables. It could either not hold 11,400 and fall to 11275 or we could RAMP – violently to the upside break through 11500 and even touch the 11600 level again. The semi-good news in the GSEs might create enough euphoria to do it – but fundamentally there is a drag. I am expecting the 11400 to be a straddle strike and a possible violent move away (up or down) from here. Double bottom or weak support – it’s 50/50 at this point.)

NDX 1850 / 1900 (We are hovering close to the previous 1900 support, but closed below it. 1850 is in the cards and there is really nothing in the 3rd quarter to fundamentally ramp the market higher at this point.)

SPX 1260-1275 / 1290-1300 (We are in a very similar situation as the INDU – breakdown or rip higher very fast and hard, again on euphoric optimism. At this point it’s clearly a crap shoot. Treat this area as a straddle strike and expect violent volatile move away.)

RUT 720 / 740 (The broadest market, which recently saw hyper volatility, is back down in the support area – we are above the 720 line – but it is all about the close. Watch 720 – that is key as to flow in or out of the market vs. treasuries.)

This is NOT a market about bulls or bears – but rather knee jerk reaction and volatility. I will continue to repeat don’t expect the VIX to have a clue as to actual statistical volatility – so far the VIX vs. actual has been very wrong. Gamma traders that have hedged hard deltas have either been making huge money or not losing very much. Those top and bottom pickers are seeing P&L swings that make the VIX blush.

___________________________________________________
Conclusion

I am not biting on the Freddie and Fannie news as if it’s all ok and the problem is resolved. The stocks are acting like it – but I think, just like the short covering and 30-40% rally in the financials after the SEC rule change – will be short lived. We will not find a bottom until we shake out the debt, close the Discount Window, and see lending get very lean. Defaults are still up – so I don’t know what Freddie and Fannie are thinking – increasing their debt on a bond vs. lending spread – yeah – that is a brilliant plan! For now Frank, Pelosi, and Dodd are saying “See it’s working!” – but I think they are in for second round of bigger surprises.

We are also seeing the VIX pull off too much and are in a precarious range in the indices between a traditional support with euphoric optimism and short covering fueling another hyper 2-3% rally or a break-down and loss of confidence as we drift lower. I don’t think any wise people should be betting any serious hard deltas on direction up or down. This is investor sideline area and trader gamma time – nothing more or less. For those that don’t have your hedge on – premiums are VERY CHEAP compared to statistical volatility – if you don’t have your long or short hedges on, well you have no one to blame but yourselves.

The longer we don’t move the bigger the move tomorrow. Hidden volatility is ramping.

8/26/08 (Bravo Ms. Obama, Financial Pinch!, Case-Shiller declines!)

Traders,

Last night the DNC convention started, I was very happy to see Ted Kennedy up on his feet and making a tenacious speech after his serious aliment. Whether you are a Democrat or not – his family has made a lifelong commitment to political service and that is admirable. I was really impressed and surprised by Michelle Obama’s speech. What shocked me was that she didn’t talk about socialism or handouts or government aid. She is a very proud women that made something of herself on her OWN. Her strong family unit, herself respect, her drive, and her pride move her from a low-middle class / poor family and put herself into college on scholarships and made something of herself. Her speech was about self respect, accountability, responsibility, and NOT asking for handouts.

I found it very ironic that she was giving this speech to the DNC convention – it would have been equally as welcomed if she was a Republican and speaking at the GOP convention. Not one word of government programs or handouts. I have a sneaking suspicion (IMHO) from her speech that she does not look fondly on those with their handout or social programs. She is no doubt a smart, intelligent, and strong woman – who earns respect and did it on her own with family support. Great speech, bravo Ms. Obama. Now let’s hope that speech actually sinks into the members of your party – showing the party they can pick themselves up and make something of themselves without government intervention. (please note: I am neither a Democrat or Republican – don’t blanket approve of either party).

The market got whacked yesterday, after Friday’s massive rally – talk about whipsaw and knee jerk. Go figure – more volatility.

________________________________________________
EU confidence declines – Euro falls.

The EU is starting to see the confidence erode and a slow down as they have been remaining ahead of the US slowdown. However, I think it is going to catch up with them sooner rather than later. The dollar saw some strength after the news and may yet see continued strength (or has found a stabilizing area) through year-end. What will really send a jolt to the currency is if the EU changes rates – so far they have remain pat to fight inflation. Remember they do NOT have a dual mandate, unlike the US. So it is possible that inflation remains on the forefront of their agenda and rates may NOT come down – regardless of slow down. It will be interesting to see how the ECB reacts to changes going forward.
For now – the Euro is sliding against the dollar.

________________________________________________
Financial sector scrambling for capital

According to Bloomberg this morning, Merrill Lynch, Wachovia, Lehman and other banks and financials have collectively almost a TRILLION dollars of bond maturing. Obviously the rush to the Discount Window has kept the reality of the need for more capital (at higher rates) at bay – temporarily. But we are talking about a TRILLION dollars – that money will NEED to be replaced to carry the balance sheets. The problem – refinancing these bonds that come due means paying MORE interest as credit risk increases, Bloomberg estimates annual interest could top 23 billion MORE than the previous year – that WILL hurt as capital is already tight.

Borrowing money to stay liquid and paying higher rates means one thing – TIGHTER CREDIT. It IS going to get harder to borrow money – as these firms can NOT afford to lend money as they are getting squeezed from both sides (write-downs and higher interest rates). I have a sneaking suspicion that the FED will push the Discount Window out AGAIN as it is suppose to shut in January to the non-members. Once you open that door and extend the 100s of billions – you can’t really shut it.

``The credit crunch is only now beginning because bank capital is so constricted by losses to date, that they will have to begin shutting off credit to households and corporations and that's when we get the defaults,'' David Goldman, the former head of fixed-income research at Bank of America Corp.'s securities unit in New York.

As reported yesterday – the spread is already 78 bps over fed fund rate average and is expected to go higher.

Merrill Lynch has $26.5 billion due this year and $35.5 billion in 2009 – they paid 2.25 percent HIGHER than Libor to sell $1.2 billion in bonds in May. Good luck at getting a better rate on the rest as it comes due. OUCH!

WHACKoiva which just reported a loss of $8.9 billion in the 2nd quarter, has $34.5 billion coming due in 2008 and 2009.

Lehman (losses in the last 12 months of over $8 billion) has $30.4 coming due in 2009.

You think home owner’s interest only option arms looked bad? How would you like to refinance billions in debt after serious write downs and a loss of credit? Don’t expect these firms to get ANY breaks on rates. That is going to squeeze credit lines down to nothing. It’s not like we are going to see these firm increase their profit centers significantly enough in this economic landscape to make up for more expensive borrowing. I think Mr. Goldman is right – we are going to see some defaults. The question is WHO does the FED cut off and WHEN?
____________________________________________________
Case-Shiller declines!

The home sales index declines again – as expected. The Case-Shiller home index (which includes 20 metro areas) declined by 15.9% (slightly less than expected). Home foreclosures so far have not seen a slow down and the listings by banks (REOs) continue to increase. As more inventory hits the market the more we will see pressure in home prices. The problem (from the above story) means we will also see tighter credit lines which will be HARDER to finance homes. Of course we could see government lending increase.

Recently read a funny post and sad at the same time: “2012: DMV expands to handle applications for single family dwellings.”

_____________________________________________________
Futures Pre-Market

The futures were up and then backed off and are seeing some volatility in the pre-market. Looking unchanged – don’t expect any big gaps up or down – unless something changes in 30 mins prior to the opening.


______________________________________________________
Support / Resistance

We broke some support areas – not a good sign that we should be picking bottoms.


INDU 11275 / 11500 (Back to that narrow band that we broke out of last week – now we are back in it. The real support test is 11275 - and I think there is a real chance of visiting that. The upward trend is broken – but the larger support area is still intact. We are at a pivotal point either support at 11275 or bottoms up. If we can’t hold – expect 11,000 in the cards and that is not a place you want to bottom pick at either. Keep an eye on 11275 and watch the close.)

NDX 1850 / 1900 (We broke the 1900 level that we stalled at last week and rallied off of. Now we broke it and there is not really any support until 1850. We either move back above 1900 and close there or expect to see volatility and downward movement to 1850.)

SPX 1260ish / 1300 (We are back to the previous weeks support – while the INDU and NDX BROKE support – SPX has held it in this range. The question is do we hold or visit the 1250 area?)

RUT 720 / 740 (We closed just above that support and now the question is do we hold – I wouldn’t get LONG hard deltas at this level. If we break then 700 is in the cards. We could see support there – but really this market is about volatility – not direction.)

_______________________________________________________
Conclusion

We are really getting into the home stretch on the big marketing push of the candidates. The DNC convention had an impressive opening night. Nice to see Ted back on his feet as he fights brain cancer. We also finally got to hear Ms. Obama – very good speaker and great speech (regardless of party). She’s right – Americans need to pick themselves up and take responsibility and accountability – we can do it. The big question at the DNC is Hillary. News came out last night that they WILL call a “Roll-Call” and both will be CONSIDERED candidates until the roll-call. Silly – but Hillary just doesn’t want to step aside without some respect – there could be fireworks and I am not ruling that out.

The market is as uncertain as the presidential election and we will continue to see more volatility. I wish I could say the market is bottoming or topping – but I think we could see continued up and down knee jerky movement as each day brings us either new hope or reality.

8/25/09 (Russia Trumps! Lehman's Ride, Credit Where?)

Traders,

We saw a huge upward jolt on Friday – oil came back off and the dollar started rally - it’s like the day before never existed. These kinds of moves are indicative of the Volatility in the market. One thing that is a little alarming is how low the VIX is getting – as if there is no concern. The VIX has dropped below 19 (down 5% on Friday). Yet – we continue to see daily huge moves in the market. Seeing premiums retreat is alarming – meaning there is NO FEAR. I think – like we have twice this year already – see another big move up in volatility and it will come when we least expect it.

The big mystery to who Obama’s VP is was made clear this weekend. The big question (according to NPR) is going to be the Hillary Wildcard. Initially – they were not going to have a roll call, but they probably thought that would inject a huge amount of resentment at the DNC convention. Pelosi this morning on NPR said that they WILL have roll call and they will not expect any problems. Hillary is a good soldier and will get her supporters in line (I like how NPR referred to Hillary as a soldier). Anyway – it should be worth watching. I think Obama did right by picking Biden, his catholic background and political experience will add to the ticket. The wildcard IS Hillary – it will either be very peaceful and supportive or not. While I don’t think we will see a 68 Chicago DNC – there could be some volatility at the DNC. Does Hillary have control of her troops?

______________________________________________
Russian plays the trump card!

Russian’s Parliament votes to recognize South Ossetia. While I posted a very informative article about the situation in Georgia

– this is the first public (and official) step for Russia to support the separatist state in Georgia. This means tensions will be high – Georgia launched an attack to keep their two separatist states under their control (obviously with the unspoken support of the US – their largest ally). However, Russia squashed the invasion and pushed them back. Now they publically are supporting these two separatist states – the ball is now back in Georgia (and the US) court. It’s a face off!

The big economical questions are: How does the West (Europe) and NATO respond? What is the oil premium risk (the world’s second largest oil pipeline runs through the region and it one of the life blood arteries of Europe)?

http://www.stratfor.com/weekly/russo_georgian_war_and_balance_power

_______________________________________________
Lehman's Rollercoaster

Last week we heard rumors of two banks (Korean and Chinese) that were interested in purchasing up to 50% of Lehman – stock rises. Then they walk away – stock falls. Then the Korean bank is rumored to buy out the whole firm – stock rises. Then Korean regulators warn about the risks of investing and a couple more banks in the US fail – stock falls.

The volatility in this stock is HUGE from day-to-day. It’s clear that Lehman is in serious trouble. They are borrowing from the Discount Window – looking to sell huge tracks of their stock, have raised money from anyone and everyone. They now fast a last ditch effort to get out from under this credit debt.

When you see this kind of volatility in a stock – there is more troubles and rumors and less certainty. We really don’t KNOW what the value of Lehman is because the balance sheet is so murky with the illiquid mark-to-market positions. We also don’t know if they can stand on their own feet – if they are constantly at the Discount Window – keeping them alive.

Expect lots more volatility in this stock. This is a traders stock – investors stay away. It could easily go under, get taken over, or continue to flop around like a fish on the dock. Note: Another bank fails this weekend – Columbian Bank and Trust (Kansas).
Stock is back-down in the pre-market.

_________________________________________________
Credit Tightens

With everyone that CAN go to the Discount Window going to the Discount Window and the GSEs facing nationalization – money is getting tighter. If you didn’t know better – you would think interest rates were UP and the Discount Window close by looking at how tight lending is. But we are seeing the exact opposite – Discount Window is lending 100s of billions, money is pouring out of the FED, leverage is getting extended (primarily to the GSEs), and interest rates are very low. So why is money (credit) tightening – it doesn’t seem to make sense. However – if you step back and look at the deleveraging going on – it is clear. As write downs continue the money being flooded into the system is just make up the losses – there is not enough to fill up that massive hole. Banks are shutting down lending to keep what little they have on the books against more write-downs.

The Economist printed a article last week: Ticking Time Bomb! http://www.economist.com/finance/displaystory.cfm?story_id=11921871 – Here is a quote:

Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from 0.49% in the last quarter of 2007 to 3.91% in the second quarter. But the real crunch will come when the mortgages“recast”, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011. By some estimates, borrowers’ monthly payments will then surge by 60-80% (see chart), at a time when property values may still be at, or close to, their trough.

Rating agencies were unusually alive to the dangers of option ARMs: they demanded more collateral to protect holders of securitised-mortgage bonds. Banks were slower to wake up to the danger. An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank. Wachovia stopped originating loans that allow negative amortisation in June, and is setting aside heftier reserves to cope with expected losses. It has also waived prepayment penalties for existing product-holders and is marshalling its employees to help move these customers on to conventional mortgages. Such efforts are welcome. But they also signal just how protracted America’s housing woes are likely to be.

Now Libor is getting tighter as premiums banks charge each other are rising. Banks want to keep cash and don’t want to lend it as they see things getting worse before it gets better. Stories like the ones in the Economist and also the future of the GSEs is getting banks (those with money) very concerned about extending credit.

``These problems going into year-end are likely to be worse this time round because of the amount banks have to refinance in December,'' Stuart Thomson (Resolution Investment Management) said, citing a figure of $88 billion. ``The suspicion is that banks are still hiding losses. The banking system relies on trust and at the minute there quite simply isn't any.''

Those that are lending are charging 77 bps over what the Fed’s target will average. The spread is expected to expand – rather than contract. This will put more pressure on the Discount Window as banks will have no choice but go back to the Fed to borrow. How much MORE will the FED (tax payers) lend? Who knows – but if they can’t get money from each other or else where the already heavily burdened Discount Window is going to turn into the biggest lender on the block. I think we will see a push out of that January date to close the window.

___________________________________________________
Futures Pre-Market

The futures are getting hit as more credit concerns surface, a bank fails, and the future of the GSEs come into question. The futures are front running the cash – if the spread remains expect a gap to the down side.

___________________________________________________
Support / Resistance

We saw a hyper move on lower volume to the up side – oil coming off (after a massive move to the upside the previous day) helped fueled the excitement. Short interest also saw contraction – so there was some short-covering going on as well that helped fueled the rally.

INDU 11500 / 11800-12000 (As expected that narrow 3 day range saw a huge bust out – it was to the upside. 11800 seems to be a resistance area – but if you follow the stepping volatile trend then 12000 could be in the cards. However this morning seems week. If we don’t close above the 11500 area – then Friday was just a fake-out. Watch the close.)

NDX 1900 / 1950 (We move back into the mid-range. 1900 or 1950 is in the cards – this morning shows some weakness. The 50 point range needs to be broken to see any trend be set. Right now expect volatility.)

SPX 1275 (1300) 1325 (The 1300 area is a straddle area – we will move away from it fast and hard. We either break out and go higher continuing a trend from mid July or we head back down to the 1275 (and lower) range and break the trend. It looked like we broke the trend last week – if not for a big rally on Friday.)

RUT 720 (740) 760 (We are right in the middle of this high volatility range – low volume not lots of thick price action all means more hyper up and down moves in this typically low volatility issue. 740 is the straddle area. Expect violent moves away (up or down) from 740.)

___________________________________________________
Conclusion

The dropping (and low) VIX has me concern – uncertainty is around every corner (credit crisis, GSEs, banks, election, etc.) – the market is moving up and down big (even intraday). Statistical volatility (measured continually) is out stripping the VIX. That means the hidden volatility is ramping up and getting ready to explode and that is not a comforting thought. Usually volatility explodes means the market pulls off pretty hard. The skew (volatility smile) is smirking and we are seeing some increase in the skew – but not enough – yet. If the VIX continues to drop the louder the black swan’s wings flap.

The credit tightening is getting alarming as well – and it’s only a matter of time before we see the GSEs nationalized at this point. That seems to be where they are headed. Lehman could be the next Bear Stearns and that could cause more concerns.

I was hoping that we would see the credit crisis ease and the housing situation get under control going into the 4th quarter. My expectations were for a mild 2009 and we start to stabilize after a volatile 2008. However – it seems like we keep pushing off the problems rather than to sort them out and face them today. The GSE issue has not been resolved and that could mark the bottom (for now). However – what does that mean for the dollar?

There are too many uncertainties not to be hedged and pushing the problems out (Discount Window till Jan, from Sept.), the long drawn out story of the GSEs, the election games, etc – means that my hope to see a bottom in the 4th quarter is looking less likely.

Stay hedged!

8/22/08 (Gold? Lehman Rises? Game Over Fred & Fan!)

Traders,

Yesterday was another day flirting around the “unknown” support levels, while the INDU and SPX gained a little the NDX and RUT pulled off. We also saw a massive move in oil to the up side and a huge drop in the dollar against foreign currencies and metals. The Fannie and Freddie news put serious questions on the line as to the economic backdrop of the US and the FED – it would put huge pressure on the dollar – taking on that level of debt.

An interesting side note – which to many is not making sense – is we have seen a HUGE drop in Gold and Silver recently (ironically at the same time as a big gap up in the dollar). As a buyer of physical gold and silver – newer minted coins are coming harder and harder to come by. The turnover at my local dealers is intra-day – he has NO gold and the silver goes back out the door as fast as it comes in. So physical minted coins are becoming harder to come by. Also dealers (on the internet) have posted messages that purchases of many coins are on back order. This doesn’t seem to make sense as to the laws of supply and demand. If silver and gold prices are coming off – one would think that people are unloading gold and silver and that would mean MORE should be available – however that is NOT the case.

Yesterday, Reuters issued a story http://www.reuters.com/article/ousiv/idUSN2140103820080821 that the US Mint has stopped producing Gold Eagles – WHY? Well – it’s important to note that Metal Futures and ETFs are PAPER silver and gold – not physical. That also means that have one interesting component that you can NOT do with actual physical gold and silver – and that is to SHORT it. The short open interest in many precious metals is enormous. I recently saw a report in silver indicating that all the open short interest is equivalent of the world’s mining production for over 100 days. Another interesting fact is several issuers of ETFs do NOT actually own the silver or gold – but rather have contracts to purchase actual silver or gold. These contracts come in all forms from short puts too long futures. I contacted the issuer of DBS – a Silver ETF – they actually do not own ANY silver, but rather spreads in silver future contracts. After looking further into this interesting paradigm – silver and gold prices are not driven by physical demand, but rather paper trading in the ETFs and Futures.

The massive short future positions have driven down prices – but good luck at actually buying in PHYSICAL quantity in size – there is not much out there. The real interesting thing is that the US MINT has halted or stopped shipping Gold Eagles – that is rather concerning. Now – I like many are on the waiting list. As silver and gold has dropped in price – I am on a waiting list to buy it. There is definitely two different supply and demands out there – physical and paper. And the paper contracts have massive short positions. I mentioned earlier when Silver got in the $12s it was a time to buy – now it’s hard to even find any. Weird.

Some theories about propping the dollar up by shorting the metals - interesting. One thing is for sure – something is a foot.

_____________________________________________________________________
Lehman the Knight in Shining Armor?

Just yesterday Lehman got hit as two possible buyers stepped away from the table and Citi downgraded the company. But a new rumor hit the street that a Korean Bank is “open to” an acquisition. Shares have jumped in the pre-market – while the company has not SAID they will buy the bank or even invest in the bank, they did say they are studying all the possibilities including buying the company.
Both Lehman and the Korean Development Bank have declined comments as to the story – but volatility is abound in the underlying – yesterday down and now a huge rally in the pre-market this morning. Some are saying that Lehman is an excellent target at these prices – but others indicate the huge debt that remains on the books – not to mention the additional borrowing costs (interest payments).

What IS interesting is that the Financial times reported yesterday that both Korean Development Bank and China’s Citic Securities walked away from a deal to buy 50% of the company- because Lehman wanted too much money. Now the Korean Development Bank is back (a day later) with rumors to buy out the entire firm? Seems like there is a lot more to this story.

At this point expect to see volatility in Lehman continue as so far the stories are conflictive and coming from two sources. No doubt that they are on the block – but for a an acquirer to step away from the table to purchase 50% of the company because price is too high to come back the next day to buy out the whole firm – seems strange. Would be nice to be a fly on the wall in those meetings.

Anyway – Lehman is up big in the pre-market.

Traders come and play – investors stay away! Anything goes!

______________________________________________
Freddie & Fannie – Game Over

Buffet this morning on CNBC pretty much said that Fannie and Freddie are DONE – Stick a fork in them. He said they do NOT have any NET WORTH. He blamed Congress for giving them the latitude to borrow without any restraints and the Federal Government gave them a blank check. Now the tax payer is going to have to pay for it.

It was interesting that Buffet said they had been the largest investor in Freddie and Fannie up until about 2001. He started unloading all their shares in Freddie and Fannie as he started seeing the writing on the wall. The only reason they continued to exist was they had the federal government behind them – allowing them to borrow more and more. Fannie was created as part of the New Deal in the 1930s when socialism swept this country, Freddie came about during the height of the Vietnam war when inflation was heading through the roof. Now they are both coming back to bite us as we are ready to start the NEW NEW DEAL – with MORE government programs that we don’t have money for.

It is now just a matter of time before Freddie and Fannie are nationalized and we begin to see the birth of the New New Deal.

Buffet was speaking at the premier of the movie I.O.U.S.A – which I think everyone should see before they vote this year.

Watch the Preview: http://www.iousathemovie.com/

_______________________________________
Futures Pre-market

We are getting a good pop in the futures in the pre-market. Some of that is coming from the rumors that Lehman might of found it’s White Knight – also oil has come off after its massive run yesterday. Expect a small gap to the upside if the spread remains.
_______________________________________
Support / Resistance

We are still flirting with these support levels – which are more straddle levels than anything else. Any single news event can drive this market up from support and break down through them.

INDU 11250-11400 / 11500 (We closed above that 11400 level again – floating in the support valley. 11500 needs to be broken through to see any strength return.)

NDX 1900 / 1950 (Just above the support area – we are looking a little higher in the pre-market. Watch the close.)

SPX 1275 / 1300 (We are just above the support area – again watch the close)

RUT 720 / 740 (We gave up a lot of ground in the RUT from the run up to 760 – just above the 720 level after another fall off yesterday. Watch the close.)

__________________________________________
Conclusion

The gap up and back down from 120 to 140 to 120 in oil seems to of been caused by the SemGroup massive short covering of over 1 million barrels of oil ($3 billion loss), the dollar gap up (biggest in years) was created by a massive unwind of shorts that triggered in the currency trade, Silver and other metal futures are seeing massive short positions drive down the price – but physical minted circulation is hard to come by. I am just trying to point out that we are seeing huge moves in commodities, currency, and metals not because something has fundamental shifted in the economic landscape, but rather we have seen massive unwinding of positions and huge deleveraging as well as a rush to liquid capital to maintain any leverage left.

All this means there is HUGE volatility that has not surfaced in the market – it only takes one SemGroup with 100,000+ future contracts to cause a massive gap in Oil. It only takes one major financial bank to unwind billions in currency. It only takes one massive short metals position to cover. The positions by some of these firms out strip their capital by 10:1, 20:1, 50:1, and even 100:1. If you want to see proof positive of those massive results of leverage – look no further than Freddie and Fannie at 100:1 leverage on positions. They are done – according to Buffet and Nationalization or failure is their only options. Lehman is probably done – if they don’t get a buyer or bailout – they still have massive positions on the books. Economist just reported that Wachovia has over 45% of their loans in option arms that will begin to reset to possibly great disaster.

We are watching deleveraging unwind and that will send massive volatility moves in the market. Be prepared!

8/21/08 (Russia Flex! Lehman Done? Paulson's Bazooka!)

Traders,

Yesterday was a rather benign rally, the combination of intraday volatility and weakness did not lend to confidence. Yesterday also saw some political maneuvering and saber rattling by the US over Russia on the Georgia issue. It is clear that the US is over extended its military and while Georgia is an ally we really could not commit with any strength even if we wanted to. So what was the next best blow to Russia? Agree to Poland’s terms to put the missile defense in their country. US says it’s to protect Europe from Iran and rogue nations from launching an attack. Based on current military assessments Iran doesn’t really have the capabilities to launch such an attack and that has been Russia’s contention. Poland had been on the fence with agreeing to the missile defense system and had concessions that the US would have to agree too. Ironically, right after the Georgia’s escalation the US made those concessions and signed the deal. However a bigger rattle of the saber by the US was the inclusion of Patriot Missiles – not initially part of the missile defense program.

The problem is really getting the facts straight, our country as well as others has seen an increase of editorial journalism, opinions are passed as facts and sometimes facts that do not fit with the editorial stance of the paper of left out. CNN is liberal and FOX is conservative – fine, but both these stations are skewed to one side or the other. The same is true with the printed media in this nation – politicians look for open endorsements from the media and the media gives it to them. Obviously if the media is endorsing a candidate the news will be slanted. We continue to point fingers at foreign nation (mainly Russia and China) controlling their media. No doubt they do – but we play the same game. When Russia move troops into Georgia – every US media source (conservative or liberal) reported it as if it was an unprovoked attack and invasion of a sovereign nation. However, after anyone really bothered to read what ACTUALLY was going on Georgia had been attacking to separatist states in their nation – who had been allied with Russia. This is not to condone Russia’s action – but it would be nice to know what actually IS going on. It was obvious that Europe has been on the fence about the missile defense program that the US wanted to forward throughout the region, WHY? Well – where do you think Europe get’s a good portion of their oil? Russia. Now – the tension is escalating and we are seeing premiums in oil rise and troop build-up continue along the borders. The US really can’t help since it is already over-extended in the Middle East. Some European nations are already grumbling that the US is provoking the sleeping bear which Europe will be bitten not the US. Russia has already been in high level meetings with China over the few days since the Georgia situation has been escalated. This situation could inject MORE premiums into oil and more stress on an already cash strapped nation.

For a more detailed account of what has been going on in Georgia (giving also the Russian’s view and situation) this is an excellent intelligence article by
Startfor (intelligence briefings): http://www.stratfor.com/weekly/russo_georgian_war_and_balance_power


____________________________________________________________
Lehman – what next.

Citi has downgraded Lehman and rumors of a Chinese and/or Korean bank / investment firms may have been riding to the rescue have been squashed. The firms announced that they have abandon talks with Lehman, they probably saw the balance sheets! Yikes! Lehman’s savor could be another Bernanke bailout negotiation. Lehman is already visiting the Discount Window to stay ahead – but there is NO WAY they are going to be able to pay back those short-term loans, thank Bernanke for extending them from 30 to 84 days. However, moving the date out for payback doesn’t mean the problems are going away – they have only been delayed. The real bad news (IMHO) is when foreign banks and sovereign funds say “No Thank You” and walk away. T

he question is who is going to be the Knight in shining armor? A worst question, IS there a Knight in shining armor?

Lehman is getting hit in the pre-market!

_____________________________________________________________
Paulson’s Bazooka!

Bloomberg reminds us this morning in an article during Congress testimony when Paulson asked for expanded powers – he likened them to a “Bazooka” – ``If you have a bazooka in your pocket and people know it, you probably won't have to use it”. Well guess what – that Bazooka he was given – well it’s loaded and it looks ready to be fired! Paulson has been showing off and threatening with this new found weapon and that is causing problem. The problem is simple – who wants to buy shares or more importantly lend money to Fannie or Freddie if the Government is going to just nationalize them (wiping out any and all investments). The interest on debt that Fannie and Freddie are paying is going up – as risk of default accelerates and Paulson waving his weapon is only sending those rates higher.

If he pulls the trigger shareholders will be wiped out and preferred holders will also probably see less if anything. And don’t forget that not only do many banks own common and preferred in Freddie and Fannie, but so does many pension funds and mutual funds and other large retirement pools. Nationalization of these companies could wipe out 100s of millions if not billions.

The Bazooka is loaded and many are predicting it is only a matter of time before he pulls the trigger. Barney Frank, Chris Dodd, and Pelosi have all been cheering him on “Pull the trigger! Pull the trigger!” – Ron Paul, and others are saying “Put down that Bazooka! Don’t kill the economy and tax payer!”

I personally think he has a twitchy finger and we are going to see a BIG explosion and yes – more money will need to be printed!

___________________________________________________________
Futures Pre-Market

The futures are seeing pressure in the early session as Asia and Europe has come off, oil is heading back up, Fannie and Freddie are about to become Mortgage USA, Lehman is treading water, and Russia was just poked with a big stick! This morning was not about any good news – and the futures are reflecting that. The spread is fairly wide so we could see the Arb traders buy futures into the opening and short the cash basket. If this spread remains expect to see a pull back in the cash markets.

___________________________________________________________
Support / Resistance

We saw what seems to be a little stabilization after a couple of days of slippage – but the futures are slowing that might have been short-term hope. Hopefully you have your hedge on and gamma is your friend. Expect volatility.

INDU 11275-11400 / 11500 (This two day 11400-11500 wedging area means the spring is loading and volatility (statistical) is about to explode – up or down. At this point the news is negative and a slip down through 11400 at the opening is almost a certainty . If we don’t hold the 11275 area we will not be looking good going forward. One thing IS for certain – we broke the stepping up trend this week. It’s about either consolidation to get back on the upward track or a big slip down – I hate to say it – but I have a bad feeling that 11,000 will be seen sooner rather than later.)

NDX 1900 / 1950 (We have held the 1900 line for a couple of days – but the futures are looking down at the opening. If any of this morning news starts panning out expect to see more pressure. A break of the 1900 line means 1850 is in the cards. 1900 HAS to hold to see strength return. 1900 is the straddle strike – make sure that hard deltas are hedged here – if we break your gamma has to get you short or you need to get in front of that quickly.)

SPX 1265-1275 / 1300 (We are holding in that narrow support area – we need to close in that narrow support area if we are to dodge more negative pressure. Watch the close!)

RUT 720 / 740 (This still looks like an over-extended dot.com stock – for the largest and broadest index with low volatility it sure is not acting like it over the last couple of weeks. A visit to 720 is in the cards today – futures are already down almost 7. The question is 720 support? It might be a good place to get long some deltas – but make SURE to have gamma. I really wouldn’t bet the farm on support – but you could get some bounce trading short-term action off that line.)

_____________________________________________________________
Conclusion

The Olympics are coming to a close and the world may be getting back to the political US vs. THEM attitude again. Russia has flexed its muscle and they are still a force to be reckoned with.

Obama and McCain (both promising not to attack each other – yeah right) are now laying broadsides into each other. Obama’s voting against partial birth-abortion is causing some controversy and McCain’s uncertainty of a ProChoice or ProLife running mate is putting volatility into his polling numbers as well. It’s interesting that this nation is still wound-up over the abortion issue, while no doubt important – to vote or not to vote for a candidate just because of this is rather silly (regardless what side you are on). Hey wake up! We are in an economic hell hole, Russia is flexing their muscle, oil prices and energy crisis is on the horizon, consumers can’t pay their bills, healthcare is an issue, etc. And people are worried about how Obama voted in a state issue about partial-birth abortion or who McCain chooses are a running mate – give me a break. Guess what – the Vice President doesn’t get to over through Roe vs. Wade and Obama’s state voting against partial birth-abortion is not going to have any impact on the Supreme Court. This is an important issue – but really out of the President’s hands and most certainly the Vice President’s hands. It’s just a hot button voting issue that really is not going to change anything. Hey – if President Bush can totally stack the Supreme Court bench (which was already conservative) and they haven’t over turned Roe vs. Wade – what makes anyone think that Obama or McCain is going to do really anything different. We have bigger problems.

Last note – there is a movie coming out called I.O.U.S.A – I think anyone who is going to vote should probably watch this.

Stay Vigilant and sorry I was not trying to charge anyone up on the abortion issue – while important (for both sides) – I really think we should be looking at some more pressing issues right now and make sure we vote on a broader array of issues then this single hot button topic.

8/20/08 (Disagree? Oil Direction? Nationalization!)

Traders,

Yesterday we slipped a little further and volatility continues to be the driver in the market. We saw oil see some strength and the dollar start to pull back as continuing uncertainty in the financials are now followed by the retail sector difficulties.
I had an interesting conversation with a colleague yesterday, while we disagree about commodities and the currency – he is bullish the dollar, I am bearish. He is bearish oil, silver, and commodities, and I am bullish – it’s fair to say while we disagree, he also has justified his reasoning. It’s nice to hear opposing views and if it’s those opposing views that create supply and demand. But what more interesting was our conversation on the topic of futures – he made me think about if we didn’t have futures and relied on the spot market what would happen to prices? He seemed to think that without futures oil prices would plummet to $30 a barrel, I of course totally disagree. I think with a monopoly supplier and world demand we not only would see possibly higher prices than what we have seen traditionally in the futures market. I believe that when you choke down the supply lines to one source, in this case the spot market with one controller of price (taking the multitude of futures participants) – one supplier would obviously raise prices as demand rises.

However, one interesting point that he made is that oil prices WILL come down as we move to alternative energies, this I agree with – but there is a BIG BUT! (Isn’t there always!). The big “BUT” is that assumes that those countries like China, Brazil, India and other emerging countries also start switching to alternative energies. That is something I am skeptical of. I think as long as the emerging markets can purchase oil and to meet their demand they will. China doesn’t seem to care about the environment (look at the air condition in their major cities - same is true for many emerging markets) – so they are not going to see pressure from environmentalist. And true, while our demand (consumption) may slow, China’s and other emerging markets will pick up the slack. Looking far into the future is difficult and I agree with my colleague that eventually the reliance on oil will slow and probably quicker in this country than others as we move to alternative fuels. The question is will the world also move quickly to alternatives or not.

As per oil, commodities, and the dollar. I think we may see oil consolidate at these prices and begin to rally again in the next 6 months and also think the dollar will weaken more unless we the economic landscape changes in this country. My colleague, to be fair, has rational and justified reasons for his theories – it’s fine that we disagree and it’s also good that we do. I rather talk with someone that challenges my thoughts and theories (trying to poke holes in it) that have people blanket agree with me. Being able to define ones ideas helps solidifies them. For fun we have a Prop Bet on the dollar in the next 3-6 months, I think weaker he thinks stronger. I guess there is a icy cold beer on the line as to the health of the US economy.

______________________________________________________
Oil Inventories

Goldman has raised their target for oil to $149 as expectations for stockpiles may show supplies shrank for a 4th straight week. US gas supplies dropped by 3 million barrels last week and while consumption may have slowed we are still in the peak driving season. Oil has come off about 20% from the highs, but gasoline has only come down half that much (if that – depending on location).
On top of shrinking gasoline supplies, some OPEC members have called for cuts. Seems crazy, but some knowledgeable oil people (Pickens being one of them) has already indicated, while we may not be OUT of oil most OPEC nations are already pushing maximum extraction and are having difficulties running close to 100% extraction rates as it is. When you are pumping more seawater into the reserves than you are getting out, well that should tell you something.

As my colleague correctly pointed out that the US consumption rate has seen a decline, my bigger concern is world consumption is not seeing a declines. The question that I don’t have an answer to, while we (the US) are the largest consumer of oil and our consumption is slowing, how much does that off-set global increase in consumption? More importantly, when does the emerging markets surpass the US in consumption? I think that question is “WHEN” and not “IF”. I think we need to continue to look beyond our shores and remember that while we are the biggest consumers we are not the ONLY consumers.

My thought is that it will be hard pressed to see oil break down through $100 in the near-term, in drops below that would be “fat-tails” and short lived spikes before a rush in to buy it up would happen. If Goldman is right and US supplies continue to drop we could see oil rally from these levels.

_______________________________________________________
Fannie and Freddie – soon to be Nationalized?

The arguments are heating up, yesterday a member of the Fed voiced his strong criticism that we should of and should now privatize Freddie and Fannie. Many have said the concepts of the GSEs and their ever extended leverage is creating a bigger hole and thus a bigger bailout. It is clear at this point, without the government intervention and aid at the Discount Window these two companies would be bankrupt.

Now, there is over $250 billion of debt maturing in the next month and rising borrowing costs are putting the serious squeeze on these firms. Sec. Treasury Paulson wants authority to pump unlimited capital into Freddie and Fannie as their capital is depleting fast. As news continues to pour out the shares continue to fall. These companies are like watching a massive train wreck and the government is keeping them afloat by loaning more money – unbelievable amounts.

They are at the tipping point, if their capital runs dry they are done – the most important factor is for them to remain liquid. Paulson wants to pour money into them to remain liquid, Barney Frank and his supporters want to Nationalize them.

Over 40% of all US mortgages sit at these two firms and now these firms are be floated. They have to pay $250 billion at the end of the quarter, they DO NOT have $250 billion – so they are going to have to ROLL that debt. The question is that is really NOT how it works, this is NOT a revolving charge card.

There are 3 outcomes, Paulson gets his way and lends them unlimited amounts to stay afloat, Congress pulls the trigger to nationalize these companies, or we let them fail. The last option will not happen. However remember both the first two is still about lending money – either nationalize them and bail them out or keep them status quo and lend them more money.

It’s a massively ugly situation. Most American’s have no clue as to how bad this is or how much this is really going to cost this country – through more inflation and more taxes. Makes me want to puke. I don’t know the right answer, but you have to hand it to Barney Frank and Congress for allowing Freddie and Fannie to EXPAND their debt and turning a mole hill into Mount Everest!

_______________________________________________________
Futures Pre-Market

We are seeing mixed action, first up then down then flat then up. I think the ARB traders will be sidelined going into the opening and not willing to risk long or short futures legs to against the cash basket. Expect a mix opening and afterwards who knows – energy inventories could inject more volatility when released later.

_______________________________________________________
Support / Resistance

Up is down and down is up. Volatility is the only sure thing in this market.

INDU 11,275 / 11,500 (The range is narrow because we broke that 11,500 area which was the base of the stepping trend. We also didn’t break down through the 11,275 area. It’s anyone’s game in here – who knows – but don’t expect us to be range bound between 11,275 to 11,500. If we break up through 11,500 we could get another big rally if we can’t hold 11,275 we could be heading fast to 11,000. Expect volatility.)

NDX 1900 / 1925 (Another narrow range – we stopped just above the 1900 area and it seems that a couple of issues in the index are pushing higher in the pre-market. 1925 is in the cards, but if we don’t close above 1900 then a quicker move towards 1850 is in the cards.)

SPX 1250 – 1265 / 1275 (We are in a tight pull back. We stalled in a shallow support and we are either going to break out of 1275 or break down through 1265 and head to 1250. Expect volatility.)

RUT 720 / 740 (Right in the middle – it’s fair game in either direction.)

____________________________________________________________
Conclusion

My conversation with my colleague had me thinking about some of my observations, but I continue to fall back to the big picture – has anything really changed in the economic landscape? No, consumers are strapped, the GSEs are facing a bailout of epic proportions, oil consumption on the global scale has NOT slowed, and the massive deleveraging continues. He makes some valid and interesting cases for a strong dollar, but in the short-term – I think with treasury auctions having problems and the lending at the discount window (and now a bailout of the GSEs) means MORE money being poured into the system, not less. The M3 levels are ramping hard – even though the government doesn’t want to look at them anymore. So in the short-term, while the dollar did make a big jolt to the upside – I am chalking that up to the big short covering and a rush to liquidity and deleveraging – I don’t think it’s because things are getting better.

One thing we BOTH agree on is to expect more volatility. I appreciate and respect his beliefs and theories and we should all question everything. Don’t take my opinions as fact, they should be challenged as with all opinions. These are difficult times and no one is going to be right 100% of the time. Therefore as my colleague also agrees with – it’s always best to HEDGE your positions in case you are wrong.

Stay vigilant.

8/19/08 (Muddy Water? Home Depot, PPI JUMPS!)

Traders,


Volatility continues to rule the day as the market gives up steam heading to the upside. These are not the times to be stubbornly bullish or bearish, but rather accept that fact that at any time and any moment the market can make surprisingly huge moves. As the economic landscape remains unclear, investors chase yields, and analyst continue to make rudimentary observations with only a few pieces of the puzzle – we will continue to ride the wave of uncertainty.

The problem with the market is transparency, as we accept the fact that massive deleveraging is happening from the consumer to the corporation, the government and regulatory organizations preventing failure at any and all costs has clouded the ability for investors and traders to ascertain value. Is Lehman OK? Do they have enough capital to manage their balance sheets? We do NOT know because between the SEC short prevention, ability to borrow from the Discount Window, and a plethora of other incestuous relationships between government and regulatory bodies – creates a fog of uncertainty. Buffet last year already correctly called the write downs based on mark-to-market accounting, Mark-to-MYTH.

Freddie and Fannie too are also deep in mud and government regulation and oversight. The slug on the books of no performing paper is beyond $1 trillion (20% of their paper) and it could be worse. It is very possible that the GSEs are quickly to become government owned.

However, the question no one is asking – the Discount Window has been the KEY to keeping the GSEs and financial institutions afloat. The loan traditionally a 30 day short-term loan was only available to members of the FED, has now been made available to NON-members (investment banks and the GSEs). In the history of the FED the money being borrowed is unfathomable, even dunning the S&L crisis we never saw this kind of money being lent, 100s of billions. The Discount Window being open to NON-members was enacted by the FED as an emergency temporary measure – but the amount of money being lent and the temporary limited time (until Sept.) has obviously been extended to January 09 and the loans are now extended from 30 days to 84 days. The question, what happens in January? What happens when the loans are due? Do we really think the Lehman’s and others can pay back (even in 84 days) the 100s of billions being lent? Of course not, my guess is the window will be extended again in January. We may even see Congress change the mandate and powers of the Fed and permanently allow these non-members to borrow money, or even make them defacto members. Talking to a colleague he made an interesting observation, if there is not enough money in the reserve pools and the borrowing of money at the Discount Window becomes the standard of the industry, doesn’t that mean the banks technically have become nationalized? Interesting observation and something to think about. True, as Bernanke has pointed out, that not a single loan at the Discount Window has failed. However, it is also true if you continue to extend the length of time to pay back that loan – you could honestly say that they would never fail. Extending the date may fool some of the people some of the time, eventually someone has to pay, could that be tax payers?

________________________________________________
Producer Price Index (PPI) jumps 1.2%

As the Fed has continued to say that inflation (based on the “Core”) is moderate, the reality is that we (both the consumers and corporations) are feeling it. The PPI, the measurement of inflation affecting companies, jumped 1.2% in July (the Core increased .7%). The forecast by economist had been considerably lower based on the falling prices in oil (.6%) - but the PPI doubled forecasts.

Some economist believe that July will be the peak of inflation measured by the PPI as oil prices continue to come off, however I suspect that while this might be a peak – it may only be a peak in the short-term. Smart commodities people are predicting a rise or continual high prices in oil in the 4th quarter and 1st quarter (09). The peak predictions don’t explain the Core rising by .7%, (their expectations were for .2%) – that is showing that other commodity and raw material prices are also on the rise. While true the dollar has seen a rebound of late, which should curtail CORE rates from further increasing – that assumes the dollar remains strong.

The big questions are two-fold, Has oil prices peaked, not to return? Did the dollar bottom and is now going to continue to rise? If you answer yes to both of those questions, then it is quite possible the PPI (and possibly the CPI) have peaked. If you answer NO to just one of those two questions – inflation may continue to increase.
The futures sure didn’t like the news – and have dropped sharply.

_______________________________________________
Home Depot Profits Fall

As expected, after Lowe’s news, Home Depot follows suit with lower profits. The good news, they fell less than analyst expectations – and the stock seems to be holding ground in the pre-market. The bad news – they are predicting a further drop in profits over the next year and no rebound foreseeable until 2009. However, predictions that far out (IMHO) are pretty much worthless. For Home Depot to predict that next year they will be seeing an increase in profits is a pretty big assumption based on many economic forces that so far even the brightest economist have failed at. Give there short-term forecasts (next quarter) some weight – telling investors that they are going to see profits rise in the 2nd quarter of 09 is “feel good” talk by the CEO – nothing more and nothing less.

They did sell lots of plywood, batteries, and other hurricane related items this last week in Florida as FAY was expected to be more than a tropical storm. Additionally hurricane season is getting in full force now – so we could see some sales increase in the South East – but that may not make up for broader profit short-falls.

_______________________________________________
Futures Pre-Market

The futures were down, but the knock down came when the PPI reported a double jump over expectations. The drop in futures also created a decent spread going into the opening. Expect Arb traders to buy the futures and short the cash going into the opening – to drive that spread to parity. If the spread remains this wide going into the opening – expect ARB traders to put pressure on the cash at the opening = meaning a gap down!

________________________________________________
Support / Resistance

Again – volatility plays a roll and the market shrinks back to supports. Just as we were ratcheting higher, and rolling up your hedges was prudent, we see a mass pull back testing and breaking some of those supports.

INDU 11300 (11450) / 11800 (The 11,450 area is NOT support but a key place we need to close above if we are to hold this area and maintain the ratcheting upward move. If 11450 fails at the close – then the short-term ratchet trend has failed. Don’t get stubborn at 11,450 – that is a place for LONG deltas to have enough Gamma to get them flat to short in a drop by 11,400.)

NDX 1925 / 1975 (We have been consolidating in a wide band in the 1950 area – a solid close above 1950 would be a sign of supporting the consolidation area – otherwise testing 1925 is in the cards. I wouldn’t get long 1925 if we break – but flat with gamma. If you get long at 1925, make sure you have enough gamma to get flat in case we break that line. A close below 1925 means 1900 is in the cards and a visit to 1850 again is possible.)

SPX 1275 / 1300 (Do NOT get long or short hard deltas at 1275 unless you are 2:1 MAX Delta to Gamma – we could and we will rip from that 1275 line either up or down. Calling direction at 1275 is risky unless you can back up your deltas with some solid gamma – and I am not talking about little OTM options, which may not help against hard deltas.)

RUT 720-740 / 760 (Yuck, I would not be buying at 740 as picking a bottom unless I was fully sacked up with Gamma. I don’t think 740 will hold and that means we could have a vacuum suck out down to 720 – as the volume between 720-740 is close to nothing. That means BIG volatility action between the 720-740 area but that range also means don’t go home long or short hard deltas in that range.)

_________________________________________________
Conclusion

The fog that clouds transparency as to the solvency of many financial institutions and GSEs is every more cloudy as the government intervention continues. I heard Mr. Frank already make the suggestion of nationalizing the GSEs (another suggestion to save them) – thanks Barney, who championed this mess to begin with. Was he and Ms. Pelosi not already warned about extending the credit lines and ability of the GSEs would be their doom back in February? It was predicted that if they pushed through their bailout of the sub-prime by letting the GSEs absorb that crud paper – it would mean we would have to bailout the bailout. As much as we point fingers at China and Venezuela (Hugo Chavez) for nationalization of some of their industries – we are lock-step marching in the same direction.

I can’t imagine the U.S. nationalizing the mortgage industry (GSE) or the financial institutions and banks (via the never-ending borrowing from the Discount Window). Not letting anyone fail (citizens or corporations) means we as a government fails – because a loss is a loss – shifting it to the government doesn’t mean it is gone. It means we print more (FIAT) money and tax people more to bailout these losses. I don’t know how much more treasuries we can sell – since foreign nations are sideline on big purchases – as seen in the current auctions as it is.
One of the big questions this election you should be asking yourself is:

1. Do you believe it IS the government’s roll to bailout the banks and consumers?
2. If so, the only way to pay for that is MORE taxes with the very high possibility for more inflation – as the short-term will require printing of more money (via more loans).
That is one of the biggest differences between McCain and Obama.

However, even though McCain may not be for more taxes and bailout – at some levels is really out of Obama’s and McCain’s hands – as Congress, the Fed, and Treasury have already been leading the charge as to bailing everything and everyone out.

I now wonder what could McCain or Obama (not that he would stop it) – be able to do?

Is the problem so big that we have moved past the point of no return – the Tipping Point? Enough so that even a president opposed to such an endeavor is powerless to stop it?

The shift of power is taking place.