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


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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!

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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!

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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.

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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.)

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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.