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.
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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.
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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?
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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.”
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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.
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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.)
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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.
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