Traders,The INDU came back and closed down through the 11,500 level – I guess it wasn’t support as expected. The continual volatility is the only thing that we can expect as 200-300 point moves in the INDU are becoming the norm. I really don’t know how long-term investors are able to make heads or tails out of this – what seems to be happening is the knee jerk flush of money in-and-out of treasuries and back into the market. Just when we see the RUT go up and the yield in treasuries go up – the opposite occurs as they rush back into treasuries and we see the RUT come back off. Chasing yield (and supposed safe havens) seems to become the game of the moment – with flip-flopping opinions daily jerking the market around.
I find it interesting (and amusing) that most analyst don’t like to look at the big picture, they rather lock on to ONE piece of data or news to justify their opinion. If they would just take a step back, a deep breath, and look at the whole picture – rather than a single piece of government data or new item – I think they would be better for it – maybe at least limit the new jerk reactions that continue to be the norm in this very volatile environment.
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Fannie Mae
As analyst gave Freddie a very low bar to get over (a loss of 54 cents) – which Freddie managed to tumble over with a loss 3 times that amount, so too is Fannie (Freddie’s sister) tripping over that same low bar. In the 4th straight quarterly loss – Fannie (like her brother) is cutting the dividend by 85% as if that will help. The loss of $2.51 a share, didn’t shock the analyst that much with their .72 a share loss estimate – as Freddie also tripped hard on their earnings. The dividend is now a measly $.05 a share, at which point you might as well just cut it all together.
These reports clearly indicate we are now well on our way to bailout the bailout. Yeah – thank your Congressman for turning a mole hill into Everest. Lifting the lending restrictions and giving them the ability to leverage themselves (pretty much to infinity) has put them on the fast track to a massive bailout. What really pisses me off is that these GSE’s are public companies and they NEVER had government backing (even though many were convinced that the government would not let them fail). Nancy Pelosi and Barney Frank were warned by smart men and women just 6 months ago that just because they ARE GSE’s doesn’t mean that the government can lift lending restrictions and allow these companies to bailout and take down more risky paper. Because when it comes down to it a loss is a loss – it doesn’t matter if you move it into the GSE it is still a loss and someone will have to pay for it. The Congress was warned that if we DID allow this to happen the implied assumption that the government would bail them out when they too failed is now becoming a reality.
The sad truth is rather than have a bank or public company fail and the shareholders lose – now those losses are now on the tax payer’s back – all thanks to our Congress NOT letting anyone fail. We haven’t even scratched the surface and both Freddie and Fannie will soon be fully nationalized companies before this is over. If you look at the math the leverage is too big with too many defaults to get them back into the black. It will take at least a decade and the government (taxpayer) will be paying for it.
Of course socialism is becoming more and more popular as the economy worsens because everyone wants mommy government to bail them out. Think about this – Congress has let Fannie and Freddie to increase their leveraged position in mortgages to over $5 trillion dollars. Anyone that can do basic math can see they do NOT have enough money to carry those positions if just the smallest fraction of that $5 trillion fails. Of course that is not a problem – Congress will just lend them MORE money. And the cycle continues.
Expectations is that they will need to raise another $15 billion just to stay ahead of the losses, and that will probably only last a few months before they need another $15 billion. They have also been granted access to the Discount Window to borrow money (which again is unprecedented).
The more I read about this the more I just want to puke. Who ever came up with the idea that our government should create these GSEs or for that matter be in the mortgage business needs to be taken out for a good beat-down. At the end of the day it is you (the tax payer) that will be paying for this. Expect MORE taxes!
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MBIA reports a net income?
Well it sounds good and looks good – but you have to do the math. They are reporting at $1.7 billion (or $7.14 a share) gain after a change in accounting allows them to book mark-to-market derivative hedges against devalued losses. It becomes even more interesting that the net income was not generated from an increase in business, since that has significantly shrunk after it lost its AAA rating. So how did they book such a massive gain in just one quarter – after this company had all but failed.
It’s called accounting magic – the new accounting rule allows financial firms to report gains when the market prices of their liabilities fall (YEAH RIGHT!) - See they get this special magic dust they can sprinkle of their accounting books and WA-LA those losses are now gains – because we can book the hedge as a profit (even though the hedge has NO REALIZED gains!). It’s sort of like owning a put on a stock – the stock falls and the put the hedge increases in value. Now you book the intrinsic value increase of the hedge as an actual gain. Thank the accounting gods for that brilliant magic. While this is a simple explanation – it is probably the game they are playing – I for one am calling their bluff!
Most analyst are scratching their heads as this company’s business has shrunk by 50%, loss it’s AAA rating, and had more risk on the books – but now they are reporting a massive gain?
``It seems odd to me that they haven't taken any more losses,'' said Rob Haines, an analyst with CreditSights Inc. in New York. ``The market continued to deteriorate during the second quarter and that was reflected by their competitors in their results.''
It sounds like something Congress came up with to help these failed companies. The Bailout is in no doubt full swing!
Don’t drink the Kool-aid
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Futures Pre-Market
We had seen some gains in the futures across the board – but I think the Fannie news is putting a little damper on that. Oil has come off pretty hard and is down below the 120 mark, as US consumption slows – that had initially gave a boost to the futures. The spreads are fluctuating so I think the ARB traders will wait till the opening – rather than to leg into opening risk.
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Support / Resistance
INDU 11,500 support or resistance – at this point who knows. I expected it to be revisited this week and suggested to get flat because we could bounce up or breakdown from there. The reality the rally we have had was baseless – except for optimism the worst is behind us. The government is doing everything in its power to keep companies from failing and putting the brakes on the market to keep it from going down.
INDU 11,500 (From resistance to support back to resistance. We could visit it again today or not. Expect only volatility. It think treating the 11,500 line as a straddle strike and flatten out deltas is the safest bet as the market really doesn’t know up from down. 11,275 is also in the cards so play the gamma and if you are long or short deltas expect to get whipsawed – you will!)
NDX 1850 / 1900 (We revisited the 1900 area yesterday only to give up and head back down. The index was mixed with big gains and big losses. Expect 1900 or 1850 – we are right in the middle. Futures are flat at the opening – so any indication at the opening is a tossup)
SPX 1250 / 1290-1300 (We again did NOT get to 1300 after 3 tries in as many weeks. We are also looking a little weak this morning. I think 1250 could be in the cards and while it would seem to be a support area – treat it as a straddle strike.)
RUT 700 / 720 (I said yesterday that I didn’t think 720 was a support area and after watching the yield collapse in treasuries – it was just a sign that money was flowing back out. Futures are looking lower to flat and we are right in the middle again – is it 700 or 720 we visit? – who knows – but expect volatility.)
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Conclusion
By the time you read this the Olympic games are underway in China. I am actually excited to watch the games and there should be some great competition. Of course all the protestors are out in force – while I may not agree with China’s political philosophy – couldn’t we just give it a rest and let these young men and women from around the world compete and allow them to take pride in their abilities? Maybe we should stop worrying about China and their politics and start focusing our attention on our own problems and troubled economy.
So with that – go home and enjoy the Olympics –the market will be here on Monday with more volatility – not less.
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