Traders,We sold off pretty good yesterday - was that the bottom? Probably not - we have more to go most likely. We could get a bump today - but it's a crap shoot. The reality started to set in, things are only going to get worse until the full deleveraging is completed and it seems like we have a long way to go. We also saw oil rally back and huge move up in gold as the faith in the dollar began to fade. It seems that it takes a day like yesterday before people start to realize that we as a nation are printing money with no backing (other than faith in the government) - the government's job now is selling that faith and they better be VERY good at that.
AIG story came and went very fast - just little over a week ago it seemed fine - now it's gone, so is Lehman - that was fast. Now Morgan Stanley and Washington Mutual are on deck, do they survive the weekend? The market sold off pretty orderly yesterday - it was a big move - but I still didn't see panic (nothing like 87, 97 Asian Flu, or even 9/11 type levels - yet). Do we get a panic or just continue to drift lower?
Yesterday the CEO of WHACKovia sent an email to employees - I guess to sell the faith. It is important to note that these emails are going out at every bank, I have seen several of them (Washington Mutual, B of A, Citi , etc.) - CEOs from time-to-time send out emails to employees - however maybe it's time we read these a little more carefully, as they could be hints as to the issues the banks are having. There is nothing in the email that we don't already know and is also reported in the media, it's just interesting to hear it from the CEO himself - maybe I am reading too much into it.
Here are two parts that got me concerned first the Lehman positions close to $500 million, could that mean that (like others) they could halt money market redemptions:
"Following the Lehman Brothers bankruptcy, we have made great efforts in the past two days to unwind certain transactions with Lehman Brothers and replace Lehman with different counterparties. Overall, our direct exposure to Lehman Brothers is modest and consists primarily of support agreements from Wachovia to Evergreen money market funds. Under these agreements, Wachovia will support the value of Lehman credit in the amount of approximately $494 million held in the funds. We’ll continue to monitor developments relating to Lehman Brothers closely."
Second, the selling the "hope" - but I think the first sentence in selling the hope could have been stronger.
"We cannot predict with certainty how events will play out. But let me be clear: For years Wachovia has been a forward-thinking force to help fuel business growth, create and manage personal wealth and build strong communities. We intend to remain focused, continue serving customers like no other competitor and utilize our many skills and talents."
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WaMu on deck!
Washington Mutual is rumored not to last the weekend - bailout, bankruptcy, or takeover. That's the rumor on the street anyway. They have also said they are publicly up for sale and have hung the for sale sign on the door. But there are some big concerns there over their $300 billion balance sheet and the $58 billion loan from the Fed Home Loan Bank - which HAS to be paid back.
The question - which is going to buy them? We are running out of buyers out there. Is WaMu too big to let fail? Some say yes - but can our government afford it? It could be in play as early as this weekend. Remember - things are happening FAST.
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Morgan Stanley , Deal or No Deal?
Rumors are that Morgan talked with Citi and Wachovia. They are also talking to a bank in China. It is a race against time - they either need to raise money (selling a stake in Morgan or through a loan) - or has to sell/merge with a bank. So here are the possible outcomes, merger with Citi or Wachovia, full sale of the company to international bank (Chinese), raise money via selling a huge stake in the company to a Chinese bank, or .... I don’t want to say it....Can Morgan survive without a merger, sale, or investment? That is the real question - many think they cannot survive, while earnings did look good they still have some liquidity concerns, the stock was also hit for over 20% yesterday and concerns have several large private funds/hedge funds leaving Morgan looking for more secure pasture. Those are huge accounts that Morgan cannot afford to lose.
It's fair to say they WANT to remain independent and would rather sell a stake in the company. Wachovia (by some analyst) is not a real player as a merger candidate - because they have huge problems on their own balance sheet – it WOULD be surprising and would not give firms at Morgan any feeling of security. Citi is a possible player - but they already have a large investment bank arm. There are even some that think that Goldman might be interested in some kind of merger. One thing that IS for sure is that Morgan will probably not remain independent - unless he can do something quickly.
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Russia halts market again
Russia has halts trading in their market for a second day. It is seeing similar problems that we are with massive deleveraging and liquidity concerns. The government is also injecting capital. It will be interesting to see what happens when they do open their markets.
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No Liquidity – Central Banks inject more money
We are in a massive liquidity crunch, last night before the European market opened the World's Central Banks auction off currency over $200 billion in currency (around 4%), since the banks are tapped and are not lending to each other (LIBOR is up and that is causing concerns). If banks have any money – they are holding onto it – that’s sending lending rates up fast.Europe markets got a huge bounce when the news of the injection of capital should grease the liquidity concerns, but as one economist said, “Liquidity being created by the Central Banks might reduce the LIBOR rate, but that is NOT because they are lending to each other – it’s because they are getting liquidity directly from the Central Banks. What happens to LIBOR when banks again go back out to borrow money?”
Yesterday I mentioned that several Money Markets have also been frozen – clearly – liquidity is an issue. Hopefully this massive injection will ease that problem. It’s important to note the injection was made in the European markets.
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Oil
Oil sold off pretty hard as the market started coming off - I talked with a trader who mentioned a big part of seeing oil coming off was many institutions and funds selling out positions to reduce leverage and raise capital. It was not a positional bet because of oil demand/supply lines - but rather freeing up capital. Now we are seeing oil rally back fast - we are back to $100. I expect we could more volatility in this market. It is interesting that Oil prices came off almost 40% from its top but gas prices only came off about 5%. There doesn't seem to be that much connection between the two – as much as people initially thought.
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Gold and Silver
Rumors came out earlier this week that China was buying gold and also looking to fiat inflation hedges. Silver and Gold have come off pretty hard. But yesterday a ripple was felt as if the market for the first time was concerned about the US currency (the faith began to fail?) - gold ripped up $90 an oz, silver also was up over 10%. Is there something to be concerned about? Well - it really comes down to the government's balance sheets and is they able to sell assets or raise money via treasuries. The US mint stop issuing gold and silver (1oz coins) about a month ago - WSJ stated that it was because they ran out (but did they just run out of minted coins or the actual metal) - true the US government has been selling off gold before and after the we came off the standard in 1971 - there has not been any audit of how much is left - so who really knows.
Secondly, the secondary treasury auctions have been very weak, more that 50% of the market makers have left the market - I think they are down to 16 market markers. China had announced that they would NOT be renewing treasury positions as they came due and have actively looking at NON US back assets. Several other countries are following suit. Some nations are trading oil in other currencies, rather than the dollar. As the world reserve currency it has fallen, but is still above 50%. The question remains - can the dollar remain strong, sure - as long as we have faith. The problem is that faith is starting to fade as investors domestic and abroad - as well as governments - are looking for alternative holdings - not just the US Dollar. Keep an eye on the Dollar as a reserve currency – if it breaks below 50% we could see the dollar get weak fairly quickly. That could also spur more inflation.
I predict that inflation will continue to increase and we could see the dollar seriously slip more against gold (metals) as well as foreign currencies. It really comes down to the balance sheet of the US government and if people have faith they can get the debt and budget in order. In an election year it is also hard to know not only WHO will be president, but which president will get a better handle on it. Then after being elected it will take time to prove they got a handle on it. It takes years to get the budget and debt back on track - it also takes Congress to get back inline as well - the president can't do it alone.
I still think Silver is undervalued at these levels.
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Futures Pre-Market
Futures are getting a jolt as the World Central banks are injecting 100s of billions of liquidity into the system and also the more hand-cuffing of the short-sellers. Both (IMHO) short-term solutions that might give the market a boost - but doesn't solve the credit crisis problem. Futures are up fairly good in the pre-market. If the spread remains - expect Arb traders to short futures and buy the basket into the opening - which could create a boost to the market at the opening.
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Support / Resistance
Supports, we don’t need stinking supports! Ug – we are seeing a rally in the pre-market, but could that be a knee jerk opening to the injection of capital? Who knows – the market is making no sense at this point.
INDU 10,600 ??? / 11,000 (I don’t know if 10,600 is support – we closed on a low as sellers kept selling into the close – usually not a good sign. The opening is looking higher from the injection for capital – but who knows. At this point it is really anyone’s guess. Expect volatility – we certainly are not going to just sit here at 10,600.)
NDX 1600 / 1700 (We have completely blown through any supports – that means big volatility and more volatility. We are really at the hands of volatility at this point.)
SPX 1150 / 1200 (Again – we could be at 1100 or 1200 quickly and without thought. This market is seeing massive margin calls, huge selling and massive short covering. It’s a crap shoot.)
RUT 660 / 700 (The only index that DOES have support is RUT – it’s around the 660 level – 680 was short-term support and we are there right now. 660 needs to hold to see the rest of the market find some common ground.)
Short covering could come into play today – so we could get a pop – that pop could be intra-day or the whole day. The market is looking higher at the opening – but at this point who knows how the day will unfold.
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Conclusion
We are seeing things unfold at a record pace - we turn our head and one of the Dow components is gone (AIG), next is Morgan and/or WaMu. What next - I think we will see more surprises this weekend and also next week. We are far from over as the entire system is going through deleveraging.
The questions we should be asking ourselves:
1. How long is it going to take to deleverage the system?
2. How much debt can the Fed take on before it threatens the strength of our currency?
3. We are heading into a recession - how long will it last?
We are seeing an unwind of a massive kind - it is hard to say where the bottom is. Right now too many people are pointing fingers, rather than trying to solve the problem or get in front of the issues. These are serious times and the Fed/Treasury/Congress is focusing on the bailout train - they barely have enough time to solve any of the fundamental problems. I would further argue that their bailouts are bringing a new problem to the table and that is more pressure on the currency as they take on more liabilities.
The US is going through some major changes - a slowdown in consumer spending and massive deleveraging.
I get asked - where to put my money? I would say stay hedged all hard deltas (both long or short), I have been a big believer in silver and gold (as part of any portfolio), I have been a believer to get invested off-shore (foreign bonds and currencies), I also believe that investing in commodities as well. There is NO magic one bullet answer.
Expect more volatility
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