9/2/08 (Hot Topic! Gustav Dud! GM Volt! Lehman Rumors!)

Traders,

Well, I did get a lot of feedback from my father’s story of seeing the Obama’s speech at Michael Moore’s theater in Michigan. Please understand that I was also teasing my father a little (as he does read this). However, we did speak over the weekend, my father meet Michael Moore at the theater and was glad to hear that Michael Moore is making his theater available for free for the GOP’s McCain’s speech and also some of the independent party platforms – that is very admirable.

I also received several emails both praising Obama and praising McCain. First, let me clarify the purpose of mentioning politics in the Market Preview – while politics are a very hot topic, as there are issues from Abortion, Prayer in School, Death Penalty, Gay Marriage, etc. I will never discuss the pros or cons of any of these issues, nor try to convince anyone of their personal convictions. These and many other issues are personal and important to each and every American. However, the Market Preview WILL cover political issues that will affect the market, including Trade (NAFTA), capital gains (taxes), oil issues (other commodities), Congress and the bailout of the GSEs, the Discount Window, etc. Unfortunately politics, economics, the markets are all interwoven.

Let me clarify that this election WILL affect the market, trade, the dollar, oil, taxes, etc. And those are the issues that I will discuss as they pertain to politics. As to anyone that took offense to my teasing of my father, or making little of any of the issues, I do apologize sincerely and will remain focused on only the economic effects of these conventions. Tensions are running high and I do not want to instigate anyone.

As to the market – Friday saw another crack to the downside fast and hard across the board. It seemed that no one wanted to hold positions going into the weekend and the possible risks of the oncoming hurricane.

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Gustav a bullet dodged?

It could of gone either way, the small shift in temperature and the quick diversion of the path moved the Hurricane on shore as the strength weaken. It’s amazing that only a couple of degrees in water temperature and/or a change in pressure and weaken/strengthen and also redirect a hurricane. While damage looks to be in the 4-10 billion range (3rd largest damage reporting in the area – with only Rita and Katrina topping it) – they managed to evacuate the majority of people, the levies (so far) for the most part held, and the refineries and rigs seem to be ready to go online in a day or two.

Oil prices on the Globex session sold off very hard – down $8 points. The electronic trading in oil was lighter than normal over the holiday – which added to the volatility, initially up a couple of points and then down sharply. A few oil traders are expecting a 100-105 bottom range in oil as a supporting area. A couple said that the oil trading was a little hyper volatility, mainly because of the holiday and electronic trading – where many firms were not able to trade in ETFs or other oil related products since the market was close.

I seem to hear two different views about oil prices in the 100-120 range, some say that oil has come off hard from 140 because of the falling demand and that oil prices have lots of speculative premium in them. Others have said we still remain in these high ranges because of several factors from Russia in Georgia, the volatility in the Middle East, and also the increased activity in the Hurricane season.

Regardless if the glass is half full or half empty view – we are still in the 100 plus range and it looks like we may stay in the upper bands for some time. Oil has come off fast and hard from the upper band in the 120 plus range (part of that jolt upward was from the massive short position by SemGroup that was covered to the loss of $3 billion plus) – so I am not sure you could of ever said that 140 range was fair value.

For now the massive pull off of oil futures may be over done, but they are sending a HUGE jolt to the futures in the pre-market.

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GM Shocked or VOLT?

GM has put all their eggs in the new “VOLT” electric car – expected to be rolled out at the end of 2009 or early 2010. At the same time they are pushing their hybrid lines, which for some reason are not getting the same kind of traction as foreign hybrids. A recent report showed that the Prius out-sold the entire line of GM’s hybrids (they have 8) by 2:1. GM was late to the party and also has some serious legacy issues – still not being resolved.

Another interesting report showed that the average GM starting salary is $28 an hour, - the highest starting salary of any manufacturing job in the world. GM also has a 6 billion annual legacy costs (retirees and health care) which they have to borrow to cover the costs, which means taking on more interest. The legacy program is something their competitors don’t have clogging up the books. The UAW and GM did come to terms and GM will be unloading the legacy program over the next couple of years – giving the UAW full control over it.

However – GM is still running a huge deficit and this year’s auto show’s golden moment was the “VOLT”. Many analyst are calling it a make it or break time for GM, if the VOLT fails – not meeting expectations it could be the final nail in the coffin and Merrill Lynch has even gone as far as saying the “B” word is a real risk. GM as a whole is not attractive take-over target, their billion a month burn rate, huge truck inventory, restructuring, vs. revenue is still running in the dark red. They HAVE made huge strides to survive – but we really will not know all the results probably until the end of 2009 or beginning of 2010. There are too many unknowns at this time.

For now – even GM says the 2nd half of 2008 is going to be a very rough ride.

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Lehman – the latest rumors

First it was a Chinese and Korean bank that were going to buy 50% stake in Lehman, the next day they were walking away from any deal, the next day the Korean bank was going to take them over, then again we are told that was not going to happen. This morning, the bank is back at the table talking about some kind of merger – again sending a spike to the upside in Lehman stock.

The stock has seen 20-50% moves up and down as the rumors surface and then fade. The facts are clear – Lehman has a balance sheet loaded with liabilities, they have sold stock, borrowed money, foreign investments, and also going to the discount window. They fired their CFO – who said she had a handle on it and the worst was behind them, until David Einhorn called her out. They NEED money – that is clear – the question is HOW MUCH and what does an investor really get for that investment?

The reality – is you are buying a ton of illiquid positions that you believe they have written down to some level of fair value. You either think those liabilities will pay off or not. The current income from their commission and clearing business is attractive, but is pales in comparison to their liabilities – that is why we are not seeing any clarity on any deal.

Simply, why would you sell your company or even 50% after the stock (it’s market capitalization) has fallen 70% - technically the bottom? Because you really don’t have any choice – either you raise money or you stick a fork in it.

Lehman needs a deal – and if it does get one expect a pop in the stock, but don’t expect the balance sheets to be cleared of their issues. The liabilities are just being put on someone else’s shoulders.

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Futures Pre-market

The futures were flat to down and then started rallying hard as oil futures started coming off once we saw the hurricane not doing the type of damage that it could of done to the oil rigs and refineries. The spread is huge in the futures – front running the cash. Expect Arb traders will short futures going into the opening to buy the cash basket to close the gap into the opening. Expect a large pop in the indices at the opening.

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Support / Resistance

The market is seeing huge wipe saws as positions are covered – for sure margin calls will be the focus of the day both in oil and equities. So expect some violent up and down moves (in the respective products).

INDU 11,500 / 11,750 (We could easily see a hyper rally at the opening and even get to the resistance level. Expect huge moves at the opening and then as positions are managed, margins are called – the market to tame down a little.)

NDX 1875/1925 (We are seeing a massive jolt to the upside and 1900 does seem to be a intra resistance area – but we could break that at the opening and head a little higher. The big move in the market – up and down – is NOT about fundamental changes but massive repositioning that will continue to drive markets in these hyper moves.)

SPX 1275/1300 (We could certainly visit the 1300 area and even pop through it. However – don’t let opening up or down knee jerk moves dictate the positions going forward. We are going to get a HUGE pop at the opening – but anything could happen after that.)

RUT 720/760 (We are back in the middle of this very wide band – expect extended moves up and down 750 or more is realistic at the opening.)

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Conclusion

The market is getting the big relief the hurricane didn’t do damage rally. Oil has come off hard in the early session and futures are ripping for no other reason that oil has come off. We will see slight squeezes in oil and gas supplies as it will take a couple of days to bring them back online, however this is a knee jerk rally just like Fridays’ sell-off that the 2nd Katrina was going to hit. The market is moving on huge perceptions up and down. We have no clue as to which candidate is making ground, the GOP choose their VP which sent a shocking jolt to the political story over the weekend as well.

Clearly there is still uncertainty across the board and good news will send upward jolts to the market and bad news will send the market falling. We are trading in the present and not the future – because no one knows the future. From the next president, credit crisis, Russia, oil, etc – this has been and will remain the year of volatility. Today we are up hard, tomorrow we could revisit the lows.

These are times to be nibble until a certainty, even a little can be determined.