Traders,
It seems that while Congress is talking tough they are all on same page about passing this plan, now it is all about details. You know what they say the devil is in the details. There is the Executive Pay, Helping Main Street, Protecting the Tax Payer, Regulations, and for me (while I am not really a supporter of any plan) that Section 8 (which gave Paulson no oversight, not even by any court in the land) - which needed to go.
Last night I watched CNBC ASIA - they had two Asian Economist which both came to the same conclusion, it will be Asia and Europe that bails them out and takes the REAL risk, not the tax payer. This is an interesting observation - their view is simply the US will have to sell Treasuries and sell LOTS of Treasuries to fight off inflation as they pour 100s of billions more into this market from this bailout plan. The HOPE that the Treasury and Fed have - is that Foreign money will BUY Treasuries. However, at this point both these economist said there is NO DOUBT that there will be a severe recession in the US and on top of that the 700 billion is buying illiquid positions that NO ONE will buy because the losses are too great. They went as far as to say they were both SHOCKED that Congress believes Paulson and Bernanke that buying these LOSSES and that they could possibly make money. They pointed out that if they just did the math there is NO WAY these positions can make money, based on the prices (the models) in which they will purchase them. They are giving these companies huge premiums for these positions that have not just lost VALUE, but are not even seeing ANY revenue on them. They went even further to point out that if the government wishes to sell them back in the future - they would be taking huge losses because of the value difference. One made a funny statement, he said the: "Bailout plan is based on the same belief that got them in trouble - the belief that the housing market will always go up! They are making a 700 billion bet and paying a massive premium - betting on the housing market rallying!"
They concluded, if the pass this plan there is a good chance that they will have trouble selling US treasuries to foreign countries, who WILL be the ones holding the risk. Congress says it the tax payer that has risk, that may only be true - but down the road. The risk on the front-end is any foreign nation (foolish) enough to buy MORE treasuries on this bet. If foreign investment funds have already passed on buying this paper, why would they want to do it by proxy - purchasing the dollar backed treasuries?
I must say they have a point and I too am very concerned about how this will put huge pressure on the dollar, while we may get a knee-jerk rally in the market, the risk will be shifted to the government and there will be a question as to how much will foreign money pick up the tab. There is a REAL increase in pressure and with this plan a serious possibility to see the dollar devaluing - we have already debased our currency in the 1964 on coinage and in 1971 with paper money (gold standard) - the only thing now is devaluing.
No nation in the history of civilization has devalued themselves to prosperity!
That is EXACTLY what we are doing in this nation.
_________________________________________________________________
GE Cuts Forecast
On the eve of economic changing events, GE cuts their forecast and suspends the buyback they initially plan. Causing more concern in already a very fragile market. They lowered expectations to 43-48 cents from 50-54 cents (between 5-20% cut). GE is increasing capital in the GE Capital to reduce their leverage ratios (as I continue to say - this is about deleveraging) - they are doing this by cutting the dividend and suspending the buyback. The dividend will continue to pay the dividend through the end of 2009. They are also looking to reduce their commercial paper to 10-15%, which too will take time (finding a buyer).
The concern really came down to keeping the coveted AAA credit rating - which after the news both S&P and Moody's affirmed the rating today.
GE is getting hit in the pre-market.
________________________________________________________________
Buffet's $5 billion BET on the Bailout Plan!
Too much is being made of Buffet's $5 billion dollar purchase. Even CNBC is using it in an ad, as Bernanke said something along lines as "Buffet on CNBC said he purchase $5 billion in Goldman because he has confidence that Congress will do the right thing!" I think he should of said that he HOPES that Congress votes for the bailout plan, because I just made a MASSIVE bet that they would.
Also - you need to look at the DETAILS of Buffet's investment - it is more of a very cherry loan than an investment. Very cherry - how many people do you know are getting a 10% dividend when they purchase stock! Also - why do you think Buffet made this investment in Goldman? It certainly wasn't a value play - if it was why is he asking (and getting) a fat dividend? It's called a safe haven investment.
See - Buffet like the rest of us is looking for safety. He sees the following - Treasury Sec. Paulson (who happens to be the Ex-CEO of Goldman) about to be granted super powers and a $700 billion check. You have to think that Goldman will continue to be FIRST IN LINE on any money. That plan in smart money eyes - is simply a massive put against bad paper. Goldman (and others) will be able to dump bad paper on the tax payer slush fund. So of course he is going to say it's a good plan and he has confidence that Congress will do the right thing. He just made a $5 billion bet that they would!
Look - I like Buffet - but no one EVERY questions him and thinks he is that nice guy. He is a shrewd businessman, a vulture, a very hard negotiator that has no problem bending people over to get the great trade on. He also does it with grace and style. He is very nice and accommodating - people probably just don't know they gave him their wallets - because he asked so nicely. I like him, have no problem with that, but please - don't think he actually believes this is just a good plan. This plan was a HUGE opportunity for him - he saw that it was a high probability of happening and rushed in to get a great trade on (with a 10% dividend). So of course he is going to say it's a great plan - and NO one will question his motives as to it.
The talking heads actually BELIEVE that his investment in Goldman is to show confidence in the market. I have to say that was a brilliant piece of marketing for making a huge trade based on a bailout package. Obama and McCain should higher his spin doctors. I need a snow shovel listening to these talking heads.
It was simply a good bet - getting his money closer to those in charge that have a $700 billion check (Paulson) and getting a fat dividend in the process. He NEEDS the bailout plan to go through to secure his bet!
______________________________________________________________
GMAC Future uncertain
GMAC is only one company, $150 billion is 20% of the entire $700 billion bailout package. I think it is going to take a lot more than $700 billion. Also, Paulson never worked for GMAC, so we KNOW that they will be behind Goldman.
At this point they may not be able to afford leasing or making auto loans - the money is just that tight.
______________________________________________________________
Interest Rate Cuts?
Fed Fund futures are expecting another cut. Clearing showing the risk to the credit markets is a lot greater than we are expected to believe. The need to shore up the money markets (with $50 billion) is a clear sign at how bad and tight credit is. The spreads in the lending market are widening and a rate cut could relieve pressure.
Sure the bailout plan will inject money into the system, but that is just to free up the bad debt. A cut in the rates will ease lending. Fed Fund Futures are expecting a cut, but they did last time and it didn't happen. Maybe this time they'll be right.
______________________________________________________________
Futures Pre-Market
The futures in the face of the bailout plan and GE's lowered forecast is seeing a "Hope" rally as Congress and the Administration try to work through this bailout deal. The ARB traders can participate - because it is a short future vs. long cash trade. Which if the spreads remain - expect a slight pop.
_____________________________________________________________
Support / Resistance
Yesterday we sat the support levels in the holding pattern. We are right on the edge - it's now about selling the hope and faith. Bringing confidence to the market and "praying" for a rally.
INDU 10,500-10,750 / 11,000-11,500 (We are building up a charge for a move - don't expect that we will sit here.)
NDX 1650 / 1700 (We are in the bottom area of support - this market wants to rally on Hope)
SPX 1150 (1200) 1250 (We are right at the pivot point - waiting for Congress to save the day again - expect a move)
RUT 680-700 / 740-760 (This market has a wide band - we saw big losses yesterday in the broader market - not really a good sign)
___________________________________________________________
Conclusion
You want faith, forget watching the religious channels just turn on C-SPAN / CNBC / Bloomberg - it's all about selling the Faith. If we want a bailout package, then $700 billion is not even CLOSE to being enough. If GMAC alone has $150 billion (20%) can you imagine what the rest of the market is like. We are talking in the 10s of trillions in debt obligations.
The reason I do not support this bailout plan is simple - we will NOT find a bottom to the market and we put huge risk and pressure on the dollar. It is interesting if you listen to other nations economist and analyst - they have a VERY bleak picture of the US and shake their heads with long faces as to this bailout package. They are sick of hearing the tax payer concerns - because it will not be the tax payer that INITIALLY puts up the money for the bailout - it will be MORE lending by foreign governments. The problem is twofold - if they DO lend more money it is on very low interest rates as it is (that maybe lowered further) on a dollar that by even CPI estimates has a negative ammo. If they look at the short-term paper it is already trading close to NEGATIVE face value. I get the feeling there hands are forced to do so - because of their trade relationship. But what is interesting is that on 10% of China's GDP is based on exports to the US, not as big as I would of thought. China as early as last year mentioned they would not be renewing a trillion in treasuries, they are openly purchasing the Euro paper and also gold. Can they decouple? Will they come to the rescue and buy more treasuries? That is really where the hope lies.
Listening to Jimmy Rogers - he says this is not going to be good and the dollar is going to get worse. Recession is coming and it is coming in a big wave - this bailout will NOT jump start the economy - but rather just toss a lifeline to companies so they don't sink today. The question remains the Dollar - something not a SINGLE Congressmen has brought up.
Maybe they should start listening to Asian and European economist and analyst - since they are the ones we are REALLY going to for a hand out.
I will leave you with this famous and very true quote:
"Paper money eventually returns to its intrinsic value --- zero."
Voltaire (1694-1778)
No comments:
Post a Comment