9/3/08 (More Money? WHACKoiva, Coke is it! Yo-Yo)

Traders,

Yesterday saw initial euphoric action to the upside as oil was coming off hard. There was no real reason for the rally other than a knee jerk response to oil, after that subsided the market gave up and started to slip fast and hard. We face a fight between optimism that things are getting better vs. reality of the economic credit crunch. Oil sold off hard on Monday (market was closed) and into Tuesday pre-market. Other ETFs and oil related products were not available to trade, volume was light, so the volatility was high and exacerbated. Oil rallied off the lows and while it did close significantly down, it was well off the lows of the day. That is not to justify that oil should be at these prices, but rather to point out that the volatility was higher than usual.

The big shocker was the INDU moving up over 200 points and then giving it all back to finish negative on the day. What had many scratching their heads was the strength of the dollar and weakness in commodities – how come the market sold off? It’s funny – if you listened yesterday to CNBC in the morning – ALL MORNING they were saying the market was rallying because oil was selling off. Then at the end of the day they said the market sold off (and was down) because oil had sold off. Which is it? As you can see even when the talking heads have to flip-flop 180 degrees in a single day – no one really has any grasp as to what is up and which is down. Yesterday is the poster child of a volatile and uncertain market. As I continue to point out this is the year of volatility – trying to be a Bull or Bear is useless – because there are no solid fundamentals to base any investment stance on. One day it’s great to be in commodities, the next equities, the next treasuries, etc. People are chasing two things with no clue – yield and safety at any given movement on any given day. I wish we COULD make heads or tails out of this market.

There is no light at the end of the tunnel and that is the problem, this is also an election year and there is no clear leader – since the economy is in economic turmoil there is a level of expectations that either Obama will make some fundamental huge changes that will affect taxes and the market, and McCain – being a historical maverick, is also a wild card to a certain extent. As much as people say he is just an extension of the Bush years – I think he is more of a wild card than any of us would really like to admit. Look at his shocking VP choice, not to mention his constant battle with Bush over this or that. I think both candidates are a wild card and that also has the market nervous. Whoever wins I don’t expect more of the same – I expect change and maybe that change will be for the better or worse – and that seems like how the market is perceiving this as well. There are serious economic and foreign issues on the table – just ready to inject a huge dose of volatility into the market.

____________________________________________________
More money needed!

Barclays is looking for more money and it could be as much as $13 billion. Barclays is the 3rd largest UK bank with a significant presence in the US – it is also an issuer of a large array of ETFs. The problem, like with many banking and financial institutions is the need for capital to meet capital to position ratios. The continual losses in illiquid positions is causing rot on the balance sheets. We have also seen some trickery of moving assets of balance sheets or relabeling them to keep the capital ratios in line. Regardless these positions continue to create havoc.

Some other investment firms are seeing a huge draw down in their investment in Ospraie Management, a very large investment firm that has lost over 38% this year. One of their long commodities fund has been taking it on the chin and hard. It’s interesting to note that while one fund is losing as the market pulls off, another (SemGroup) lost big as the market went up. We ain’t talking millions, it’s billions. So what? The reason to be concerned is the massive investments from other investment banks into these very large and to some extent illiquid massive strategies. Lehman for instance held a huge position at Ospraie, 20% of their commodity fund. This doesn’t paint a rosy picture for Lehman because they don’t need to report MORE losses as they are trying to negotiate a sale (merger, takeover, etc) with the Korean Bank (if rumors be true). It looks like Lehman maybe visiting Bernanke, again, sooner then we think.

The credit squeeze is the continual story that doesn’t seem to be going away. Eventually if we pour enough money into the system we will find a bottom, the question is that can we find it faster than the rate of inflation? Doesn’t seem like it yet!

____________________________________________________
WHACKovia continues to struggle

Wachovia has been in and out of the rumor mill since the beginning of the credit crisis. The purchaser of mortgage related companies, the increase and continual writing of short-term-interest-only-negative-ammo loans – all the way up to June of this year. And the massive amount of crud non-performing paper on the books that they have written down, quarter after quarter. They have been on the short list of those looking for the next IndyMac.

The company has announced that it will fire almost 7,000 workers, looking to restructure some of their departments, and has been a also looking for capital in all the wrong places. Today’s latest news is about shaking up the top management, they are brining on Tom McManus as CIO (Chief Investment Officer) – to oversee their substantial investment business that has been floundering. McManus hails from B of A and if he had anything to do with advising the take-over of Countrywide – well enough said. Many have said he is the man for the job, but is it too late? Who knows – it sure can’t hurt.

Keep Wachovia in your sites – I wouldn’t be getting long on the news that they got a CIO – it’s about performance.

_____________________________________________________
Coke is IT!

Every country is a little different in their tastes. If you travel through Central America you quickly see the love for Orange Soda, in Japan even fizzy milk (Calpic) is popular. While Coke has made inroads into every country, being able to REALLY tap local taste is the holy grail of the industry. China has a love with different fruit juices and Huiyan Juice company is one, if not the, corner stone company on that market.

Coke is buying Huiyan Juice for $2.3 bill, does it make sense, it sure does when you are talking the largest population in the world and their love of juice. Expectations for this acquisitions will not only boost sales growth for Coke, but will also allow them to cross market and introduce new brands in and out of China. Don’t forget neighboring nations may have similar tastes and moving popular products into new vertical markets means expansion and increased revenues. Branding is everything, especially when in a decades old closed society. While Coke IS a recognized name, purchasing a brand that the nation is already comfortable and familiar with expands market share tremendously.

Coke is one of the few companies that has a low cost product that can move volume around the world. This is a smart acquisition by Coke, even in this economy, expanding their presence and looking for new markets. Coke is a key multinational that is not plagued by being geographically locked down, nor with R&D and cost over-runs. Small cost point, massive volume, international exposure = success in almost all economic environments.

_____________________________________________________
Futures Pre-Market

There has been some volatility in the pre market. The futures sold off and then rebounded slightly. Whether the talking heads want to connect the movement to oil futures or whatever – the reality is that we are just seeing knee jerks to each and every story as it unfolds. The spreads are there as the futures are below the cash fair value. Expect ARB traders to buy the futures to short the basket at the opening. Market expected to slightly gap down at this point.

_____________________________________________________
Support / Resistance

Yesterday can be summed up as Yo-Yo – with no rhyme or reason. Knee Jerk to oil and then knee jerk to oil? Crazy.

INDU 11,275 (11,500) 11,750 (It seems that 11500 is the straddle strike – we ripped to 11750 yesterday – the resistance and great shorting opportunity, I sure didn’t think it was going to be an intraday shorting opportunity. We will certainly not stay at 11,500 – expect another visit to 11,250 or 11,750 in the near future. Please welcome our good friend, Volatility!)

NDX 1850 / 1900 (1850 was the previous upper band of resistance through July and we are rapping on the door today as support, does it hold? This is the place for it to hold if it does. We will probably break down in the early session, but it’s about the close – if we can stay above it. If it does NOT hold expect 1800 to be in the cards in the near future.)

SPX 1265 (1275) 1300 (The range is tight and 1275 is the straddle strike. If we close at or above the 1260-65 level it means we held, today. However, that will be key at the close – we could be testing those support levels this morning. If we don’t 1250 is seriously in the cards.)

RUT 720 (740) 760 (I can assure you that 740 is not going to be a place we stay at long – while it does seem to be a magnet strike for now a break out is coming and it will be violent. I would expect to see the 720 a higher probability than 760. If we move it will be hard and fast. 720 is also a key support level. Watch the close!!!)

_______________________________________________________
Conclusion

The Yo-Yo move yesterday caught out a lot of people, short covering going into the early session just to see them cover at the top and then a sell-off back down. Yesterday was not about news or fundamental changes in the market – it was simply about positioning based on the market being closed the day before and the big move in oil that created lots of margin calls. The huge gap in the futures in the pre-market that drove the cash higher in the early session drove to more short-covering that fueled the move even more. The covering finished, no fundamental news, and back to reality we went.

I don’t expect market conditions to change going forward, fundamentally things stink for the most part and we currently don’t have anyone leading the country. Bush is the lame duck president that even the GOP doesn’t want him at the RNC.

Obama and McCain are tied and have their own controversy to deal with. We don’t really know the economic policies of either candidate because they both flip-flop like a fish out of water, McCain voted against the Bush tax cuts and now he wants to make them permanent, Obama was for raising taxes on business, but now has a new small business tax cut policy. I think they are both doing the best they can to address the never ending economic wobbliness of this nation as reports change daily, like the GDP increase (good news) followed by increase in Jobless claims (bad news). No one can make heads or tails of what is going on – so expect more flip-flopping by both candidates as this continues. The both seem to be moving towards a economic centralist view – anything to save this drowning economy it would seem.

Expect Yo-Yo movements to be the standard.