We saw interesting action on Friday - could it be a bottom, I am sure we will hear that all too common phrase "the worst is behind us", as you know I mentioned last week that there were some oversold companies and a few good value play - but remember this is not a Stock Market problem, but rather a credit problem. Until that credit problem is solved - then the market still has an underlying fundamental problem - in which any rally could be short-lived.
The market however did should some bottoming on Friday - that means we could get a huge massive dead cat bounce. That means a rally of hope. We also have a few days of shorts in the market - that means we could see some short covering as well, which always makes the up move more exacerbated.
At this point the only thing you can rely on in more market volatility.
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Bernanke is building an Ark
Bernanke has built an Ark and has invited all his fellow central bankers. They are going to see the world’s largest FLOOD of dollars. In yet another unprecedented move they are going to flood the system with dollars - not just Bernanke - but the entire network of central bankers. The announcement this weekend has already started to have positive affects as markets are moving higher (futures pre-market are ripping to the upside) - just like the Kumbaya rate cut. Will this last or is it another dead cat bounce. I think it may have more legs then the previous global rate cut - simply because rate cuts don't help when banks don't have money to lend. This may have more legs simply because the amount of money they are pouring into the system, it collectively will be trillions. One of the interesting differences in the European policy is to back the interbank lending - since banks are afraid of lending, offering them backing for those loans if they were to collapse may spur lending - or so they hope.
However, we are now seeing some weakness in the US dollar - after the announcement the dollar began to fall as the Euro and other currencies began the rise. It wasn't huge moves against the dollar - but we did see an unwind of the "safe haven" play, that is if you still want to call it a "safe haven" play. The Euro popped over 1% as the carry trade which as one point was racing for the exit door almost stop in its tracks.
The dollar index is down about 2% - how much MORE are they going to flood into the system.
On a side note - even Freddie and Fannie are back in the game (currently being DIRECTLY run by the government) are now buying down another 40 billion in paper. What, I thought these two companies were MORE than bankrupt? I guess not they are now just a new nationalized lending program - the balance sheet has been burnt and the only thing that matters is the printing press running at full steam.
The Dollar Flood is coming and the Ark is being built. Central bankers are holding hands going two by two up the ramp.
We are seeing a BIG pop in the futures as the HOPE that printing money and flooding the system will unlock the credit squeeze - maybe - maybe not. But will we look back at this action (collectively with the bailout and discount window) as the catalyst for a future dollar crisis?
Expect a big pop in the market at the opening.
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Morgan Stanley
The stock plunged last week, along with every other company. However, their investments and current negotiations with Mitsubishi bank of Japan for more capitalization came into stress for a couple of reasons, first the obvious - the market was in free-fall - the second was that the initial investment talk as to the capital being invested became a larger portion of equity - a very large portion - which kicked in the 25% foreign action rules. So it's now back to the drawing board - Mitsubishi will still purchase 21% stake in Morgan Stanley - for about $9 billion with many strings attached.
Of course Morgan is going to spin it as if they are doing this deal without government intervention. That maybe true on the surface, as the government is NOT involved in the negotiations - however the U.S. government did contact the preferred holders last week and told them that they (the U.S. government) would guarantee them. Of course the government is involved in the deal on the backend - they will be probably involved in every deal going forward.
Right now it's not the time to be buying banks or financial firms as their balance sheets and risk remain questionable.
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Iceland Mother Hubbard
The store shelves are bare as Icelanders race to purchase goods as their currency has begun to fall, banks are frozen, and shop keepers cannot afford to restock shelves at current exchange rates. Ironically if you looked at same-store sales in their food sector you would see sales up 50%.
The IMF landed last week in Iceland to review the situation - as if the nation is now a 3rd World Nation. Things are not rosy when the IMF has to come to the rescue.
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Futures Pre-market
We are seeing a euphoric rally in the futures - hopefully this latest move by central bankers and the promise to back interbank lending will unclog the money supply. The futures are sure getting a kick in the pants. The spreads are huge at the moment, expect to see ARB traders sell futures and buy the basket if the spreads remain.
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Support / Resistance - some BOLD predictions
Have we found support? Well supports are created - so at least I would say we are building one. As I mentioned last week was the time to start buying some stock (but fully hedged) additionally expect more volatility. The probability of a dead cat bounce is very high - it might have a few day follow through - but it expect it to return. I don't usually make some bold predictions - but why not.
INDU 8000 - 9000 (Ok here is the big prediction. I think we COULD have a big follow through rally - maybe even back to the 10k mark. However, that will be the topping area for a big retracement back down. If you are long I would hedge my positions and as the market rallies - I would roll up my hedges to higher strikes and expect a retreat. If this rally DOES have legs and a follow through - 10k IS in the cards. But get flat to short at that area.)
NDX 1200 - 1300 (The next whopper prediction - we could fill the gap in a hyper rally to 1500. Again - 1500 is a place to flatten long deltas, rehedge, and get ready for the big pull back.)
SPX 900 - 1000 (Again we could get a massive rally and follow through up to the 1100 area - if we do get there in a massive move - again flatten long deltas, rehedge, and expect a retracement back down.)
RUT 500 -550 (Her we go ad rally to 600 or even 650. If we get to those spots get flat to short.)
OK - I did mention to get long some go value stocks last week and fully hedge them. We have another hope rally upon us, but we could see it have some legs and go higher. However, remember the key is the LIBOR and lending - the credit lines have to open up to see a good rally out of here. It could be a sustained rally. If we hit those levels that I mentioned above - you can bet the TV talking heads and analyst will say - "See, the worst is behind us." The VIX WILL pull off hard and fear WILL leave the market. However, fundamentally the economic landscape does NOT change that fast. We will not see consumer spending all of a sudden kick in or the housing market rally. We will see inflation start to ramp. Just when all the talking heads begin to cheerlead and get all silly and happy and the VIX declines hard - that is the signal for the second sell off. At those points you BETTER get FLAT and HEDGE! Because this - in my very humble opinion - will be the mother of all dead cat bounce rallies and we could very easily revisit the lows. Watch order flow, volume, VIX, treasuries, and swaps = they will show you what will happen next.
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Conclusion
The backing of interbank lending could be the crowbar to unwedge the credit freeze - however the flooding of money to grease the gears could actually flood the engine. Like when you pump the gas too much on your car because you think you need more fuel - you just soak the plugs and it's not going to start. I think it is too much too late and while we may see LIBOR come in a little - it sure is not going to change the economic malaise.
Look for a good rally - if we can close on a HIGH (cause it's always about the close) we could get a follow through. If we get a hyper parabolic rally to those levels - expect a stall - just like an airplane heading straight up and running out of air and the engine suffocate and it stalls. We could head back into a flat spin to the downside.
The numbers - INDU 10k, NDX 1500, SPX 1100, RUT 600-650 - If you don't want to Cowboy up at those numbers - promise me you will get flat deltas or at the very least hedge all positions at that level 1:1.
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