Now I know how it feels to be an astronaut during take-off pulling 3gs. I thought we might get a rally with a follow-through - but yesterday was like moths to a flame. Because we closed on a high - we will most likely get some follow-through this morning. Remember those "bold prediction" numbers yesterday? Well - if we have another day like today we could hit those points today. Now REMEMBER - if we do start hitting those numbers GET YOUR HEDGE ON. Treat this rally as a gift from the gods - because the fundamentals haven't changed and the credit lines, while they maybe trickling, are still fairly clogged up.
I seriously hope this recent fall in the market has put the scare in you and that you NOW are getting your hedges on - it's not over yet and there is a very good possibility that we could revisit those lows. So now put down the pom-poms and start looking to hedge those positions.
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Goldman at the head of the line...
Buffet is surely no dummy with that full-nelson trade he put on GS. Remember, $5 billion, 10% dividend, 100% warrants 5 year maturity. You KNOW what was going on in the back of his mind "Paulson, Ex-CEO of Goldman, is about to get a blank check for $700 billion, I am sure Goldman will be first in line and will also probably be first up for double-dipping." - Well Buffet was right. The first chunk of change is going to be a direct investment into several banks, with Goldman leading the way. Ok, I do exaggerate, as Goldman only got $10 billion as the other banks got more.
Hold on, wait a second. I thought the $700 billion check was for buying down toxic paper? Oh yeah, I forgot we gave Hank the Carte Blanc option to spend it as he see fit. The credit crisis could not wait for buying toxic paper and these banks needed a direct injection now. We saw the market plunge last week - we probably didn't have weeks to wait for them to figure out what toxic paper to buy.
While ECB and London made similar actions they added an interesting component - which does NOT require capital on the front end. Remember the problem is credit is frozen, banks will not lend to each other - regardless how low we take the target rates. The actual rates between banks are 200-300 bps higher and that is if there is any money. London and the ECB added an interesting component - to help unfreeze the credit markets, instead of giving them cash, they will insure the interbank lending 100% for those banks that will loan. That should reduce the trepidation of lending and borrowing - as banks have little faith in each other and are hording what little cash they may have. Doing this incentivizes the banks to lend each other, rather than just giving them money.
The US is following suit now - but not to the extent that the ECB and London has. Instead we are flushing seriously more cash into the system.
Now it's time to see if this works. One thing for sure there is a tipping point - at some point the government will print so much money and pour so much into the system that the it will work. Of course I think it is very short sighted on several fronts. First - how did we get here? Through hyper lending and consumption to obesity levels. Now we are trying to keep this consumption going by making sure people get MORE credit lines? Yeah - we haven't learned that lesson. Second - what happens to the dollar when we print more and the national debt ramps into orbit?
I understand the need for action - but we are so quick to act and push through bills, print money, and inject more money - that no one is thinking about the future impact to the entire economic system that is based on a fiat currency, nor are we addressing the consumer credit addiction in this country.
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LIBOR - LIBOR - LIBOR
Yesterday was a holiday in this country and Japan. The big global money pumping into the system decided over the weekend was uncertain as to if it would unfreeze the credit. The market on Monday hyper rallied as if it already had, even during a banking holiday. The test is today - did LIBOR come off. Remember LIBOR is the litmus test as to the credit and lending between institutions and it has been going up as it is the true measure of lending, unlike the target rate (which is just a target the Fed WANTs banks to lend at).
Well - LIBOR came off 50 bps this morning to 4.08% - while it is still very high - the clog is starting to move. That is a clear sign that money is starting move again - even at a slow trickle. It will take some time to see if we poured enough Drano (money) into this clogged toilet.
As I mentioned before keep an eye on lending - that will be the true measure to see if credit lines are starting to free up. We were at a record at 4.76% just a couple of days ago. It will take time.
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Iceland pounded
As the market rallies and we all return to euphoria and forget the problems that troubled us just last week, Iceland market reopens to a complete implosion to the downside - their benchmark index plunges 77% - after the nationalization of their banks and a 3-day halt in the stock market. They have been meeting with the IMF for aid. Others have said they should join the EU and adopt the Euro. Sure, it's a very small country - but it is in a very similar situation as many other consumer debt nations that have seen credit freeze. Maybe it would not of been that bad if they had been a member of the EU and were using the Euro, at least their currency would not of collapsed in isolation.
Being a member of the EU and using the Euro is similar to the Franchise Business model. We know that not all McDonald's chains will be successful, some may have trouble at different times of the year, some maybe only very profitable during holiday seasons, some maybe just steady-eddy. The Franchise works in that it picks up slack when others fail. The EU and EURO works (abet for now) because it can pick up the slack when one country fails. However, countries like Germany (the EU banking and industrial leader) needs to remain strong - but the smaller members are free to suffer as the rest carry the slack. If Iceland was a member of the EU and using the Euro - sure it still would have the same serious banking problems - but the ECB, EU, and the Euro would of carried the slack.
Iceland is the "canary in the coal mine" that economist like to monitor - because it is small enough to see all the impacts to the currency, economy, lending, trading, political policies, etc. It is a mini Europe, UK, USA, Japan, etc.
Can what happened to Iceland happen here? Sure, but it is a VERY low probability. Why, because the dollar is a reserve currency - it is currently used to price oil and many other commodities. However, if the dollar's standing changes for any reason - that probability does increase. That means watching how OPEC prices oil in the future, foreign investments into U.S. treasuries, its reserve status, its exchange rates, and yes M3 (which our government doesn't feel is worth measuring anymore?) are all important factors to monitor to see if a shift in the dollar status will increase the risk to economic instability.
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Futures Pre-Market
LIBOR - yeah it is starting to show money is again beginning to flow. The high close yesterday - coupled with the fall off in the LIBOR spread is giving a good boost to the futures which are front running the cash by a good margin. Expect ARB traders to sell futures into the opening and buy the basket - giving a good pop to the equity markets at the opening.
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Support / Resistance
Wow - I never thought my "bold prediction" would have those kind of legs. Believe me - I am NOT patting myself on the back - I know the difference between luck and good trading. I do however think we will continue to get the follow-through - the question is when we get over-extended at what point to we flatten out positions and for those Cowboys re-short the market? ALL OF YOU - should be rolling up the hedges and thanking the market gods for granting you this gift. This market rallied on HOPE - NOT FUNDAMENTALS!
INDU 8,500 / 10k (If we have another hyper rally today we could get to that 10k marker - that would be a point to flatten off ALL HARD deltas. Sure get some gamma and get short.)
NDX 1300 (1400 ) 1500 (1500 is the gap fill - if we fill that cap - which we could - get FLAT! GET FLAT! GET FLAT! Get some downside gamma on and if you want to shorten up deltas - do it 2:1, 3:1, 4:1 against gamma.)
SPX 900 (1000) 1100 (Again 1100 - we could hit that - if we do GET FLAT! GET FLAT! GET FLAT! - at the very least GET FLAT! Did I say get flat? Ok - the Cowboys add some huge gamma and get ready for a suck out and sure load up some short-deltas. It's reloading time.)
RUT 500-550 (600) 650 (If we hit the 650 number - it's time to reload with downside gamma and deltas.)
OK - what is the worst thing about getting flat deltas at those levels with a little gamma? NOTHING - just some time decay. Gamma gives you WINGS (not Red bull) - that means from those points with flat deltas and long gamma - if this market makes another big move up or down you make money! Easy - remember to keep it simple. For those Cowboy traders - get SHORT deltas at those levels against long Gamma. If you are 2:1 Deltas to Gamma - then if the market moves up against your position - you get flat quickly so loses are very limited - and do the downside you clean up. I think those are going to be BIG reload to the downside levels. And if I am wrong - it's no big deal - because at the end of the day - it is GAMMA that saves your Hard Delta Ass!
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Conclusion
The VIX came down hard, but does that mean volatility left the market, hell no! Did you see the move we just made - remember VIX just measures premium it really doesn't measure the actual volatility of the underlying - we almost rallied 1,000 points! That IS volatility.
However - I have a feeling this could be the mother of all dead-cat bounces - that is why ALL long investors need to HEDGE their positions now and also roll up to hedge when we hit those levels. Sure it may cost some premium, but I seriously hope what happened last week scared the hell out of you - there is NO ROOM for "HOPE" in the market - leave that to Obama's sales pitch. In the market - we need to HEDGE and protect our positions. This is a gift and HUGE gift and don't look a gift horse in the mouth. Hedge those positions - if you don't you are going to wish you did.
Could we head higher than those points that I mentioned above - sure, but not on fundamentals, just hope. Remember the we have a big problem with consumers still. Three quarters of the GDP rely on consumer spending and they are out of credit, while we might free up the credit markets at the bank the losses are still here, there is more money printed into the system, more people are out of work, and consumers are tapped out. There is not going to be any buying sprees in the consumer sector to rally the GDP out of the hole - nor pay off the equity losses in the toxic paper.
So - when you get a rally - Hedge!
Only FOOLS hope.
BTW: Remember diversification is an important investment STRATEGY - but it is NOT Risk Management!
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