The opening was a little volatile with some up and down action - but as the session began to settle we got some strength in the market that continued to push into the close.
Even though the INDU had a big move - it wasn't a breakout move but rather to the top part of the range. It needs a serious follow-through to break through that 9500 level. Same is true for the other indices. We did have a good run, but we did NOT break through those resistance levels. Today is about either a continued move to the upside and we break through those areas, or another retreat back down.
While the VIX did come off yesterday, it certainly didn't mean that volatility left the market - actually it was the opposite - a 400 point move (up or down) in the INDU is BIG volatility. That is one thing we can expect - more volatility.
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SPEND SPEND SPEND SPEND SPEND
Christmas is coming and it looks to be a big dud this year. Credit is very tight, consumers are unable to get car loans in my neighborhood two homes did sell - but they both put down more than 50% to purchase the home. That's right - you need to put down 50% for some of these upper middle class / higher-end homes.
Also - we can't forget that the US is a consumer based nation in which 3/4s of the GDP is based on consumption. So how can we get consumers to consumer again? How about another stimulus check?
I am NOT kidding - they are talking about another stimulus check. The problem with this idea are numerous - but a couple of major issues are:
1. The FED and Treasury have gotten so comfortable printing billions of dollars and haven't seen inflation (according to the CPI/PPI) rear its head (YET). So it must be OK to print 100s of billions more, right? How much MORE debt is the government willing to create and it will affect the CPI, PPI, and inflation - but it takes time before we will see that. Again - back loading more dollar risk in the future.
2. Consumers still have a addiction to spend, rather than save. Additionally - consumers (of the most part) are lemmings and will buy wants (Flat screen TVs, PS3s, DVDs, etc.), rather than needs (food, fuel, and shelter). Of course this will help companies that make those products.
3. Artificial rise in the GDP and Consumer Spending. Economist reviewed the increase in consumer spending and the GDP back in the 2nd quarter and quickly realized that a big chunk of that came from a government surplus check. The government giving money to consumers to spend - is NOT really an increase in the GDP or consumer spending, but the models do NOT differentiate as to where the money comes from. Of course when consumer spending and GDP goes up - the cheerleading on TV will start again.
Those are just some of the key problems with a stimulus check. The FED and Treasury (along with Congress) are reacting to short-term knee jerks in the market, as if that is a guide if things are getting better or not. They have moved a little of their focus over to Libor - but they are still not monitoring the core problems of balance sheets, credit, risk. Rather they react when the market makes a big down move and cheerlead when it makes a big up move - as if THAT is the barometer of economic health.
The problem with using the market as ANY type of barometer, other than what it is (a psychological indicator of perception), is that we will never address the heart of the mater. Little did they forget that the market was just recently at very high-levels as these balance sheets had loaded toxic waste - remember the market is about PERCEPTION - until the Piper comes to town and asks to be paid up.
Pelosi is already on the band wagon trying to put together a NEW stimulus package together - hopefully before Christmas. What is very alarming is their belief that it may jump start jobs. WHAT? What kind of jobs are they thinking it will jump start - part-time workers at See's Candy for the holidays? It certainly didn't jump start jobs from the last stimulus check, in fact one could argue that in may just prolong a bigger layoff cycle that could have a bigger impact down the road.
Sure - it would be nice to get a big fat check to spend from the government - and I am sure there are some families that could critical need such a check. But we already have several welfare (state and federal) programs for those needy people. Giving EVERYONE another stimulus check to buy MORE flat-screen TVs is not going to create jobs, solve the economic problem, nor in REALITY give the GDP or Consumer Spending a REAL boost. It is further going to put real pressure on the dollar.
Since Obama is an out spoken supporter for a new stimulus package - ASAP - and now Bernanke has endorsed a stimulus package - several people have latched on that Bernanke has endorsed or supporting Obama and the Democrats. Interesting observation - it did create a heated discussion on CNBC this morning - that's for sure.
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LIBOR continues to come down.
The good news is that LIBOR is still coming off - the overnight rate is below the FED Target of 1.28% - which on the surface looks really good - but remember that is the overnight rate - it is the 3 month short-term that really needs to come off. It did come off 23 bps to 3.83 % and where a big chunk of the money is priced at. It still has a lot of room to come off.
We are starting to see credit flow - but so far the flow is just bank-to-bank. The consumers are not seeing ANY credit, in fact quite the opposite. 30-year FIX rates are up, Short-term car loans are up or not even available, Credit Cards rates are up. That is why we are getting so much talk about the a 2nd stimulus check. While banks are starting to see lending - they sure are NOT making it available to consumers. Not yet any way.
The question is - do we see consumer credit unfreeze and become available? If it does, is it only available to certain clients with many strings attached? How much will limited credit strain the GDP and consumer spending? LIBOR over night is BELOW the Target and 3-month is coming down - if the 3-month gets to the Target level will consumer credit unfreeze?
I am sure consumer credit will again be available, but the question is when and how much will be available. It may not come before Christmas and holiday shopping, that is where the Stimulus check comes in.
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Earnings
Earnings are still coming out and for the most part taking a back seat to the economic news. Earnings are mixed - but it seems that all companies are reporting slow-downs for the most part from either credit squeeze, slower consumer spending, or general economic malaise. Typically we would expect a few large earnings to drive this market higher or lower going forward - but I don't think we will get any drivers as economic headlines and credit lines rule the day.
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Futures Pre-market
Futures are getting hit pre-market - Expect ARB traders to buy futures and short the basket. The spread remains going into the opening a few points, will create some pressure at the opening.
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Support / Resistance
Moving into the upper bands - futures showing weakness- can we break through?
INDU 8750 - 9000 / 9500 (We need to break through and close above the 9500 area to see continued strength. A drop below 9000 is not a good sign and 8750 will have to hold. If we remain in the 9000-9250 band expect volatility to decrease and hidden volatility expanding as a big jerky move will more likely take place.)
NDX 1300 / 1400 (We are right in the middle of the rally back up to 1400 and need to see continued strength to get there, the futures are looking a little weak in the opening session. 1300 needs to hold - a break of 1300 and a close below would spell and end to the run up.)
SPX 950 / 1000 (The SPX looks to have a little more strength then the more volatile cousin the NDX. Closing above the 1000 area would be a show of strength - we made a good move up, we need to continue. A break of the 950 level and a close below will mean 900 is in the cards.)
RUT 500-525 / 550 (If we want to get to 600 we need to close above 550 with some strength. A drop below 525 means another visit to 500 and that will HAVE to hold.)
I was really hoping the euphoria would continue to drive us higher - but the futures this morning are looking weak. Things could change - but watch those short-term support areas. If they don't hold things could revert to the ugly levels again quickly.
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Conclusion
Another Stimulus check - please. Didn't the first one just blow serious tax payers money and did NOTHING to help ease the pain in the economy, other than give several companies more money. Bernanke is now endorsing another stimulus check - didn't he learn the first was a dud? Oh - well - expect another round of 100s of billions being mailed out before the holiday so addicted consumers can continue to give the gift that keeps on giving (the government handing out money). At some point doesn't it become the big joke or farce?
Don't forget, make sure to sign the gift cards "From Aunt Nancy", "From Uncle Ben", "From Daddy Hank", or name the politician that supports such an endeavor. Sure it might make the holidays a little brighter to get that PS3 or 50" Flat screen - but really - at the end of the day is it really creating jobs? Of course they will measure consumer spending - when it does pop - and it will after 100s of billions in stimulus checks - as a success. Fools, sad fools.
I have a sneaking suspicion that things maybe bright from X-mass, but the darkness will return and it will be a long cold winter - unless we can get a head of this economic problem (without the need of printing and giving away more money.)
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