Wednesday, October 22, 2008

10/22/08 (Even Billionaires can be fools!)

Traders,


The market pulled off yesterday - we got to that high resistance band the day before and really couldn't break through. Now we are heading back to the low support band.


Even Kerkorian gave up, in 2006 he bought a huge stake in GM - only to sell it for huge losses later. Then it was the failed $5 billion bid for Chrysler in 2007, and now it's his 1 billion bet in Ford. He bought it around a $7-$8 price average and started blowing it out last week for $2.50. It's like he hasn't learned his lesson, he does have a love affair with American cars - but come on - if you love the cars o much - just buy a couple cars. Don't blow billions in buying failing businesses. Maybe he should take a lesson from Buffet. Buffet took a big loss in US Air - it only took one loss and he learned his lesson not to invest in Airlines. Fortunately for Kerkorian there isn't another American giant car maker.

So should we all learn for Kerkorian’s three time failed bottom picking? Sure - it means several things - 1st don't go all in, 2nd don't keep buying the same failed business model over and over, 3rd ask someone if you have gone senile before making an investment.

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LIBOR


The talking heads and media keeping talking about over-night LIBOR coming off hard and now down below the Fed Funds rate, currently the over-night LIBOR is at 1.12%. Well - it's not the over-night that we are concerned about. It's the competition at the Discount Window - if companies can borrow for three-months for 1.5% from Ben, then why borrow in the LIBOR market at 3.5%?

Sure many companies use the over-night - but the money isn't flowing and many are trying to secure longer term money. Also - a overnight LIBOR at 1.12% sounds great - but how much money is really available at that rate?

The OIS spread measures the cash available over-night vs. 3-month and for the first time it did narrow yesterday. So it is showing that more money is available at the lower rate. However - still it's about how much money and not the rate that really matters at the end of the day.

Again - we need to see 3-month get down closer to Fed Target levels and also see MORE cash available at these levels.

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Next Big Wave of Toxic Paper is coming


First it was the housing paper that was toxic, the next wave is coming as we are seeing downgrades in credit ratings in Corporate Debt. The first real big measure of this next wave came in the form of Lehman debt - were investors of that paper are facing 90% losses and on a global scale from Iceland banks.

The debt obligations in the corporate credit markets is over $1 trillion dollars. Because of the increase losses we are seeing across the board in the financial sector and now because of the credit marketing freezing up it is creating balance sheet problems at businesses not in the financial markets.

We are now seeing the credit rating agencies setting their cross-hairs on this corporate paper (after they just blasted the mortgage paper). Will it get as bad as the mortgage paper? Well - maybe not all of it - but any of the paper in the financial sector (banks, brokerages, etc.) are sure getting hit pretty hard.

Think about this - a Bank holding toxic mortgage paper that is creating balance sheet losses and write downs - is out borrowing money (with their own bonds). Quarter after Quarter of write-down and losses, most certainly does bring their own bonds into question.

``We'll see the same problems we've seen in subprime. Banks will take substantial markdowns.'' Said Alistair Milne, a professor in banking and finance at Cass Business School in London - reported by Bloomberg.

Already with Lehman and some Iceland banks we are seeing the paper trade as low as 10 cents on the dollar. Expect more to come.

Think about this - Lehman borrowed money via the Discount Window too - so did many of these banks. If there paper in the open market is failing - do you really think they also made good on their debt to the Fed? The Fed has an endless balance sheet to absorb more debt and print more money.

The question is - when do foreign nations connect the dots and begin to ask themselves is holding paper on a debt ridden asset worth it?

Side note: Paulson spoke last night - mostly it was about a plea to the next president to maintain the glad-hand parade to China. We need China more than China needs us - that is for sure when you look at our nations deficit, debt, and balance sheet. Paulson is trying to keep that VERY important relationship in check.

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A Rush for Cash


I was talking with a firm in NY that has made some interesting observations in some of the trading positions. He mentioned the unwind at some firms is fierce as they race to get capital on the balance sheets. The leverage unwind is forcing some positions with no risk, in fact actual profits to unwind since the positions are carried with some level of leverage - whether it be Reg-T, Haircut, Carry, Loan, etc.

That creates a difficult value assessment if all products are being sold to convert to liquid capital and reduce margins. A company might have a great balance sheet, no debt, good revenues - but if there are more sellers than buyers - that stock is going down (regardless of the fundamentals). The same, he mentioned, was happening across the board in commodities (in which some cases leverage is steeper). Some commodities are in short supply - but if you look at the price action you would assume the opposite is true.

I came away with a simple conclusion - even with all the capital being poured into the system, even overnight LIBOR coming down - the credit markets and capital is in VERY short supply. The world has over leveraged themselves and now there is a race to capital. The secondary problem is that once they do get liquid with capital and unwind the leverage - they are hording the capital bracing for the slow-down.

This creates an interesting paradigm as there might be lots of capital on the sidelines that may stay on the sidelines because of the global slowdown and the inability to revert back to large leveraged positions.

Secondly - it does call into question valuations of companies with solid fundamentals as well as some commodities. It can make bottom picking a very dangerous game - as you might be right in the long run - but the stock could continue to fall in the short term. That is why I say ALWAYS hedge those positions. Naked long positions in this market is a fools game.

I am wondering if we will see a hyper rally in some commodites if and when the capital frees up.


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Futures Pre-market


The DJ futures are getting the serious smack down in the pre-market, followed by the NQ, ES, and TF/TO (new RUT futures). The spreads are fairly wide, but we may not see the Arb traders rush in too much to pick up the spread as it might be difficult to short the basket going into the opening. Expect to see some pressure at the opening.

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Support / Resistance


We hit that resistance bands and then we came off and didn't push through. We came down back to some pivot and support areas. The futures look like we could be testing those supports today. That doesn't mean to get long - but rather make sure to adjust deltas accordingly.

INDU 8500 - 8750 (9000) 9250 (Sure we had a big pull off yesterday, but we didn't even get to the pivot point of 9000. We will certainly break the 9000 area this morning (based on futures pre-market) they question is if we stay in the upper support narrow band of 8750. If we close below 8750 that is not a positive sign, however it is really the 8500 lower support area that we need to be careful of - watch your deltas.)

NDX 1200-1250 (1300) 1350-1400 (We fell below the pivot point and really took a big beating yesterday compared to some of the other indices. Watch the 1250 area - which we WILL test today. 1200 is the lower support area.)

SPX 900 (950) 1000 (Again - we did come off pretty big but didn't get to the pivot point, sure we will break down through at the opening the question is the 900 level. Watch the close.)

RUT 500 (525) 550 (Just like the INDU and SPX we really didn't even get to the pivot point. The 500 level is the big support area. Watch the close.)

For all the hyper volatility we are having we are still pretty range bound (abet the range is wide) - put the lower support levels in as alerts - if we hit those alert supports you better have your hedge on or at least some positive gamma. If you have some balls and want to Cowboy Up at those levels - do it fully and I mean FULLY HEDGED. Only fools will bottom pick unhedged.

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Conclusion


Well even billionaires can be fools - Kerkorian just like many retail investors got married to the US Auto-industry in a foolish love affair that will cost him a good chunk of his net worth. He was so in love with these companies that he not only went all-in, but had to pledge other stock assets as equity against the massive leverage he took in Ford. Again, he is the same guy that married a gal 50 years his junior that lasted only a month - so maybe at 91 senility has set in. Maybe he should just enjoy his wealth instead of playing the big investor game.

The market sure isn't getting a break and we just saw Wachovia report huge write-downs again - enjoy that pig Wells Fargo. It's like Wells missed out on the big write-down game and not wants to be a player. I wonder if any of these upper management people really take a look at the books and off-balance sheet positions before making a take-over bid. In the old days (just a year ago) companies would spend months reviewing the viability of taking over another company. Even hiring special accountants and lawyers to review all the data, balance sheet, risk, etc. Now days it's a weekend, a couple of handshakes, and a backing by the Fed and you too can buy a behemoth of debt. I think some of these CEOs (even the new ones that have taken over for the old ones) still don't understand the difference between price and value. Sure the stock price may LOOK cheap - but that doesn't mean it IS cheap. When a company takes losses greater than the entire net capitalization of company that should be the first clue that even at $5 or $10 a share - there is a mountain of debt trailing behind it. Some of these companies should be PAYING to be taken over, rather than be paid.

Don't forget consolidation also means consolidating MORE debt.

Still stay out the financials - regardless how low or attractive stock price may SEEM. Also - Airlines and Autos - both Buffet and Kerkorian (billionaires) showed us how easy and fast it is to lose money. If they can't make money in those sectors - what makes YOU think YOU can?

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