Yesterday was another test - and we rallied back at the close, just like the day before. But we are really not out of that safe zone and still testing these supports. This morning I got up and I saw it - LIMIT DOWN FUTURES. What does that mean? It means that the pre-market futures are down so much that the "circuit breakers" have kicked in to keep them from falling any further.
As I have said we really have not seen blood in the streets - because we really haven't hit a limit down situation or a intra-day halt. We have had big moves to the down-side, but those moves have been rather smooth - sure we move down - but we haven't had the big Gap Down. Today maybe the day we see that blood starts to run in the streets. It's been a long-long time since we have seen futures limit down before the opening.
These are the days where you better have your hedge on, there is not "Hope" that those STOP ORDERS will work - stop orders do NOT work on large gaps. As I have been saying - it is a race to liquidity - a race to cash.
It's FRIDAY - so we may NOT see that pop at the close - as people may NOT want to go home with long positions.
__________________________
Perfect Storm!
Commodities, equities, everything is getting sold. Don't TRY to make sense why a good company with solid fundamentals is going down, or commodities, or anything. It is simply a race to cash. We are seeing deleverage unwind, margin calls, redemptions, which helps fuels selling. Today is about deleveraging - massive deleveraging.
The selling started in emerging markets yesterday, big force redemptions and unwind of the carry trade. The unwind of leverage yesterday overseas was MASSIVE - yet our market rallied into the close. But remember the unwind happened during our trading session - which meant that when the Asian markets opened overnight we would see more unwind, and now we are seeing the futures in the U.S. market get hammered.
Sure - redemptions, margin calls, and deleveraging has been happening across the board - but it has been spotty. Yesterday was a large blanket unwind - do NOT try to make sense of this. People are selling, not because of anything to do with market values - but rather the FORCE selling from unwinding leverage.
Are we crashing today? - Well limit down means we can't go lower in the pre-market, until the re-open. We will probably open and very shortly after the open hit limit down in equities and halt trading for a bit - then reopen - if we head down another 10% from the first limit - we will halt again. These limits are set once a quarter - not from the opening or closing price.
Expect Paulson and/or Bernanke to make some surprising announcement today - to try to jump start the market (yet again). Yeah - we could have a surprise rate cut (today or over the weekend) or Paulson making a several $100 billion investment directly into regional banks. Who knows - but these are the type of days that they come out and do a cheer-leading routine to try to calm the market and get it rally again.
If you are hedged do NOT panic - remain calm. This is a sell-off of deleveraging – FORCED SELLING!
For those traders - today is a huge day of opportunity as those that are panicking are not concerned with price - expect volatility to explode and take advantage of the skew.
______________________________
Paulson has $700 billion burning a hole in his pocket
Sec. Treasury Paulson is planning to make direct investments in a number of regional banks - to help halt the freeze of credit. He is expected to announce his plans as soon as today. He has already injected an initial $125 billion into the nine largest banks, this would be round two. That would leave only $500 billion left.
The problem is simple - banks are seeing rising delinquencies in payments (auto loans, mortgages, credit cards) and as Paulson injects capital to free up credit (mainly for interbank lending to get them off the government nipple at the Discount Window) - the banks suffer more losses and the money that is injected is just off-setting those losses - THUS the credit remains frozen.
The regional banks (just like their larger brothers) are reporting more write-downs and more layoffs. National City Corp, Ohio's largest lender - reported a $700 million loss and plans to cut 4,000 jobs. SunTrust (the biggest regional lender in the south) reported a massive decline and authorized a sale of $2-$5 billion in preferred shares to the U.S. Treasury.
Clearly - the pipes are still clogged, but it will be hard to unclog the pipes with more money if the loans continue to fail. We still have a ways to go to find a bottom. The problem is that when we do hit bottom - consumers will not have any capital and very little credit available to them. That means we might see a stagnant market for some time once the bottom is found.
_________________________________
LIBOR please come down!
The over-night LIBOR started heading back-up 7bps to 1.28, that is NOT what we need right now. It clearly shows what little capital was available over-night is now demanding higher fees.
There are two-spreads to watch. First is the LIBOR-OIS spread which measures the difference between the over-night and three-month lending - that widened 8bps to 262. We need the 3-month to come down. It was as high as 364 back in early October and was coming down, but it is starting to widen again. What really need to see is the 3-month LIBOR get closer to the Discount Window rate - this will relieve the Fed as being the "go-to" source for capital.
The second spread to watch is the TED spread, the difference the banks and the U.S. Treasury pay to borrow for 3-months. That spread is also widening - currently 261.
The LIBOR and the different spreads for borrowing are the barometer to see if capital is moving between banks and if the credit freeze is starting the thaw. As I mentioned the big one to watch is the 3-month LIBOR (not the over-night) and that 3-month LIBOR needs to get down - closer to the Discount Window.
____________________________________
Futures Pre-Market
What can I say - LIMIT DOWN! There ARB traders will not be doing anything this morning - expect to see the market get smacked pretty good on the opening.
_____________________________________
Support / Resistance
Those supports are going to be wiped out at the opening - that means we could hit freefall with limit downs halting the market throughout the day. On the other hand - after the limit down and halt - we could see the market calm down and rally off the halt - which HAS happened in the pass. But it IS Friday - and the probability that anyone WANTS to hold unhedged positions over the weekend is probably pretty low.
INDU - 8000 - (We will probably hit the 8000 market this morning. The question is do we hold that. This is critical times.)
NDX - 1100 - (We will probably hit 1100 this morning - 1200 is a key support area that we closed above. If we bounce to only be down 20-40 points and close above 1200 that will be a good sign. A big close below that will not be good.)
SPX - 850 - (We will see 850 at the opening - the question is do we hold, halt then rally or sell off more?)
RUT - 450 - (Again that will probably be reached quickly - the question is do we hold)
THESE ARE CRITICAL AREAS - we could very well halt and rally - but do NOT bet on that being the case. Make sure you are hedged - the morning is going to be about panic selling and a huge pop in OTM premiums.
_____________________________________
Conclusion
For the last month we have been in a slow-motion crash - today we are going to see a move at normal speed - no slow-motion today. If you don't have your hedge on - it's a little too late. Panic selling will increase as forced selling (deleveraging, hedging, margin calls kick in at the opening). The question is does the FORCE selling end after the opening?
If the force selling ends after the opening (even if we do get an equity halt) we could see the panic selling subside and there is a small chance of a bounce. If force selling continues through the day - the speculation buyers will not be able to keep the market from falling.
Of course this could be one of those days were Paulson or Bernanke comes out with some Ra-Ra NEW PLAN to get a euphoric spur to the up side. If they don't do it today - the probability of a rate cut or something of that nature could happen over the weekend.
One thing you can count on is MORE volatility.
Jimmy Rogers on Bloomberg yesterday was asked what he is buying (or hedging) - he is still short the U.S. equity markets, long the Swiss Franc, long the YEN, and has started to buy commodities at these levels.
Remain calm today - you can't make good decisions when you are blinded with PANIC.
No comments:
Post a Comment