Friday looked to be a pretty severe day with the futures limit down prior to the market opening - but it was like the foot coming off the accelerator after the opening, in fact after the opening the market started to rally off the lows. There is definitely two types of sellers out there - FORCED sellers (margin calls, deleveraging, redemptions, etc.) and the other type Panic sellers.
The market has come off something fierce - almost like a slow motion crash. It would seem that many of the long holders have taken off a good chunk of their positions, there are even reports that there are some big cash reserves on the sideline. The market has become numb to these big moves. However - it would seem that there are still those that are either long and don't plan on selling or those looking for opportunity - amongst the selling.
So did panic subside on Friday or were they just really numb to the moves and it was just forced selling at the opening? We probably will never know. What we do know is that nothing has changed YET and we need the credit to on freeze.
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Powder Running Dry
Bernanke was on the steady-eddy rate cut - meeting after meeting - 25 bps per clip in the 4th quarter of 2007. In 2008 he really started to turn it up - bigger cuts and more surprised cuts. The last of such a surprise cut was the "Kombaya" rate cut of 50bps just three weeks ago - as world central banks held hands and "hoped" that a world rate cut would keep the markets and banks from falling.
While the rest of the world has plenty of powder left - it's the U.S. that took the lead and tossed inflation to way-side as it focused to help the banks - that has eroded the current target to 1.5% - and the dreaded-first-stop-shop Discount Window to the same 1.5%.
Bernanke is meeting is coming up and it is almost a sure-fire bet that Bernanke will cut, the question is how much? Most are expecting a 50bps rate cut to 1% - others say it could be as high a 75bps or even 1bps. Whatever the rate cut amount - it will not make much off a difference is banks are NOT willing to lend.
Many forget the Target Rate - is just that, a Target. It is the rate that the Fed wishes the banks to lend to each other - if they decide to lend. But what many are not focusing on is that when he cuts the Target Rate, he will also be cutting the Discount Rate (in tandem). The Discount Rate IS the RATE and the ONLY rate that matters. For the Discount Rate is the rate that the FED lends money to banks and currently it has moved from the last in line (lender of last resort) to the first in first in line - since the banks are NOT lending to each other.
So the rate cut is going to do one thing - it will give the banks and other borrowing institutions a cheaper rate at the Discount Window, as the Target Rate plays second fiddle.
This is NOT about rates anymore - it is about deleveraging and liquidity.
I think we may see rates go below 1%, maybe not at this next meeting - but they probably will. If (and when) they get to 0% - which is a very really possibility - the Fed has nowhere else to go.
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The Commodity Confusion
Oil is coming off hard and has lost more than 50% of its value from the high - even several metals and agricultures have been coming off. I would argue if we didn't have a credit crisis with a freeze of capital we would probably not have dropped this low. But we are seeing a race towards liquidity - to CASH.
Last week I talked with a trader in New York (as I mentioned) who said there is just a rush to liquidity (CASH) - they had seen everything - commodities, equities, ETFs, bonds, etc - being sold. Evening products with solid fundamentals or in short-supply.
The problems in agriculture we saw last year and earlier this year with food shortages has not changed, but if you looked at commodity prices you would assume that there is lots of food and the shortages have been resolved. The same is true about silver, if you look at the paper market (futures) silver is down below $10, but if you go out and actually by any silver you would be paying between 10-40% premiums over spot-price.
Even oil - Oil has come down over 50% from the highs - but what about gas prices - they are only down around 20%.
There is a disconnect, or so it would seem. There is clearly a rush to cash and everyone is selling anything and everything (regardless of fundamentals) to get much needed capital.
Jimmy Rogers pointed out last week - he has been long Swiss Franc and the YEN and remained short U.S. equities. But he also made an interesting observation as to the story that has taken a back seat - food shortages in many countries. He has been getting long agriculture after their recent declines - because while prices have changed, the need to eat has not. He pointed out the credit squeeze and capital problems are putting pressure on farmers, that means we could see a drop in production next year.
The point being, just like in equities (where some solid companies with good fundamentals have sold off) - commodities are seeing the same phenomenon and maybe one of the few financial products to see a rally in the coming future.
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Futures Pre-Market
The futures initially were getting hit in the pre-market, but rumors and talk about Bernanke's next rate cut is giving a boost and taking them off the lows. There is a spread in the pre-market, so we may see a little pop in the futures are ARB traders buy the futures and get ready to sell the basket.
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Support / Resistance
We broke through at the opening, but rallied back. We are certainly giving these support levels a serious test.
INDU 8000-8250 / 9000 (We again saw the 8250 level tested - but bounced off that on Friday. It is about the close and in the last several sessions we are seeing a rally off the lows going into the close.)
NDX 1200 / 1300 (It looked really bad on Friday morning - but again the market rallied above the 1200 market, just above it. )
SPX 850-900 / 1000 (We are right in that support band and we had a good rally after the opening on Friday. A close above 900 would spell a little more faith that we are seeing the worse and getting relief.)
RUT 475??? (The broadest index is looking very bad and it would be nice to see this back above 475 or even up to 500. This index has cracked and it doesn't really have any support down here. Watch the close on this index a close above 475 or even 500 would spell hope for the broader market.)
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Conclusion
There is no doubt that the economy is going to have some serious tough going over the next couple of years, we will probably not see double digit growth and consumer spending (especially credit spending) will seriously be curtailed. The problem is getting to the bottom - the REAL BOTTOM. That day will come - but only when we see solvency without printing more money and pouring it into the system. We need to see the financial institutions stand on their own balance sheets. But that will be harder to determine as the government becomes a bigger player in the system.
I am consistently hearing that capitalism has failed, but I would argue that what has failed was the ability to regulate. The most highly regulated market has been the mortgage market with Freddie and Fannie, both Congress mandated companies, both had tremendous government oversight and intervention. However, they also both had large lobbyist and have been steep in accounting scandals. The problem is NOT too little or too much regulation, the problem is our Government's ability to regulate. We NEED regulation - but we NEED to TRUST the regulators and our Congress who have completely run AMOK. This is NOT a Republican or Democrat issue - it is just a Government problem. You can't ALLOW the two biggest lending institutions that are regulated and overseen by our Congress the ability to LOBBY them! That is ridiculous and it was the catalyst for this problem.
The sheeple for the most part don't KNOW how to manage money - just look at consumer debt and consumer savings - which proves that point. If you are going to make credit available they you need to be a responsible lender, but that starts at the TOP - our Congress needs to abolish the Lobbyist - especially Freddie and Fannie.
I have an answer that would work after we get out of this mess. It is TWO systems working together.
1. Private Lending - they are NOT backed by the FDIC, are NOT allowed to be bailed out by tax payer money, are NOT given access to the Discount Window or any other government agency. They can lend to whomever they want, but when they fail - they fail.
2. Gov. Backed Lending - these are given FDIC, allowed to lend to each other on the Target Rate, etc. However, they can NOT LOBBY and are under strict lending guidelines. We can NOT allow the motto of the government "making home ownership available to all Americans" lower the lending standard.
It was the lowering of the lending standards - lead by our politicians and the belief of making home ownership easy and available to ALL Americans, regardless of credit ratings or their ability to pay that lead to lower standards.
Remember - the sheeple do NOT know when enough is enough. Give them credit and they WILL spend. Give them the ability to buy a home with NO MONEY DOWN and negative interest / interest only payments and they WILL buy.
Tighten up the lending standards by Government Backed institutions and we will not have this problem. However, that means that "home ownership will ONLY be available to those that can AFFORD it on 30 year fix mortgages!"
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