Traders,
Yesterday’s action was interesting (going into the expected rate cut). The market rallied mid-day after the cut announcement, but then going into the close sold off hard again on rather larger volume. The INDU and SPX both closed down on the day – but the RUT held some gains. The rate cut was expected and as I mentioned it does give some relief as to the cost of borrowing money from the Discount Window – however it also means the LIBOR having to play catch-up on another 50bps – thus setting the bar lower and lower.
We are also seeing the forced merger of GM and Chrysler – both on the brink of collapse and in desperate need of money. GM is burning through 1 billion a month and is expected to run out of capital in the next 15-18 months. The CEO Wagner (GM) has put his hand out for $10 billion from Hank. The merger for Chrysler is also a desperate attempt to shed costs and bring two broken balance sheets together (just like consumers consolidating debt). However – they have the UAW to deal with and that means a new UAW Accord and you know the UAW is not going to like anything that’s going to in that accord – yeah it means shedding jobs and that is a hard pill to swallow- but I think we are at that level with the U.S. (past) giant automotive companies that means either NO JOBS or FEWER JOBS. Of course the blame game is probably going to start and you know (rightly or wrongly) that the upper management is going to be blasted. Of course I could also inject some sarcasm – maybe the new proposed increase in corporate tax rates will help GM and Chrysler create more jobs?
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LIBOR LIBOR LIBOR
As I keep saying it is LIBOR and it’s need to close the spread on the Fed Funds rate (specially the 3-month) that will help get money flowing. The LIBOR came down over night 23 bps, but Fed cut rates by 50bps. So while it was a great move on LIBOR (trying to narrow the spread) it now has to play catch-up on (the spread actually widen by 27 points). Still it is good to see the 3-month rates drop.
Again – these needs to narrow MORE to see money (capital/lending/credit) begin to flow again. However an additional injection of capital may also be playing a hidden hand as to why LIBOR is coming down – and in my play book it is not showing a clear lane for bank lending, but rather another government injection from the back-door on LIBOR. The FED agreed yesterday to provide swap lines of $30 billion each ($120 billion) to the four central banks. The foreign central banks are able to get dollars from the FED and then auction them in their own markets. Of course this will help pry open the borrowing lines – but really who are they borrowing from? Just more of the same flow from the government. The problem is tracing back the money to the original lender. If a bank lends money to another bank, but the money is being given (in any number of non-normal channels) by the government to the lender, then what is the difference between that and going to the Discount Window? Not much – true lending comes from banks OWN reserve pool – not through back-door government lending. The additional problem is that swaps being lent out also are exposed to credit risk – the same problem that got us here in the first part.
So – (in my playbook) – until we see banks (lenders) stand on their OWN reserve pool and balance sheets and lend DIRECTLY to each other – regardless of route and LIBOR coming down to a decent spread – then we really haven’t seen capital on freeze. Currently it’s like a slow draining toilet – you know there is a clog down there and we keep pouring more Drano – but that dirty water is not really draining. Pretty soon that septic tank is going to be filled.
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GDP – Got Recession?
Gross Domestic Product (GDP) the key measure as to the economic health of this country contracted by .3% in the 3rd quarter. Good new, it was less than expected (which was in the .5% range). However - economist expect it to contract further in the 4th quarter. For some the measure of inflation is the GDP contracting for 2 or 3 consecutive quarters. Well – I guess this means to start counting.
Consumer spending also contracted by 3.1% (the biggest decline since 1980) - remember it’s consumer spending that makes up a vast majority (70%) of the GDP – and with their homes (ATMs) tapped out and other credit lines shrinking – don’t expect to see any surge in spending. (side note: Credit Card defaults - even for prime borrowers – has increased rapidly. Credit Card companies have already be offering deals to close accounts by having consumers pay off at a discount – as low as 70cents on the dollar – but if consumers are “Credit” spenders – how are they going to pay down any balance?)
Inflation? The government report showed costs tied to consumer spending “Core” (excluding food and energy) increased 2.9% - the most in 2 years.
However – the pundits are still debating if or how long this recession is going to last – silly I know. It’s like the definition as to whether it is GDP or jobless, inflation vs. spending, 2 quarters or 3 quarters, etc – is going to make a difference so that one “talking head” or “politician” can actually call it a Recession or just a BIG slow down. Of course it will be hindsight when a consensus is realized.
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Futures Pre-market
The 50bps rate cut, LIBOR coming off, and the GDP – while negative – wasn’t as bad as economist thought – has sent a good jolt to the futures in the pre-market. Yeah – a euphoric rally in the middle of a recession. Don’t try to make sense of it – just realize the spread is huge at this point and expect the ARB traders to short the futures to buy the basket at the opening (if the spread remains) which will send a jolt to the upside in the market.
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Support / Resistance
We rallied and sold off yesterday – testing resistances – just like we were testing supports. Again we are seeing a good jolt to the futures in the pre-market. Will it hold?
INDU 8000-8500 / 9500 (9000 is the pivot point, futures are showing a strong pop to the upside and 9500 is in the cards – the quest is do we close above that or sell off again.)
NDX 1200 / 1350-1400 (1350 is in the cards today if we get a hyper rally follow through this morning, but again it will be the close. We are getting a good pop with a 1325 opening – is it a selling opportunity at the opening or do we rally a little higher?)
SPX 900 / 1000 (We are getting a good rally in the pre-market the 980-1000 upper band is resistance and a place to get flat and those with gamma get short. We could touch that this morning – but it means more euphoric buying on a contracting GDP – hmmm.)
RUT 450 (500) 550 (We are just below a pivot point in this index. The RUT broke support and also didn’t get the kind of rally the other indices had – it is looking strong this morning in the futures market (above 500) – the question is do we CLOSE above 500 on our way to 550? – maybe a short-term rally could continue.)
Look at the close and the volume increase in trading. We saw some huge volume relative to the day’s volume right at the close with selling pressure.
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Conclusion
GDP contracting, 50 bps cut (with Bernanke hinting he will cut even more), LIBOR still high, consumer spending slow down, and more credit and company problems – but we had a 10% rally the other day and look to have another strong rally at the opening. No – don’t TRY to make any sense of this – the market is still very foggy as to finding solid footing and hyper moves are to be expected.
We also have a HUGE injection of volatility coming up next week – the ELECTION. NPR was reporting that depending on who gets elected we could see riots . RIOTS, are they kidding? Well it only took one man (Rodney King) to send LA and other parts of the US into riots – so I really don’t know what to expect – other than to share NPR’s concern. I hope nothing like that happens. It will be interesting to see the knee jerk reaction the market takes with whoever is elected. I can assure you that regardless of WHO is elected – don’t expect to see the economy to change for the next couple of months – however we could see some knee jerk reactions.
My only message to you is to VOTE – make SURE to VOTE – regardless of your party or affiliation – just go out and VOTE. Make you voice heard. However – if I had one suggestion – please take the time to spend thinking about your local, state, and federal representatives – they WILL have a bigger impact on you than the president.
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