Well we got a little move to the upside, it’s funny that I say little because in a traditional market a 2% move in a day is huge – but lately it seems like a rather mild day. That just goes to show how we have become use to high volatility and numb to big draw down days. We are still in that resistance band have really haven’t broken out of it. The rate cut did spur some hope, but in reality it only makes borrowing from the Discount Window cheaper. LIBOR IS coming down and came down again today – which is a good sign, but it still has a ways to go. The GDP was better than expected but still negative. Consumer spending is expected to slow down, but maybe not as bad as expected in the 4th quarter because gas prices have been coming off. As you can see the overall picture is negative, but there are some signs that things are starting to get slightly better – we may just be in for a long-term slow down and mild recession or stagflation. That actually wouldn’t be that bad compared to the alternatives.
Today is Halloween, actually one of my favorite holidays. I really miss being in northern Michigan (Traverse City) this time of year to see the leaves change color and that brisk cold wind that nips at your nose. It really makes Halloween something special, we have a massive large oak on the property up in Traverse – and when the leaves change it is really something special. Well – we are making due here in Florida and have a couple of grand oaks on our property here – we even set up a little grave yard, some ghosts, and a smoke machine - for the local kids. My son will be a ghost for the second year in a row.
Happy Halloween – now to see if the market gives us a Trick or Treat – so far the futures are showing it to be a Trick, rather than a Treat.
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Japan cuts rates (first time in 7 years)
Japan has been the source of cheap (free) money since their country hit the death spiral (or triple down turn) a couple of decades ago. Actually – Japan figured out an interesting business model in the wake of their triple downturn – they became the world lender. However, that lending has put many big U.S. firms into some hot water and the unwinding of the carry trade has cost serious money for many firms. See – it may seem like a good trade if you only looking at the interest rate of Japanese borrowing – but it’s the currency rate that CAN rise up and bite you in the “you know what” and that can hurt. With the hyper volatility we have seen in currencies recently – it’s no wonder that any positions relying on any type of carry can stay in-front of the curve. Borrowing foreign currency to leverage investments definitely tosses another monkey into the barrel of risk management.
Japan – already had very low interest rates (.5%) they certainly don’t have any powder and a rate cut is almost a joke at this point. It was more of a show – (to the world) – that money is cheap here – come and get some. Japan – like the U.S. is now facing a very sluggish economy that has already seen signs of slowing down and thus a rate cut (even with almost no affect) does off some “hope”. It would seem that Japan – for the first time in a while – is now looking inward (again) as to their own problems.
The YEN rose 96.87 (from 98.43) to the dollar after the decision. The Yen had been as high as 90.93 just a week ago (highest in over a decade) – which hurts exports. Getting it back to 100 to 1 is something that could spur exports and some economist say that setting a target of 100 and getting back to those levels should relieve some stress from the economy.
I guess the question at this point – does the U.S. soon become King of the Hill as the source of the Carry – leaving Japan to focus inward?
If you want to know how government intervention (not regulation) screws up a economy, stock market, and banking system – look no further than Japan (good chapter about it in Vandal’s Crown and Tug of War.) The U.S. is following in some historical screwed-up footsteps.
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Corporate Bonds not as attractive?
Well – I guess after holding Lehman paper and watching it collapse (even insured paper) to less than 10 cents on the dollar – doesn’t make other corporate paper (even at 9%) look that attractive. The problem is the hedge! Traditionally (and in my play book foolish) – the play for hedging converts was to short the underlying against the paper. The problem traditionally was getting called away and having to re-short for losses or facing a hard-to-borrow situation. Recently we saw many funds that trade this successfully get the massive crap beaten out of them when the SEC (with a push from Congress) BAN short selling of any kind – creating a hyper-short covering on top of holding unhedged paper in credit eroding issues. Several long time funds, including institutions, saw sick losses for no other reason that the rules were changed overnight.
Now – many firms avoid that investment, because of the uncertainty of what rabbit the SEC or Congress will pull out of there hat next week. The problem – well it was these firms ability to buy corporate paper and HEDGE IT that allowed the paper to flow freely. Companies issue paper on a regular basis to raise much need capital for all sorts of reasons and traditionally firms do NOT mind lending capital IF they can hedge those positions (hence the need for the ability to short stock.) Take away the hedge, you take away the big lending.
Now rates are going higher for lots of this paper – and it’s solely based on the hope that the credit ratings are remotely correct and many of the big firms are avoiding the paper like the plague. That leaves those unhedged buyers the only players in this market and they are traditionally smaller lenders than those that do hedge. Since we have seen Lehman fail and others get bailed out with uncertainty as to the paper value – coupled with overnight rule changes – the corporate paper market is very tight and rates are going higher.
Add these to the credit squeeze for inter-bank lending – some of these companies are going to hurt REALLY bad if they can’t raise funds. Just look at GM – which is on the verge of full collapse and the CEO with his hand out for 10 billion which will just float the current debt for not even a full year.
This isn’t only happening in the states – but overseas as well. Once we see credit-default swaps, convert paper, and all sorts of corporate issue debt decline in rates and start to flow – it would be a good sign that credit is unfreezing and we would also see stability to some balance sheets on many of these companies that rely on borrowing.
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Futures Pre-market
The futures had been getting a good smack around after Japan came off hard from their silly rate cut of hope (which I think was more of a slip of the cards that things really suck in the land of the rising sun.) – but they have rebound coming into the early session (30 mins prior to the opening) Spreads to fair value are shrinking – but we still could see some Arb traders buy futures to short the basket – which could put some pressure to the downside on the opening.
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Support / Resistance
Welcome to the wide band of resistance – so far no break out – and that may be harder than we think.
INDU 8000-8500/9500 (We are above that 9k mark which is good but we have a ways to go to get a good break out. 9500 is a good area to flatten long deltas and get short. In the lower area of the 9000-9250 I would say stay flat with some gamma.)
NDX 1200-12500 / 1350-1400 (We are just below the band of resistance and starting to see some pressure. A close up into the 1350-1400 band would show some strength into the weekend.)
SPX 850-900 / 950-1000 (We are just into the band right now a close above 950 in this band would end the week rather well.)
RUT 450 (500) 550 (500 seems to be a pivot point – we are above it – but the volatility range in here seems high.)
Trick or Treat? It’s about the close!
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Conclusion
The money is pouring into the system from backdoor channels, Discount Window, bailout packages, etc. It’s rather insane at this point – also we are seeing hyper volatility in currencies – which is tossing the carry trading into massive disarray – as positions are force to close on any given day. Tack on the uncertainty going into an election cycle between two candidates that for as much as they SAY they are different they are just more of the same – (they both voted for the Bailout package loaded with earmarks) – and the tax policies are so convoluted that you need to be a tax attorney to make heads or tails out of it – well whatever happens expect a GOOD jolt to the markets (up or down) - My guess it could be another 10% move – on nothing more that HOPE and/or FEAR.
Now there is talk in Congress of another multibillion dollar stimulus package? This is just getting out of control.
I once heard a trader on the floor in a messy divorce say “Don’t get married, just find someone you hate and buy them a house – it’s the same thing!” – I am getting that feeling with this bailout and government aid and socialism that is rearing its head. My taxes are going to pay for and keep someone in their home because they were not responsible?
I guess we could make a decision of who we would want to vote for if there were not so much alike – really – how can one call the other socialist or the other more of the same – when they voted for the same bailout package and continue to support more government spending? Is McCain more like Bill Clinton or is Obama more like Bush? Now even I am getting confused. Where is a decent third party when we need it? Sure they both have different social views – which I will not defend or argue against – my Market Preview focuses on the Market and the Economic impacts and right now the Bailout Package and more government bailouts seems to be the agenda of both parties. I am still trying to figure out the tax structure of both parties – right now all I know is that $250k makes you rich – I have a friend in Manhattan that would seriously disagree with that hypothesis.
Anyway – go out and trick or treat – enjoy the Ghosts and Ghouls.
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