(sorry - again no pictures - maybe when I get the time again...just very busy)
We saw some serious volatility yesterday - down, up, down, up, down. LIBOR came out this morning and NO CHANGE - the Kumbaya Rate Cut did nothing for interbank lending. It's not a lending issue, but an insolvency issue - that is why banks are going to the Discount Window or asking for handouts. Lowering targets is not going to get them to lend to each other, because they have nothing to lend. It was an act of solidarity to sell the "hope" - but we should leave the "hope" selling to Obama who has been selling it with great appeal.
Iceland - wow. What can you say - it is getting worse this morning - they have HALTED their markets for the rest of the week. They could not even defend their own currency and their government through their hands in the air and gave-up when the pre-market flushed the Iceland krona into the toilet by more than 50%. Pegs only work if the government CAN defend it, but if the government is busted there is NO defending squat. I saw a shop owner in Iceland, very concerned - not because of the local ability to purchase goods, but rather his ability to buy MORE merchandise at reasonable prices. If a nation (such as ours) is a net importer consumer, then yeah - the exchange rate does make a serious impact. Those that think we earn dollars and spend dollars - thinking the Euro, Yen, or other currency we do business with doesn't make a difference - is living in the 40s when we had a closed society and were more self reliant.
The concerning item I heard yesterday was an economist calling Iceland the proverbial "canary in the coalmine" - if that is true - how long before we see something like that hit our shores? In the 96-97 Asian Flu - the ripple of currency crisis started in Asia and quickly circled the globe - foreign nations RAN to our shores as the beacon of safe haven. That is not the case today - this is the American Flu - we are starting this virus and now it has spread. Where is the safe haven? That is the concerning question.
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What earnings season?
Earning season has started, but with all the market mayhem it's like no one is paying attention. Most certainly the expectations are not that high. However, some companies that had already lowered expectations earlier this year are fairing the storm rather well.
IBM a leadoff hitter came in at the top range of estimates - previously shedding their PC business to a Chinese company has reduced overhead risk which has helped in this economic landscape. Bringing core focus to the service line of the business allows for easy expansion and contraction as market dictates.
However, while IBM is rather nibble for such a large organization - since their restructure - many other companies are not expected to fare as well. Expectations according to an analyst on Bloomberg this morning are for 25% to come in lower than estimated, 50% to be at the low end of the estimates, and only 5% to be in the higher end. Expectations for 2009 don't look much better. The contraction will have broader implications.
The good news - there are some recessionary and global diverse companies and also those that are nimble. Even Wal-mart while being a retailer has broaden their market enough to absorb hits in the retail line while groceries / pharmacy can off-set those losses.
It's about being nimble, avoiding the need for credit, reducing debt, and having a global presence.
No doubt these are rough times - we WILL survive. As Jerry once use to echo, "I will get by, I will survive."
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Deflation or Inflation?
As money is pumped into the system that is just being sucked up by write-down paper losses - destroying capital. That most certainly is creating a deflationary situation as money is in short supply even as the government is dumping billions into the system. When there is little capital that creates deflation, however the pouring of the money into the system would infer to inflation. However, while we may be seeing deflation on the front end, the nation’s debt has surpassed 50 trillion. That 10% recent increase from the treasury and Fed's continual capital dump - will probably mean about 3-4% of the GDP in the next two years.
As you know I am very concerned about the dollar risk as per the buying power (inflation). We have seen foreign nations already sidelined on picking up treasuries, even though as domestic money has run for cover - there is just not enough money to buy up the amount of money the government is printing. What happens when we DO find a bottom, we might not see inflation on the back end from the printing of too much money - but we could (and are) seeing faith fade as to the USD and the government's ability to maintain its debt level. We just saw Iceland's government freeze (at the point of bankruptcy) their currency got hit and they can't get any loans. So it is a real possibility that the government can go bankrupt. That occurs when we print excess money and HOPE that someone will extend us the money (by purchasing treasuries) - if the government fails to receive credit lines for the printed money we could see what happened that broke the gold standard. When we were on the gold standard, our government paid its debt in dollars (since it was backed by gold) - however since the dollar was interchangeable with gold - France called our bluff. They said we NO LONGER want to be paid in Dollars we want to be paid back in GOLD. And if Dollars are TIED to GOLD - then you should have the gold. As soon as France asked to have their redemptions in gold, others followed. The reality - we HAD printed MORE money then we actually had gold for and we quickly saw our gold deposits depleting - we had no choice but to get off the gold standard. The bluff was called and the US folded, this time around we don't have a asset basic currency to fall back on.
Now foreign nations do not have that option, instead they are purchasing treasuries that are backed by FAITH and now ramping DEBT. Will a country ask for their treasuries to be backed by a hard asset other than just the government's WORD? The term "backed by the government" is losing ground as having any real value other than the fact they own the printing press. I will not be surprised to see foreign nations, just like Buffet's investments in GE and GS, ask for something more than a crappy interest payment on a deflating asset. What will it be - Food, Commodities, part ownership in these NEW socialized companies AIG, Freddie, Fannie. Who knows but we are getting to a point where being back by the government is becoming as transparent as WMD's in Iraq.
The rate curve should probably be called a faith curve.
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Futures Pre-market
The futures have seen a little volatility - but are generally higher. While IBM is bringing good news to the pre-market and there was mix reaction to the Kumbaya Rate Cut - the LIBOR has not come down. Of course the DJ futures are up - but that is spurred by IBM. Expect a mix but slightly higher opening.
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Support / Resistance
I am reluctant to any supports - but I will.
INDU 9000 / 10,000 (With 300-500 point moves it means we really don't have a support level - until the market volatility can settle down a little.)
NDX 1300 / 1400 (Again - expect volatility in a range.)
SPX 950 / 1050 (1000 seems to be an area a lot of traders are talking about as a straddle strike.)
RUT 550 + (It would be nice to get above 550 and move back into range.)
I think we could expect to see a dead cat bounce - no doubt the market is oversold from the credit crisis as there are legitimate companies seriously undervalued. The problem is being able to absorb the volatility.
I think for those more risk-adverse and ONLY with the use of FULL HEDGES to buy some equities in here - but MAKE SURE YOU HEDGE. Be careful - and avoid those companies in the credit squeeze - that means leave financials and banks alone - however companies like Wal-mart, IBM, JNJ, etc - might be worth a look at - but FULLY HEDGED. Again - I don't think this is a bottom over all - but it might be time to look for some longer term value IF HEDGED.
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Conclusion
We should be seeing a dead cat bounce here - the market still has a lot of problems, not because of companies having problems - but rather their ability to borrow short-term money. LIBOR and other interbank lending did NOT come down after the global rate cut - that means that money is still very tight.
The problem is not companies but rather credit and down the road the dollar. Additionally - do NOT expect to see companies to see the growth rate going forward that we are a custom too. People just don't have the money (OR credit) to spend. Neither do companies. That means that any growth will be slow. For long-term investors you should be looking at low volatility companies, good yield (pay a dividend), little to no debt or good cash balances, and solid revenue and positive margins. It's called VALUE or FUNDAMENTAL investing - avoid technical trading for the long-term the technical’s have been blown out. Look for fundamental solid companies and HEDGE - they could sell off some more and institutions need capital.
Additionally the short ban has been lifted - will it create a difference. It would be funny to see the market RALLY the day the Short-ban is lifted - that would really put the stinky shoe in the mouth of those political fools and talking heads that blamed short-sellers for the market down fall. Fools!
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