11/10/08 (New Deal? AIG $150 billion? Where's the money?)

Traders,


Sorry for nothing on Thursday or Friday, it seemed like the market fell apart late last week - however despite the bad news on Friday the market managed to bounce a little. The market's massive rise and sharp selloff reminded me of those better than expected earnings situation.
Time after time, a stock would be touted in the news because of a possible FDA approval, new product, or something. Everyone was talking about it and earnings expectation were better than forecast. The stock would rally the week into earnings - sometimes 5, 10, even 20%. Then the earnings came out, they were better than expected, but the big money had already been made as the firms and investors bought the stock going INTO earnings. On the day of the news they sell the stock to REALIZE those profits and the stock falls. I would be frequently asked, WHY did the stock fall when earnings were better than expected? To me it would seem silly that anyone would ask this question, especially after seeing the stock make a hyper rally into the earnings. Stocks move because of SUPPLY and DEMAND - news is just a catalyst to drive volume. The stock simply went down because all those that bought the stock going into earnings (thus buyers driving up the price) are now SELLING because the news is out and they want to take their profits.
Well the market had made a hyper rally after the sell-off. I think I heard it was the biggest rally the previous week in market history (I am not sure if that is true), regardless it WAS a massive rally. The rally was going into the earnings date, sorry I mean the election. The election came and every one sold the market to capture those profits (or take off their risk). The election was just the catalyst that the marked the end of expectations.
I guess the saying "Buy the rumor and sell the news" has a point. Now we are back to volatility from news, credit lines, inflation, and recession risk.

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The fine line

I am hearing several people, very smart and some that I admire, make a rather strong argument for government INTERVENTION. Everything from protecting jobs, boosting consumer spending, etc. Obama is now being compared to FDR in that a NEW NEW DEAL is coming. One smart investor that I respect, made a comment that the government does need to help and boost some sectors to bring stability - temporarily. The problem is TEMPORAIRLY - why - because usually once the government goes down a certain road - it's permanent.
It is true that some are temporary - but the question I have is are raising taxes (even if temporary) really help spur economic growth or is it really subsidizing government programs? The question you must ask yourself is the government better at managing domestic needs and therefore managing money? Their current track record is pretty poor.
If Obama is being compared to FDR and a New New Deal is upon us - well I ask the question how far will he raise taxes? FDR raised taxes to 80% - someone had to pay for the New Deal. The government expansion and spending increased like never before in history. The government became the nation’s employer. Some would argue that it had too to make sure the people had jobs and could get paid. But that money had to come from somewhere - it was a massive redistribution of wealth. The reality of this time was the new businesses did not expand nor could new business find employees - the government was every businesses competition - companies couldn't compete with the government. World War II took kept tax rates high and WWII actually help end the massive NEW DEAL socialism because the government had not OWNED military or industries to make the planes, tanks, ships, bullets, and other needs of the military. The WAR (while tax rates did remain high) helped end the New Deal and the expansion of socialism. Many believe FDR brought us out of the depression and the NEW DEAL was a great plan that saved this nation, I would argue we were on a road towards socialism, with 80% taxes, and the government's role as employer was expanding fast. It was the WAR (unfortunately) that shifted employment to large industries as they expanded to meet the war demand. It took a decade to bring those hyper tax rates down again.
But something changed - the birth of the international markets. Our nation became a consuming nation of not only natural resources but also durable goods. And something else happened as well - companies started moving overseas to avoid those high taxes. Several industries in this country were now competing with foreign nations. Taxes had come down from 90% high in the war to 60% by the early 80s it came down to 50%. But competition from overseas was tough and many companies started moving overseas or relied on off-shore resources to keep margins down and compete. The Auto industry became the focal point of what was happening in every sector. Eventually the government realized that high taxes that was introduced by FDR in the NEW DEAL was no longer something they could force upon this nation, because the upper tax bracket had a choice - MOVE. Jobs were going overseas and this nation became more dependent on foreign trade.
Now times are different than in FDR's day - sure they had low tax rates prior to the market crash (I believe in the 20-25% upper bracket) and then the depression sent them well up to 70-80% and even topping out at 90% during WWII. We were an isolated nation back then - we relied on our OWN natural resources and manufacturing. Companies could not easily move nor could the citizens. These times are different and the NEW DEAL may stick this time - unless something can change it. While we might agree in short-term government intervention to help get through this difficult time - there is a fine line between temporary intervention and socialistic change.

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AIG the bailout continues

At this point the government got stuck with a toxic mess that it really can't get out of. The initial $85 billion "loan" to bailout AIG has turned into a $150 billion mess. The NEW bailout looks like this - $60 billion loan, plus $40 billion in "preferred" shares, plus purchasing $52 billion of mortgage securities owned (or backed) by the company. Hmmmm...wonder where those mortgage securities will go - oh wait I've got it - we can squeeze some room on Freddie or Fannie's books.
Of course the government takes on more debt (easily translation is Taxpayers of the future) to try AGAIN to help salvage AIG to escape bankruptcy. That sad thing is that the first try of $85 billion didn't help, and it is possible the second try of $150 billion may not help either. The government could be stuck with another $50 billion in mortgages and out $100 billion in cash (loan) and worthless stock when all is said and done.
But then again - as if to give us comfort that the government is tough and means it this time - they have frozen the bonus and severance package of the top brass - WOW - that should save about 50 million or 1/3000 of the government's investment.

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Transparency ???

As our Congress brings the hatchet to bear on companies and demands more transparency, they can't even muster that in their own house. From the ability to anonymously add earmarks and pork to bills - to (NOW) even the Fed and Treasury playing the "Three Card Monte". The Federal Reserve is refusing to identify the recipients of almost $2 trillion in emergency loans and the toxic paper companies are using to collateralized borrowing from the Discount Window.
In September Hank and Ben said they would comply with Congress needs for transparency of the $700 billion check they just gave them - additionally what about the other trillion going out the door via bailouts and the Discount Window? However - so far Congress doesn't have a clue what is posted as collateral, how much money is going where, what are the deal terms, etc.
As warned - the Congress gave sweeping powers and a fat check to a couple of guys and they either trust them or they don't. Several people are giving Congress heat to create some transparency - it's amazing how fast the shoe falls on the other foot. Only months ago Congress complained about transparency in the corporate world and on Wall Street. Now it is Wall Street and the Corporate world demanding from Congress how the people's (tax payers) money is being spent.
The problem - in that bailout package and the Fed's emergency powers act - there is no line item for transparency. It's ironic that the man being demanded of more transparency on how he is spending that $700 billion said as early as September to the Senate Banking Committee, "We need oversight, We need protection. We need transparency. I want it. We all want it." (Paulson).
The question - can and will Congress get more aggressive and get that much needed transparency so the world and the tax payers can start making VALUE judgments on companies? How can you invest in the stock market or a company if you don't know how deep in bed or not with the government? Also - how much of Hank's $700 billion is left or How much is Ben lending backed with WHAT collateral?
The sickening feeling I have is the printing presses are smoking and Ben is taking failed 3rd mortgages as collateral to lend - remember he lowered the standard to include ALL rated paper (that means junk) for collateral. I wouldn't be surprised if there were a few IOU notes on a cocktail napkin. YIKES!
Maybe we really do NOT want to know.
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Futures Pre-Market

Despite the bad news last week the futures are getting a good pop in the AM. It looks like a decent spread and the ARB traders are probably ready to short some futures into the opening to buy the basket. I expect a small pop in the market at the opening.

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Support / Resistance

Are we creating a short-term double bottom?

INDU 8500 (9000) 9500 (It seems like a stall and a pivot point - we could retest the 9500 or 8500 level. Question is are they really support/resistance levels - I would get flat those levels with Gamma, if taking a direction stand.)

NDX 1200 / 1300 (We broke down last week below 1300 - thus turning that into resistance. It is about the close and getting above it.)

SPX 900 / 1000 (We are getting a boost in the market - 950 might see some resistance - which could form a pivot point in the near term.)

RUT 500 / 550 (If you want to do some cheerleading - 500! 500! 500! 500! - it needs to stay about 500 to build support - we are getting a good bounce in the premarket - let’s see if it can stay above 500.)

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Conclusion

I was in Chicago running around in meetings like a crazed chicken - I was lucky to hit a warm spell (65-70) and I really love Chicago (but not in the winter). Remember - I am a Michigan boy - so I KNOW cold. Anyway - Chicago was nice and we left the day before the snow came and the only thing that was on my mind was the Sailboat race on Saturday in the WARM sun in the GULF - that would let me tolerate an early cold spell in Chicago. I am very fortunate to have friends with a lovely Gaff rig sailboat (turn of the century design). While we were a short crew (only 3 of us) - we managed to push up all the canvas (6 sails) - of course I was master grinder and on a Gaff rig - tacking also means pulling down and resetting a mizzen stay-sail. So while it was work - the work was something that I love. Not to mention - it was warm and sunny.
That got me also thinking - (a little plug) - I am in one of the nicest buildings (brick and interior gardens) and there is a couple of traders in the building (commodities, futures, etc.) So if any of you northerners that get this are looking for a WARM winter offices for a break - I think this is a perfect place for those Chicago, Connecticut, New York, Detroit, or the many others - that want to have a winter home office. These markets now fully electronic allow you to be any where these days and I can't think of a better place right now than along the Gulf -(with sailing and golfing). This building is primed for traders, funds, and investment firms - as it has lawyers and accountants already domiciled here - along with wealth managers, funds, traders, etc. So if you are interested - I do know the owner and can put a good word in for you. Oh - and if you like sailing - I know a few sailors and yacht clubs!