Talk about testing the bottom....it was like we fell and loaded up that spring off the support and shot up like a rock. No doubt it was a key day to see if those support levels held. I noticed that the volume was fairly light in the morning - then it was like a shot and we bounced hard.
This morning the "worst is behind us" talk is starting up again. It's like any time the market gets a 300+ point rally the "worst of the behind us" talk starts coming up, crazy I know. Again - euphoric optimism works wonders - just like chicken soup. But chicken soup doesn't cure the cancer in the system, neither does euphoric optimism. Regardless of the excitement about the G20 meeting - it's a meeting. Sure they could come up with conclusions and ideas - (let's hope). However - no matter what happens in the meeting - you can guarantee they will say it is a success. - Whoooo Hoooooo!
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Bretton woods II - let's hope not.
Pretty much you fall into two camps (Keynesian / Hayek). Bretton woods lead us here and in my book Keynesian has pretty much failed - you just have to look around (like today Freddie Mac reporting another record loss of $25 billion). It's amazing the love people have for Keynesian - probably because he was running the show at Bretton woods and was pretty much a believe that the government could solve the employment problem - His conclusion for the great depression was to lower interest rates and create massive employment through massive government projects and oh yeah - I almost forgot tax the crap out of people to pay for this project. Obviously you can tell from my writing what my opinion of Keynesian Economics are. To me it seemed simply their suggestion was a circle solution, employee the people, tax them at 70-80%, to pay them back with their own money. Then lower interest rates as low as we can so that we can print money and while our debt will probably skyrocket (it did to over 50% of GDP) at least our payments will be cheap. How that is an answer to anything is beyond me - but they all meet at Bretton woods and because Maynard probably had a way with words and a fancy degree (backed with the thought we could give everyone jobs) they bought it hook-line-sinker. The problem (in my very humble opinion) is that they were focusing on the WRONG problem - sort of like putting the cart in front of the horse. JOBS - they wanted to give everyone jobs then they back-engineered on how they were going to pay for all those jobs. My biggest issue was that came out of Bretton woods was the government crossed the line between regulation to intervention - and that is a dangerous line to cross. We saw what happen recently with that at Fannie and Freddie - and the bailouts. How do we know if the economy is successful and companies can stand on their own balance sheets if the government is just going to be the funding and supporting companies and jobs? We don't, rather we shift our value analyst to the government - instead of the company.
If the government is going to fund companies and manage them to a certain extent - then shouldn't we be judging the governments books and credit - rather than the company? That is the problem when you move from a regulator to a player in the game. It's a line that once crossed - becomes a difficult game to step back into the role of regulator and not interloper.
The G20 is meeting - Obama and the Democrats programs are looking very much like another round of Keynesian (which has failed) - and more government intervention and getting involved in the game. It is admirable that Obama doesn't want ANYONE or ANY COMPANY to fail - but people and companies have to fail - shifting the debt from the person/company to the government does not absolve the debt, instead it puts that debt on ALL our shoulders - but worse creates wider pressure on the economy and worse the confidence in a fiat currency (or as I like to call FAITH currency). Since the government doesn't have to BACK the currency with anything like gold, silver, or even property - they don't have to FINANCE the printing of money and the purchase of debt. Sure they supposedly have to sell treasuries to keep the balance - but so far they can't keep up and lowering interest rates makes treasuries to our creditors (foreign nations) less attractive. What happens when we can't sell treasuries (or enough)? We create inflation - you don't have to look far to see two recent (yet extremes) Iceland and Zimbabwe. We have the advantage of being a world reserve currency (unlike those two countries) - but at some point we put all our HOPE on it maintaining its standard as a reserve currency. However we got called on that bluff when we were on the gold standard and France said "I don't care if you currency is backed by gold, we want to be paid in gold!" and other nations followed suit. We had to sell so much gold that we couldn't maintain the standard and it wasn't long before we had to decouple from gold. Will our bluff again be called? How much to we print and bailout before other nations say "No thanks" to our treasuries. I can tell you buying them at current interest rates (which could go lower) is not that attractive. Additionally - even the Economist could not make heads or tails out of the strength it maintains other than FAITH.
Obama needs to sell the FAITH and we need to pray!
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Freddie Mac - when a bailout is not enough....
How did we get here? I would argue it is a culmination of greed and desire by the consumers (their addiction to spend coupled with the desire for instant success and riches) - added together with our government's willingness to make home ownership available to ALL (even if they can't afford it). While it is admirable - they have gone a little overboard in that regard. Given someone an inch.....
Freddie and Fannie have been the catalyst, the focal point, in which Congress not only overseas their roll - but has instigated the need for making credit (mortgages) available even to those that cannot afford it. Freddie and Fannie have two severe problems that have not been addressed - leveraging their books (to ridiculous levels) and the willingness (even today) to take down MORE sub-prime toxic debt.
However, Congress did NOT see these two companies (that they oversee) as a problem. Just recently (in the first quarter) Barney Frank (along with Chris Dodd, Nancy Pelosi, and Hillary Clinton) lead the program to have Freddie and Fannie BAILOUT the mortgages and foreclosures by purchasing MORE toxic paper. They were warned that toxic paper is toxic paper and just because you move it over from a traditional bank lender to a Congress oversight firm (Freddie and Fannie) that it wouldn't go away and it can only get worse. Guess what it did - and this government had to bailout the bailout. Freddie and Fannie went belly up and the government (who was already overseeing these firms - which seems crazy) had to bail them out (with YOUR money).
Fannie announced earlier in the week as to their massive third-quarter loss (after being bailed out) - guess what Freddie posts a RECORD LOSS of $25 billion and is asking the treasury for ANOTHER $13.8 billion. Are they f'n kidding me?
What is even more sick is that they CONTINUE to buy down more toxic paper. One analyst stated you could easily get losses north of $100 billion from these two (government controlled) firms. When do the people say enough is enough? Fannie said they may need more than $100 billion in funding to stay afloat.
We have NATIONALIZED the mortgage industry with these two giants (both continue to operate and buy and issue more paper). Don't let anyone tell you socialism doesn't exist or that Keynesian economics coupled with faith back currency works. All you have to do is look at these two behemoths failing even after being bailed out and now FULLY run by our government to see how adapted the government is at running business.
I need a sick bag.
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LIBOR on the rise
I was hoping to see the 3-month continue to fall and narrow the gap on the Target rate - but as we hear more news of government intervention, Congress wanting to bailout the Big Three, and Freddie and Fannie collectively in one quarter reporting 50 billion in losses - well many foreign banks are starting to tighten up again. Why lend to banks in a country where nationalizing AIG and the mortgage giants is seeing more write downs and printing money faster than a polecat in a hen house is their answer to solving the problem. Not to mention the in-fighting between Congress, Fed, and Treasury as to HOW the money is spent and HOW much is being lent.
LIBOR climbed a second day as Recession spreads and the world's reserve currency (the US Dollar) could come under some serious inflation heat. Could this be the low in the USD? Who knows - right now it has bounced on FAITH - not fundamentals. Keep an eye on the 3 month.
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Futures Pre-market
We got a great rally off the supports and now the futures are giving back a little. Spreads are in - so expect ARB traders to buy the futures and short the cash at the opening putting pressure on stocks.
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Support / Resistance
That was a serious "brow wiper" yesterday! We broke through the supports in the early session and like a spring being loaded we exploded to the upside into the close. I got phone calls and emails as to WHY - don't ask me that - I have NO IDEA other than following the paper. Light volume married with some short-covering - does it really matter? All that matters is closing out positions, rolling up hedges, and managing your gamma.
INDU 8000-8250 / 9000 (We flirted with 8k and now are just off the 9k resistance area. How do people want to go home today? Watch the close!)
NDX 1150 / 1300 (Again - another hyper intra-day volatility - watch the close!)
SPX 850 / 950 (Bounce?)
RUT 450 (500) 550 (In the middle - another pivot point)
Please don't call and ask me why the market went up or down 500 points. Could this be a double bottom? Sure - but don't tell me the worst is behind us. I really hate hearing that over and over.
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Conclusion
We might see a rally or the market may stay in this low support range for a while. People may even believe the bailout and the flooding of capital into the system is working. What we need to watch VERY closely is the dollar, inflation, bonds, treasuries, and LIBOR. If we are just pouring money down a drain - and debt builds and the government is NOT able to finance the increased debt via treasuries - well as they say "Huston, we have a problem!" That problem will not surface quickly - just like the housing or dot.com bubble but it will build and if not managed correctly when that bubble breaks it will make the housing/credit problem look rather like a small opening act at a lollapalooza festival.
When we get these big pops (don't look for reasons why) just hedge and roll up those positions. Let the talking heads try to figure it out.
Now go out and enjoy the weekend. I will!
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