We got a massive rally on Friday that drove the market back up and through some relatively important support levels. This morning it seems that the futures might at to that tail wind. No doubt we were oversold (from a panic basis) all you had to do was look at the massive drop in Treasury yield (in some cases negative) and you could see the lemmings running off the cliff either looking for safety or chasing yield. And that trade (treasuries) is loaded with its OWN ASSumptions (like validity and safety – because it is the US Dollar) – even Economist is covering stories that S&P or Moody’s may knock down the coveted AAA status of US Treasuries. You know what they say about ASSumptions.
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Congress owns a new BANK
Citigroup falls to nationalization, just like AIG, Freddie and Fannie. Not only are they getting $300 billion in loan guarantees, but they are getting ANOTHER $20 billion (adding to the $25 billion they already received from the TARP) from the government. This time for the $20 billion and the $300 billion in guarantees, the government is getting preferred shares that pay an 8% dividend and warrants to buy 254 million shares of stock at $10.61 each (wait I thought the stock was trading less than $5 a share). It’s a full-frontal dork deal – warrants for 2x the current stock price and 8% on $20 billion and with the implicit risk of carrying another $300 billion in risk – are they kidding me. Citi got a GREAT deal and the tax payer got the shaft, Buffet would NEVER EVER have done that deal. But who said Congress knew how to negotiate tax payer’s money (for a better understanding on how government spends YOUR money – look no further - http://marketpreview.blogspot.com/2008/01/how-money-is-spent.html (that tax payer got HOSED!)
Several economist have already pointed out that about $100 billion of the $300 billion has failed and will need to call on that guarantee, while the rest is all BUT failed. When all is said an down expectations for Tax Payer money into Citi is between $150 billion to $350 billion – and the sad thing is that does NOT guarantee that they will survive – even after all the money being poured in – they may still have to breakup and sell off the company.
Sure the stock is seeing a bounce in the pre-market – but ask yourself why? They just became another semi-nationalized company. Remember this is a transfer of risk – Citi’s risk should be reflected in the Treasury market. Think about this – Company A has D credit and Company B has AAA credit . Company B takes over Company A, shouldn’t Company B’s credit drop for assuming Company A’s risk? I will let you sort out who is Company A and B in this deal.
Well at least the CEO (Pandit) did well – he sold them his Hedge Fund (for $1 billion) and became CEO – right before his fund collapsed.
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Merrill Lynch Deal or No Deal
On September 15th, Bank of America announced that it would buy Merrill Lynch for $50 billion (Terms: BAC would exchange .8595 shares for each share of MER) the price WAS at 1.8 times stated book value. But all this was back when BAC was trading at $32.50 a share (that would make the deal for MER at $27.93 per share). However – since the deal was announced BAC is now trading $12 a share – making MER at $10.31 a share. But Merrill is now trading at $8.30 share (a significant discount to both deal terms $2 a share and the capital terms of $50 billion). The spread alone $2, based on the deal terms, is bringing the question to the table – “Deal or No Deal”.
I am sure everyone on both sides of the fence is wondering what is going on – things in the economy are changing fast and what looked like a deal in September may not be a deal in December. Keep your eye on this story – things could change fast.
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Futures Pre-market
The futures are getting a good pop in the pre-market and driving the cash up with it. The spread is still in play – so expect the ARB traders to short futures going into the opening and buying the cash – that should give the opening a good pop to the upside.
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Supports/Resistance
Can you say Supports Part Deux? What looked on Thursday as a full bust down through supports look to be a head fake as we revisit them on Friday!
INDU 8000 !!!! (Ok we are back above $8k but for how long – it’s the support to keep an eye on.)
NDX 1000-1100 (Support range)
SPX 800 !!! (Support)
RUT 400 !!! (Support)
I didn’t bother with resistance – because it seems that everything above support IS resistance….
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Conclusion
Obama is going to unveil more of his economic team and plans today. If Senator Schumer of New York is “in the know” then we should be expecting a WHOPPER $700 billion stimulus package – and that will mean the lines at Red Lobster will be long – also Wall-mart better stock up on some Playstation 3s and Flat screens. One thing you can bet on – Consumers KNOW how to spend and not to save. You think they’ll pay down their mortgage and other debt – or is the new Swing-Bling going on the car, Flat Screen on the wall, and a family outing at Lobster going to break the 3 digit barrier! Of course we can just tax those above the $250k bracket and corporations more.
A friend said to me on the phone over this weekend – “Companies in the black will pay higher taxes to pay the bonuses for those working at failed companies and people making over $250k are going to pay for those under $250k flat screen TVs and consumer junk!” – I said – I agree – but I isn’t this a bailout. He said “NO – the failed banks and automakers business model and debt is STILL on the books – so NO - the higher corporate taxes are just keeping the toxic paper and failed business models alive. The tax increase over $250k is NOT paying for the failed mortgages – it is just being redistributed to those fools that got themselves into debt! Why would you give a failed business more money? Why would you give a consumer that doesn’t know how to save – more money?” - He has a point. Hank is no longer buying the toxic paper, the Automaker bailout is not revisiting the business plan or hiring new management, and the Stimulus check is just a shopping spree.
May credit and consumerism live on.
It isn’t Socialism we should be concerned about it is Consumerism.
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