I hope you had a good Halloween - ours was quite fun and the weather warmed up (after a week of a cold front). So we now wait for a bigger Trick or Treat - who makes it into the White House. Obama was in our town last week and downtown buying a Pumpkin with the family. He has been making the rounds in our hood because it is a more Republican area of the state. The war of the signs in people's yard has been popping up. A friend of mine made an interesting observation - he said "Notice all the Obama signs are in the lower income neighborhoods and the McCain signs are in front of the houses with over $250k income." I never thought about that - but after driving around for the most part that does seem to be the case - at least around here anyway.
My big concern is not WHO becomes president - but if Obama wins AND they get a super majority in the house. That means (regardless if you are Republican or Democrat) that there is NO compromise - we become a one sided government and the GOP might as well just go home. Now for those that may like that (for social issues) - on the economic side it could be awful. Since this Preview is about the market and economics - I will not venture down any of the social issues. The problem with giving either side (Republican / Democrat) both the Administration and a super majority in the house - is that there is never a compromise, the ability to filibuster, or even a chance to disagree to the point of coming to the table together on issues.
Tomorrow will determine many issues going forward - but from an economic landscape - Pelosi is on the march for another MASSIVE stimulus check (rumors are to get it out before Thanksgiving) to help get consumers some money to spend. Of course if they get a Super Majority and Obama wins - expect another 100s of billions to be mailed out to spur more spending. It could be a great X-mass, but what does that mean for the Government when it starts getting its deficit spending bills. The corporate taxes also will probably be pushed through, while we are already one if the highest corporate tax rates in the world already. Expect more jobs to be shipped overseas and even corporate headquarters to move when corporate tax rates go up. All you had to do was watch Bloomberg or CNBC and listen to the CEOs and CFOs who have all mentioned the concern in an already tight economy - how do they expect to pay MORE taxes and at the same time create more jobs - it really doesn't make sense.
However - for me - more alarming is the increase deficit spending we have seen in the last year and increased leverage of Freddie and Fannie - with Frank, Pelosi, and Dodd leading the charge. In a super majority - along with a administration that will NOT threaten to VETO - we could see more failed economic decisions from the Banking and Finance committee who have done a horrible job over the last year. We have seen the Democrats run both houses and even the recent bailout package was racked with earmarks and pork-barrel. One thing for sure is that if this be the case going forward - John Murtha will be the happiest pig in "slop" with his never ending pork.
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LIBOR coming off.....Good News!
We are seeing LIBOR continue to come off and it broke the 3% barrier this morning (2.89%) - which is showing signs of money working its way through the system. We are also seeing the "perception" of credit risk decrease - as the rate for hedging corporate paper declines as well. Both indicating that from the credit side things are beginning to improve.
However, it maybe some time before we see the rate cuts and credit trickle down to consumers - as the lending institutions are still getting their own house in order. There is also huge illiquid toxic paper on the books and the hopes at this stage is that they have "mark-to-market" them appropriately - however more write downs are expected.
It's going to be the GDP that will show if any of the credit spending increases on the consumer side - for now it looks to be a recession that will last well into 2009
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Commodities - a mix bag and confusion
Commodities across the board have gotten hit - and every talking head has their theory - so far I have heard them all. But let’s follow the money and two important factors that have been playing a serious roll in commodities.
1. The race to cash recently has been the tune of the day. All firms (hedge funds, mutual funds, investors, institutions, etc.) have been racing to cash - many firms have been FORCED to close out positions simply because of leverage. One fund in New York unwound their entire basket of commodities (over $1 billion) simply because their equity positions required more capital and they are not able to cross margin the positions. We have seen good companies (with solid balance sheets) being sold, we have seen every commodity being sold, we have seen bonds of all types being sold, in fact almost every financial instrument has been sold. As they sell more they force more margin calls and the vicious cycle continues are it forces more institutions to cash.
2. Currency rates / swaps / forwards / etc. Every currency product traded has seen hyper volatility. The U.S. has pushed inflation concerns aside and has been dumping cash into the system and cutting rates, while the rest of the world has (for the most part) maintained higher rates and put inflation as their first concern. The volatility in currencies has been insane - one trader I talked to a few weeks back said at this point it's the tail wagging the dog - as any day could mean a rush to the YEN, Euro, Dollar, or a mixed basket. There is nowhere to run to. We have seen the YEN carry almost turned on its ear and then invert yet again. Currencies also play a huge part in pricing many of the world's commodities since a commodity might be priced in one currency another country has to convert to purchase that commodity - if the exchange rates are in hyper volatility it could send up and down spikes in the price action of the commodity.
3. Front Loaded short-term supplies had been the game in late 2007 and early 2008 - as the world was facing higher oil prices (shipping costs) many nations horded productions and short-term supplies meant that in the near-term (3-12 months) that grain storage locally could help meet demands without having to rely on the spot price. Just like with oil, many nations loaded up before prices got to high. Current reports show many Asian countries have adequate supplies in the next 3-6 months, however some African countries (Egypt being in the news) are still running dry. The Front loaded short-term supplies means they don't have to chase prices NOW since they may have enough to handle local demands. However - what has NOT changed in the consumption rate or the poorer countries running into huge deficits. The first world countries don't need to chase price and that means the futures are not seeing the buy-side pressure we had seen in late 2007-early 2008.
The problem is that many talking heads do NOT measure demand, but rather supplies. Just like the SPR (Strategic Petroleum Reserve) there is enough to last a few weeks - but what happens after that.
Once we see the race to cash subside, currency volatility drop, and the short-term supplies dwindle - the reality is that the world is still consuming more commodities and that consumption rate is increasing on a global scale.
I am not saying this is a low - but between the dollar's buying power (strength), which I think could be in jeopardy going forward (because of deficit spending and debt) - along with increased global consumption - well I wouldn't be surprised to see the commodities start to climb at some point across the board.
For now - expect volatility from the credit squeeze (race to cash), currency volatility, low demand for purchase stores, and also an election.
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Futures Pre-market
We initially saw the futures up - but the economic problems still remain. We could be in a holding pattern until after the elections. Expect ARB traders to sideline their action this morning as the spreads are little and volatile.
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Supply / Support
We had a good rally last week and are in the resistance bands - do we stay there or fall off? Does OBAMA push us higher or lower. Does McCain win in an upset that causes more volatility? Who knows - but one thing to expect is Volatility. Be careful playing any long or short HARD deltas. I would play it flat with small leans against gamma 1:1.
INDU 9000-9500 (The resistance band is in the 9000-9500 range - a close above 9500 would be strong. 9000 is the lower part of the band and NOT a place to get long but rather flat. This is a wide band - but with the volatility and going into election play it flat with gamma.)
NDX 1300-1350 (1400) (The 1300-1350 is the resistance band and jolt to 1400 is in the cards but could see more resistance. The big resistance (short area) is in the upper 1490-1500 range but that is the outside area. If we get to 1400 that is a pivot point. For now 1300-1350 is the volatility band that we are in and the longer we stay in that band the bigger the jolt in the market.)
SPX 950-1000 (Again this is the band (range) for now - we could see some testing at 950 today.)
RUT 500-550 (Again this is the band - a solid close above 550 could mean a run towards 600 in the short-term. If we don't hold 500 then it's back to the 450s.)
Trying to figure out direction is a fools game right now. We could get a hyper rally out of here - regardless who wins - simply because the election is over and we can move on. For sure we could see 10k in the INDU, 1500 NDX, 1100 SPX, and 600 RUT. That is not out the question - however if we get that "Thank god the election is over" rally to those levels - it does NOT mean the economic landscape has changed and it would be PRUDENT to hedge ALL hard deltas and a solid place to re-short deltas against gamma in this market. If we do NOT get that hyper rally - and the market see a Super Majority along with Obama in office we could see a sharp selloff - especially if there are any more stimulus checks or bailout packages - putting more stress on the dollar. Add in the tax raises on corporations and those over $250k - you can expect to see lower margins, smaller returns, and yes job shrinkage.
My point is simple - we could see the market over react for whatever reason and a massive up or down move of 10% is NOT out of the question.
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Conclusion
Well it's going to be interesting - there are so many issues on the table (as far as the economy is concerned). I am not even going to touch the social issues (since everyone has their own feeling on this or that). These are certainly (regardless of who wins) going to be difficult times for both the consumer and business and we will probably see that reflected in the market place.
Side Note: I recently received a copy of "Fooling some of the people all of the time" by David Enihorn - I am already a 1/3rd through the book and recommend it to anyone interested in the market.
Good luck - stay hedged - and go out and vote (for YOUR candidate) - take the time to think LOCALLY about your local propositions, officials, and state representatives. While McCain and Obama have been getting all the press- it is your local officials that will affect you even more. And let's hope - regardless who wins - that it doesn't become a one sided victory and we see NO compromises.
Funny side note: My friend dressed up as Joe the Plumber for Halloween. Very funny indeed.
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