Congratulations to Obama. As a American he represents everything that is great about this country - that ANYONE can achieve what they set their sights to. He is a great American story and as an African American he made huge strides for the community and Martin Luther King's dream is now a reality. He is also a great orator, far better than Bush or even Clinton. His messages inspire hope and bring together those that feel they do not have a voice. The sheeple, (sorry I mean people), have spoken it’s time to move on from this election and to start focusing on "steep climb".
As much as I respect Obama, his journey, his story, and his ability to inspire - I do have serious concerns. As this is an economic / market preview my concerns about Obama fall clearly along economic lines.
The "sticky wicket" for me in this election (not social issues) was we had a chance in the middle of the election to see both of these candidates take action with the bailout bill in the fire of this economic crisis. I was really hoping that ONE of the two candidates would of stood up against the Bailout package (at least question it, offer changes, or show leadership) - giving one man a $700 billion check to spend as he sees fit (not to mention it was racked with pork and earmarks) - however, neither candidate stood up to the bailout bill, address its concerns, or the even mentioned the pork and earmarks in it - they BOTH voted for it not as leaders, but as followers and without issue. While a bailout package may of been necessary - the approach (IMHO) was wrong. I was disappointed in both candidates. I guess only voting 10% against party lines makes you a Maverick (McCain voted 90% with his party), but does that also means that only voting 3% against your party means Change? (Obama voted 97% with his party).
Thus my big concern with Obama is fairly simple, first we are waiting on the Senate to see if the Democrats get a super majority - that would NOT be a good thing for fair and balance (not what our founding fathers had in mind). Second, Reed, Pelosi, Frank, and Dodd smell FRESH MEAT. These people have been in Congress for a long time and now they have a "green" Democrat in the White house and a majority (and possible super majority) in both houses. Obama voting 97% with his party may not be the change we are looking for and may be indicative of moving seriously to the social left as far as economic concerns. It will be interesting to see if he can STAND UP to his party - because one thing IS for sure - Frank has made HORRIBLE decisions as far as running the Finance Committee with Fannie, Freddie, and the Bailout Package. Dodd has done NOTHING to enforce regulation in the banking sector in 2 years as he runs the Banking Committee - yet he has no problems blaming the GOP. Pelosi and Reed - have lead the huge spending spree by the government and are have another $200-$300 billion stimulus check burning a hole in their pocket. No DOUBT they are going to put serious pressure on Obama, can he stand up to them - if his voting record is an indication - I would say no and that is a concern. Change for me would represent NOT lock-step in line with his party - but rather standing up to both parties and also reaching across the aisle.
The next issue (again being a economic and market preview) is his very unpopular economic and market tax plan - raising capital gains and dividend tax, raising corporate tax, and raising taxes on those making over $250,000. We will now have to see if that was just VOTE getting rhetoric or if he will really follow through with that. It is something that in this economic landscape would create serious pressure in an already slowing economy. Will he put it on the back burner or even drop the idea of raising taxes?
Lastly - we need to pay attention in the next few weeks as he forms his cabinet - who will be the next Secretary of the Treasury - will he keep Paulson or someone new. In the next couple months in this current market - those he chooses could create positive or negative market reactions.
My economic and market concerns aside - today is a day for celebration - the election (and it's volatility) is over. This is definitely a historic time and for that simple reason we should celebrate the principals of America (whether you were for or against Obama) - he definitely embodies the American story.
Now it's over and it is time to seriously dig in and start dealing with a massive economic storm we are in and I just hope that he is able to stand up to his party and can move to the center on economic issues.
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LIBOR coming down - but where is the money?
LIBOR rate is coming down faster, to 2.51% on the 3-month (from 4.82% just a few weeks ago). Clearly a good sign that money is starting to flow. However the rates is still 150bps above the Target (and Discount) rate - which means we are not seeing U.S. banks look to interbank lending yet. If you can go to the Discount Window - why borrow from at higher rates in the interbank lending?
But the real question is where is all the money that the FED/Treasury has poured into the system. The Treasury and Fed had assumed (or hoped) that pouring over 1 trillion into the system (via bailouts, loans, etc.) would see credit unwind and give consumers access again to borrowing - however that has not happened.
One economist, and I think he may be right, said they money (for the most part) has been used to eat up write-downs and losses on the balance sheets - and since those losses are DEEP (with overvalued mark-to-markets) - the money is simply being absorb by the losses. And for those banks that have reconciled their balance sheets - they are holding on to CASH, cutting costs, not lending and battening down the hatches to ride out the coming recession. If that be the case - consumers are seeing little if any credit available to them.
New mortgage applications have dropped significantly, mortgage rates are going up, and those that do (qualify) and get a mortgage have to put up 20,30,50, and even 60% down. In my neighborhood every home that has sold in the last few months have put up over 40% down to mortgage the home. One agent I talked to said the interesting dichotomy is that if you have NO money and are in the lowest income tax bracket you can STILL get a loan via one of the government programs (HUD, etc.) - no money down. However if you have good credit and money and if you don't qualify for special assistance you need to put down 20-50%.
It would seem we haven't learned our lesson as the GOVERNMENT continues to make sub-prime loans to unqualified people (as owning a home should be available to all Americans - even if they can't afford it) - as those that can afford are not getting access to any credit and are required to put down huge sums and pay higher rates.
The agent told me that nothing has changed in the sub-prime market - other than the government taking on the roll of those failed sub-prime mortgage companies. However the government has one thing that those failed sub-prime mortgage companies don't have - a printing press!
LIBOR is coming off - that is a good sign - and some money is flowing. However - it is not flowing as intended and with the Fed almost out of powder (only 100 bps left to cut) and the Treasury spending that 700 billion - they are running out of money and rates to cut and the consumers are still not seeing anything change.
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GMAC more losses!
If people are not paying their mortgages and we see foreclosures ramping, what make you think they will be paying their auto loans or credit cards. GMAC the foolish of lending companies not content with being just in the auto loan business headed to "browner" pastures of the home equity and mortgage market - as to not be left out.
Their third-quarter net losses expanded to a epic record of 2.5 billion and totally net revenue decline over 40% (sounds like they are taking a page from GM's sale's play book that fell 40%).
Rescap (a lending unit of GMAC) ranked 12th in 2006 in subprime home loans - going to borrowers with the worst credit ratings. ResCap posted losses totaling $4.6 billion this year alone. GMAC in a statement today said "substantial doubt exists regarding ResCap's ability to continue." Yikes - between home and auto loans GMAC is seriously is the pinch (along with GM).
Of course Hank has dawned his cape and flown in to the rescue or has he. The Fed did approve GMAC to participate in the Fed's program to buy commercial paper. GM is already with their handout for $10 billion (to help pay for the purposed merger with Chrysler) - can GMAC get a little love too?
If GMAC is any measure of the credit problems on the consumer side - things are looking a lot worse than earlier imagined. A side note - credit card default rates are ramping fast (the last bastion of consumer credit access).
Where is Nancy with that stimulus check!
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Futures Pre-market
We have had a massive rally in the last week as Obama took the lead in the pools after the bailout package and brought hope and a sign of change. The market (just like with better expected earnings) rallied into the election. Now it's over the futures are coming off. The spreads are slight, but enough for the ARB traders to buy the futures and leg into the short-basket - which will cause pressure at the opening to the downside.
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Support / Resistance
We rallied into the close a few percentage points yesterday - but remained for the most part in the resistance bands with now breakout. The futures are showing a weak opening after the election. But that is on the back of one of the biggest one week rallies in the history of the market. The economy is not looking better and while Obama inspires hope the market really doesn't know if those purposed tax hikes are real and in the cards nor do they know who may fill Hank's shoes in the coming months.
INDU 9000 (9500) 10,000 (9500 is the pivot point we are 100 points above it and if we come off to 9500 it will be interesting if we hold or consolidate.)
NDX 1300-1350 / 1400 (We are mid range in a narrow band - while I wouldn't say that 1300 is a support area to get long it would be a place to get flat. Staying above 1300 is a key area. 1400 is in the cards but we will begin to see some pressure.)
SPX 950 / 1000 (We got to resistance yesterday at 1000 - it looks like it is coming off in the pre-market future action. Watch the close.)
RUT 500 / 550 (Again just below the resistance line and now we are seeing some weakness in the pre-market. note the RUT was up very little compared to the narrower based indices - which is not a good sign of strength for the market.)
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Conclusion
Again congrads to Obama, personally I really like the guy even if I don't agree with his economic and tax policies (this is also not a place to debate social ideals and I will leave that for the bar with friends.). However, regardless of WHO got elected that doesn't mean the economic landscape has all of a sudden overnight changed or has been solved. There is a long road ahead and our Senate and Congress are the heavy lifters, policy makers, and collective leaders as to how we resolve the current issues. I firmly don't agree with Frank, Dodd, Reed, Pelosi on economic issues and they have proven with Freddie and Fannie that making the wrong choice can cost the tax payers billions. It is a fine line between regulation (which we need) and intervention (which we don't) and I am seriously concerned that they really don't know the difference between the two. Obama maybe a great leader, but if he bows to the will of Pelosi and Reed he may not bring the "Change" we "Hope" for.
These are pressing times and while the hype volatility of the election is over - the volatility of what Obama brings or doesn't bring to the table will be key as to solving this economic mess we are in.
NOTE: There will be no Market Preview tomorrow or Friday as I will be out of the office traveling on business. But don't fret I will be back on Monday.
Have a good weekend if you don't hear from me and again Congrads to Obama - he certainly inspires people and has inspired this nation. He has proven the American Dream is real. Now if he can only inspire the Sheeple to get off their coach and pick themselves up without putting their hand out. If he can do it so can we!
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