I guess that was a resistance test yesterday as we retreated back down – but Santa Claus could still return. Who knows at this point – for there is no way to rationalize any market direction in these times and if someone says they can they are fooling themselves. No doubt there are companies of serious value, little debt, cash reserves, black balance sheet, and nice revenue – even IF the stock does not reflect the true health of the company. But equities are moving up and down on the need for cash and the euphoric hope that at any moment this could be the bottom. This has lead those in the trade of “stock picking” in a difficult situation and value investing even more difficult. These are the days that those long-term traders should be looking to hedge principal risk in their long-term strategies, hedge against inflation, keep some cash (dry powder), and avoid buying treasuries like the plague. What to do? I am asked – Hedge your principal risk and don’t HOPE for the best. These are the days that long-term buy only strategies normally deployed by financial advisors are starting to EARN their money. Those financial advisors that can HEDGE principal (draw down) risk are worth their weight in gold and deserve that management fee – those that believe relative returns are all that matter, even if they beat the S&P by 5% are having a nasty year. It’s very easy when the market goes up, it’s very hard when the market goes down. Go easy on your financial advisor – no doubt he/she is doing the best they can, but maybe their best isn’t good enough if they can’t hedge your long equity positions. Cash is still king (even as inflation draws near) – don’t get suckered into buying treasuries at 1-2% returns – the 10 year treasury (even at current CPI levels) is a guaranteed losing position. Technically you are PAYING the government to LOAN THEM money. No doubt foolish – but many are just running to them because they believe it IS safe. Those that are in – be prepared to see some serious sticker shock in the coming year and Volkeresk type Fed policies to emerge by 2010 – if not we are on the fast track to Japan’s tragic economy.
But there is good news – there are some great products, ETFs, Holders, etc. There is money to be made and strategies to deploy. Traditional bottom picking is not the only game in town, even though it is the most widely deployed. Learn to use the other tools in your financial tool box and if your Financial Advisor calls it is time to talk with him/her about using some of those other tools. Remember your Financial Advisor is on YOUR TEAM. He/she is your Quarterback – doing the heavy lifting. There are many strategies and products, not just picking the next stock to go up. A combination of hedging strategies, bullish/bearish positions, commodities, ETFs, collars, etc may not seem traditional – but these are not traditional times. Take the time to spend the time with them and look at some alternatives (not just long and wrong or long treasuries). There are many good financial advisors out there – I know plenty. If yours isn’t cutting the mustered – find one that is!
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Car Tsar
Yeah I spelled it with a T and not a C - the title should of made my point (unless you haven’t studied your history)! I can’t even believe we are talking about a totalitarian Car Tsar, can you say Socialism, Communism, Nationalism, or one of the other isms. The door is open and soon we should expect to see more Tsars, Mortgage Tsar, Banking Tsar, Financial Tsar, Credit Card Tsar, etc. Come one sheeple – WAKE UP!
No doubt some (or all) of you believe the car industry is worth saving, based on the simple fact that there are so many poor souls (making the highest unskilled labor wages with awesome benefits) that could be out of a job. People forget that business is NOT ABOUT JOB creation, but generating profits. Jobs are a BY-PRODUCT of a healthy business. As a business grows they hire more people, as a business shrinks they lay off people. As SOON as we take our collective EYE off the purpose of business (MARGINS!!!!) then we quickly lose focus as to what the real problem is.
This is NOT about jobs (as we are lead to believe) it is simply about a FAILED business plan with a legacy system that would sink ANY company in existence. Japanese and European car makers are suffering from the slow down, however they don’t continue to pay 70-80% salaries to all their retired employees – they too would be out of business. A PAY-GO pension plan, rather than an investing plan (or even matching) will sink a company. I am surprised that GM, Ford, and Chrysler lasted this long. Oh wait – I know why – they borrowed and borrowed and borrowed. The payments that GM made just to cover interest on their loans was insane.
However – does Congress and the drafters of this Auto bailout concern themselves with failed business plans, legacy programs, broken pension plans, or UAW contracts – NO! They are concerned about keeping jobs and sustaining a failed business model for a company by giving our tax payer money (or should I say more massive debt 15 to 30 billion more or even more) to keep the failed plan working.
You KNOW once we give them the 15 billion and sure they say they have until March 31s to get restructured before the second 15 billion – that EVEN if they don’t get anything fixed that second 15 billion is coming anyway. The government cannot fail once they make this massive step forward. These companies – with their current business plans – will forever be on the bailout wagon – if they don’t get their money from the banks – they’ll go to the government.
Chrysler is back at the table for more money – sure Lee Iacocca had a business plan – but he never changed the failed model and it was doom to repeat itself.
Please don’t be fooled – this has nothing to do with the downturn in the market – sure it brought this problem to the surface quicker, but these companies were doomed to fail. They had been living off borrowed money for decades – with MASSIVE DEBT. The downturn in the market cut their supply of borrowed money from the banks off and with auto sales down they can’t survive – unlike Japan and Europe automakers. Sure they are hurting too, sure they have layoffs, sure it is difficult – but they don’t have a failed business model or in 100s of billions in debt. That simple fact separates the survivors from those that need to be nationalized by our government.
I am not saying we shouldn’t save the automakers – I am saying our approach is ALL WRONG because it is based on maintaining jobs and not solving the problem. The UAW still has serious pull and they are pulling hard and calling in all the favors. Remember – when the UAW is bringing in over 100 million in dues, huge lobbyist, one of the top donators to politicians – they have serious pull! You’re kidding yourself to think they don’t! They were smart and jumped on the Democratic ticket early – not the presidential ticket – but Congress (the people that PASS legislation). Donations were 99% democrat vs. 1% republican this last election cycle. This is NOT about Obama, but rather about getting legislation passed through the house and you need as many friends as you can get. Democrats already got a huge windfall at the mid-term elections and it look like they could of gotten a supper majority. If you owned a business that needed government help who would you lobby and make donations too? This is not that they agree with their politics – this is about calling in serious favors! It’s not Democrats vs. Republicans – it’s who controls the vote! I would argue we would see a switch in lobbying and donations if Republicans controlled the house. The UAW are serious players in that arena and they are NO dummies!
The put skew in these companies is still massive. I don’t think holding these positions is the wisest course of action. Don’t be patriotic with your money – because you want to support jobs, made in the USA, or any other such nonsense. You can vote, so don’t vote with your money!
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GMAC fails to become bank!
AMEX managed to pass the Frat Boy test and make it into the inner circle (access to the Discount Window). GMAC quickly followed suite and started pledging. However, they needed some serious capital to make the cut and it looks like they just missed it. They failed to obtain enough capital and thus failed to become a bank holding company – thus cutting them off to much needed capital from the banking system, sorry I mean the Discount Window (which has replaced the banking system).
GMAC – stick a fork in it. I seriously don’t know what they can do – oh wait I know – the government can bail them out and they can join the ranks of Freddie, Fannie, Bear, AIG, GM and Chrysler. We could create and Auto-loan Tsar!
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Rio Tinto battening down the hatches
Rio is the latest to join the hording category. Lay-offs of 14,000, cut in capital spending, and other margin increasing policies are put into place. They just got out from under that hostile takeover bid from BHP Billiton – thanks to the rough economic market conditions. The stock has jumped on the London Exchange as the focus on cutting the burn and increasing the margins means that the company looks to be a survivor and not a causality.
As you know I am a big believer in commodities in the coming year(s) and Rio is a big player in many commodities fields. I am not advocating to go out and buy their stock – but in the coming year (regardless of economic conditions) companies like Rio Tinto will be the world player – that’s if you believe like me that the dollar is facing inflation and the world is going to put more value on the commodities we need to remain a strong society. It doesn’t matter if Rio gets paid in dollars, Euros, Gold, what-ever – they have and produce what we need.
Rio in my book is a survivor. Ask yourself why would BHP try to make a hostile takeover for the company – even in this economy? Jimmy Rogers knows that answer! http://www.riotinto.com/whatweproduce/218_our_products.asp
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Futures – Premarket
Futures have seen a little volatility in the pre-market. Looking higher after the yesterday – the spreads are fluctuating but are in play. Expect ARB traders to short futures to buy the basket on the opening – sending equities up!
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Support / Resistance
We headed back down – but NOT to those pivot points and are setting in the upper range.
INDU 8000 (8500) 9000 (It a volatility game in these ranges – Santa could come to town or skip us all together)
NDX 1100 / 1200-1250 (We are in a upper range – we could fill the gap to the downside or stay in here – who knows – expect action)
SPX 800 (850) 900 (Back towards the pivot)
RUT 400 (450) 500 (Back towards the pivot)
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Conclusion
These are tough times – investors need to work WITH their Financial Advisors.
Investor advice: Pick up the phone talk WITH your financial advisor not AT your financial advisor. There is nothing wrong with going to cash, looking at ETFs, hedging positions. It’s about principal protection. He is on your team!
Financial Advisor advice: Your investors are feeling the pain and so are you. Look for some liquid alternatives – ETFs and Holders – you can get in and out in quickly. Many have options. Collar strategies are perfect in this market. It’s about principal protection and toss the “relative returns” talk into the garbage and talk about “absolutes”!
Traders: Enjoy this market – we probably will not see this kind of action in our life time again. Gamma traders are making a killing (or should be if they don’t over hedge), Volatility traders are playing a skew that make it look as if every company is going out of business. Just watch liquidity and hard deltas. Play it safe – if you want to hit it out of the park – use soft deltas with gamma. Your enemies are HARD DELTAS, Short BIG gamma, Naked massive shorts, concentration, and 100% haircut. Cut everything in half and try to get gamma on your sheets for FREE!
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