12/16/08 (Sayonara Interest Rates, OPEC cuts?)

Traders,

Yesterday looked as if the negative news was again trying to drive down the market as investors left for “greener” pastures – unfortunately all the pastures out there are brown. The end of the day saw some strength with a close day rally up to those pivot levels – which seem to be a magnet for now.

Today we could see some big jolts to the market – or at least the economy, Bernanke’s (very probable) rate cut, Goldman’s earnings, comments out of the ECB, OPEC and more. So – we could see some protracted moves – expect some volatility.

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OPEC and oil prices

I received an interesting email yesterday that showed the increase reliance (and expansive) budget of oil producing nations and their serious short fall in revenue will seriously curtail their spending and expand their debt. The problem is a double edge sword – oil is priced in dollars. A weak dollar means higher oil prices, but lower currency conversions. A strong dollar means lower oil prices, and higher currency conversions. It is a love hate relationship for many people – from companies that rely on trade, to those that spend on imports. Oil is also in that game. The one thing is on the mind of the oil producers – “How do they continue to maintain revenue to meet budget parity!” – they sure don’t want to look like the U.S. (deficit spending and massive debt.)

Here is a clip from the email I received – you might find it interesting – it does point to the need of raising prices (but cutting production)

Deutsche Bank and a private consulting firm called PFC, based in Washington,
have determined that Venezuela needs the price of oil to average $97 a barrel to
balance its accounts, while in 2000 that South American country only required
the price to be $34. Look at this chart, courtesy of Dennis Gartman. It shows
the price of oil that various countries need to balance their budgets

.

Russia will need $70 oil. These countries are going to need to produce and sell
what they can, which is in conflict with the need to control production and move
prices higher

.

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GOLDMAN reports wider losses

Goldman reported a $2.1 billion loss ($4.97 loss per share). The lost was greater than expected, however some analyst have argued that Goldman is starting to see the light at the end of the tunnel and have mark-to-market their assets well below fair value based on current credit levels. Meaning – there could be a significant discount to the loss.

It’s an interesting theory – and I would – if I were the CEO – probably lend toward that policy as well, for two reasons. First – marking down illiquid positions aggressively (below their collective credit rating) means that if they continue lower you have already priced it in. Second – if you are pricing to where you HONESTLY believe these assets are worth (even if it is below the credit level) – if you are wrong you could be looking at a better quarter going forward. Of course we are not sure – simply because we really don’t know the liquidity and value of these assets. If any firm were to do it – I think Goldman could and probably should be more conservative. It would be interesting as to what insight Buffet (who made a $5 billion investment) has into this.

The stock was off – but is now up a couple bucks above yesterday’s close. If this is the bottom or close to it for Goldman – we could see them as the corner stone survivor of this banking / credit crisis. Now doubt the economy and the market is going to be difficult going forward – but if they can get to REAL market values as close as they can take them down – then it could be a great decision going forward.

Remember (simply) – these firms can only taking these asset losses SO FAR because of their capital levels. For instance if they have $10 billion in capital and have a 20:1 leverage (200 billion in positions), if those losses are mark-to-market at $12 billion (of the $200 billion) they don’t have enough capital to remain solvent. Meaning they have to raise money to carry the losses. Many firms have been marking them as LOW as they can go and remain solvent, they raise some money, and mark down again next quarter. There was and IS no way for them to fully mark them down and stay in business.

Interesting point – Goldman received $10 billion from TARP, $5 billion from Buffet – that gives them a LOT more room to report losses. The question – is that enough? Probably not – but close.


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Sayonara, interest rates

Bernanke is about to do – what no other FED chairman has done – cut interest rates IN HALF! Of course that sounds bigger than it really is – since interest rates are already a 1%, cutting in half is 50bps to 50bps. That leaves almost no powder left – but don’t count him out – he could take it to ZERO.

Economist are predicting a cut of 50 bps – but will that really make a difference. Rick Santelli (CNBC) made an interesting point – pretty much he said the spreads do NOT really matter anymore because of government intervention. Whether you agreed with government intervention or not – the one thing we could count on in the interest rate markets was the ability to see the expansion and contractions of spreads which dictated rates and money flow. He’s right! Now that system has all but broken and Treasuries yields are in the toilet – not because they reflect market conditions, but rather a full intervention by government intervention and lemmings chasing safety.

Yesterday – I mentioned that Bloomberg has requested (TWICE) transparency to the $2 trillion lent (to WHOM and with WHAT collateral) – which the Fed has refused to reveal – their excuse was lame.

Bernanke’s creditability hangs in the balance – and that is a serious problem for the entire economy and the USD. He has bailed out companies, lowered the lending standards, gave access to none members to the Discount Window, and extended the loan period. And he is taking rates down fast and hard. What can he do? After today (if he cuts – as expected) he has almost no room left – 50bps is nothing. When he makes that final cut – we will be at ZERO.

After he cuts to zero – his next course of action is “provision liquidity” - - - which is really purchasing treasuries to inject cash into the system. By the way – THAT IS INSANE!!!

Think about this for one second.

The government SELLS treasuries to RAISE money. They PAY BACK that money (with interest) for BORROWING it from YOU and Foreigners. Now remember – the government also PRINTS money. So does it make sense that THEY buy their OWN treasuries? It’s completely idiotic – on paper and in the theoretical world it LOOKS like it works – but come on – we live in the real world. It’s like I own a store (and buy goods to sell), but I have no customers so I use my own money to buy my own goods. How long do you really think my store will last. All we have to look at is the lost decade in Japan to see how well that worked.

The one thing we can count on – if they start down this path – how much FAITH do you really think will be maintained in the dollar. I say – LITTLE. Remember – our currency is based on FAITH (because it’s not backed by anything).

Read more here: http://www.bloomberg.com/apps/news?pid=20601087&sid=aJOGrevCE.M4&refer=home

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Futures Pre-Market

The futures were up fairly strong and have started coming off. They are still well above fair value – giving the ARB traders the action to sell the futures and buy the basket. If the spread remains – expect pop at the opening.

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Support / Resistance

Back at the pivot levels - higher or lower? It’s questionable.

INDU 8000 (8500) 9000 (We close just above pivot after being down. The futures are showing a pop in the morning – but it will be about the close. Expect some volatility.)

NDX 1100 / 1200 – 1250 (We came off from the 1200 level – but stayed above the upper 1100 support range. Futures looking higher at the opening.)

SPX 800 (850) 900 (Again – close to the pivots this morning – looking higher.)

RUT 400 (450) 500 (Again – close to the pivots this morning – looking higher.)

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Conclusion

Is Goldman the first to reach the bottom – I personally think they are pretty close. Now that doesn’t mean that they are going to start rallying and we are going to see the market of old, but it DOES mean that they are possibly a survivor – which is saying a lot in this market. They did suck down some serious money – prior to the reported losses. Let’s see what they do next quarter – I don’t expect growth – but maybe not the kind of losses we have seen of late.

X-mass is around the corner and the numbers coming in are looking pretty weak. It’s going to be interesting to see the final numbers – but I don’t expect them to be good. Enjoy some cookies and company – and keep more of that money in the wallet.

We also saw the dollar fall pretty rapidly against the EURO, Pound, Frank – and also Gold and Silver making a good run. If Bernanke hints at buying a ton of treasuries – I am really not sure how long the dollar can tread water. We could become the new carry trade nation and steal that title from Japan. Firms should get boned up for that business model – which looks like it is well on its way.