Yesterday showed some pull back after the hyper-euphoric rally the previous day from Bernanke taking rates (effectively) to zero. On the other side of the coin, the dollar started to slide fast and hard (against foreign currencies and metals) – not a show of strength. Additionally the yields across the board on treasuries are falling fast and will continue to fall even faster, as Bernanke pointed out that HE TOO will be buying treasuries (as he borrows from Hank) – go figure and it sure really doesn’t make a whole lot of sense.
Some have called this a bottom – for no other reason than Bernanke had made the most dramatic move since he has taken office – but heading down this road is similar to heading down the road that is a culmination of Japanese Economic Policies and FDR’s New Deal – both have proven disastrous to their respective economy – Japan has lost a decade (as they say) – and FDR raised TAXES from 20% to over 70%, issued an excise tax, and unemployment actually got worse – a lot worse (up to 19% by 1938) – it wasn’t until WWII that they started pulling back on a lot of the New Deal programs – realizing that too much government intervention had stalled the economy and prolonged the problem. This is NOT to say that the Japanese leaders or FDR were not great leaders – this is only to address the economic situations of their time. For I don’t want to get into a political debate (which I have already received many email responses) – I am just pointing out the economic facts that occurred in both those situations. Sometimes too much help – is worse than letting the economy find it’s natural bottom to recover. I for one believe that with too much intervention we are unable to find real value (since those values are being propped up by the government) – what is or was the REAL value of Bear Stearns, AIG, Freddie, Fannie – and now GM or the entire banking system. It becomes harder and harder as the books become blended with much government aid – additionally that puts undue stress on the government’s books as well.
History – has and will always be doomed to repeat itself. Humans and society is greedy – that will never change – what does change is the enablement of that greed and the ability to shed or skirt the accountability and responsibility, both of which equal liability.
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Second wave in credit crisis
CNBC reported this morning that a second wave of mortgage failures are coming – the prime and commercial paper. One of their guest mentioned that as late as mid-2007 Lehman had issued $1 billion in mortgage-wrapped paper (none sub-prime) of which 43% has already defaulted. The problem, is simple, even if the government DOES help home owners (with resets and lowered rates) – if you are 40-50% underwater in equity – who really cares. It will take years, if not decades, to recoup those equity losses and some home owners would rather walk (in fact run) than continuing to pay. Ross pointed out that the “big collision” is that many mortgage products accrue interest – so the actual paper gets bigger as the home equity get lower. Both moving away from each other – that is a serious problem.
Additionally – auto-loans are seeing a ramping in defaults. As you know GMAC is doing everything they can to get access to that Discount Window (trying to become a bank) – if they don’t they are pretty much done – as private money is avoiding them like the plague.
On the relatively new end of the credit crisis spectrum is Credit Cards. I had reported that several credit card companies are cutting limits and sending letter to have client pay (as low as $.60 on the dollar) to pay down the balance. Banks just don’t have money to lend and no longer can they float customers that can barely make the interest payments. Additionally – new fees, increase interest rates, and other nickel-dime fees are being added left and right to make up for short-falls.
It would seem that across the board that liquidity is still a big issue and that leverage is still unwinding. Additionally – mortgages seem to be coming down – but no one is lending and they sure are not coming down as quickly as the interest rates. The sad truth is that there is NO MONEY to lend.
Expect credit to continue to tighten.
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Jobless Claims fell to 554,000
The first-time claims remain close to decades long highs –and it doesn’t look to recover soon. The slow-down will continue well into 2009, and the report on the second wave in the credit crisis could push out the recession to 2010 or 11.
I think Mr. Levy, (economist at Bank of America) put it best as reported in Bloomberg this morning, “This is exactly the stage of the recession where businesses are aggressively cutting employment” – we are already seeing that with more layoff announcements –and with more announcements we will see a shrinkage in the GDP – which traditionally remains 2/3rd derived from consumer spending.
No doubt companies are hording cash and cutting expenses – jobs not vital to business revenue is cut to keep margins in the black. The slow down continues.
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Futures Pre-market
The futures are seeing a little volatility – above and below fair value- the spreads are NOT in and ARB traders are sidelined. This is also expiration week which is adding to the hedging and rolling issue – in a very fragile market.
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Support / Resistance
Questionable – at best – this is expiration week too – so we could see a stalled market with more pin risk or a volatile move away – who’s to say.
INDU 8000 (8500) 9000 (We visited 9k on the hyper run up and pulled off some yesterday . Still above the pivot point and that is anyone’s game.)
NDX 1100 / 1200-1250 (We are in the middle of the upper band of the 1200-1250 – again a little pull back yesterday after the run – but it’s anyone’s game.)
SPX 800 (850) 900 (We continue to ride right at, in fact above the resistance – but volume is mixed.)
RUT 400 (450) 500 (Is the SPX pulling up the RUT – it was the only index up yesterday – moving TOWARDS resistance. Is this is a good sign? If the other indices can stay towards their resistance and we see the RUT move higher it could be sign of a short-term move higher.)
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Conclusion
We still could get a follow through move to the upside and continue higher – Santa is coming to town? However – the economic numbers, jobless, second wave of credit crunch, and Bernanke’s action spell a long-term problem. Any rally at these points is really based on hope and not solid fundamentals. I really don’t want to get to long in here – unless you hedge yourself.
These are difficult times and it is important to do your best to plan for future events, instead of reacting to the daily news. A short-term move up or down today – is more market jostling – and not any sign of a top or bottom – remember that.
Tomorrow is Expiration – be ready and prepared.
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