MP Vacation 2/23 - 3/3

No Market Previews for a week. I think you should do well without me.

-wink-wink-

MP 2/22/08

Traders,

The market pulled off yesterday as concern in the credit market mounts. The bond market auctions are failing at an alarming rate – over $23 billion in bonds failed in the last couple of weeks as firms fail to make bids (and be the “Back Stop”) on the bids. The refinancing rates for State and Local funds are rocketing from the low 4-5% range and in some cases topping out at 20%. Yesterday over 62% of bond auctions failed (395 out of 641). Several state funds are looking to the private sector or refinancing at higher rates – but simply there is NO MONEY. I bring this up because it is very serious as to the credit problem that will have tremendous pressure on this economy. For 395 bond auctions to fail is UNPRECIDENTED. Think about this – only 44 bond auctions failed since 1984 to last year, to have 395 fail in a day is clearly indicating out very tight money supply is and that banks (lending firms) can NOT afford to use their own capital. As Picken’s pointed out yesterday a billion dollars a day is exiting this country, couple that with a inflation and a weak dollar – we are at the tipping point. So far this issue is not really reflected in the market place and the talking heads have been side-stepping this story. Unless something is done quickly – we are starting to see serious cracks in the fundamentals of living in a fiat currency economy.

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More Pressure on Oil Prices

Turkish Army began ground assaults in northern Iraq against the Kurds. For the first time in over 11 years Turkey is moving a full scale assault in to Iraq. Troop movement has been escalating at the border over the last 6 months, yesterday at 7pm (ET) 2 Turkish divisions moved into Northern Iraq. Two large fire-fights have been reported. While the Kurds (PKK) is no match for the Turkish Army – they are dug in and spread-out through Northern Iraq. The EU is seriously concerned about this latest escalation as it is bringing more chaos to the region.
The oil market initially reacted and rallied in Europe overnight when news had hit the exchanges. The US is currently not commenting on the action, but rumors are that Turkey is no longer willing to listen to the US – since the Genocide Vote in Congress – which put US/Turkish political relationship into turmoil. The US, since the start of the Iraq war has managed to keep Turkey from engaging the Kurds (a long standing feud). Now, as some has said, Turkey is not picking up the phone.
Expect this to put more stress on oil and push prices higher. It is uncertain as to how this will unfold, if the PKK collapses quickly it might ease economic concerns. However, one expert on the region has already stated once Turkey gets a foot-hold into Northern Iraq – they may not let go so easily. Additionally – oil rights to Iraq have been constantly argued about between the US and her allies (including Turkey). If the US pulls out of IRAQ next year – it could bring even more instability to the region from oil grabbing states.

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Freddie Mac and Fannie Mae

I have little faith in government controlled business and Freddie Mac and Fannie Mae are perfect examples. They have both been caught in huge accounting scandals over the last couple of years and now they are losing money (via write-downs) in the billions of dollars. Some analyst say that Freddie Mac and Fannie Mae’s books are so convoluted and their back-room government deals taking on more questionable paper (in a back-door bailout) is creating even more concern.
Merrill Lynch finally gave up their faith in the government mandated businesses and recommended to clients to SELL Freddie Mac and Fannie Mae. So far regulators have been put on the back burner from taking to close a look at their current positions – since they have both been thought to be used as the “Ace in the Hole” incase a bigger bailout is needed.
Smart Money will tell you – that there is really no such thing as a bailout – someone has to lose. A bailout is just shifting losses from a company to the government (Fannie Mae or Freddie Mac). We already know they are losers – so why not just load them up with more junk paper! The government can just print more money, right?
It’s time for Bernanke to head back into the basement and start cranking on that printing press again. One thing is for sure – he is going to have a upper body that will put Arnold to shame from all that cranking!

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Futures Pre-open

The futures are up small and the spread in the NQ and ES from the cash basket is very narrow. I don’t think we will see the ARB stick their neck out to far – so short pressure on the futures will be light going into the opening. The cash will get a little pop at the opening – but not with the strength from the Arb traders buying it.

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Support / Resistance

We broke down yesterday from the pivot points – but are still in a narrow range. There is still no blood in the streets yet to find a bottom. Now doubt it would be nice to have a massive shakeout and find a bottom soon – so we could put these problems behind us. But it would seem that the government and lending firms would rather drag it out and are still arguing about whether or not we are in a recession or going to be into one.

INDU 12250/12500 (We never got up over 12500 to hold there and yesterday started slipping fast. We are still wedging into a range – do NOT get long or short between these levels without hedging. Once we break-out it could move quickly to the 12000 or 13000 range)

NDX 1750/1800 (Another range not to pick upside or down side. Again once we break out we will move fast towards 1900 or 1700 – an beyond)

SPX 1350 (This is still a pivot point again the longer we stay close to this the more the charge is building)

RUT 700 (We are still in a narrow range )

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Conclusion

First is was the sub-prime, then it is the bond insurers, and now it’s the state and local government bonds. The credit problem is spreading wide and far. I recently talked to wealthy investor (from overseas) he made a very funny ironic observation. In order to have a good credit rating you need to be in DEBT! The US is built not on savings or value – but rather how much debt can one hold and maintain payments. The entire system from the top down (companies to individuals) is based on a credit line and when things go south – the government takes the losses and just prints more money. Our government is in such debt and looks to get further behind the eight-ball when all is said and done. I thought his statement was rather true – we take pride in having a good credit score – but what does that REALLY mean? That we are good consumers that know how to spend borrowed money. He understood the nature of debt for making big purchases (house or car) – but isn’t the goal to be FREE of debt and to pay OFF those big payments? Isn’t the finish line a person with no debt, lots of savings, were the credit score no longer matters?

Regardless – the economy is starting to show the cracks behind that massive dam of debt. The state and local governments are unable to borrow any more money – since the lenders are also tapped out, since the lenders relied on the consumers to pay back their debt (which they are not). The circle of debt is feeding on itself and the foreign nations which have been large purchasers of government debt (treasuries) are not coming back – since the dollar is falling and the interest rates are too low .

I think we CAN get out of this problem – but the shakeout needs to happen first. And listening to the “talking heads” still making stock picks and arguing about whether we are in a recession or not are living in a fantasyland. It is no doubt that decades of mounting debt is now weighing down on the shoulders of this economy – the piper has come to town and he expects to be paid.

These are serious times – it is best to hedge you positions (for investors)

However – for us traders – these are the times that history is made. Expect to see the vulture plays take millions and billions out of this market. Traders to take down serious returns with high volatility. These are great days for traders and horrible days for investors.

MP 2/21/08

Traders,


The market seems to continue to load at these levels – getting ready to unload. The bond and insurance sector is still creating concern and since the transparency remains foggy at best – we really don’t know how the chips will fall. Oil also saw continued strength in the upper 90s band and even spent time above 100. The dollar has also remain weak. Yesterday – the government indicated that we are still facing inflationary pressure (like we didn’t know that – but I guess people need the government to tell them that). The economic storm and (possible) recession is going to be with us a while. Keep watching the skew and different sectors as some areas will benefit from the weakening economy.

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Pickens Speaks

I caught Pickens on CNBC this morning briefly and he made some interesting observations. First of course they asked him where OIL is going (note: being THE oil man and the person that called $100 barrel for the beginning of 2008 – he does have better insight that probably any one). He said he thinks oil will pull back $10-$15 over the second quarter – however the second half of the year we will be above $100.
He also said something I never thought I would hear him say, we need to invest in ethanol! Now that is shocking for him to say, since he has been against it and sited some very valid reasons. 1. It is very costly. 2. The government subside (which he is against) 3. It will create inflation in the food sector. However, he said he laid awake all night, because he could not believe he was going to say this. Let me clarify – he didn’t say let’s buy ethanol to use INSTEAD of oil, but to blend it to stretch oil consumption.
The reason he came to this conclusion (even though he still has issues – as stated above 1,2,3) – is that a billion dollars a day is being sucked out of the US to foreign nations – based on our consumption of oil. At this rate (note up from 200 million a day) is something this country can NOT sustain for any length of period. It will and can bankrupt the country as the money is getting sucked out at a billion a day. He shot Obama’s idea down – by saying bio-diesel only solves 1-2% of the US oil consumption. He went as far as to say he doesn’t think Obama even knows what bio-diesel is. He also said he was concerned that NO candidate is addressing this issue.
He mentioned that both Natural Gas and Coal are the two largest natural resources in this country, the port of Long Beach and soon the port of LA have switched to burning Natural Gas. He also indicated that we NEED to figure out how to burn coal cleaner – between natural gas, cleaner burning coal, and adding in ethanol (to stretch oil consumption) is needed NOW in order to curtail the massive ramping outflow of money out of this country.
If oil (as he predicts) stays above $100 and we do NOT look to quick changes to using existing energy consumption – this country could be facing even bigger economic problems in the very foreseeable future. While we all like to dream about alternative energy sources – it will take years if not decades to switch over – we currently have natural gas, coal, and could ramp up ethanol to solve the immediate problems.

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Jobless claims

The jobless claims decreased by 9,000 last week to 349,000 – below the 350,000 level. While it is a slightly good sign that claims are reducing it is still in the very high band and indicating the slowdown in the economy. Additionally, the number of people continuing to collect benefits rose to 2.78 million (up from 2.73 million). This will continue to put pressure on the consumer spending level – which of course will affect the bottom line at retailers.

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State and Local Government bond auction collapses!!!

While this story is not getting much air time on CNBC or Bloomberg – this is a SERIOUS crack that showing that the $2 trillion dollar bond market is failing and there is NO MORE money for state or local governments.
Hundreds of auctions failed this month sending borrowing costs over 20% for what is traditionally very low rates for state and local governments. The reason for the failure is that the large investment firms stop bidding with their own capital (thus supporting the market) – Goldman, Citigroup, UBS, Merrill and others just stepped aside and the market collapsed. Their propping of this market with their own capital (some say bid manipulation) is has now seen in a blink of an eye over $342 billion market vanish! Guess who is going to pay – the TAX PAYER. If private money does not come to the rescue the only answer to off-set is to raise taxes. The bonds that are auctioned (in now a very thin market) are going for rates as high as 20% - which local and state governments really cannot afford – again higher taxes to come.
Florida’s Citizen’s Property insurance (which is a state-run insurer for homeowners against hurricanes) bond of $4.75 billion (which it needs to maintain cash in the bank ) has jumped from 5% to over 15% at the last auction that failed on Feb 13. More are to come and without the big institutions bidding the rates will only sky-rocket more!
These local and state bonds reset regularly and unlike typical treasury bonds – there is no daily pricing – only at the auction. The state and local governments have relied on the big financial institutions to be the “back-stop” and set price and clean up the balances. When they stepped aside the bottom fell out.

This story is not getting enough attention – but it is clearly showing the economic situation worsen – seriously.

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Futures Pre-Open

Futures are slightly front running the cash – mainly on optimism talk in the decrease in jobless claims. Spreads are 4 points in the NQ and 2 points in the ES – fairly narrow and coming in line. The arb traders – will back off on shorting the futures to heavily into the opening. Expect to see the cash basket pop at the opening a little.

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Support & Resistance

We are getting VERY wedgy at these levels – the longer we tighten on this range the more the load starts to build and when it unwinds expect the market to rip in one direction or another.

INDU 12,500 (Is the pivot point the longer we stay around or close to this level the bigger the load and the bigger the move)

NDX 1800 (Is the pivot point – the load is building)

SPX 1350 (Is the pivot point – the load is building)

RUT 700 (Is the pivot point – the load is building)

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Conclusion

The market volatility is clamming down as we start loading up at these narrower ranges. The market is flagging (getting wedgy) optimism and pessimism is pushing and pulling on the market. It’s true the market has had its teeth kicked in pretty good. However, don’t let a decrease in volatility and the narrowing market give you confidence – it is a clearer signs of concern (as to volatility). The longer we range the bigger the charge. So expect a violent move when this does unload – every day we stay here that move (when it happens) will become more dramatic. At his point I give it a 60/40 to the downside – since fundamentally things are not looking good. However, optimism could get this market going and if the shorts step-aside and some are forced to cover we could rip up fast and hard and test those resistance levels.

The news about the failed bond auctions has me concerned that there are deeper and bigger problems in the credit market. Also – I don’t want my taxes to start going through the roof to off-set the short-falls. I get more nervous about that – as I know McCain (if he wins) might be forced to raise taxes – even though he does not want to, and Hillary and Obama will not even stutter when it comes to raising taxes fast and hard. And the sad thing – raising taxes is NOT going to solve the problem.

MP 2/20/08

Traders,

Can you say OIL! Oil broke through 100 yesterday and the dollar slide against the Euro. The market also gave up all gains and closed lower by the end of the day. The market is taking on a serious load and is getting ready to make a power move and odds are to the downside. The techs also started sliding by late afternoon and just could NOT hold.

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The dominos are tipping….

Corporate bond default risk is rocketing as concern over the structured investment products defaulting is climbing and the bond insurance companies are barely treading water. So far we have ONLY seen $150+ billion in write-downs, but there is between $200-$300 billion more to come (predicted by S&P and UBS), the bond insurers don’t have enough to cover the current losses (god forbid the flood gates open and more begin to default). All of which we have known for a couple of months now….but the cracks are NOW forming in the Corporate Bond market – since many of these companies are involved in CDO, SIV ,and other structured investments. Most of these corporate bonds are in the AA or AAA rating level and are believed to be able to pay back their loans, however yesterday an economist pointed out that you NEED to connect the dots, these are the same companies that are holding these CDOs, these corporate bonds are rated by the same agencies that rated the CDOs, these companies rely on the same bond insurance companies that are failing, at some point you need to ask yourself can these companies afford to lose more?
The concern is directly reflected in the cost of protecting corporate bonds from default via credit-default swaps to hedge the mounting losses, those costs have rocketed to an all-time high. The scramble to hedge default as concerns mount in the $2 trillion dollar CDO market.
Some Florida state investment funds have already seen losses that happened so fast they had no time to even try to sell them. When ratings drop from AA to D in on cut – they have just said your investment just went from secure to default in a blink of an eye. KKR Financial (a $20 billion publicly traded credit fund) already froze (delayed) repaying some of their asset-backed commercial paper – most of which has been rated D by Fitch – is in talks with creditors. They are only one of many facing serious issues.
Keep an eye on this – if any one of these dominos fall – the blood WILL run in the streets.

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Housing Starts Down

Housing starts remain at their lowest levels since 91 and show the deepest housing recession in over 20 years. Couple that with a serious drop in new mortgages and we could see the housing market continue lower and remain low for some time. While work did start on some new homes – the growth rate is negligible. Additionally – many of the new home starts are being built by developers and have not sold.
After speaking with someone in the foreclosure business (one of the largest firm in the south) – the rate continues to increase exceeding 30,000 foreclosures in the state of Florida per month and does NOT show any sign of slowing.
Locally – at the foreclosure auctions the banks (1st mortgage) are not even able to unload them – as the make the first bid (just enough) to cover the first and no one bids behind. My neighborhood (on the water), after reviewing county records, is about 10% foreclosed, 90% of the homes are fully mortgaged. We have a lot of room for more foreclosures and defaults.
This will curtail both the job market (in construction) and consumer spending as they do not have any more money to tap. It’s interesting that my father’s generation goal was to just get that “monkey” of their back and did NOT want to have a mortgage. They felt free – once it was paid off. So what happened to our generation? We believe that a house is an ATM! It looks like our generation is in for a serious life lesson.

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Inflation is on the rise (CPI)

As I have been saying that inflation will continue to rise and the dollar continues to sink – it’s very simple math. The reason is that the majority of the products we consume are made overseas (including some food). As the dollar falls, the companies the purchase goods from overseas to sell domestically are getting squeezed on the currency exchange rate. Through in ramping shipping costs from oil going higher….. well you get the picture….the consumer (the bottom of the food change) will have to pay more for their goods.
As Bernanke hacks at interest rates with his ax, the dollar will continue to slide (as foreign nations do NOT cut their own rate). We are all affected by a weaker dollar and the need for hedging against it is very important. We certainly don’t want what happened in Japan, Mexico, or the many other nations that either devalued their currency (or the market devalued it) to happen to this country.
I am not a fan of government data (as you may know) but even the Consumer Price Index (CPI) is reporting a rise in inflation. Regardless if you believe the government numbers are accurate – they are reporting inflation is rising.
Expect it to continue….


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Futures Pre-Market

The futures are getting a slid whack in the pre-market between rising inflation, housing starts looking soft, and the concern now spreading to corporate bonds – well the market is getting a pessimistic impact prior to the opening. Expect the ARB traders getting long futures to short the basket - to put additional pressure on the market at the opening. The spread is about 7 points in the NQ and 5 points in the ES. It will narrow some going into the opening – but the selling pressure on the basket will send the market down at the opening.


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Support & Resistance

The spring is loading and looks more likely to UNLOAD to the downside.

INDU 12250 / 12500 (is the narrow band – once it breaks one side or another it could start moving very fast. Watch 12,250 closely – if it breaks – it will break down fast)

NDX 1750 / 1800 (1750 is key support – don’t get long here without fully hedging…if it breaks look out below)

SPX 1350 (This is about to unload – probably to the down side)

RUT 700 (Same thing – ready for the spring to unload)

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Conclusion

You cannot argue with billionaires (Rogers, Ross, Buffet, Pickens) these old school investors have been calling the commodity market (and oil) and shorting the crap out of the dollar. Rogers went as far as saying he wouldn’t own any dollars by the end of 2007 and the stock market is overvalued. Ross and Buffet are circling the dying bond insurers looking to scoop the taste flesh of the mono-line bonds and leave the rotten meat on the bone. Pickens has been buying oil on every pull back – as the young talking heads call him a fool. One thing is for sure – they all beat to their own drum, they all don’t give a shit what people think about them, and they have all made their fortunes by casting HOPE and OPTIMISM aside and just following fundamental data.
Well – they have all pretty much called the US economy a pig and have been for some time. Rogers has his children learning Mandarin.

So follow what they say – and if you are in the US market – hedge your equities, expand into commodities, hedge your dollar risk, look outside the borders of the US (there is a whole world out there).

MP 2/19/08

Traders,

Well after a day off we have plenty of news – most of it will not fundamentally change economic conditions, however it could have a perception impact to the market forces. Everything from Fidel stepping down, Wal-Mart, Oil, MBIA CEO stepping aside, to mortgage rates accelerating.
The pre-market futures are getting a little blast to the upside – how much of that is optimism (at this point who knows) it could get a follow-through.

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Fidel Wins?!?

Whether you hate him or just not like him, the reality is that the little dictator stood 50 years and through 9 presidents. The little island has put egg on the face of the US for a very long time. I had visited Cuba and Havana back in the mid 90s and I must say it is a very lovely country. I ran into many Germans, Canadians, French, and English all of whom told me the ridiculousness of the embargo – but they all didn’t want it to end – cause they didn’t want an invasion of US cruise ships and tacky t-shirt shops. Verdedo (sp?) beach, just East of Havana rivals any resorts you would find in Hawaii – all owned and operated by Europeans. Castro need money have the fall of the Soviet Union and capitalism entered his country via tourism and massive resorts. I told a friend about these massive resorts, he didn’t believe me (he bought in to the American Propaganda – yeah ever country has propaganda, even the US) – and I loaded Google Maps satellite view and we zoom over East of Cuba and you could see the new resorts, massive pools, and excellent beaches.
Regardless, Cuba IS a poor and repressed country. It has no middle class, you are either poor, wealthy, or a tourist. Fidel was also a horrible dictator as well, no denying that. But the country is beautiful, the people are incredible, Havana is like stepping into the past, and the resorts are very nice.
The market seems to be getting a positive rally from this – but what does it mean for Cuba’s future? Who knows – the market seems happy that he is gone, maybe the US will drop the embargo (which really hasn’t hurt Cuba – since every country in the world – even our neighbors Mexico and Canada - have no barriers).
Only time will tell – but what I really hope is that the US doesn’t get to strong a foot hold in Cuba. If you want to see what the US does to a foreign tourist destination just go to Cabo San Lucas (the streets are lined with t-shirt shops, margarita villes, and a litter of tacky shops.)
For now – it’s just injecting some optimism into the market…..but Fidel resigned, he wasn’t over thrown and there is still a dictatorship government….

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Wal-mart – making sense from the numbers

Wal-mart said 4th qtr profits rose more than estimated after it increased discounts on holiday sales. Flat-screen TV sales seemed to be the salvation as they were the big mover. However, full year earnings fell below analyst’s expectations. “While the 4th quarter did see a rise in revenue, the year fell flat of expectations and future profits will see stress from the consumer slowdown”, said an analyst this morning on CNBC after the earnings release. Full year will be at $3.43 a share – below forecast.
The good news is that Wal-mart out-paced Target for the first time in several years. Wal-mart caters to a wider range of shoppers buy a larger hardware and grocery section which is capturing additional sales. The recent Wal-mart mantra is a one-stop-shop and it seems to be working. While the groceries margins are very small – it does drive traffic and pays for itself. With the slow-down in the economy – Wal-mart is looking to capture more business as people start taking notice of HOW much they spend and WHAT they spend it on. Wal-mart’s low prices and wide variety of products is putting the squeeze on both the super markets and other retailers. Wal-mart could be the new recession retailer – maybe their new slogan is “Where do you shop in a Recession? Wal-mart – the one-stop-shop place to save!”
However, they will also be seeing a slow-down and expect to earn between .70-.74 cents a share for the next qtr and $3.30 - $3.43 for the year. Analyst surveyed on Bloomberg expects the higher-end of .74 per share for the 1st qtr and $3.44 a year. These recent projects by Wal-mart (lowering their forecast ranges) has put a halt to the pre-open rally in the stock after the earnings. Wal-mart is pulling off their highs in the pre-market. It may still see a pop at the opening, but as more “talking heads” pour through the numbers and see that Wal-mart is lowering forecast – it could over shadow their better than expected 4th qtr results. Remember, earnings are how they DID not how they will DO!

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MBIA CEO stepping down

Another CEO bites the dust, this time the head of one of the world’s largest bond insurers. With all the concerns floating around the bond insurers, their need for more money, the vultures circling, and now federal investigations – well the fire got too hot for the CEO and so he pulled the rip-cord on his Golden parachute and decided NOW was the best time to start playing golf and leave this steamy pile to someone else.
The stock is getting a boost in the pre-market, but remember – just because the CEO stepped down does not mean MBIA is all of a sudden a solvent and viable business – there is still a long and bumpy road for this sector.

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Mortgage Rates Rising???

Initially the avg. mortgage rate spread back August of last year (before all the rate cuts – Fed was at 5.25) was about 1.25 at 6.5%. The mortgage rates initially started coming down, along with the fed rate cuts and the spread WAS in lock-step – but then is started widening and fast. More recently in the last 30 days. The spread has now exceeded 300 bps and mortgage rates are on the rise.
There are several factors are work, first the mortgage companies are trying to make up for losses – the bigger the spread the bigger the profits. Secondly, lending restriction went from fully slack to extremely tight. But the most alarming has been the bond insurers recent troubles and their lack of having the funds to cover the losses of the CDOs. Couple that with banks needing money and looking to severally reduce their leverage – the sale of ALL paper (even ones that are “really” AAA credit) and it seems to be a mass exodus from mortgage securities.
So far the rate cuts have ONLY helped the institutions – none of the home owners are getting the break and are recently seeing an avg of 6.3% mortgage rates. An interview with a some manager of the real-estate agency group (forget the name of their association) actually said mortgage rates are down and this is a good time to find value property. Thank god the interviewer on Bloomberg had some sense and said well they are down only 25 basis points, but the fed has cut over 200 bps – are we really seeing the discount pass through to the consumers? Of course this guy had the stump-speech answer, 6% are traditionally low rates – even during the boom.
The reality – things are very VERY tight. Mortgage companies (banks) don’t HAVE money to lend and what money they do have will only be lent at the biggest spread possible (currently exceeding 300 bps) and to very VERY solid assets (like a 50% under the assessed value) – if they had their druthers. How does this affect the market? Well – it will put more pressure on the housing market, since the tighter lending has just stripped out a massive amount of potential buyers. It will keep the housing market depressed and could possible force prices lower as sellers may need to unload and dropping the price maybe the only way to find a qualified buyer. Expect the housing market to continue to slide.

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Oil heading back to $100 – sure why not?

Nigeria has been having problems in production and OPEC has been making up the short-fall. OPEC is already just below maximum extraction and China has been demanding MORE oil. OPEC actually is indicating that they are looking to cut production – because of supposed over-supply. While it might be true that some sectors are over supplied – China, India, and several over nations in Asia are expanding and are in under-supply problems.
OPEC is also facing another problem – the US Dollar which has fallen against other currencies. Rumors the last several months have indicated insider talks of re-pricing oil to the Euro, thus cutting the dollar’s strength off at the knees and it would also most probably lose its status as the world’s reserve currency – since many nations hold US dollars as reserves (and a chief part of that is oil is priced in dollars – oil is still the world’s life blood).
Oil is ripping in the early morning hours (up $2 to $97.50) – expect this to put more pressure on the market and the US dollar.

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Futures Pre-Open

The futures are getting a good pop from Fidel stepping down and Wal-mart having better than expected earnings. The futures are front running the cash by about 5-8 points going into the opening. The ARB traders will be out in force shorting the futures and legging into the long basket – so expect a good pop at the opening. But after that – there is really no FUNDAMENTAL news to get this market going – we could pull back.

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Support / Resistance

Friday was pretty flat and we were closed Monday – it would seem the market is trying to play catch up to the rest of the world. Whether this is a sign of a real rally – well who knows. The market is getting VERY WEDGY – expect a BIG MOVE – up or down!!!!

INDU 12250 / 12500 (these are narrow bands of support / resistance – don’t go long or short at these areas – they just need to close above or below them to give any indication of future direction towards 12,000 or 13,000)

NDX 1800 (We need to close above this to see strength return)

SPX 1350 (It’s the pivot point )

RUT 700 (Pivot Point)

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Conclusion

I have not seen any good “fundamental” news that the economy is turning around – great news about Castro stepping down and Wal-mart having good earnings is one thing – but not enough to turn this economy around. The rate cuts have not filtered through to the man on the street and oil is rallying again (fast). The dollar will probably continue to slid. We are NOT at the bottom.

The market is getting very wedgy – and will is getting loaded to make a big move. Expect BIG MOVE up or down – when it comes it will move fast and hard. Be ready.

I would make very sure that you are hedged to the down-side – especially if oil breaks 100 or the Euro breaks 1.50.

MP 2/15/08

Traders,

Well it looks like people finished reading “The Secret” yesterday – yeah there was no surprise or secret. Bernanke, Paulson, the MBIA/Ambac testimony, and the jobless claims grabbed our ankles and brought us back to earth and “unfortunate” reality. Too bad, I was hoping that we could of hit those resistance levels to really unload – oh well. Economic issues are just the heavy weight and we can’t punch our way out of it. Toss on Greenspan stating we are at the brink of recession and the CEO “pow-wow” in Florida issuing their report stating 80% of them think they will have sluggish growth and the slow-down will continue for the next 6 months – well it sure is not a rosy picture. Stay down Rock! No, Cut me Mick!

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UBS joins S&P forecasting more write downs….

S&P last month indicated $250 billion in write-downs for 2008, they initially stood alone – as no one wanted to stick their neck out or be the bearer of bad news. This morning, UBS joined the ranks and stated they expect to see “up to” $203 billion in additional write-downs because of the bond insurance crisis.
Write-downs have already totaled $150 billion so far, with S&P and UBS forecasting over another $200 billion – we are not even half-way through the woods.

UBS and several other financial institutions have been watching the bond insurer story unfold with growing concern. MBIA and Ambac continue to struggle and “hope” to maintain their AAA credit rating (which everyone KNOWS they should not have). The bond insurers do not even have close to the amount of money to cover the current losses – god forbid there is more write-downs.

Fitch (the credit rating agency) usually overshadowed by S&P and Moody’s has been fairly aggressive and stepping up to the plate in calling a strike, a strike. They have already dropped the credit rating on 130,000 bonds. Now they have seriously stepped up and downgraded Ambac from AAA to AA citing “significant uncertainty”.

Of course Ambac and others are ignoring Fitch – well there are two other rating agencies that are bigger and well known that have kept their rating at AAA. However, as we have seen Moody’s and S&P’s ratings pretty much don’t hold water.

I find it a little humorous that “talking heads” and others are still giving weight to Moody’s and S&P credit ratings. Hey – WAKE THE HELL UP! Just look at the books – they DON’T have money to cover the current losses (obviously since Merrill had to take an additional $1.9 billion in write-downs cause the insurance could NOT cover it), AAA ratings doesn’t hold water! The finger pointing has been in full swing between the banks, credit rating agencies, and bond insurers – yeah of course it is nobody’s fault.

Now Spitzer has forgotten he is now the Governor of New York and is now reverting back to his old job – and is stepping in and is coming up with a plan and demands for these Bond Insurers – however he won’t tell us what those plans are. What does he really think he can do? Force the private sector to cover the losses? Force the banks to cover the losses? Tax the people of New York into the stone age to cover losses? Government to the rescue is just shifting risk from the company to the government. Great – I am sure if he had his druthers he would just give them a massive amount of government money and bail them out.

One thing is for sure, Bernanke’s biceps are getting massive from cranking on that printing press in the basement!

The Fitch downgrade of Ambac is the first REAL crack – next might be a jump from AA to D?

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Best Buy (largest US consumer electronics chain) cuts forecast

The tech sector is seeing a slow down based on consumer spending. Best Buy has made a small cut from $3.10 to $3.05 a share for the full-year. The company has previously predicted as high as $3.20 a share. It would seem they are on the initial cautious Bernanke model – little cut, little cut, little cut – BIG CUT?
The retail sector has been feeling the pain – but it’s starting to trickle into the tech sector. Concerns of a slow-down in new orders is expected to rise in the 2nd quarter. This does not bold well for Target and Wal-mart, which have increased their push into the technology sales and have become more reliant upon them during the holiday cycle.
Best Buy is already down over 3% in the pre-open – expect a pressure to span into the tech and retail sectors.

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Futures Pre-Open

The futures are slipping after UBS followed S&P with expectations of more write-downs and the concerns in the bond insurance sector is increasing. It is also option expiration day – so we are seeing some additional volatility. The Futures are front running the cash – between $2-$4 points in the NQ and ES – but the cash is catching up – with Best Buy and others losing ground in the pre-open. I am not sure how many Arb traders want to leg long into the futures to take the risk of shorting into the cash basket at the opening. It’s looking like a weak opening.

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Support / Resistance

It looks like Rocky legs are just giving out and he is not able to get off the mat again. Optimism is what drove the two day rally – but the one-two punch of continuing negative economic data is just pounding it down.

INDU 12,000 / 12,500 (We couldn’t stay above 12,500 – if we can’t get some strength to close above it today – well I think we have seen the last pop before revisiting supports)

NDX 1750 / 1800 (We couldn’t stay above 1800 – just too much negative pressure. People pulled the rip-cord and got out when they could.)

SPX 1300 / 1400 (Maybe 1400 was just too much to ask for – maybe 1300 is fundamentally where we SHOULD go)

RUT 700 (We are still above 700 and if we can stay above it and get a little strength maybe the narrower based indices could get off the mat again)

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Conclusion

The negative news just can’t stay away long enough to get optimistic hope to surge this market back to resistance. I have been reporting on the Bond Insurers for over a month – I hoped I was wrong and it would subside and get solved (some how) – but it is back and becoming MORE serious. If MBIA or Ambac fail – the house of cards WILL come tumbling down and we could see that being the catalyst that sends this market down fast and hard. Not only will it affect the market as a whole – in the form of panic – but the state funds (and pensions) could be forced to sell 100s of billions of positions because they can’t hold uninsured products that have lost their A, AA, AAA ratings. However, it could be even worse (which Florida saw at the end of last year) when a Product goes from AAA to D in just one knockout blow. That means EVEN if the state fund WANTS to sell it they can’t since it has already defaulted and no one wants it.
The back-bone of this economy which is really just based on credit – is bending – I hope we dodge the bullet. Even if the government “feels” they have to do a full bail-out across the board (Banks, Insurers, etc) – it would not solve the economic issue. The dollar would drop, inflation would ramp, and the US government would be insurmountable debt.
No doubt we are at a tipping point. As a trader and investors we cannot afford to hope and we need to hedge our positions. While I give the “black swan” even only a small chance (5%) – ANY increase of percentage is not comfort.

Remember – it maybe improbable, but not impossible. (something that Black and Scholes – the Nobel Prize winners who wrote the pricing model forgot and lost a trillion dollars).

MP 2/14/08

Traders,

Well as expected over the last couple of days we are starting to “get off the mat”. Keep chanting “All News Is Good News” and maybe we can revisit those resistance levels (and beyond). Oh – wait – Bernanke is speaking this afternoon, oil is up, etc. So stay vigilant and hedge.

[SARCASM ON]
Thank God our political leaders can cast aside their differences and unite to tackle one of the most serious problems facing this nation. Their tenacity, focus, and investigative prowess is getting to the root of the problem and after a 2 year investigation, subpoenas, testimonies, and the full utilization of our intelligence agencies – we might be able to through a few doctors and baseball players behind bars for using – SHOCKER – steroids!
[SARCASM OFF]

Another perfect example of a waste of time and tax payer dollars (suspected to be in the millions). Having US senators, congressman, and federal agencies pouring resources into whether Bonds, Clemens, and others used steroids – what a complete waste of time and energy. If they could only focus that energy and effort into the Bond Insurers, Economy, Iraq, Afghanistan, and many other issues – well maybe would could get something done. I couldn’t even listen to Bloomberg during the day and had to turn it off “He took Steroids!”, “No I didn’t!”, “Yes You Did”, “No, I thought it was Ginseng!”, “Don’t Lie!”, “You Lie!”, etc… It was completely embarrassing. I saw some of it on TV and thought I was watching a Saturday Night Live skit – with all the pomp and circumstance you would find in a SERIOUS government investigation (such as Watergate, Patriot Act, of Judge confirmation hearing) – instead there sat Roger Clemens saying he thought he was taking Ginseng or something like that.

Don’t get me wrong – I love baseball – but the money these players make and the owners – hell they even have their own Commissioner and governing body – to waste tax payers money, valuable resources, and the time of our political leaders to baby sit a bunch of multi-millionaires caught up in a lie about taking steroids? Give me a break!

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MBIA – sacking up and saying they’ll go it alone – yeah right?

MBIA the world’s largest bond insurer is in a serious pickle. Let’s look at the issues one at a time and I think it will clearly show how this little issue can bring down the house of cards.

1. The bond insurers have expanded out of their traditional muni-bond (no risk) line of products and have insured products that are tried to sub-prime mortgages. Collectively the top insurers insure close to $2 trillion in assets.
2. The bond insurers just like the products they insure RELY on a credit rating by Moody’s, S&P, or Fitch. They need to be at the same or higher credit rating to insure the products of similar rating.
3. State Funds (pension plans) and many other large conservative investment funds are required to have their (bond) investments insured and those bonds need to maintain a certain credit rating for them to continue to hold them.
4. As the credit rating agencies have started dropping the ratings of certain bonds (Fitch has downgraded 130,000 bonds already), the bond insurers are NOW insuring what may have been traditionally a AAA rated product which may now be a AA, A, B, or even worse – meaning the underlying principal is now at risk.
5. None of the Bond Insurers have ENOUGH money to cover the mounting defaults of some of these bonds. They have openly asked for money. Warren Buffet made an offer to take $800 billion in muni-bonds (those that don’t have risk) and leave them with the junk (Great if he can pull it off, but I don’t thinks so). Wilbur Ross is looking to take over one of these Bond Insurers – but you know he will trim the fat and cut it up just like Buffet.

It started with the bond insurers "ASSUME"ing that a triple AAA rating was as safe as mono-line muni or government bonds. The ratings are the same. You know what they same about the word AASSUME (it makes an ASS out of U and ME). So they started insuring these products because they seemed safe because of the credit rating. Little did they know that the credit rating could drop and in some case go to D (which equals DEFAULT).

The concerned first surfaced when Merrill Lynch (relying on the bond insurers) realized they could NOT cover the write-downs and Merrill Lynch took the losses to the tune of $1.9 billion. Lots of eye brows went up (especially at the state on government level who rely on the bond insurers as the stop-gap measure). If Merrill says the insurance is no good and the likes of MBIA and others don’t have deep enough pockets – then there is NO insurance.

Traditional mono-line MUNI bond insurance is like Title insurance. It’s just a free-money maker with almost NO risk. Title insurance is only risky if the idiot does NOT go to the court house and look to see if the title is free and clear. The same was true for Bond insurers that only insured “technically” government paper. They knew the government would always pay – so insurance was redundant. But as they decided to spread their wings – well let’s just say this is a lot bigger than people first thought and if they can’t solve it – it COULD be the next big shoe to drop. Specially since S&P have indicated that there will be about $250 billion in losses this year – if the bond insurers can’t cover that – some State funds are going to take some real losses. Remember Orange County California? Florida is already getting in that jam right now. Merrill Lynch is already eating crow too. Who is next?

Today Ambac and MBIA will be making their presentations in Washington today and if the government puts the same amount of effort and resources they did to the Baseball concerns – it could get ugly. However, I am sure it will be a game of smoke, mirrors, and lots of miss-direction. I will place serious money on the fact that one of them will place BLAME on the credit rating agencies that said these products were AAA!

The both need to maintain their credit ratings of “super star status” – I am still shocked that they have that – but we all know how the game is played. If they lose that – the cards come tumbling down fast.

The Socialist Hawks (Spizter’s) bunch will want MORE oversight, MORE regulations, MORE this or that. But in reality that is too late and too little. If they mud was slung at me – I would probably tell them – well you did a hell of a great job with Social Security, Fannie Mae, Freddie Mac, and all those other heavy regulated government oversight institutions. Note: for those that have forgotten Mae and Mac were caught in one of the biggest accounting scandals ever and have lost billions – and we all know how well Social Security is going. Also – don’t forget it’s an election year – so expect some stump speeches from both side on how they WOULD solve the problem.

I seriously doubt we will get a peek behind the curtain today – and these CEOs have been geared up with rhetorical questions, doublespeak, finger pointing (the credit agencies), - believe me the will be able to deflect any broadsides – they HAVE too, in order to keep the straw house from falling. They have to say they can WEATHER the storm.

However – let me assure you that the Vultures don’t circle unless something is dying (Buffet and Ross would not be making plays unless they saw some exposed flesh on a dying animal). Too bad the government didn’t get in front of this a couple of years ago, oh wait I forgot they were focusing on Bond’s steroid use back then – no time for the serious issues.

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Jobless claims fall – but still in range of a slowing economy…

Remember the mantra “All news is good news!” – Just read the headlines and listen to spin – do NOT read too far into anything. This market is rallying as I have said over the last couple days and all news is GOOD news right now.

The new claims for unemployment fell for the second straight week (decreased by 9,000) to 348,000. However, the 4 week moving average has climbed to the highest level in over 2 years. Economist expected a larger drop to 347,000 (based on 40 economist).

``It confirms the economy is going through a slowing, but whether we are going into a sharper downturn remains to be seen.'' As stated by Mike Englund, chief economist of Action Economics, LLC , who participated in the poll.

The moving average is up but slowing. He has a point – but there are other factors in play that are not included in the jobless claims to see the whole picture. This is only a piece of the puzzle to forecast the economic future of this country. (Oil, Inflation, Dollar, Commodities, Consumer Spending, etc.)

Be that as it may, some “talking heads” are yes – spinning the fall as good news. So we could get some follow through today. Keep chanting “All news is good news!” it’s working!

For those that have not read the book “The Secret” – just think it and it will come true – ask Oprah! – at this point I will include a great quote by PT Barnum “No one ever lost money underestimating the taste of the American public!”.

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The Dynamic Duo are making their rounds…

Bernanke will be speaking today – his recipe – a dash of concern, a sprinkle of rate cuts, and a whooping ton of smoke. Of course all that matters is what he does. Fed Fund Futures are predicting another rate cut 100% for 50bps and 20% for 75bps – and that is what we should be focusing on.

Paulson, who’s superfund has received the cold shoulder treatment, will be talking “CHANGES” (isn’t that Hilary’s mantra?) – anyway he will talk about changes – but will be very careful how he steps. Remember, he is for LESS regulation not MORE – but he can’t deny the problem we are in.

The Dynamic Duo will testify today – but they want one thing and will be pushing it – OPEN THE SPICKETS!!!

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Futures Pre-Open

They are looking fairly flat in the pre-open, I was “hoping” for more positive spin to the lower jobless claims – but I think between the Bond Insurers testimony, along with the Dynamic Duo – there is going to be trepidation. The ARB traders are sidelined this morning. After the opening is anyone’s guess – but if we can maintain optimism we could continue higher – that’s my “Hope” strategy.

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Support / Resistance

We continue to move higher and could get another jolt. Let’s get to those resistance levels before we unload!

INDU 12500 / 13000 (The BIG number to burst through will be about 12,750 if we can break that than visiting 13,000 should be fairly easy. The 13,000 number may only be an intra-day number IF we visit it. I would start rolling up my hedges and OVER hedging to the downside at 12,750 – but I would not go full short at that point.)

NDX 1800 / 1900 (1850 is the magic number to bust through – again treat this just like the 12,750 level in the INDU)

SPX 1400 (That is the number to unload the longs and start going short. – let’s keep the “hope” alive!)

RUT 700 / 740 (This is looking good to help the narrower indices – 750 let’s go!!!)

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Conclusion


Don’t mistaken my bullishness over the last couple of days as to the economy has bottom and we are not facing a recession, that is not the case. I believe the market’s move on PERCEPTION and FUNDAMENTALS. Today and of recent we are moving on Perception and casting aside our concerns. We need, want, and hope to get off the mat – even if it’s just one more time. The market is bigger than anyone – so DO NOT short into perception – just get on the train with it. But hedge and get ready to load up to the downside when everyone realizes the book “The Secret” doesn’t work!


Sorry for the heavy sarcasm today – was pretty much tired of the baseball stuff – which has been going on for years now!

MP 2/13/08

Traders,


We saw some strength rip through the market yesterday – but the tech sector could not hold up and fell off (AAPL, RIMM, and a few others dragged the sector down). London and the ECB have continued to reject speculation of cutting rates amid a slowdown that has reached their shores. They are still focusing on the inflation risk and feel any rate cuts will weaken their currency – thus pouring gasoline on the inflation fire. The Pound rallied against the dollar as inflation reports in the UK looks to overshoot their 2% goal in 2 years and could break the 3% before then – reducing the chance they will cut rates (or if they do it will be very limited).
If the US continues to cut rates (Bernanke’s race to the bottom – seems he is in a one man race) and the ECB and London remain vigilant against inflation – we could see the dollar slip again. The $1.50 mark on the Euro/Dollar exchange is the big resistance level were many forwards are priced - the Euro has pulled off (back down to $1.45) but it could make another run sooner, rather than later. This could put more pressure on the market as a whole.

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Rate Cutes – Don’t Trickle Down

After the unprecedented rate cut last month 125bps in a week – the “hope” that lower borrowing costs would of trickled down to companies, debt, and homeowners didn’t happen. Banks are widening the spread in order to off-set current risk and to make back significant write-downs. Lending restrictions have tightened up – the exact opposite of what is “theoretically” predicted when the FED drastically cut rates. It was as if the opposite happened and money flows Tightened rather than Loosen. One economist made an interesting observation and stated “The losses (write-downs) and inflation are out passing money flow.” – the economist is probably right.
Merrill Lynch is reporting that companies are paying MORE to borrow now than before the rate cut by as much as 1.25%. The report indicates that property above $417,000 will be harder to sell with tighter lending restrictions and HIGHER borrowing cost – which could further depress the market in this sector.
The FED has certainly ramped up cutting rates – but so far we are NOT seeing any traction. Many are predicting (including Goldman) that the Fed will cut rates to 2.5% and some has even stated they will need to get below 2% before we see any freeing up in the credit markets.
With S&P announcing last month expecting $250 billion in write downs by mid 2008 - based on their recent ratings cut – we should see some more shake ups in the banking sector. It’s as if we are just in the eye on the storm and getting a little breather.
Fed Fund Futures are predicting 100% chance of a 50bps rate cut on or before the March 18th meeting and a 20% chance of a 75bps cut. Bernanke is putting his foot on the accelerator – but right now the wheels are just spinning – we are seeing a lot of smoke. If the ECB and London does cut – watch the dollar slide MORE and inflation rocket!

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US Retail Sales Rise?

The US Retail sales rise .3% in January with increase in auto, cloths, and gasoline. Showing the consumers are still spending amid the massive slow-down. However, what is NOT reported is the percentage of credit spending. Some economist are estimating that credit spending has ramped and will continue to do so by as much as 50% - further putting consumers behind the eight-ball. The market is getting a good boost from the news – as some “talking heads” have interpret this data to indicate that consumers are NOT concerned about a possible recession – going so far as to say that imploding housing market and job losses may not be that bad – yeah right! I find it humorous when these “Talking Heads” make such insane observations. Just because we HAVE to spend money on gasoline, clothes, and autos – doesn’t mean we are NOT concerned – especially if consumers are increasing their spending on credit rather than earned income.
Regardless – as I point out – the market moves on perception and like with yesterday’s Buffet bailout and GM profit – on the surface the news is spun to be optimistic and therefore get a good boost to the market.

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Futures Pre-Open

The futures got a good jolt from the unexpected increase in retail sales for Jan. Expect the ARB traders to short into the futures and buy the cash basket on the opening – thus giving the market a good POP on the opening. The spreads in the NQ and ES are between 3-6 points (and fluctuating) – that will narrow at the opening as they start closing the Arb.

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Support / Resistance

The market got a good boost (except for the NDX – tech sector) however the market needs and wants a rally and all news is being spun into optimistic euphoria (Buffet, GM, retail sales) – so expect a pop and for the last couple days you should NOT be shorting into this. If the sellers step away we could get a solid rally. Be careful – the market moves on perception!

INDU 12,000 / 12,500 (13,000) (We almost got through 12,500 yesterday and if we can close above it today we could get some strength and maybe revisit 13,000 - a good place to short.)

NDX 1800 (We couldn’t close above 1800 as the tech sector got hit. This is still a pivot point and strength at 1800 could get some follow-through to 1900 – but this is a VERY volatile sector.)

SPX 1350 (Another pivot point – if the INDU, NDX, and RUT continues to see strength we could revisit the 1400 area – a place to take off longs and start getting short)

RUT 700 (We closed above it – while the NDX got hit – thus pulling down the SPX a little as well – the broader market is starting to see some strength – as long as this shows strength expect the others to follow suit.)

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Conclusion

The Retail Sales number (getting a lot of positive spin this morning) is bringing optimism to the market – we could continue to see the strong rally – but remember the economy is still facing serious issues going forward. If the FED continues to cut rates and we get to 2%, oil rallies, dollar falls, inflation ramps, housing market continues to fall, and more write-downs (predicted by S&P) continue – while true a optimistic rally could get us back to 13,000 and 1400 in the indices – it may be VERY short lived and we could come right back down – fast and hard (when reality sets in again). For now – don’t fight the rally – check reality at the door – and jump on board the optimistic train. Just make sure to hedge your positions – we will probably (at some point) revisit the lows. The Bernanke and his rate cuts can only pump so much air into this balloon.
IF we can hold and close above those supports – the rally could continue and be strong. When we hit those resistance areas (and believe me the FEAR will leave the market after the rally), and the “talking heads” start their cheerleading – that will be the time to unload your longs and start getting short.
Get your surf boards out because we are going to ride this wave!


Side Note:


I got some flak from some Rocky fans yesterday with my analogy – wasn’t trying to say Rocky was a looser (well maybe a little). The point was clearly that Rocky knew and we knew (as the spectating public) he probably had no chance in hell of winning (he did NOT win, it was a split decision and the Champ Creed got to keep the belt and the title and the fame and the money and the women and etc.). It was HOPE that got Rocky off the mat (along with our cheerleading), but to walk away bloody and brain damaged (Yo, Adrian!) and NOT to win = good movie, but crappy life lesson. The smart money probably played the spread – betting small on Rocky (probably long shot odds) and HEDGED with some money on Creed (Probably Even Odds). It’s sort of like everything else – the point is to WIN, not almost win.
Other examples of NOT WINNING include: Barry Bonds breaks home run record (big deal) what about winning the World Series? Tom Brady breaks many QB records this year, big deal – what about winning the Super Bowl? Lewis Hamilton almost winning the F1 World Championship – so what – almost is NOT winning! So (while a movie) Rocky DID knock Apollo down and DID go the 15 rounds – at the end of the night he is still a loser, going home to that crappy apartment and his crusty girlfriend who works at the local pet store. Yeah – he comes back in Rocky II, III, IV, V (to win and pump up Stallone’s ego) – but it’s just a movie.
So remember, 2nd place is just the 1st loser. Sorry to any Rocky fans – I thought it was a good analogy (Note: It was a great movie – the Oscar’s thought so too – but he still didn’t win.) I am still scratching my head as to why anyone would be offended as to analogous reference to a fictional boxer – and why I just wasted my time rebutting a fictional character’s win/loss record. Oh well – hopefully you all got a chuckle out of it and maybe a point was made.

MP 2/12/08

Traders,

Yesterday say some mix action, we got some strength in a few tech stocks (the over-weights) that sent the NDX up fairly well, however the broader market RUT – was pretty flat and stayed below 700. SPX did get a boost by a few over-weights as well – but being broader than NDX it was not able to see the same strong rally. Reflecting the general market was flat and a few key stocks were in the driver’s seat. The volatility pulled back a little but is still in the higher bands and the skew remains steep. This is a fairly big week with some economic numbers and also Bernanke will grace us with his presence. Would could get some “knee jerks” up and/or down.


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GM – find me the REAL numbers

There was much confusion this morning – as people sift through the GM numbers. It is getting hard to figure out what the EPS really represents – since it is no longer “Black and White”. There are charges, costs, one-time this and one-time that. The first news to hit the street was GM reports a $64 million dollar profit * (or .08 a share) – beating all expectations. The stock rallied $1.50 in the pre-market. However, notice the (*) after profit!!! Ever since Maris broke Babe’s homerun record (61) and an asterisk had to be put after the number to indicate “BUT” because of special circumstances (he did it in more games than Babe), now with Bonds and other questionable records – the asterisk has come to signify – there is possibly MORE to the story. Well – in GM case the story is the same $64* million. Oh – wait – that little asterisk means they included a tax benefit, $1.6 billion for the Allison transmission unit, a $7.7 billion reduction in pension liabilities, etc, etc, etc. So – as you can see that $64 million is not even close to what is really going on behind the curtain. Too bad it couldn’t be simple like with Maris – he only played 8 more games than babe. Maybe GM should of put several asterisks after that profit or even better * to the power of 10.
Needless to say GM has come back down to earth as more “talking heads” decipher the numbers. CNBC will probably need to higher some military code breakers to start figuring out these earnings reports. GM now at $26.40 a share (down from $28.50 when the news came out they had a profit).

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Buffet dawns his cape, or does he?

Buffet swoops down in what SEEMS to be a bailout of the bond insurers, but with like everything else – Buffet is no dummy and rather than being the perceived super hero – he is more the likeable vulture picking over the good meat. Buffet is offering to reinsure $800 billion in liabilities of the three largest bond insurers MBIA, Ambac, and FGIC (which are all on the break of bankruptcy). However, here is the catch he wants to take the fresh meat and leave the rotten meat on the bone. He is only making an offer on the (NONE RISKY) municipal liabilities. Brilliant!!! He wants to insure the bonds that probably can’t go bankrupt (ala government bonds). It’s as brilliant as title insurance. I would be extremely surprised if they agreed. One has already refused (probably laughing hysterically in the fetal position about the offer – save me - please).
Talking heads would have you think Buffet is coming to the rescue to bail them out – I don’t think so – you don’t become a billionaire by tossing good money after bad. If he pulls this off – my hat is off to him – however we would still have 3 dead animals laying in the road with rotting meat and stinking up the joint.
Just like the GM story – on the surface it seems rosy and the pre-market futures are getting a boost – but once you pull back the curtain – well it’s nothing short of a lot of asterisks *************************************************


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Futures Pre-Open

The futures got a good pop on the GM news, followed by Buffet “supposedly saving the bond insurers”, but the rally is optimistic at best – but then again the market has been moving up and down on greed and fear rather than any fundamental news – thus creating MORE volatility. The spreads are 2-5 points in the ES / NQ – so expect some ARB to short futures into the opening and buy the basket – thus putting some initial buy pressure on the opening. It seems that the spreads are starting to settle down after the news is getting digested. After the opening it is questionable if we get any follow-through.

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Support / Resistance

The market is looking poised to rally – feeding on any news that seems optimistic looking for hope. So it is quite possible we rally out of this – and violently to the upside if the shorts cover and the sellers step away. Then euphoria will return and people will forget the real shit-storm the economy is in – for a little while at least.

INDU 12000 / 12500 (If the sellers step away – news like Buffet and GM could bring hope back to the market and send this up fast. I don’t think we will sit at 12250 for any length of time. The market is wanting to rally after all the bad news.)

NDX 1800 (We are at a pivot point and if we can get above 1800 with any strength this puppy could BOLT higher – it is possible maybe even to see 1900 in the near-term - however any rally is based on Greed and Hope - don’t get along without hedging yourself. However – there could be some quick profit plays to the upside – short term.)

SPX 1350 (If we break 1350 this market as with the others could launch. Everyone is trying to spin economic negative news into hope and optimism. Remember the market MOVES on perception – not reality. If we CAN break 1350 we could head towards 1400 – a place you might want to unload and start going short again)

RUT 700 (For the rest of the market to get a strong rally the broader market needs to get above 700 and head towards 725. If this does NOT happen expect any pops in the narrower based indices above to be VERY short lived.)

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Conclusion

Reality – well the economy sucks – no denying that. However, EVERYONE is sick of that story and no one wants to hear it anymore, neither do I. It is just old news and bad news. We have taking a good beating going into the beginning of the year and now we are hoping for some sort of recovery. The market moves on perception until the fundamentals can catch up (note the fundamentals are pretty shitty right now) – but if we can keep the party going (cut more rates and bail out the insurers and banks) well we might get some short-term pops to the upside. It’s like the first ROCKY movie – you know he is going to get up off the mat again and again (when fundamental he should stay down – he is just getting brain damage at this point) – and what happened in the END, he lost!!! So why bother getting up – knowing you are going to lose. Well – investors are optimist – until the Fat Lady sings (or the Final Bell in Rocky) they will continue to pick bottoms and hope. Based on Greed and Hope – we could get a violent rally to the upside.
However when reality sets in – maybe a few weeks down the road – that consumer buying power is dried up and homes STILL are not selling – and the dollar continues to slid – well the sellers will step back in.

We are at a pivot point and the market WANTS to rally (because investors and “talking heads” want it to) – don’t fight it. If you are short – step aside and get on the train and let the market rally. However, keep in mind that while Rocky may get off the mat again and again – it is better to hedge your bets and put some money on Apollo Creed!

MP 2/11/08

Traders,

It would seem the “I told you so’s” in oil being at the top were wrong again, oil had a 4%+ rally on Friday. Pickens, Rogers, and the rest are still fairly bullish on oil and as Pickens mentioned that there is a $5 premium in oil from dollar weakness. As the dollar rallied last week we saw oil pull back – but as they have said – do expect to see $70 any time soon. Additionally, OPEC has indicated they are looking to re-price oil to the Euro sometime in the future. This rumor has been circulating for some time, but it wasn’t until last week that we actually heard some members indicate that there is serious talk behind the scenes pushing for this shift. Regardless what the man on the street thinks, if oil gets repriced to the Euro it would be a clear sign of the US dollar falling from grace as being the world’s reserve currency. We are already seeing several foreign central banks increasing to a diversified reserve currency.

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Europe facing a possible recession too?

While the ECB has been putting inflation as their top concern and thus has not made the dramatic cuts in interest rates that their brethren across the pond have made, there is now concern that a “mellow” recession might reach their shores. Concerns about Europe and their ties to the US is causing concerns for sure. The Euro has pulled off the recent highs and some say could reach 1.40 to the dollar (while still traditionally high) way below the dreaded 1.50 resistance – were many forwards are sitting. If that were to break – we could see a SHARP fall in the dollar in the short-term as firms try to cover.
For now, the Dollar has gotten a short-term breather and is fought back against the Euro. The US would love to “spin” that Europe will continue to fall in our shadow it will TOO face the same issues we do. Bernanke and his rate cut race to the bottom is in the lead and is more certainly forcing inflation higher in the US, he would love to see a slow-down in Europe and ostensively have them cut as well – taking off MUCH needed pressure off the dollar.
It’s more certainly a battle between ECB and the FED. So far the ECB has been winning and Bernanke has egg on his face. While he may be giving a little relief to his boy’s over at the Firms (keeping them solvent and offering special deals at the discount window) he has done nothing to help the dollar and the economy as a whole. Can you actually believe he thinks this “Sizzler Stimulus” is going to save the economy. I think not….
We will remain in a difficult road.


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CDO’s and insurance becoming an issue, YET?

As I have been mentioning for the last couple weeks the Bond Insurers (AMBAC and MBIA) are the possible catalyst for the next massive shoe to drop on the economy. Initially, the concern about the $2 trillion worth of bond insurance in the US was something no one could really digest. It’s like if they don’t look at it, then it won’t exist. Recently, vulture’s like Ross have been circling and Buffet is creating his own bond insurers. The vulture’s don’t circle unless something is dying. If these two hidden giants fail – the domino effect could be massive. The trickle effect is that state and other type of conservative investment funds require both a certain rating (usually AA or A2 +) combined with bond insurance. The bond insurers also must maintain the same rating as the bond’s they insure.
Over the last several years MBIA and AMBAC (usually only insuring muni bonds) have jumped in with both feet to insure CDO, SIV, and other structured products. Additionally they have expanded in too many different corporate bonds. They relied on Moody’s, S&P, and Fitch rating (which ironically those rating’s are PAID FOR) – to justify the coverage. It was like they said, “Hey, if it is triple A rated then it is as safe as government bonds, right?”. Well – actually no.
I am still amazed that both MBIA and AMBAC have maintain their “super star” ratings, while S&P has publicly announced that another $250 billion in write-downs are in store and Fitch has downgraded bonds at a rate of a Gatling-gun (over 130,000 bonds). Also – we all are aware that MBIA and AMBAC are technically broke and looking for hand-outs (MBIA just raised a paltry $750 million – compared to the amount they cover). So why do they maintain the “super star” ratings? Because – if they don’t – the dominos fall fast and hard. If they lose the rating, then the bond’s they cover are no longer insured (you can’t insure a AAA bond if you are a BBB bond insurer). Many pension funds, state funds, not-for-profit entities investments have to have their bonds insured – a ratings drop in the insurance company followed by the ratings drop in the bonds themselves would cause a watershed of selling buy funds that can’t hold below AA paper.
MBIA and AMBAC (and other insurance companies) ratings are currently just for show – because in reality they are certainly NOT AAA companies anymore.
Keep a close eye on this story – as Gladwell would say, “It’s at a tipping point!” It could be it dodges a bullet with some kind of government bail-out, thus putting the government further in debt and shouldering the risk. This has other consequences, like probably putting more negative pressure on the dollar. What foreign central bank (or for that matter any large investment) want to purchase US treasuries (which obviously hold keeps the money flowing) if the government continues to take on the debt and bail-out everyone. So far – with the DISCOUNT rate cuts and “Special Loans” at the discount window – the government has technically bailed-out the banks and is shouldering 100s of billions in risk and if they step in to take-over and cover the bond insurers (that insure $2 trillion in bonds) – well that is a pretty big weight on anyone’s shoulders. For SURE that builds trepidation on purchasing “green backs” to receive a crappy 3% return (on a risk and eroding asset). It would probably force OPEC’s hand faster to move to the Euro.

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FORD cuts more jobs?

Can you believe it, just when you thought that there was no one left in the Rust Belt with a job at Ford – they managed to find another 9,000 people to fire? I thought no one was left working in the auto-motive industry. I guess I was wrong. The US car companies continue to face mounting hurdles – from the UAW recent strike and squeeze play, to margins getting squeezed, consumer spending dropping, GMAC being involved in the sub-prime business, and selling off Jaguar and Range Rover to India of all places. I guess the Indian’s finally got back at the British – how is that for egg on your face. The India owning two jewels of the English Crown, Jaguar and Range Rover.

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Futures Pre-Open

Futures were down over night but saw are recent rally going into the opening. Yahoo has refused the unsolicited bid by MSFT and the techs are getting a little volatility – NQ futures now up $10 points. However, fair value is still showing a flat opening. The ARB traders don’t seem to be too involved this morning as the futures are fairly flat. Probably a little upside buy pressure at the opening- but after that? Well who knows.

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Support / Resistance

Friday was fairly mixed – The tech sector got a boost – but the market as a whole saw pressure.

INDU 12,000 / 12,500 (We are in no man’s land. Not a place to get long or short. We are drifting lower and will continue to see pressure – but could have some short upside spikes.)

NDX 1750 /1800 (I would NOT get long at 1750 – because it really is not support. 1800 is a pivot point – if you get long hedge, if you get short hedge. It will move away from 1800 fast if it gets there and sits. Think of 1800 of a area for volatility to start LOADING)

SPX 1300 / 1350 (IT would be nice to see this close above 1350 – that could lend to optimistic short-term strength. However, I think we could very easily revisit 1300 before heading higher.)

RUT 700 (This is a big pivot point and if it continues to stay here and close above it we could see some strength in the narrower market.)

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Conclusion

We are starting to hear more about CDOs and their failures, the credit agencies (IMHO) ratings are pretty much a joke (at least FITCH is cutting ratings faster). I am concerned about how MBIA and AMBAC play out – for SURE someone (probably the government) will bail them out – but GOD this is getting pretty serious and fast. The stop-gap measure (insurance companies) are stretched to their limits (if not broken). That is a big concern since they are the DAMN which is holding up the CDO, SIV, and other corp. bond market and the watershed is getting a rate cut that makes a Marine Haircut look shaggy.

I still think the strength is in the commodity sector (while we could see a global slowdown) people need to eat, use oil, and probably DRINK more. Oil may get some pull-backs – but to see it fall to far – well I don’t see that happening. OPEC will defend the price and if they move to the EURO (or talk MORE about it publicly) it could put further pressure on the dollar.

Look at those ETFs (FXE, FXF,GLD,DOG,etc.) for some nice basket balancing.

This might be an area for a short-term long shot (based on optimism) but I would hedge my long bets or use Option Strategies as a surrogate for stock positions.

MP 2/8/08

Traders,

I was out of the office yesterday – so was unable to monitor market action and the news throughout the day. However the action seemed relatively benign. Congress has passed their “Sizzler” Economic stimulus package – waiting for the White House to sign off on it. So it looks like Ed McMahon might be stopping at your door with a $300, $600, or even $1000 check – if you are “lucky” enough to have a big family and make less than $75k.

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Why Economics is important – regardless of politics

While I was out yesterday, I had an interesting conversation with my Great Aunt (Rust-Belt Democrat) – she is looking great for being in her mid-80s and still a Spitfire. She wanted to push my buttons on politics (she thinks I am a Republican because I am not for socialism). I explained to her that I am nether Republican or Democrat. Since we were both waiting for the outcome of the operation while sitting in the hospital – of course National Healthcare came up. I was emotionally drained sitting there in the pre-dawn hours waiting and was not really in the mood for a political debate with my loving great aunt, I kept it simple. My issue (regardless of politics) is what is happening to this economy. Economics is important regardless if you are a Democrat or Republican – my issue – how do you PAY for national health care (estimated to exceed $800 billion per year)?
I gave her two real-world examples that she could understand WHY economics (regardless of party) is important. The IRAQ war (regardless of how we feel about) is a short-term massive front loaded payout. I reminded her of the time when her extended family came down to visit her and she decided (on her very limited retirement income) to take and pay for everyone to go to Disney World. I said this is analogous to going to War. She has to budget for traveling cost, paying for rooms, food, etc. How long are they going for, how many people is she paying for, etc. Why the time at Disney is finite – the cost is going to far exceed her modest income. She will be going into debt (if not already in debt) and be deficit spending the entire way. She might of not thought about all the expenses involved and find out later that she seriously in debt from such a vacation that will take her years to pay back. The national health care program has a similar problem – only it is recurring deficit spending. What if she wanted to buy her son cable TV (thus making the monthly payments) – but she decides without proper planning that she’ll add all the premium stations (HBO, Showtime, sport packages, etc.) After a few months of getting that bill for that GIFT (of Free Cable to her son) – she will soon realize that (because of the fixed modest income) that she can NOT afford it without cutting other monthly expenses. Does she continue to go into debt (ever so slowly each month) or cut her own expenses – maybe not buying as much food or dropping other services.
Regardless of politics – the budget and the economy is vital to making anything work. I didn’t want to debate the merits of National Health Care – but just explain to her my concern is first and foremost getting the deficit, budget, debt, and the economy in order FIRST before paying for anything else – which could put the country and thus the citizens further behind the eight ball.
She liked my analogies and conceded my point. Once the economy is in order, only then can the Democrats or Republican can decide to spend money.
The government is like a big business – it has many employees, offers many services, has many more debts. The country is bankrupt on paper and the only reason it doesn’t file for bankruptcy is that it can PRINT more money and can put itself further in debt. But if it was a public company – relying on revenues – it would have been out of business sometime ago. The printing of money (which we should not be printing) is not only putting the government further in debt – but sending the dollar (and thus our buying power) into the toilet.

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Oil Slipping – will OPEC cut production?

OPEC has not increased production (and some have argued that OPEC is already only a few percent below maximum extraction rate as it is). Now with the US facing (or in) a recession and consumer spending dropping – oil with it is falling. The recent boost in the US dollar has also taken some of the premium out of the price (which T.B. Pickens had forecasted – I might say AGAIN correctly). However, the question of if the dollar can continue to hold and rally against other currencies is questionable and oil is still priced in dollars – will certainly bring volatility to the table.
Regardless of pinning their revenue on just the dollar and its short-term future, OPEC may cut some production lines to defend oil at $80 a barrel. They have indicated that if the price hits $80 it is in the cards for a reduction of output. However, it would be interesting to see how both India and China react to such a cut, even if the US slows – the ramping consumption in the fasting growing nations may slow but NOT decrease. However, it is rumored that if prices stay above the $85 level there are no plans to change production levels.
OPEC is more concerned about the dollar and oil is a direct representative of the dollar’s strength (inversely that is). The recent rise in the dollar has not offset the pull-off in oil, thus margins (strictly based on currency swaps) is falling. The fear of the weakening US economy is on the mind of every OPEC member. Today the dollar might see strength, but what about tomorrow – and if the Global economy slows down – the boost (or premiums) from the weaker dollar may not be enough to keep oil above $80.

Watch prices closely – there should be (as there recently has been) a inverse relationship to dollar strength. This will set the stage for OPEC’s stance.

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Futures Pre-Open

The futures are seeing some pressure – Asia was down, Europe is giving up some gains in different sectors, and the week has been draining for the longs. Yesterday (which I wasn’t here) didn’t seem like anything really got moving (up or down). I am sure there is some ARB trading in the pre-open, however the action should be light. The futures are front-running the cash – but not by much. Expect sell pressure on the cash basket at the opening.

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Support / Resistance

The downside slide has slowed – but not to any areas that would warrant taking a long shot bet.


INDU 12000 / 12500 (At 12250 we are at the PIVOT point – we could go either way. Today will either be a move to one of the two points – rather quickly or we sit still and close at 12250 – the close will be important.)

NDX 1700 / 1800 (Again we are at a pivot point 1750 – we could test either area or just sit tight – there is no news to get this thing moving – but optimism or pessimism could send us there fast. – don’t get long or short at this level)

SPX 1300 / 1400 (At 1336 we could move up to 1350 and close – if the action in the above two indices remain relatively quiet.)

RUT 700!!!! (the broader market seems to be keeping its head above water. If it can close above 700 – we could see strength in the narrow indices also tread water. But we NEED to close above 700! – it is a serious pivot point for the general broad market. )

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Conclusion

The credit rating agencies and bond insurers are getting more headlines and it SEEMS that no one wants to come to terms with reality. The reality is that these credit rating agencies are PAID for those ratings – does that create a bias or vest interest in giving higher ratings? There is some serious issues here – since many state funds can NOT invest in anything below a certain rating – thus it is in the best interest of the ISSUER of that bond to get a rating high enough to meet that criteria. Therefore they pay a rating agency for that rating. We can only believe that the agency is unbiased, however it seems like paying for grades – doesn’t it?!?
With Fitch cutting 130,000 bonds, S&P publicly stating 250 billion in future write-downs, Moody’s and the Bond Insurers slinging accusations at each other, and now investigations from all sorts of state and federal agencies is sending a some trepidation into the market and some concerned. I recently met with the CFO of the local hospital to review 2007 financials and their 2008 budget. What I saw concerned me, but the CFO felt they were fine. They have $400 million invested via Northern Trust in to Corp. bonds – all AAA or AA rated (by Moody’s, Fitch, or S&P) according to LAST year’s rating. They also have $300 million in debt (some bond issuances) which they are paying a VARIABLE rate (eek!). We did the math – they are getting about 2% return –between the received interest from Northern Trust and the Interest payments on the debt. However, he has been told and actually believes this is ARBATRAGE. I said it is simply NOT arbitrage – you just have borrowed money to invest money – just because you are paying interest and receiving interest (which seems similar) they are not offsetting assets. Not only that, but they are paying over $2 million a year to Northern Trust for the investment – to make a 2% return. If any (of the many) bonds they invest drop below AA they HAVE to sell them, based on their charter. Also – every time they make an investment change they are required to receive an audit and revised credit rating. If the hospital’s credit rating (which is A) falls – their $300 million debt (which is broken into different components) can be triggered to higher rates and/all called in – which they currently can’t pay without liquidating their Bond investment. It is a spaghetti mess for sure. I said you are doing all this work for 2% return and paying someone $2 million to do that? I said – if I was your advisor – I would pay off the debt and invest the difference into a mixed basket of treasuries and foreign bonds (not Corporate). They could be in for a big surprise – if any of those corp. bonds get a rating change – or god forbid default. The hospital is also running about $20 million in the red every year and relies on tax revenue to make up the difference – which they are going to see about a 20% drop since foreclosures have increased and property values have fallen. Of course he said - well Moody’s is rating these things AAA or AA and they are insured by MBIA and AMBAC (both I noted were on the brink of bankruptcy).
The point of the story – how many more state pension funds and hospitals or similar investment portfolios are out there? If these ratings drop it could send a HUGE surge of forced selling of those positions – which on that scale could send serious negative pressure into the market. We know it COULD happen – the question is WILL it and/or When? I don’t know – but the risk is real – that’s for sure.

Stay hedged!

MP 2/6/08

Traders,

As I indicated if we could not hold support that vacuum to the downside would be fast and hard. Volatility still lurks beneath the market and will continue to surface and take a bite out of the market. The uncertainty in the market is reflected in the Political Race and even after super Tuesday the future candidate for each party is still uncertain. Hillary won California, but Obama outpaced her on the number of states and on the Republican side Mr. IRS-Terminator-the-earth-is-only-2000-year-old, Huckabee surprised EVERYONE and captured several states. However, McCain “seems” to be the winner of the GOP (remember only a few months ago they thought he was bankrupt and was not even going to make it out of the gate). One thing IS for sure – this is a WIDE-OPEN Race with all types of candidates. I think political races like this are great for this nation – because there is a candidate for almost everyone’s view and voice.
Regardless of the political race and where we stand now as far as WHO is going to win for their party – the market doesn’t seem to care at this point. We are in store for lots more speeches about WHAT each candidate WOULD do for the economy – the reality however is RIGHT NOW THEY CAN NOT DO ANYTHING. So right now the current administration and FED are holding the reigns, while we have all ignored Bush and the administration (hoping for a brighter tomorrow) – they still have almost a year left and we can NOT wait and hope for the next candidate – action needs to take place now. So far – the rate cuts are just pouring gasoline on the fire. The $650 dollar per family stimulus will certainly boost Sizzler and Red Lobster shares for a month – we might also see a surge in Budweiser and Miller sales – and a boost in Lottery Tickets, but one thing for sure it doesn’t solve the problem. The FED can only pull off another 125 bps rate cut before he has blown his load and there is nothing left to do. I expect retest of the lows – and possibly breaking them to new lows – as we have yet to see blood in the streets and the current administration (being a lame duck) cannot do anything – even if they wanted too. Hang on – it is going to continue to be a wild ride (both up and down). You can bet on volatility – which is the only sure thing.

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Super Tuesday – less exciting than Super Sunday

I don’t want to waste to much time on this – since every cable channel and “talking head” has talked this to death and at this stage it’s all just speculation. The press and polls have been completely wrong on everything (both Democrats and Republicans) – from McCain being bankrupt at the beginning, Huckabee not picking up a single state, Hillary sweeping to dropping out after Iowa, Giuliani sweeping, and the Man with the hair (Mitt) being the back marker. The press and poll track record – SUCKS! I think the people of this country have something to say – regardless of party.
Personal note – I watched the speeches last night. The worse speech was Mitt (he sucks as an orator) and the best was Obama (man he can really charge his followers) – Hillary and McCain have been in politics WAY TOO LONG – that they just sound so boring. If I hear Hillary say we want CHANGE one more time I think I will puke – no shit we all want change, isn’t that the point of every candidate. McCain needs to get a little more charisma – he is a classy guy and not the mud slinger that we have seen in the Obama vs. Hillary (fly-weight division) – but he too needs to get charged up and invest is a rock-star speech writer. I guess if I was Republican – I would vote for McCain (he can cross the isle and has stood up to the Republicans and is more moderate). If I was a Democrat – I would vote for Obama (He IS change – where Hillary is more big business– her contributors from major pharmaceutical companies to the CEO of several large corporations – not to mention how polarizing she is – I don’t think she CAN cross the isle even if she HAD to!). I think both Obama and McCain appreciate the need to bring this country together (both Republicans, Democrats, and Independents). That is my .02 cents. However – as most of you know – I am the minority Free Market and Constitutionalist – so I don’t have a candidate! Who has a chance of winning – I guess Ron Paul was the closest thing and my long shot (gone shot).

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Worker Productivity Rises – Not a good economic sign!

The Productivity (a measure of employee efficiency, rose at an annual rate by 1.8%). Some of the talking heads on TV would have us believe that this is a good sign for the economy – since it reflects increase in efficiency – which translates to increased margins and/or savings. I fully agree and also believe this should be the goal (from the day one of every company). However, living in the real world we all know how companies traditionally get FAT when times are good and LEAN when times are bad. So – while it is a good sign that a company is getting it’s SHIT together to trim costs and increase margins – it is not necessarily a sign that the economy is getting better.
For anyone that acts surprised that Productivity rises in this economy – well I think them a fool – of course it would rise when you start laying off lots of people, less people can slack off. The financial, lending, building, and several sectors are is massive lay-offs – so it is rather obvious that productivity measures would rise. Not to mention many companies are working to reduce employee work hours – which additionally increases Productivity. I for one would wonder what the CEO of a company was doing during the good times, if now they are actually showing an increase in corporate productivity and increase savings – which equals increased margins (more profits). It’s like the person that says, “I am going to give it 100 and 10 percent!” – I always hated that saying – first you can’t give it 110% and you should have been giving it 100% to begin with. Or something like “We are going to focus our efforts and put our nose to the grind stone!” – I am wondering what they were doing before that? Seems that people LOVE to get FAT and LAZY in the good times and now they have to hunker down. Anyway – enough of my rambling – times are tough and productivity (if we just do the math and not make stupid speculation) is a clear sign that companies are laying people off, cutting the fat, and reducing the hours – why you ask – because times are NOT so great.
This will sink in after a while – and the talking heads that think this is a sign of a bottom will quickly be scratching their heads when other economic data shows the increase negative pressure on the economy. These are not the times to be an optimist or pessimist – we need to be realistic when invested in this market.

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Futures Pre-Open

The small knee jerk to the up-side on the “Great” productivity numbers (which are a GOOD thing for companies) really reflects that companies are trying to CUT costs and hunker down because we are in a Shit-Storm – will again set-in. The futures are already retreating after the pop. I am not saying we could not rally – I am just saying that any rally off these Productivity numbers is based on Optimistic Hope that things are better – instead of the reality that companies are shedding jobs and cutting costs – which equals increased productivity. The ARB traders are no dummies and are shorting into the opening – getting ready to buy the cash basket to capture the spread. We are going to see the futures take a little sell pressure from the news release because of the ARB traders. However – we are going to see a boost in stocks at the opening – as they will need to buy the baskets to cover the spread. After the opening it is anyone’s guess.

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Support / Resistance

What supports you ask – I agree. I mentioned yesterday that if ANY supports (where I would NOT get long) don’t hold we would see a free fall – which is what we saw yesterday. I think we could test the lows be weekend.

INDU 12,000 / 12,500 (we broke 12,500 yesterday like it was butter – a place that I mention NOT to get long at but it was more of a pause area that needed to hold. We could see 12,000 again and if you were ballsy to get long there make sure to hedge 100%, because if that puppy doesn’t hold – well it could get even uglier and faster. It would be nice to get above 12,500 today – but I think that could be hard – even with the optimistic productivity numbers.)

NDX 1700 / 1800 (1800 came and went so fast that it made your head spin yesterday. Not a good sign. We are in no man’s land now.)

SPX 1300 / 1350 (It would be nice to see this get above 1350 – but I think 1300 is going to be visited sooner than latter)

RUT 700!!!! (If we can hold and CLOSE above 700 – which I don’t think we can – then it’s 650 time and fast)

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Conclusion

The political race is fun and exciting – but right now it is only entertainment – since they really can’t do anything. I feel for whatever candidate wins the presidency because they are going to inherit a bankrupt system and a economy that is in the toilet. I can see Bush existing the White House now, with the door slamming on the ass of the newly elected president “F### ya latter!” he says as he exits. Bush was the worse Democratic president we have had, I would love to bring back Republican President Bill Clinton (do I have that backward? – the fiscal responsibility of the two should not escape you – if you can see humor in it).
The 125 bps rate cut reminded me of a 24 hour “Stay of Execution” for the economy. It didn’t solve anything and is only delaying the problem – which so far is not addressed. The Democrats want to raise taxes and increase spending with a est. $800+ billion a year health care package. The Republicans want to keep the tax cuts permanent (which does solve the problem today – since the tax cuts end in 2010). The problem right now is we are in or headed into a recession – which I think is going to last a while. I don’t see where the NEW money to revive the economy is going to come from. 2001-2007 was just massive borrowed money from people tapping their homes – not real EARNED money.


Stay hedge – and expect more volatility.