MP 3/31/08

Traders,

Being the last day of the quarter – we may see some rolling and closing of positions – for SURE we will see some marking (as it has happened every quarter that I have been involved in the market). Also – we are seeing the new power of the Fed moving forward with the Paulson Plan – hopefully it has better controls and ability to manage than previous or existing government businesses (but I doubt it).

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Citigroup – ejects the credit card business!

While the housing bubble (credit problem) is deflating rapidly – the next inline is the credit-card business. The credit spending in this nation is what (single-handily) drives consumer spending. Wal-mart actually measures the credit spending at their store – and last holiday season it had hit an all-time high (as people have no savings – but still feel the social NEED to spend money – thus tap their credit cards.)

The problem – while you may have a booming holiday season – the next few months put consumers further behind the 8-ball as they try to catch-up on debt (or just move it around to other debt instruments – other credit cards.) You KNOW this nation has a problem – when you see at least 1 or 2 commercials a night advertising the ability to get your CREDIT PROBLEMS squared away.

Citi is trying to get in front of their problems – they are taking it on the chin from the housing market (and are expected to take MORE write-downs) the next shoe to drop for them is their credit card unit – which defaults are ramping. So they will spin it off! Should of done that with their mortgage unit back in 2006 – opps! Additionally they are trying to overhaul the company – (cut 6,000 jobs and reorganization). However – while reorganization will help get them focused – it will not eliminate the losses. You could say it’s like rearranging deck chairs on the Titanic.

While in a traditional market – this might be good news and see a pop in Citi – not today – it is a clear sign that their problem has become infected! Of course they could get an upgrade by Lehman (see Market Preview from last Friday to get the joke.)

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Paulson Speaks – the NEW PLAN?

Paulson speaks today and it is fairly clear what his talk will be – giving MORE POWER to the Fed. After they engineered the take-over of Bear Stearns (with JPMorgan) – the belief is that they can regulate, mandate, and manage the problems in the financial sector.

However, if the Bear Stearns deal is indicative of future power that will be handed to the FED – I am not too sure how great that will be. Remember – the FED has posted $30 billion of (tax payer money) to guarantee a portion of the credit risk (which may not be enough and Bear could still fail) – additionally the deal CHANGED after the FED had negotiated it with JPM. The shareholders had threatened - and the stock deal increased 5 fold from $250 million to $1.3 billion (nothing the FED could do) – and they are still posting the money. There was NO regulation in that deal and no time for due dillegence on either the Fed's or JPM's part. The only thing the FED could do is get it approved without all the regulation and post government money - great. You mean No regulation and More power.

So it will be interesting to see what Paulson’s Plan is - seems like a get out of jail free card. Paulson (being the Ex-CEO in the financial industry) is looking to make sure his old-boys are solvent – it’s not about MORE regulation – but more about bailout. If these companies were NOT in serious credit problems – Paulson would NOT be making this speech. Remember, coming from the industry – he is one for LESS regulation not MORE. But in order to bailout all these banks (the industry) he has to concede some more regulations, give the fed power, and get that discount window flowing with much needed cash. And why not stick the tax payers with losses – we already do with all the other social programs that have failed. No doubt – bailouts = more taxes or depreciated dollar. It’s funny when you think back in 2007 the financial industry had some of the biggest payout bonuses – the tax payer didn’t participate when things were great – now they will when they suck. Where do I buy a Paulson Plan?

I can’t blame Paulson – he needs to figure something out – but using the government as a backdoor to keep failed risk management and business models (thus the companies solvent) – is not my idea of a free market. Let Bear Stearns fail – they screwed up.

I bet if Kenny Lay was the Treasury Sec. he would have a similar plan to bailout the likes of Enron and other troubled companies. Hey – you protect what you know.

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Futures Pre-market

The futures are front running the cash by 3-5 points in the premarket. Expect a slight pull back in the futures as the ARB traders click on the buy-programs at the opening.

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Support / Resistance

The market fell off pretty good last week and we are in the center of the range. Being the end of the quarter and strong regulation words from Paulson could spell a strong rally today.


INDU 12000 (12250) / 12500 (Friday I said that 12250 was an interm-support area to get flat – but not long. However today with both the Paulson speech and being the end of the quarter we could get a strong rally into the close. Watch 12500 – it’s an area to get flat to short – hedged. However any bad news will send it down to 12000).

NDX 1750 / 1800 (We are ranged bound – but we could see the resistance today.)

SPX 1300 / 1350 (We are in the bottom of the range – unless we get some selling pressure I expect a revisit to at least 1325 today – maybe)

RUT 650 / 700 (We are squarely in range. Flatten at the support or resistance.)

Watch the close – we could get a good pop with MARKS at the close of the quarter.

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Conclusion

Things are more serious – Goldman has forecasted an additional 10-20% drop in home prices and more write-downs in the financial sector. To have the Treasury Sec. (an ex-CEO – who is not one for MORE regulation) speak about regulation and giving MORE power to the FED – is a clear sign that Bear Stearns may NOT be the one trick pony that everyone thought. There may be more problems on the horizon. So while his speech may sound great – what does it really mean (that there is more to come).

We may get a pop going into the close from quarter end marking – so watch it close.


Today is a day not to take long hard deltas without hedging them. If we close strong and get a pop, but are short of the resistance we could get a follow-through tomorrow. Get FLAT at the resistance on any pop – unless the FED is going to bailout the entire sector (nationalize it).

MP 3/28/08

Traders,

We saw a good pull off from the resistance levels yesterday – but not a serious pull down like I would of thought. It seems there is still some push-pull between the buyers and seller – the buyers not wanting to give up any gains. The Tech sector did get hit pretty good – with the ORCL news in the pre-market sending the sector lower. We have moved down into uncertainty and could retest the resistance levels again very quickly today, head lower and test supports, or continue to drift in the range. This uncertainty should keep you sidelined on taking any HARD delta positions into the weekend – it’s as if the market is waiting for something to happen before reacting.

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Citi upgrades Lehman?

To start your weekend off with a good laugh, this morning a very troubled Citigroup “upgrades” Lehman another VERY seriously troubled company to “Buy”. It’s like one loser patting the other loser on the back! Wait until next week when Lehman “upgrades” Citigroup to “Buy”.

It’s like the two CEO’s were having their two-martini lunch at the local pub talking about how troubled their credit lines are and how desperate they are for cash. They are both afraid of being the next Bear Stearns……then one of them, in a drunken stupor, says…… “Hey, what if we UPGRADE each other to BUY?” …….. “Brilliant” – says the other CEO.

They give each other a hug – “But wait” says the other…. “What about getting MORE needed money to stay liquid?”…… “Well, we can use the UPGRADE to convince our Middle East investors that things are not so bad. Also – our good buddy Ben will continue to lower the standards at the Discount Window, and if all that doesn’t work – we can always get him to bail us out or negotiate a deal! – but for NOW – lets “Upgrade” each other!”…… they exit the bar…..the Citi CEO makes one last statement “Make SURE you’ve got your Golden Parachute strapped on tight!”

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Consumer Spending increases at slower pace

Consumer Spending (as measured by the government) rose .1%, following a .4% gain in January. While some analyst use this to measure a recession (still saying we are NOT in a recession –based on consumer spending) – well we are heading that way. Many forget that consumers are what drives more than 2/3rds of the economy. Of course the inflation measure for last month saw little or no inflation (yeah – right), combined with this slowing number – gives the Fed the “data” needed to justify to take interest rates to 1% and lower. Several economist (including Goldman) expect interest rates lowered to 1 – 1.75%.
It’s important to note that one of the Fed Governors (Philly) voted AGAINST the rate cut – indicating that keeping inflation in check should be the priority. He would like to point to the consumer spending numbers (slowing) as a clear indication of inflationary impact – however the government’s CPI (inflation measure) tells them a different story – and that’s inflation is in check.
It’s interesting that ECB is keeping rates up fighting inflation and the US FED is cutting rates trying to spur spending (and says inflation is in check). Of course Bernanke doesn’t drive, doesn’t eat, and doesn’t buy any goods – so inflation WOULD seem in check.

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J.C. Penney lowers Quarterly Sales and Earnings Forecast

Well – JC Penny is not the retail bell-weather – it is a clear sign the consumer spending is slowing and they’re margins are also getting squeeze by fuel costs and declining dollar. Expect the JC Penny news to filter into the retail sector – creating downside pressure.

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Futures Pre-open

Futures are front running the cash this morning by 4-6 points above Fair Value. Expect Arb traders to short futures into the opening and buy the cash basket – which will create a pop in the list equity markets at the opening. However – after that it is anyone’s game.

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Support / Resistance

We spent a couple of days pushing against the ceiling trying to get through – but to NO avail. The market has pulled off the resistances and started to pull off. We are seeing some upside from the futures in the pre-open – but today will be a very uncertain day – we COULD see volatility or just see the market drift around – since we are NOT at a Support or Resistance. I believe that no one wants to take a big position either way going into the weekend.

INDU 12250 / 12500 (we are down near the short-term support – note 12250 is NOT a place to get long, but rather just flatten short delta positions. I don’t know how well 12250 would hold on large volume. We could just drift today…..)

NDX 1750 / 1800 (another middle of the range situation which could go either way – I think it will be dictated by institutional net delta positions and the need to go home flat. If they are coming in short – we could see buying, if they come in long - we could see selling. We are in the middle range and the smart paper will go home flat.)

SPX 1300 / 1350 (again in the middle of the range. Testing 1350 or 1300 is in the cards – but probably will not see serious volume until we get to one of those points to start TESTING the support or resistance.)

RUT 650 / 700 (We are just off the resistance levels and are seeing some strength in the futures in the pre-market. We could test 700 – but it will be how we close that will dictate going forward.)

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Conclusion

The Citigroup upgrade has me laughing uncontrollably this morning….I almost cannot type. It reminds me of Cramer (mad money) saying “Bear Stearns is strong and safe, don’t get out of Bear Stearns!” – only to have it drop to $2 a couple of days later. But then again Cramer’s only value is entertainment and as about as real as the WWF!
The consumer spending has the “Talking Heads” start the whole “are we in a recession” talk again – boring and who cares! However, it is interesting that the Philly Fed Governor is marching step with the ECB view of inflationary concern. I think the Philly Fed Governor just filled up his truck and went shopping with his wife and said “Hey, things ARE more expensive – I have been locked in my Theoretical Vacuum too long!”. If the government data continues down this path – it will give Bernanke the data he needs to justify continuing rate cuts – 1 – 1.75%, and I just heard this morning an economist on Bloomberg stating he could take it to 0! One thing is for sure Bernanke is running out of room – he has lent $200 billion, made special discount window rules, bailout Bear Stearns, and cutting rates faster than a chainsaw. At 0% where does he go from there.

I have a bad feeling that both the Capital Gains tax will be revoked (raised back to 30%) and income tax will break 40% - expect state taxes to go up. I also don’t think that even McCain (REP.) could avoid not raising taxes – if Bernanke keeps giving away money. Of course Bernanke could just print MORE (building up his biceps) and send the dollar lower. Either way – it does NOT paint a rosy picture.

Please welcome the “new NEW DEAL!” coming to a country near you. Did I mention our new Nationalizing the healthcare and homes? We could be living in a country where section 8 housing becomes the standard and we all wait in lines for medical treatment.

MP 3/27/08

Traders,

We pulled off the resistance levels during the day – but had some strength going into the close. We really haven’t broken down or up from the resistance area – meaning that volatility is still loading into the range. The dollar is also sliding fast – and commodities are ramping again. The news about Citigroup yesterday – combined with durable goods put a damper on any rally through resistance.

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Oil Pipeline Bombed!

One of Iraq’s major pipeline was bombed by terrorist a few hours ago. Iraq is saying it will take a couple of days to make the repairs once the fire is out. The pipeline feeds about 30% to 50% of Iraq’s oil. With supply vs. demand spread is narrow - even this amount (about a million barrels per day) – will have an impact. However, the greater impact is the “show” of political instability in the region.
Even with the region relatively quite for a while – oil has still rallied above $100. This latest news shows the vulnerability and the continued instability of the region. Oil is up small in the early hours. As more details come out – we could get more volatility injections into oil price.

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ORCL doesn’t meet high-end expectations

True, while ORCL did have double digit growth – it fell below expectations. Additionally in the conference call the mentioned that the slow-down and credit problems in the financial sector is also going to curtail growth going forward. Reading – into the durable goods number yesterday – it clearly shows that ORCL will be also facing a slowdown as companies order less (since businesses are ORCL’s primary clients).
ORCL is getting hit in the pre-market – expect it to put pressure in the tech sector.

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ConAgra selling its trading unit for $2.1 billion to Hedge Fund

Ospraie Management (a 10 billion dollar hedge fund) has agreed to buy ConAgra Food’s commodity trading operation for $2.1 billion. Thus giving Ospraie greater access to information into supply changes and pricing. Ospraie’s Special Opportunities unit invests in commodity producers such as agriculture and mining companies.
Ospraie is gaining edge buy this purchased – and both Lehman Brothers and Credit Suisse have made large equity stake holdings into Ospraie. This acquisition will most definitely take them to the next level and give them unprecedented insight.

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Futures Pre-Open

While the futures are UP in the opening – they are trading below fair value and a below the cash by $4 points. It does happen sometime and is confusing – but the futures had made a huge UP side move after the market close and before the globex session – thus causing this disparity. The ARB traders will be buying futures and shorting the basket going into the opening. Expect downside pressure on stocks at the opening as the spread closes.

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Support / Resistance


The INDU pulled off from 12500 but not really enough and the other indices are still flirting with the resistance levels. The market did see some strength going into the close and the futures even moved higher in the aftermarket. However – not enough to break through.

INDU 12250 / 12500 (I would not really get long at the 12250 level – and while we did pull off the resistance – it was not enough. 12500 is still a resistance area.)

NDX 1750 / 1800 (Yeah we are above 1800 – but that is a magnet area and watch the close to see if we are above or below it)

SPX 1300 / 1350 (Getting through 1350 has not really happened – seems the resistance is fairly strong)

RUT 650 / 700 (We did close above 700 with a rally into the close – but expect to see a little pressure this morning.)

I am still overall 70/30 bearish and the longer we CAN NOT get through the resistance – the more the move to the downside will be exacerbated.

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Conclusion

The oil pipeline explosion is alarming in that it shows the vulnerability of oil supplies – true the oil futures are not reacting that much to the attack – but it’s a clear warning, since supply lines are already tight vs. demand. The dollar is also sliding very hard and fast again against the Euro – from 1.54 to 1.58 in a couple of days is a huge move. Ospraie’s huge investment into the commodity trading pipelines is a clear sign that the big money is taking some serious bets in the expansion of commodities in the current bull market. I guess Jimmy Rogers was right these last couple of years.
ORCL news is also going to put some pressure on the tech market today – being a leader in the industry.

Last night’s lecture went very well – and I hope that they learned something. I do talk a little fast and I hope the information was not too technical for the audience.

MP 3/26/08

Traders,

Can you say Pushmepullyou (The Dr. Dolittle – mythological creature with two heads) – well that is what the market was doing yesterday at the resistance point. It wanted to break-down from the resistance and also rip to the upside – but just couldn’t move either way. The combination of technical’s indicating a good buy and the economic fundamentals indicating that there are still problems on the horizon kept it from making any big move. However – one thing is for sure – “hidden volatility” gets injected into the market when it doesn’t move – but wants to. Expect the longer we stay at the resistance, the bigger the jerk away from there (either up or down).
Also – I will be speaking tonight at the IBD investor group: 6pm in Sarasota. If you are interested in attending please let me know.

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Motorola – to split into two stocks?

Motorola, the once darling of the cell phone industry, has been clobbered by competition – with AAPL getting into the mix has even sent them further down the list. The stock hovering down at the $10 level. So their plan? Let’s split into two companies (one for making cell phones, the other services) – great instead of having one company worth $10, you will now have two worth $5 each (sorry for the sarcasm) – however I have seen this time and time again – and those kind of (expensive) decisions usually inject a little rally from the excitement – but when the dust settles – one of the two usually head into the toilet.
Expect some volatility and action in both the options and the stock. I am sure there is going to be some good plays in there – specially once the split happens (there will probably be some arbitrage opportunities once the process moves forward.)

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Orders for Durable Goods = FELL!

Companies are battening down the hatches and shoring up capital, thus not SPENDING money (reflected in the drop in orders.) The 1.7% drop, followed by the 4.7% drop the month earlier caught economist by surprise (as they thought Feb. would have seen some relief) – I guess from assuming that the injection of capital by the Fed would of freed up companies to borrow more, thus order more. However – the opposite has happened and they are getting ready to ride out the storm.
It clearly a sign that companies believe we are headed or already in a recession – since they would rather stock pile cash then spend it. Add in the weakening dollar and they KNOW they will need MORE dollars as their buying power shrinks.
The futures got a mild hit when the news was released – but I still think there is the fight at the resistance. But this is another bullet for the sellers!

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Citigroup on the fast track to more downgrades

A couple of analyst are lowering Citigroup estimates considerably – by as much as 4x there initial expectations. Early estimates were for losses of .28 per share have been now raised to $1.15 per share – reflecting additional writedowns. Oppenheimer’s analyst (Meredith Whitney) had correctly predicted the reduction of their dividend and downgraded them with lower expectations – this most recent estimate will put more pressure on the stock.
Expect to see more pressure in the banking sector – specially those exposed to mortgages and other debt obligations. The financial sector is going to see some negative pressure today.

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Futures Pre-Open

Initially the futures were seeing some pressure after the Durable Goods information and the lower estimates of Citi – however they seem to be holding levels pretty well. The futures are currently front running the cash by $4 points so we may see a slight rally in the futures going into the opening as the ARB traders start buying futures to short the basket. There will be some opening pressure on the market from short basket sellers – but since we are at a pivotal resistance in the indices I think they may back off and we will see less aggressive program trading at the opening.

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Support / Resistance

We are loading up at these resistance levels – after two long days fighting here. The more we stay at these levels the more “hidden volatility” is injected – so when it does release the more violent it will become. Expect more downside pressure then upside – from the Durable Goods news and the Citi estimates.

INDU 12500 (This is a pivot point – which could switch from a resistance point to a support point if we can move higher from here. However, the negative news from Citi is going to put pressure on the banking sector – not to mention the durable goods indicating that companies are seeing a recession – are going to put pressure on the market. The bulls (technically speaking) have a chart saying this is the bottom and want to go higher. I am giving it still a 70/30 downside at these points – however if I am wrong – expect a violent rally to the upside as sellers step away and shorts are forced to cover – injecting MORE buying. But it will be short lived and 12750 to 13000 will see major resistance.)

NDX 1800 (I know we are at 1825 and as long as we see the index above 1800 we could get some juice to send this up to 1875 or even 1900 – but it will have to be lead by the top overweights – AAPL, INTC, MSFT, GOOG, RIMM – there are big shorts in those issues which could inject some upside bias. I think this more about the tail wagging the dog – and I would look to the SPX and RUT as to whether this market will go higher or fall off. Looking at the broader indices I think the NDX has more downside rather than upside possibilities.)

SPX 1350 (Again the pivot point and a better indicator were the NDX will go. The financial sector will be a drag and is showing some downside pressure. We are locked for now at 1350 – but like the INDU I am giving it a 70/30 downside from the resistance. It will be hope and short-covering to get this to rally – so watch out for a ripping upside if we do go up.)

RUT 700 (This is the broadest of the above indices and it needs to stay about 700 to get the narrow based indices to see higher highs – however if this starts slipping along with the SPX we could see other indices get dragged down as well. The NDX has more upside potential from the massive shorts in those issues – but the RUT could still help pull it down. Again – watch the close.)

The Pushmepullyou continues!

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Conclusion

The Citi estimates has me a little concerned that MORE massive writedowns are on the horizon, but with Bear Stearns bailout we now KNOW that the FED will bail them out and take down worthless paper at the government’s (taxpayers) expense. However, is that enough? I feel that too MUCH bailout relief will stress the dollar to such a weak level that the bailouts may not be worth much. Foreign nations (central banks) will not want to touch the US dollar if the bailouts start mounting and it would be very possible to see OPEC make their drastic move early and reprice oil to the Euro (or basket of currencies) – the dollar would fall as the world reserve currency and would send more people to start unloading their dollars and buying Euros. So while it might domestically save the big financial institutions – it will at the same time send inflation up and the dollar down.
For sure Bernanke is in a tough spot – knowing that banks like Bear Stearns holds $10 trillion in counter party positions (that cannot fail without causing a worldwide domino effect) – but he must know that bailing them out and others, coupled with lowering rates is putting serious stress on the dollar and sending inflation up.

We are still in the “fogs of war” and don’t really know what is on the horizon – other than expect more volatility.

MP 3/25/08

Traders,

We rallied up to those resistance levels and are pushing pretty hard against them, today will be a pivotal day as to whether we will break through and move higher or fall back off. The market really wants to rally hard and is sick of the bad news – Black Rock CFO stated that last week, while short, had a ton of bad news that could of marked the bottom of the market (Bear Stearns, rate cuts, top in commodities, and special deals at the Fed Discount window) – however he pointed out we could revisit lows – but said this is a place to buy. I would agree – from only a technical point of view – however the economic landscape continues to see pressure and I don’t think a day or week will clearly delineate the bottom.





My NAZI remarks yesterday did create some feedback – but let me clarify – I was not referring to Hitler – but rather the nationalization and socialism that swept the country and trickled throughout the world. I guess I should have been referring to FDR’s “New Deal” – which wasn’t much different from the NAZI national socialist agenda (minus the Third Reich). The reason I mentioned NAZI was twofold – first I was reading Hayek (which was written from that time and refers to the National Socialist Party) and second I was trying to get a reaction – which I did. Needless to say – I think my point was made – as it did spur reactions. Take a look at this cartoon – which I find is as relevant today as it was in 1933

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Bear Stearns Deal – done?

Looks like Jamie (CEO of JP) is having to fork out MORE money for this deal. I hear many people saying what a great deal it is – their building alone is worth a billion – however people forget that JP has to take on all those risky positions and post their own money to carry them. Several firms that were contacted during that weekend of that emergency take-over wouldn’t PAY money to take on that risk.
Here was the problem – that I think everyone forgets (and WHY the FED jumped in over the weekend to make sure their solvent) – Bear Stearns carries $10 TRILLION worth of positions on their books (credit-default and interest-rate swaps) – since they are the counter party on $10 TRILL (not Bill or Mill – but TRILL) that could decouple the entire world market as far as OTC (over-the-counter) counter party positions. So THEY had to be bailed at some point. That doesn’t even include the $160 billion in structured products that are backed by mortgages.
Now with 2 days to do your due diligence – you can see why many banks and firms said – “I would NOT pay ANYTHING to carry that risk – without being able to do my due diligence!” – two days is not nearly enough time.

Only time will tell if Jamie is the man for making a scoop of the decade and picking up Bear for $10 a share – or the CHUMP for taking on $10 trillion in positions and other debt – without doing his due diligence. People are still wondering if B of A purchase of Countrywide was worth even a penny! Only time will tell.

So remember – while $2 seemed cheap (even $10 a share) – the risk behind it is very uncertain!

NEWS: JPM is also cutting their earnings – by as much as 45% - I don’t think they also have a good handle on how much this Bear Stearns position is going to COST them (yeah they have an idea of the stock price) – but they DON’T know how much of that paper WILL fail!

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Dollar rally and commodity slide halts ?

The dollar is starting to slide again as the EURO and other currencies begin to strengthen again – while last week had some major events and FED injections – was it too little too late? It would seem that it injected a huge pop to the dollar – but now it seems that the dollar is starting to give up again. The EURO was expected by some to drop to 1.50 but it’s currently seeing strength at 1.54, the Swiss Franc is also seeing some strength at 98. I also heard stories in Europe where some currency exchanges have stopped taking dollars! The Euro Money-Market Rates advanced to highest levels (up to 4.7%) as banks are hoarding cash (Euro). There are concerns that Bear Stearns was not the LAST bank to fold and banks are closing their doors to lending and looking to gather assets and cash on deposit.
Oil looking to hold at the $100 mark – and oil consumption (while predicted to drop in the US because of consumer buying power weakening) is expanding in other nations including China. Gold and other metals are starting to see bottoms after the big slides last week. Buyers are stepping back in the commodity market again.

Expect to continue to see HUGE volatility in the dollar and commodity markets. I still think the dollar will continue to slide and commodities will continue to rally over the long haul – but expect huge pull backs as traders in the short-term rush to the exit. Volatility is going to be high – but will continue to move higher.

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B of A getting some selling pressure

Merrill Lynch downgraded Bank of America to SELL from Neutral. There is still concern as to the mortgages and the investments in Country Wide and the viability going forward. The CDO and SIV markets have not been fully transparent YET – as they continue to strip away the paper – peeling back the onion – to see what is solvent and what is not!
Expect some other banks (exposed to the mortgage sector) to see some pressure.

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Futures Pre-Open

The futures in the early session got a good pop to the upside – led by Europe and HOPE that the rally will continue – however going into the opening they are losing their gains fast. The ARB is fairly flat right now – however the futures were front running the cash earlier but have now inverted and are trading below the cash. It looks to be a flat opening – but expect some pressure on the sell basket if the futures remain below the cash going into the opening.

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Support / Resistance

We hit the resistances across the board EARLY yesterday and for the most part remained there for the day. Today will be pivotal as I don’t think we can stay at these levels. There WILL be some sellers stepping in at the resistance – the question is will they step away and will short-covering kick in. There is a strong fight at these levels. This is a place to FLATTEN ALL LONG HARD DELTAS – take long positions with SOFT DELTAS – It is also a place to start getting short! But HEDGE with OTM gamma – incase we rip!

INDU 12000 / 12500 (12750) (As I said yesterday – this is a place to flatten longs and start getting short – if it breaks through the 12500 area SOLIDLY today we could rip fast to 12750 – so make SURE you have some OTM gamma to cover the shorts. I give it 70/30 to the downside today – with the downgrades in the banking sector, the dollar sliding, and more concerns in the credit market. If we rip – it means sellers stepped aside and short-covering will kick in and take us up FAST and HARD! – but I give that 30% - a pop at the opening and then sellers will step in is my educated guess.)

NDX 1750 / 1800 (1900) (We are in a very pivotal area and again will either pull off or rally hard. It will be the AAPL, GOOG, INTC, MSFT, etc – over weights – that will determine if we continue this rally. If you see weakness step in after the opening – expect a serious pull back. Again – there is massive shorts still in the market that could cause a short covering rally – which will be violent to the upside. I give this a 60/40 to the down side – as profit taking and new shorts enter at the resistance level.)

SPX 1300 / 1350 (We closed right at the resistance – and I expect it will be very HARD to continue to drive higher in the short-term. The dollar falling off in the morning and commodities rally – combined with the JPM lowering forecast and downgrades in the bank – will put pressure on the market that will be hard to drive higher. If we break – expect short-covering to make a violent move higher – but I am giving it 70/30 down-side.)

RUT 650 / 700 (We got to resistance again – this will be a hard area to break – again a short area – but MAKE SURE to hedge with OTM gamma.)


ALL investors should hedge 100% and flatten longs – it will be hard to get through this resistance levels!

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Conclusion

We had a good rally out of a very bad week of news – but the economic picture has not changed. There is concerned that another bank/s will fail – and Europe is hording cash as money-markets increase as assets are gathered. The dollar is starting to slide after a good pop and oil is holding the 100 line pretty solidly.

It’s NOT even close to being over – so expect continued volatility!!!

I think we have a better than 50% chance to pull back off these resistance levels – but if we break we WILL move up fast and hard as shorts are forced to cover. Today will be pivotal – so watch the close and action during the day – I expect some volatility as it tries to push through resistance levels!

Investors – flatten positions

Traders – use OTM gamma to hedge hard short or long deltas. We can move hard and fast – in either direction today.

Today is a resistance day!

MP 3/24/08

Traders,


Welcome back from Easter Egg Hunting – hopefully we can find some GOOD eggs in this market!
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Bear Stearns

It seems that the shareholders are rebelling against the deal (according to the NYT) – and that JP will step up to $10 a share. However, it is still rather uncertain. There is additional rumors (or stories) coming out of the deal last week – and according to some (while Sec. Treasury Paulson had said with glee that share holders were going to lose most their equity – indicating that the government was NOT bailing them out.) that while the FED did NOT set the price they had indicated the lower the better – since they ARE bailing out the debt. Additionally the $30 billion from the FED ONLY comes after the deal has closed. The shareholders of course are up in arms, that the debt holders are getting about .70 on the dollar and the shareholders are getting nothing. Additionally, there had been talk that debt holders were buying shares to secure that much needed vote, which has driven the price up to $5.
According to the NYT (and the reported that broke the story on CNBC) – the deal should be consummated sometime today and the price would be set at $10 a share. So it looks like the shareholders are going to win out (if you call $10 a share winning) AND the debt holders are going to get bailed out by the FED. Even though you would never hear Bernanke call this a bailout – it is!

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Fed Running out of bullets?

May be – some are expecting rates to go to 1% - so he doesn’t have much room there to cut. However, he in NOW getting into mortgage back securities? Yeah – you me right. The rate cuts (of 300 bps) has done nothing to help the credit crunch – just band-aid the problem for the most part. The problem remains that the firms are still carrying 100s of billions of worthless paper. So now there is talk about the FED’s last tool, the Resolution Trust Company, that would buy $6 trillion mortgage securities and take that problem off the balance sheets of the banks and lending firms. Now if that is not a bailout I don’t know what is.
The spin-doctors are working overtime to explain away the tax burden of such a proposal. The Nationalist Social Party, sorry I meant to say the Democrats, are already fully on board with such a proposal. Their brethren, the Corporate Welfare Party, sorry I meant to say the Republicans, are also on board with the proposal. At least they are both in an agreement on something.
The unfortunate reality – is that it will cost the tax payer and will put more unwelcome stressed on the government and the dollar, but why not – the government is already several trillion in debt – what’s another $6 trill!

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The dollar and commodity slide

While we have seen a massive run on commodities and the dollar sliding – they has been a recent turn around and the dollar is gaining some strength. Some currency traders believe that the Euro may slide back to the 1.50 mark – before ripping again. However, volatility of this magnitude in the currency market is not a comforting thought and the dollar has not seen these lows since 1971 (remember inflation back then?).
The G7 (US, UK, Canada, Japan, Germany, France, and Italy) meet on April 12-13th and the talk has been the weak dollar and the recent huge volatility – which is (as they see it) a massive loss of confidence in the dollar. The rumors have indicated that the G7 back in February had pressured Bernanke to stop cutting rates so drastically – which was causing a weak dollar and inflation. Additionally – just as recently as last week – there were rumors floating that the US FED had been asking it’s G7 partners to start buying US dollars to keep it from sliding more – when the Bear Stearns news broke and the Euro ripped to 1.59! I think it was a little late. The FED wants the best of both worlds – but can’t continue to serve two masters (the banks and the dollar).
The G7 (minus the US) has been concerned about inflation and have abstained from cutting rates – it’s obvious that the US is not on board and is focusing on keeping the banks solvent. There has been reported unhappiness among the G7 with the FEDs involvement in the bailout of Bear Stearns and the $30 billion payout to debt holders. Additionally – all eyes are on the Yuan and what China will do with their currency policies. While China has kept it relatively peg to the US Dollar – it is pushing hard to break and go a lot higher. I have heard even as high as 14:1 !

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Futures Pre-Open

With Tiffanies reporting a better outlook and the Bear Stearns $10 rumor the futures are stretching their legs to the upside. The spread however is fairly flat going into the opening – so I do NOT expect to see too much ARB trading (program trading at the opening). The futures are only about $1 above the theoretical cash basket.

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Support / Resistance

The market bounced off the support and is now (once again) heading for resistance. Last week was awesome for traders – let’s see if this is more of the same.

INDU 12000 / 12500 (12750) (If we get up to 12500 it is time to unwind and start flattening out your deltas. Take some limited short positions at this point, however a follow-through will push us to 12750 – which is the place to get short – hedged of course.)

NDX 1700 / 1800 (We are at the pivot point and could go either way – I think with the Bear Stearns news (if it remains $10) could send the market higher a little – 1700 is the long area and 1800 is the short area – but for now we are at the straddle strike.)

SPX 1300 / 1350 (If we get to 1350 – flatten the deltas and start getting short – a break-out could send us to 1375 – so buy some OTM gamma incase. However 1350 should be the spot.)

RUT 650 /700 (The broader market has been interesting – and a resistance is building at the 680 area over the last few trading sessions. A test of 700 is in the cards – but watch that 680 area today (intraday) – wonder if it WILL get through.)

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Conclusion

The FED is running out of cards to play – it is clear that we are far from getting out of the woods on the Credit problem – nothing on the economic landscape has really changed. We are getting some strength returning to the dollar and the commodities are pulling back – but I think that is very short-term. The G7 meeting coming up is going to be very interesting and I am sure there maybe some bullying up on the FED. Buying trillions of mortgage back securities is really no answer and seriously puts the government behind an ever LOOMING 8-ball! You could say that our country is moving fully into a National Socialist state – between universal healthcare and if the FED buys in the mortgages (a nationalizing of mortgages) – add in all the other mounting debt social programs – and we are on the way to bankruptcy, or you could say massive inflation (which is just like bankruptcy).
Side note: S&P has put both Lehman and Goldman in the negative watch list – stating that they have a 1 in 3 chance of having their credit downgraded – of course if Bernanke buys in their junk – that is the 2 in 3 chance!

Stay tuned – but expect more volatility – we may get a continued rally – but not on the back of a stronger economy, but rather hope and optimism.

I started reading the Road to Serfdom (again) last night – has NOTHING changed! Hayek hit the nail on the head – and I really hate to say this because I don’t want to be called some kind of freak (and we forget) – but the world had embraced the NAZI party (prior to the war) for the turning around of their country out of the depression. Socialism became popular across the world. For those of you that didn’t know (and confirmed by my German Partner) the bad word “NAZI” just means National Socialist Party. Not saying we are headed for a crazed military fascist state, I don’t think we are – but Socialism is not the answer in ANY form. Usually people think you are a freak if you bring up the word NAZI – but without studying history – we are doomed to repeat it (well at least the national socialist party – maybe not the crazy Hitler war mongering stuff – but wait we did invade Iraq didn’t we? Funny side note: I was in the Navy when Iraq was our ally and Iran was our enemy – but I guess we all forgot the “Earnest Will” mission in the Middle East in the late 80s! I didn’t – I was there! ).

MP 3/20/08

Traders,

Again, just like the 200 billion injection rally, the next day the market sells back off. This clearly shows the continued “uncertainty” of the economic landscape. The financials are getting lots of volatility action since the Bear Stearns failure. The massive rally to the huge pull back. The PR campaigns to differentiate themselves from Bear Stearns are ramping. They need to start building trust and keep their clients loyal – but selling trust to existing and new clients is very difficult among all the recent fall out and the continued uncertain credit risk. So far there has not been any run on the banks, like what we saw with Northern Rock a few months ago – you could say the Fed stepping in with Bear Stearns curtailed any run. Additionally – people don’t know WHAT to do or WHERE to go with their money even if they did withdrawal their deposits.
CNBC this morning touched on why BSC Bear Stearns was up from $2 – I think it’s several issues – people can’t BELIEVE that it is worth only $2 (those are the same kind of people that bought K-Mart, WorldCom, Enron, and the many other companies when they were at similar prices – not believing they too could go out of business). But people forget (or didn’t read the fine print) of the JP Morgan contract – which includes many “lock downs” on stock price, rights to purchase, real-estate guarantees, etc. Pretty much JP Morgan has them in a Full-Nelson and Bear Stearns can NOT get out without losing a major limb. Not to mention JP Morgan is currently “covering” their positions – a quick pull of that plug would put Bear Stearns back to insolvency quickly. So at the end of the day – I really don’t know WHY it would be trading higher than $2, other than chalk it up to “Hope” – good luck with that! There ARE rumors that bond holders (which get about 70 cents on the dollar) are buying up shares to gain the right to vote on the take-over. Bond holders would be willing to give up a few dollars per share to guarantee their 70% equity in the bonds – by having the right to VOTE FOR the take-over. Share-holders have lost almost all their equity – so it’s fair to say they are NOT TO happy about the deal!

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Jobless claims rose!

The Futures were up pretty solidly in the early morning session until the jobless claims brought us back to reality. Initial jobless claims rose 22k to 378k in the week that ended March 15. Important to note higher than economist had forecasted and the high since January. Economist (on avg.) expected only 7k, so the impact over twice as much is rather alarming.
Citigroup has also announced a layoff of over 5% of its work force to curtail mounting losses. Between the financial company credit problems and the construction/building/real-estate/home problems – expect to see increase of lay-offs in these sectors to shore up losses and/or to cut overheads as margins and revenues drop off.
The 85,000 US jobs lost in the first two months, declining retail sales, and weaker manufacturing data – does have some economist that thought we were NOT in a recession changing their tune!

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FED-EX down in the pre-open

While FED-EX did have better than expected earnings – it was their forecast for 2008 that they had lowered has investors concerned. What is even more concerning is that their predictions is based on current dollar exchange rates and fuel costs – and does NOT include “shocks” to prices – which I still think their forecast is rather “optimistic”. It would have been better if they had their “flat cost” forecast and two additional – Optimistic based on a stronger dollar and lower fuel cost – and Recession Forecast based on weaker dollar and higher fuel cost. Yeah – it’s more work – but it would let investors know (and gauge) their forecasts of Fed-Ex based on their own assessment of currency and fuel costs moving forward.
However, even with the flat line forecasts – it lower than expected – which is putting pressure on the stock in the pre-market.

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Commodities and Dollar getting Hit!!!

When there is a rush to the exit you see big moves and spikes. Gold, Oil, and other commodities are falling off pretty good in the morning and the dollar is gaining back some strength. However, there is LOTS of unwinding going on today – because of “Triple Witching” when all three derivative contracts expire today – so we are seeing big rolls and forwards being priced and traded.
So expect some pull backs across the board. Additionally the unwinding of some of the currency forwards are giving some strength to the dollar. However I would not read TOO MUCH into this – just like a 400 point rally in the INDU doesn’t mean that everything has changed. Remember the market is very reactionary and very volatile during these times.

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Futures Pre-Open

The Futures were down over night, rallied into the morning prior to the jobless claims, and then sold off again, now they are back to flat. Toss in expiration and this market is more than a little volatile. Don’t expect to many of the Arb traders to step in at the opening – as the combo of “Triple Witching” – dollar strength – and jobless claims are all pushing and pulling on this market. Add in the last ingredient – tomorrows a holiday – and while trading would be traditionally heavy – we may see some leave early for the Spring Break week-end.

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Support / Resistance

The indices all pull back to some support areas and the short triggers yesterday had some huge gains when we visited some of those resistance areas yesterday. Today it’s about holding supports!

INDU 12000 / 12250 (Today it’s about buying at the support areas, as yesterday was about selling at resistances. The support is 12000 which is an area to get flat and start getting long, however hedge with some OTM puts – if we start to slip – over hedged to give yourself some gamma to the downside. 12250 is not really a resistance area – but is a place to flatten long deltas.)

NDX 1700 / 1725 (Again 1700 is a place to get flat – but it we can’t hold it – make sure you have some extra downside gamma!)

SPX 1300 (It’s the straddle strike – or pivot point – while it is expiration and we could have some pin risk – this thing can rip away (up or down) from the strike.)

RUT 650 / 700 (We have to hold 650 – a place to get flat to long – but hedge.)

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Conclusion

With all the volatility I don’t know how much pin risk will play in reeling in the volatility – which it would traditionally do. The Open Interest is so mixed across the board – it’s hard to say how the hedging will force the issues to the strikes. A small rip could move any issue up or down to the next heavy OI strike – so expect little jerk moves to big OI strikes as deltas move to 100 or 0.

Today is expiration – so get those Do/Do NOT exercise notices out. There is ALWAYS FREE MONEY after the close – so watch the stock in after hours trading and have those notices handy and get ready to trade the stock. If you need help – give me a call – but I am a little swamped because my partner is out Skiing – (he deserves it!).

MP 3/19/08

Traders,

The 75bps cut was interesting, since it was not the full 100bps that the futures had expected. I heard some interesting commentary about it on Bloomberg last night. One of the thoughts was that Bernanke, after the weekend’s emergency 25bps Discount Cut and seeing the world reaction via the EURO and YEN making unprecedented moves up against the dollar, was concerned that more eyes (world central banks) were on the dollar reaction rather than the market. It’s as if he was trying to serve two masters – the banks that need the liquidity and the world central banks that do not want to see MORE inflation. By ONLY cutting 75bps you could say he was respecting the world central banks, while at the same time serving the domestic needs. The rumors, as I mentioned, were abound with the Fed contacting foreign central banks to start purchasing US dollars to keep it from sliding, maybe not cutting the full 100bps is a sign that he is willing to work with them. At this juncture it is speculation.

As far as the market reaction rally, I had expected that we could get to 12250 in the INDU (a place to flatten hard deltas) – but if we break we could get some massive short-covering and rip 300-400 points (see Support / Resistance). However, I still believe that the market will remain volatile and that (just like with the $200 billion injection) rally – one day does not change the economic landscape. Investors want to put the finger on a day and mark it as the bottom, looking for that turn around day. Investors forget the market is very short-term and reactionary – it is never indicative of a bottom or top in the economy. You can never place your finger on an Index price or day in the market and say “That was the top!” or “That was the bottom!” – for if we could we would all be billionaires. However, we will forever try to pick those days. The economy is a slow moving beast and just because we had a 420 point rally in the market – doesn’t mean that all the credit problems and economic problems have been solved or adverted.

Wilbur Ross was asked this morning by CNBC that exact question, was yesterday indicative of the bottom and the worse is behind us? His answer, If the market reaction was a sporadic EKG of a human’s health we would expect them to die! He further went on to say, the negative economic landscape before Bear Stearns and after the rate cut has not changed. While it is a small comfort that Bear is not going bust and the Fed is taking action – just because we MAY have dodged a bullet – doesn’t mean they have stop firing them. From his comments – the volatility and the negative impact to credit lines and homes is far from over.

Expect to see continued volatility and don’t get naked long stocks just because we had a 400+ point rally – remember the market is currently moving on perception, hope, fear – not a core fundamental change in the economy.

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Morgan Stanley showing better vitals…

Could Bear be the lone babe in the woods? You may think so, with Goldman and others looking to weather the storm better from their reports yesterday. This morning Morgan is also stating they have batten down the hatches, through up the storm jib, and their hull integrity is fairly solid – at least the bilge pumps are working. Expectations were very low for the financial sector, as rumors spread that Lehman may be the next Bear Stearns.

Just like the political race, Goldman, Morgan, and Lehman are trying to differentiate themselves from Bear Stearns. So far it seems the public is buying it and I am not dismissing it or saying it’s not true. However, let us not forget that Bear (just a few weeks ago) said they too were fine and had a $100+ billion balance sheet and they have manage the storm (still singing the praises of their awards for their risk management systems?!). Also, we must not forget all these firms have repeatedly told us last September that they were not in the same problem as Bear, only to report billions of write downs in the 3qtr and saying again that was it. Then in the 4th quarter they took even MORE write downs! So what they told us in September didn’t hold water, what they told us after didn’t hold water, and now they are saying the same thing? I would not say they are lying, I think it is a two-fold problem – 1st they do NOT know the extent of the risks (because of the complexity and entanglement of the structured products) and 2nd they are still using old school mark-to-market theoretical models (which we have come to realize that after writing down $100s of billions – well something is not working). It’s obvious that Bear’s risk system (praised as the best in the market) failed.

So we “hope” at this juncture the new management teams, risk managers, and CEOs have a handle on it and have shored up the risk and losses. However, we must not forget the risk is FAR from being gone – it is STILL on the books. Let’s hope they manage it well – but don’t assume anything. Hedging assets in the financial sector is key.

The good news is that they are all getting a good jolt to the upside – a good place to lock in gains and flatten positions.
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Futures Pre-Open

Initially we were seeing a pull back in the futures going into the opening – but we are starting to see a good rally since 9 am ET – with help from Morgan news.
The futures are front running the cash by a few points and will help fuel a good pop at the opening from the Arb traders buying the basket. Expect to see a small pull back in the futures as the Arb traders short into the opening.

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Support / Resistance

We got a solid massive rally yesterday – breaking resistance had the sellers step away and the shorts racing to cover. I was told that there was some serious covering going into the close – and we will probably see a little follow-through this morning (from some additional covering).

INDU 12000 / 12500 (We CAN see 12500 today – with more euphoric moves to the upside. 12500 is an area to get flat – if you go short – over hedge AGAIN with gamma to the upside – another rip could send us to 12750. However – expect a slow down at 12500 – specially when the shorts (and long buyers) stop and sellers re-enter.)

NDX 1700 / 1800 (We are hitting some small resistance in the 1750-1775 area – but expect a kick in the pants at 1800 – get flat there.)

SPX 1300 / 1350 (We could get to 1350 today quickly at the opening. Start flattening and looking for shorts – over hedge OTM call gamma in case we get another covering rally)

RUT 650 / 700 (700 is in the cards – another place to flatten long deltas and start going short – over hedge OTM gamma in case we get another ripping rally.)

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Conclusion

We had a great rally yesterday – and some serious intra-day whipsaw trading. We are probably going to get some more action to the upside at the opening, from what I heard there is still some buy-side paper that didn’t get filled yesterday. However, after that – well – I think it would be wise to take the coin OFF the table and be happy with profits.

Jimmy Rogers is still going long commodities and mentioned that he is now shortening into this rally and the financials – including Citigroup, Fannie Mae and other investment banks. He said, great their 75bps cut got a good rally yesterday – but what are they going to do when we are down again? Bernanke is not going to have any bullets left! When you take rates to 0, the Fed is now just watching on the sidelines – nothing left to do.

Rogers, Ross, and others see that we have a long way to go before the problem is close to being solved – they are not reacting to the “knee jerks” of the market or jumping on the euphoric rally. At some level, unlike analyst and talking heads on a salary, these guys make money by putting their money where their mouth is. They also don’t have any marketing or political agenda.

Expect a rally at the opening – but if we hit those resistance – expect sellers to step in with Rogers leading the charge?!

Investors – lock in gains and roll-up your hedges!

Traders – have fun!

Expiration THURSDAY - and other info

Traders –

Expiration (THURSDAY)

Since Friday is a holiday, Thursday will be the last day to trade options – so make sure you are on TOP of those Do/Do Not Exercise Notices. Additionally – Cash Index Settlement is tomorrow morning – so MAKE SURE to get your positions together at the close of Wednesday in the Cash Based Indices! If you need to go over any exercise positions – please call me TODAY. I will very busy tomorrow as my partner is out.

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BLOG - marketpreview.blogspot.com

I have been asked for my essay and archives of past Market Previews. I have put them up on a blog, but it only dates back to Jan 1 2008 – I have not the time (or the copies) of all the old Market Previews to get the previous ones up there. If there IS something you are looking for please let me know and I will try to search for it – if I have the time. marketpreview.blogspot.com

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Lecture - http://ibd.meetup.com/234/calendar/7421829/

I will be speaking to the Investor Business Daily (IBD) Sarasota group on Wednesday, March 26th at 6pm. The topic is managing your portfolio and risk (with the utilization of options). If you are interested in attending please see the information below and make sure to contact them – so they can be sure to accommodate you.

I've updated this meeting. For more details, see the full listing: http://ibd.meetup.com/234/calendar/7421829/

When: Wednesday, March 26, 2008 at 6:00 PM

Where: Pines of Sarasota12th Street at Orange Ave. Activity RoomSarasota, FL 34237941-927-7243

RSVP limit: 100 "Yes" RSVPs

If the changes affect your plans to attend, please take a moment to update your RSVP. (You can RSVP 'No' or 'Yes'.)

You can always get in touch with me through the 'Contact Organizer' feature on the Meetup.com website: http://ibd.meetup.com/234/suggestion/

MP 3/18/08

Traders,

Well you can’t deny the market is fairly resilient, even when one of the top investment banks in the world melted down over the weekend and the dollar slipped heavily against the Euro and Yen. We can spend lots of time on who or what kept the market from sliding down, maybe it was the cut at the Discount window over the weekend, maybe it was KNOWING that the FED will rush in a bailout any large financial institution and make guarantees ($30 billion in Bear’s instance). However, there is no denying at this juncture how serious the market turmoil is. We have recently seen the world’s largest lending company (Countrywide) which without the buy-out by BofA would of gone bankrupt, the world’s largest bond insurers at the edge of insolvency, the dollar sliding, oil rallying, and one of the world’s top investment banks fail.

Even Crammer didn’t have a clue (but then again I don’t give him too much creditability – although no denying he is entertaining to watch – just waiting for his head to explode), anyway he had it wrong last week – just look http://www.liveleak.com/view?i=2b7_1205751955 – another reason to watch him for entertainment value ONLY – not investment advice!

What is alarming is that there is still NO BLOOD running in the street, the “faith” that these financial firms have got a handle on risk is still status quo. That is rather alarming, especially when you see Bear Stearns (note they forgot to update their website) http://gawker.com/368637/bear-stearns-forgets-to-update-its-web-site tout their awards on the website: Best Risk Analytics (which failed), Best Buy Side Innovation (you mean buying without care), and then there is the tag-line “Never an unprofitable year”. So with all these financial accolades they still failed – fast and massively – to an extent that the Federal Reserve and a very low ante by JP Morgan ($2 a share = about $250 million, not billion). So who is next, Citigroup (which their large investors – the Dubai Investment Group already concerned), Lehman (the rumors are circling the water coolers), who knows.

However, the “talking heads” – which had recently (as of last week) said that Bear would NEVER fail (see Crammer’s link above) – have moved on and continue to say – Well the Bear Stearns thing was an anomaly it would happen to a “REAL” financial firm like Lehman or Citigroup. Maybe they have optimistic marching orders from the parent company (many of which are involved in the financial sub-prime mess) or maybe they just want to stay positive? Regardless – we are NOT OUT OF THE WOODS YET! You may be asking “Where was the SEC when all this was going on with Bear Stearns?” not that I am for MORE government oversight – but you have to admit they fell asleep at their post!

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The largest rate cut since Volcker?

The Fed Fund Futures are looking for a 100 bps cut (in both the Target and Discount rate) – thoughts are that they could even take the Discount rate to parity. The recession argument is still going strong – but the side that says we will not have one are losing ground fast. The meltdown of Bear Stearns has raised the bar on the serious factor of this problem. If the futures are right – this would bring down Target rates to 2% - the irony is that mortgage rates are UP! So the cuts are not flowing through to the homeowners.

Last week the CPI (read http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html ) would have us believe that inflation was in check and that while Bernanke was free to cut rates (believing that his cuts was NOT causing any or only a little impact on inflation) ----- then the weekend massive collapse happened, the emergency discount rate cut and now those futures are pricing in a 100bps cut for today.

Now here is the larger concern – while the market (futures in the pre-market 7am ET – yeah I am writing this early) – that the currency market is having the inverse relationship and the Euro is back to the 1.58 level. The inflation pressure and weakening dollar is only going to mount. The global stage is watching and waiting – between the weekend emergency discount rate cut and now the predicted 100bps cut – they global market doesn’t care about the knee jerk rally in the stock market – they have bigger concerns - they are watching that dollar very closely.
Expect another day of HUGE intra-day volatility!

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A forgotten story…..did it foretell of this coming?

Early last year there was a small story that no one gave that much attention too, it was China mentioning that they would NOT be renewing over 1 trillion dollars in US treasuries as they came due, they even mentioned that they would be selling to some extent. I made a big issue out of it because it is China and group of other countries that really keep the credit lines open by buying trillions in US treasuries. Of course we are a very arrogant country, a country that throughout history is more about muscle flexing, that many “taking heads” didn’t give that little news story the time of day. I was even on a conference call with UBS – and when asked they didn’t give it too much concern either – having “faith” in the US Dollar. Many people I talked to in the industry have argued that China relies on the US to purchase goods as reflected in the trade balance. However, I would argue that is not necessarily true – we rely on them to keep our credit lines OPEN and keeping the dollar strong.

In a very simple way of looking at it, we live in a very massive circle of debt, which other countries fuel by purchasing treasuries. When we spend on credit (mortgages, etc.) – if you follow the money – it all leads back to the Fed, not the banks as one would think. Almost every bank is fully leveraged on capital, meaning their positions (and their clients) exceed the amount of capital on deposit by very excessive amounts. The banks usually borrow from each other overnight to stay solvent – which is monitor and controlled (by the Federal Reserve).

Now the Fed has their beloved Discount Window in which you can actually borrow money from the government overnight. The Fed traditionally likes to punish those that do by charging higher interest rates – they would rather have the banks borrow from each other’s reserves. Now toss in the fact that the US government is in massive debt and deficit spending and now you can start seeing the BIG PICTURE. The US dollar is massively leveraged out. There is not enough printed US currency in the entire world to pay down all the debts in the US, even more alarming the net leveraged positions exceed issued currency by over 100:1 according to some. In order to keep the printing presses (not literally) going – the US NEEDS to sell treasuries – to avoid inflation (printing too much money – which makes the money worthless).

Now if we step back to take this all in – we quickly see that the largest group of treasury purchasers are floating the credit lines of the US. Those very large purchasers of treasuries are a foreign nations, China, Japan, S. Korea, Saudi Arabia, UK, etc. Many small nations also purchase US treasuries. Now their reason is several fold.

First, since almost all nations have dropped the gold standard (following our lead) – they are reliant upon SOMETHING to set the standard by De Facto – well that became OIL (and ostensively the US dollar since Oil was priced in it) – all nations need oil and need to purchase oil – so if it is priced in dollars then they should probably own dollars.

Second, since the world’s life blood is priced in dollars – then the dollar becomes the new “gold” standard. By owning large reserves of dollars – these nations are able to bring stability to their own currency.

Third, is more of a self for filling event, since they all hold dollars and oil is priced in it, well the dollar becomes the world’s reserve currency and everyone begins pricing and trading in that currency.

Now here is the very interesting irony, all these countries purchase huge reserves of dollars (and buys US treasuries) for the above mentioned reason, what they all had failed to realize is that it was THEM (the foreign countries) the propped up and supported the dollar by purchasing the treasuries. They have believed “faith” in the US dollar was their currencies protection, their “gold” standard, their security blanket. They didn’t realize that it was years of every increasing investments in the dollars that made that belief a reality. Then, it was as if a light bulb turned on one morning in some Central Bankers head in China – he probably said – we have Trillion in US dollars to purchase oil and to secure are own currency – but is the US dollar supporting our currency or are we supporting the dollar by purchasing US treasuries? What would happen if we stopped purchasing trillions of treasuries? Maybe we should look at the US Government’s Balance Sheets! How safe is the dollar, if we don’t own it? As you can see now all these countries are all wondering WHO is really the “hidden” gold standard – that is keeping the dollar propped up? Some believe the Euro and other’s the Chinese Yuan.

That answer will come in time – right now there is a scramble out of the dollar but to where? Gold just topped $1000 an ounce and other metals are rallying. Until nations have faith in SOME currency – expect to see commodities continue to rally.

For the first time in the US dollar’s history – the World’s Central Banks “FAITH” in our currency has SERIOUSLY shaken to a point where many countries have completely lost faith. They see the massive debt the government, corporations, and the US consumers are in and they don’t want to own it anymore. When the world starts pulling out of the dollar – the credit lines disappear – since they are no longer fueling those purchases. You can see it in the rapid drop in the dollar.

You could say, that small news story which I touched on at the beginning of last year, was the questioning of “faith” in our dollar and ostensively our economy. It may very well be the straw that broke the back of the economy. For if China and other nations had faith in the US dollar and our economy they may have continued to purchase dollars and support this economy during the housing sub-prime mess. But they were already heading for the doors – even before the sub-prime mess was fully realized – we could no longer rely on them – their bags were packed!

It is now the World’s Stage that will determine the future of the dollar and our credit lines. There is nothing that Bernanke can do, other than slap on some more band-aids. His current policies is keeping the World from buying dollars. Between cutting rates (no incentive for them to invest in dollars – getting paid LOWER interest rates for a depreciating asset?), putting the government further into debt from bailing out more companies, to opening up the money spigots at the discount window. The rest of the world is saying NO THANKS – we are not interested in your dollars!

We need to build confidence in the world stage – to get them to purchase dollars – because without the global support, the dollar will continue to fall. Rumors are that Bernanke has already begun calling upon his brethren at the ECB and other foreign central banks to get them to start purchasing dollars to stop the slide. Wonder what incentives he has to make to get them to purchase dollars?

I will leave you with this quote “No nation in the history of civilization has devalued themselves to prosperity!” that is the road we are currently on.

If you want to know what is happening and what WILL happen read the following two books, it will make sense out of it. If you are reading this Market Preview and give an ounce of care to what is going on – you need to read these books. Of course you don’t have too – and that means you either have “faith” in Bernanke and the dollar or you just don’t really care enough about what is going on. Sorry for pounding on this issue – but these are times that define the future of our country.

Tug of War (by Paul Erdman)
Vandal’s Crown (by Millman)
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Inflation?!?!

If you are a reader of the US Government’s reports on inflation (CPI) and listen to Bernanke (and his beloved Core) we didn’t see any measurable increase in inflation in the last month. However, the rest of the world is seeing it and what is even more ironic – THEIR currency is UP. So if their currency is up and they are seeing steady rise in inflation, simple math would clearly indicate we are seeing way more inflation than those across the pond. However, inflation and cutting rates don’t go well together (like oil and water). Bernanke was very happy to see the CPI showing no(or only little signs) of inflation – because it means he can continue his massive axe cutting assault on interest rates with OUT affecting inflation. Yeah Right!

China is seeing increased inflation and is looking to defend their currency, Europe has NOT cut rates to keep inflation at bay – because they too are seeing it. However, Bernanke has taken a different tack – he doesn’t care about inflation (or actually believes the government reporting). What’s so alarming is that if you ask ANYONE (even yourself) we are all FEELING and SEEING inflation – food prices are going up fast, gas prices are going up, energy bills are up, etc.
May be the government’s reporting and all its changes and adjustments are finally coming back to haunt them? http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html

The world is watching the interest rate cuts and the dollar closely. Keep an eye on it today.

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Futures Pre-Open

The futures are getting a good boost in the pre-market (7:30 am ET) are front running the cash by as much as 10 points. Expect to see the ARB traders short futures into the opening and buy the cash basket. The basket buying will create upside pressure on the market – how short lived it will be is anyone’s guess. The futures are rallying on a 100bps rate cut expectation. Of course things could change in the next hour – but it seems that we will have a positive opening.

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Support / Resistance

Yesterday looked as if the market supports were not going to hold and also indicated we could get a solid covering rally into the close. The INDU closed UP on the day (even though it’s only 30 stocks). It did show some resilience.

INDU 11750 / 12250 (This is a fairly tight range and we will probably stay in it today – but with lots of volatility. If we break 12250 expect a HUGE short covering rally up to 12500. It could happen today another big upside 300-400 point move. Now remember this rally is NOT because of the 100bps cut, but rather short-covering. Do NOT be surprised if it happens. Start flattening out positions at 12150, get fully flat at 12250 – and start leaning short – fully hedged (over buy some OTM calls) in case we rip. To the down side play it the inverse at 11750. Cover all shorts at this level and start getting long fully hedged (over buy some OTM puts) in case we break down.)

NDX 1675 / 1725 (We will probably see some action in here today – both up and down. We don’t look that strong at 1675 – so long have to over hedge at this point in case of a break to the downside. Which I think has a higher likelihood of happening if we test. 1725 is NOT a place to get short because of the short-covering risk – however flatten hard delta and get some OTM gamma on your sheets at this level.)

SPX 1275 / 1300 (1275 is KEY support – get flat but ONLY take long SOFT deltas – 1275 is a great gamma point cause we will either rally off it and maybe catch some short-covering or breakdown hard and fast. The futures are showing a 1290-1300 opening right now. If we get through that and catch some short-covering – look for a 1325 area to get short. I would flatten all deltas at 1300!)

RUT 650 / 675 (650 – another area to be fully hedged on long positions. If we crack then it will continue to slide fast and hard. It WILL pull the rest of the market with it. If we hold and bounce off 650 – and get through 657 – we could see short covering massive rallies in some sectors. WATCH 650 – that is the “tell” for the whole market – if it can’t not get off that mat here – the market as a whole will begin to fail their supports.)
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Conclusion

We will look back on these times as defining the economic and political turning points. I predict the history books will write the Bill Clinton/George Bush era as the zenith of the American Empire and our nation will pass the torch to China and/or India as the next big Super Power. Not that anything is wrong with that, but we can only be king of the hill for so long. The Sun DID set on the English Empire 100 years ago and they are still a great nation and doing fine. It might be nice to have our nation out of the lime light. However, the process of passing the torch is and will be a painful one. We are fighting with everything we got to stay on top of this hill, but I don’t think we have the economic war chest to keep us up there.

The political landscape is changing and socialism is sweeping through the nation as the middle class disappears (becoming poor or rich). The Dot.Com and Housing Bubble have wiped billions away and is accelerating that need for a government that is more reflective of Mommy than what our founding fathers had intended. The Womb-to-Tomb nation has been born and hopefully we as a society can stand up and take accountability and responsibility – to shed any feeling that we want the government to be our mother. The fingers are starting to point at everyone but themselves. There will be a demand for MORE government oversight, MORE taxes, MORE government knows best, MORE social programs, etc. For those that have not read The Road to Serfdom – it should be mandatory reading for every high school student!

The economic landscape and 100 years of the John Maynard Keynes has shown its massive failure. I only wish that they would of given Hayek more consideration. What is left of the Bretton Woods accord is a few threads (which shows how successful that idea was) as Bernanke changes the rules daily. It’s interesting to note the a very young Greenspan wrote a paper of the possible problems of becoming a Fiat Currency (off the gold standard). And now as Hayek, Freidman, and (a very young pre-Fed chairman) Greenspan all predicted those problems have reached our shores. Bernanke, while a great study of the Great Depression, is facing a different time. Those were the days of a “CLOSED SOCIETY” and not the current Fiat Currency. His scrambling, rate cuts, and injections have done nothing to save a bank from failing, lending firm from failing, bond insurers from failing, shoring up the credit problems, or at the very least LOWER mortgage rates – which are up! His recent scrambling however does have an effect on the dollar and inflation – both of which are having a national dramatic affect – but his CORE CPI would have him (and us fools) believe that inflation is in check.

So I continue to predict a very volatile year – and only time will tell. Our dollar and economic future is now in the hands of other nations and what they feel is the best course of action. It is THEIR faith in a NEW security (gold, silver, oil, Euro, Yuan, etc.) that will set the bar and as that slowly happens the dollar will continue to slid. It may take years to pass the torch to the next nation – but from what we are seeing it could happen sooner and it may be painful.

These are great times for traders – the action, volatility, and positions (both short and long Vega holders) are enjoying the ride.

However for investors it’s hair pulling time. What to do? What bank to trust? Where should I put my money?

I will continue to say HEDGE your positions and speak with a trusted, knowledgeable, and seasoned Financial Advisor. Don’t let them tell you we are in this for the long haul and stay the course. Demand alternative strategies and investments. Ask about hedging and insuring positions. You can’t afford not to.

MP 3/17/08

Traders,

Well it looked like Friday’s opening was getting a big boost from the CPI (as if we were not having any inflation and Bernanke could ease his mind about cutting rates) – THEN – the bottom fell out and Bear Stearns was on the ropes – the market tumbled. Could Friday be the last day of hope and the crack in the damn broke?


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Bear – it’s whats for dinner!

Bear was done – stick a fork in it. Even though they held their BBB and BB rating on Friday and it looked like it “MIGHT” get through the write-down problems – according to talking heads on Friday (after the close) – it WAS done – cooked! The FED and CEO’s of major banks had an emergency meeting to TRY to make a decision on Bear before the Asian Markets open. After the close – they KNEW that if they did NOTHING – Bear on Monday morning would be bankrupt and the FED was afraid that with that news there would be a run on US banks and also the Dollar would fall into the toilet. The FED could not really find a bank, other than JP Morgan that would even bail them out. At $2 a share – one of the World’s top 10 investment banks – just sold for about $250 million – down from $20 billion market cap just a few months ago. Additionally – JP Morgan wouldn’t touch it without some guarantees - the FED is shoring up the Bear carcass with $30 billion. However, it’s done no matter how you look at it. Of course if you think Bear’s book of CDO positions is worth ANYTHING then you may say this is a scoop. But the risk is still GREAT – and if it was not for the FED stepping in and shoring up some of the losses – well it probably would have been even uglier than it is this morning. At least the BOND holders are secured (for now) – but the shareholders are going to be pissed!

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Lehman Brothers – on the ropes?

The rumors are that Lehman Brothers is the next domino to fall. The stock is getting some serious smack-down in the pre-market from the Bear news. There is concern that their debt is as bad as Bears. What’s funny is Moody’s is keeping their A1 rating on Lehman and its holdings. Look how well those ratings worked for Countrywide and Bear Stearns! Thanks – credit rating agency’s – your ratings have assured me there is NO problems. Keep an eye on Lehman to see if this one gets blasted!

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Discount Window – free dollars anyone?

The Fed (after the horrors at Bear and the rumors at Lehman) have cut the Discount window over the weekend to keep the money flowing. It’s only 25 bps above the Target Rate. Traditionally – in peace time and normal economic times – the Discount window is usually about 100 bps above the Fed Target rate to discourage banks from borrowing from the Fed. You could say it penalizes them by charging more. The concern is that if all banks borrow from the Discount Window instead of each other’s reserves that several things happen, the shift of risk and debt is now shouldered on the government and it stresses the dollar (weakens). Bernanke has been lowering it in tandem with the Target rate and late last year cut the Discount by 50 bps MORE THAN the target to give Banks relief as money supply tighten. Cutting it over the weekend another 25 bps – well it’s almost parity. When it’s parity (or god forbid below the Target) – we will see MORE banks start borrowing at the Discount Window. This could put even MORE pressure on the dollar – something we don’t need. It will more certainly shift the risk onto the Government’s shoulders. Technically – if it takes the full-load and any more Bear Stearns problems arise – you could say we will be having some NEW national banks (YUCK!).
Fed Fund Futures are pricing in a 100 bps cut! If Bear needed $30 billion from the FED along with the JP Morgan $2 a share. How much do you REALLY think that $200 billion injection by the Fed is really helping? One thing they should do is change the name of the Discount Window to the Liquid Window. Bernanke is getting some MASSIVE biceps cranking on that printing press!

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Dollar, Oil, Gold

The Bear news and the Discount emergency rate cut has sent the World into a panic. The faith in the US economy is collapsing at a accelerating rate additionally the “Faith” in the US Dollar is close to failure and is at a tipping point. The EURO shot to 1.59 over night and the Yen is close to 95 – those kind of moves are huge in the currency markets – I would think that we would of seen a worse opening if the Fed didn’t step in over the weekend.
Rumors are that the FED has talked to the world’s central banks to urge them to start buying dollars to STOP the slide, seriously – that is how bad this is for the dollar. Some US and Foreign companies have been lobbied to champion the Fed and urge world central banks to start buying dollars – as it’s paramount for their bottom line to keep the dollar from sliding into the toilet. Gold ripped through $1000 as people are rushing out of dollars and several smaller countries are shedding dollars as their reserve currency. Concerns of possible bank runs are on everyone’s mind. Bear Stearns failed – which we all were assured by credit rating firms, analyst, and talking heads – that it could NOT happen. Now it has – who is next? Lehman?
The FED’s action (over the weekend) has stopped the slide in the Dollar and we are seeing it pull back from its lows against the Yen and Euro – however that is just for now. The Dollar has gotten the literal SHIT knocked out of it over night. I heard on economist said it looked like the OLD Peso before the devaluation – that’s comforting.
So – as I have been saying – we are probably on the same road as Japan. Triple Down Turn – rates, market, and currency all head south – and we lose an economic decade in this country.
How low can the dollar go, I really don’t know. But if the rumors are true and Bernanke has been on the phone all weekend to get foreign central banks to start buying US dollars to stop the slide – well that’s not really a positive sign.

Truly – the world hold’s the fate of the dollar’s value in their hands! There is NOTHING we can do domestically to shore up the dollar. We RELY on CHINA and the rest of the world to keep its value!

These are interesting times!

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Futures Pre-Open

Yeah – they are down and have been extremely volatile. They are currently front running the cash between 5-15 points – normally I would expect a bounce coming into the opening (we still may get a small one) – The Arb traders might be sideline – not willing to take the risk of TRYING to get off a short-basket of stocks at the opening in this market. OUCH!

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Support? and Resistance

All bets are off – do NOT look for supports in this market. If you take a stance to get long HARD deltas – PLEASE only do it with Spreads or fully HEDGED positions!

INDU ?????
NDX ?????
SPX ?????
RUT ????

Don’t look for supports – we broke them all this morning.

WE COULD GET SHORT COVERING GOING INTO THE CLOSE – SO WATCH OUT FOR BIG SPIKE UP MOVES - IT MAY NOT HAPPEN – BUT IT COULD!
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Conclusion

I had a funny conversation (in hindsight) with an investor last week. He said – you always tell investors to hedge at the end of your Market Preview – when are you going to stop saying that. I said – when you START hedging your positions (which I know he does not). Today is another example why. Ask any Bear Stearns investors asking how he feels this morning.

To me Moody’s and S&P are a total joke. S&P didn’t cut Bear’s ratings, even on Friday when it looked like they had serious liquidity problems. Moody’s is keeping Lehman at A1, and they are all still giving MBIA and AMBAC A+ credit ratings. At this point – what’s the point. (I know why – it’s keeping the pension funds and other investment grade paper from forced selling.) You could say that Moody’s and S&P have their finger in the dike and are keeping the forced selling from happening. Can you say HEDGE!

So – I will say it again – HEDGE HEDGE HEDGE – it’s never too late.

This is some great trading for those traders – have fun but DO NOT get caught out!