10/31/08 (Trick or Treat?)

Traders,

Well we got a little move to the upside, it’s funny that I say little because in a traditional market a 2% move in a day is huge – but lately it seems like a rather mild day. That just goes to show how we have become use to high volatility and numb to big draw down days. We are still in that resistance band have really haven’t broken out of it. The rate cut did spur some hope, but in reality it only makes borrowing from the Discount Window cheaper. LIBOR IS coming down and came down again today – which is a good sign, but it still has a ways to go. The GDP was better than expected but still negative. Consumer spending is expected to slow down, but maybe not as bad as expected in the 4th quarter because gas prices have been coming off. As you can see the overall picture is negative, but there are some signs that things are starting to get slightly better – we may just be in for a long-term slow down and mild recession or stagflation. That actually wouldn’t be that bad compared to the alternatives.
Today is Halloween, actually one of my favorite holidays. I really miss being in northern Michigan (Traverse City) this time of year to see the leaves change color and that brisk cold wind that nips at your nose. It really makes Halloween something special, we have a massive large oak on the property up in Traverse – and when the leaves change it is really something special. Well – we are making due here in Florida and have a couple of grand oaks on our property here – we even set up a little grave yard, some ghosts, and a smoke machine - for the local kids. My son will be a ghost for the second year in a row.
Happy Halloween – now to see if the market gives us a Trick or Treat – so far the futures are showing it to be a Trick, rather than a Treat.

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Japan cuts rates (first time in 7 years)

Japan has been the source of cheap (free) money since their country hit the death spiral (or triple down turn) a couple of decades ago. Actually – Japan figured out an interesting business model in the wake of their triple downturn – they became the world lender. However, that lending has put many big U.S. firms into some hot water and the unwinding of the carry trade has cost serious money for many firms. See – it may seem like a good trade if you only looking at the interest rate of Japanese borrowing – but it’s the currency rate that CAN rise up and bite you in the “you know what” and that can hurt. With the hyper volatility we have seen in currencies recently – it’s no wonder that any positions relying on any type of carry can stay in-front of the curve. Borrowing foreign currency to leverage investments definitely tosses another monkey into the barrel of risk management.
Japan – already had very low interest rates (.5%) they certainly don’t have any powder and a rate cut is almost a joke at this point. It was more of a show – (to the world) – that money is cheap here – come and get some. Japan – like the U.S. is now facing a very sluggish economy that has already seen signs of slowing down and thus a rate cut (even with almost no affect) does off some “hope”. It would seem that Japan – for the first time in a while – is now looking inward (again) as to their own problems.
The YEN rose 96.87 (from 98.43) to the dollar after the decision. The Yen had been as high as 90.93 just a week ago (highest in over a decade) – which hurts exports. Getting it back to 100 to 1 is something that could spur exports and some economist say that setting a target of 100 and getting back to those levels should relieve some stress from the economy.
I guess the question at this point – does the U.S. soon become King of the Hill as the source of the Carry – leaving Japan to focus inward?

If you want to know how government intervention (not regulation) screws up a economy, stock market, and banking system – look no further than Japan (good chapter about it in Vandal’s Crown and Tug of War.) The U.S. is following in some historical screwed-up footsteps.
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Corporate Bonds not as attractive?

Well – I guess after holding Lehman paper and watching it collapse (even insured paper) to less than 10 cents on the dollar – doesn’t make other corporate paper (even at 9%) look that attractive. The problem is the hedge! Traditionally (and in my play book foolish) – the play for hedging converts was to short the underlying against the paper. The problem traditionally was getting called away and having to re-short for losses or facing a hard-to-borrow situation. Recently we saw many funds that trade this successfully get the massive crap beaten out of them when the SEC (with a push from Congress) BAN short selling of any kind – creating a hyper-short covering on top of holding unhedged paper in credit eroding issues. Several long time funds, including institutions, saw sick losses for no other reason that the rules were changed overnight.
Now – many firms avoid that investment, because of the uncertainty of what rabbit the SEC or Congress will pull out of there hat next week. The problem – well it was these firms ability to buy corporate paper and HEDGE IT that allowed the paper to flow freely. Companies issue paper on a regular basis to raise much need capital for all sorts of reasons and traditionally firms do NOT mind lending capital IF they can hedge those positions (hence the need for the ability to short stock.) Take away the hedge, you take away the big lending.
Now rates are going higher for lots of this paper – and it’s solely based on the hope that the credit ratings are remotely correct and many of the big firms are avoiding the paper like the plague. That leaves those unhedged buyers the only players in this market and they are traditionally smaller lenders than those that do hedge. Since we have seen Lehman fail and others get bailed out with uncertainty as to the paper value – coupled with overnight rule changes – the corporate paper market is very tight and rates are going higher.
Add these to the credit squeeze for inter-bank lending – some of these companies are going to hurt REALLY bad if they can’t raise funds. Just look at GM – which is on the verge of full collapse and the CEO with his hand out for 10 billion which will just float the current debt for not even a full year.
This isn’t only happening in the states – but overseas as well. Once we see credit-default swaps, convert paper, and all sorts of corporate issue debt decline in rates and start to flow – it would be a good sign that credit is unfreezing and we would also see stability to some balance sheets on many of these companies that rely on borrowing.

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Futures Pre-market

The futures had been getting a good smack around after Japan came off hard from their silly rate cut of hope (which I think was more of a slip of the cards that things really suck in the land of the rising sun.) – but they have rebound coming into the early session (30 mins prior to the opening) Spreads to fair value are shrinking – but we still could see some Arb traders buy futures to short the basket – which could put some pressure to the downside on the opening.

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Support / Resistance

Welcome to the wide band of resistance – so far no break out – and that may be harder than we think.

INDU 8000-8500/9500 (We are above that 9k mark which is good but we have a ways to go to get a good break out. 9500 is a good area to flatten long deltas and get short. In the lower area of the 9000-9250 I would say stay flat with some gamma.)

NDX 1200-12500 / 1350-1400 (We are just below the band of resistance and starting to see some pressure. A close up into the 1350-1400 band would show some strength into the weekend.)

SPX 850-900 / 950-1000 (We are just into the band right now a close above 950 in this band would end the week rather well.)

RUT 450 (500) 550 (500 seems to be a pivot point – we are above it – but the volatility range in here seems high.)

Trick or Treat? It’s about the close!

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Conclusion

The money is pouring into the system from backdoor channels, Discount Window, bailout packages, etc. It’s rather insane at this point – also we are seeing hyper volatility in currencies – which is tossing the carry trading into massive disarray – as positions are force to close on any given day. Tack on the uncertainty going into an election cycle between two candidates that for as much as they SAY they are different they are just more of the same – (they both voted for the Bailout package loaded with earmarks) – and the tax policies are so convoluted that you need to be a tax attorney to make heads or tails out of it – well whatever happens expect a GOOD jolt to the markets (up or down) - My guess it could be another 10% move – on nothing more that HOPE and/or FEAR.
Now there is talk in Congress of another multibillion dollar stimulus package? This is just getting out of control.

I once heard a trader on the floor in a messy divorce say “Don’t get married, just find someone you hate and buy them a house – it’s the same thing!” – I am getting that feeling with this bailout and government aid and socialism that is rearing its head. My taxes are going to pay for and keep someone in their home because they were not responsible?

I guess we could make a decision of who we would want to vote for if there were not so much alike – really – how can one call the other socialist or the other more of the same – when they voted for the same bailout package and continue to support more government spending? Is McCain more like Bill Clinton or is Obama more like Bush? Now even I am getting confused. Where is a decent third party when we need it? Sure they both have different social views – which I will not defend or argue against – my Market Preview focuses on the Market and the Economic impacts and right now the Bailout Package and more government bailouts seems to be the agenda of both parties. I am still trying to figure out the tax structure of both parties – right now all I know is that $250k makes you rich – I have a friend in Manhattan that would seriously disagree with that hypothesis.

Anyway – go out and trick or treat – enjoy the Ghosts and Ghouls.

10/30/08 (Got Recession?)

Traders,

 

                Yesterday’s action was interesting (going into the expected rate cut).  The market rallied mid-day after the cut announcement, but then going into the close sold off hard again on rather larger volume. The INDU and SPX both closed down on the day – but the RUT held some gains. The rate cut was expected and as I mentioned it does give some relief as to the cost of borrowing money from the Discount Window – however it also means the LIBOR having to play catch-up on another 50bps – thus setting the bar lower and lower.

                We are also seeing the forced merger of GM and Chrysler – both on the brink of collapse and in desperate need of money. GM is burning through 1 billion a month and is expected to run out of capital in the next 15-18 months. The CEO Wagner (GM) has put his hand out for $10 billion from Hank. The merger for Chrysler is also a desperate attempt to shed costs and bring two broken balance sheets together (just like consumers consolidating debt). However – they have the UAW to deal with and that means a new UAW Accord and you know the UAW is not going to like anything that’s going to in that accord – yeah it means shedding jobs and that is a hard pill to swallow- but I think we are at that level with the U.S. (past) giant automotive companies that means either NO JOBS or FEWER JOBS. Of course the blame game is probably going to start and you know (rightly or wrongly) that the upper management is going to be blasted. Of course I could also inject some sarcasm – maybe the new proposed increase in corporate tax rates will help GM and Chrysler create more jobs?

 

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LIBOR LIBOR LIBOR

 

                As I keep saying it is LIBOR and it’s need to close the spread on the Fed Funds rate (specially the 3-month) that will help get money flowing. The LIBOR came down over night 23 bps, but Fed cut rates by 50bps. So while it was a great move on LIBOR (trying to narrow the spread) it now has to play catch-up on (the spread actually widen by 27 points). Still it is good to see the 3-month rates drop.

                Again – these needs to narrow MORE to see money (capital/lending/credit) begin to flow again. However an additional injection of capital may also be playing a hidden hand as to why LIBOR is coming down – and in my play book it is not showing a clear lane for bank lending, but rather another government injection from the back-door on LIBOR.           The FED agreed yesterday to provide swap lines of $30 billion each ($120 billion) to the four central banks. The foreign central banks are able to get dollars from the FED and then auction them in their own markets. Of course this will help pry open the borrowing lines – but really who are they borrowing from? Just more of the same flow from the government. The problem is tracing back the money to the original lender. If a bank lends money to another bank, but the money is being given (in any number of non-normal channels) by the government to the lender, then what is the difference between that and going to the Discount Window? Not much – true lending comes from banks OWN reserve pool – not through back-door government lending. The additional problem is that swaps being lent out also are exposed to credit risk – the same problem that got us here in the first part.

                So – (in my playbook) – until we see banks (lenders) stand on their OWN reserve pool and balance sheets and lend DIRECTLY to each other – regardless of route and LIBOR coming down to a decent spread – then we really haven’t seen capital on freeze. Currently it’s like a slow draining toilet – you know there is a clog down there and we keep pouring more Drano – but that dirty water is not really draining. Pretty soon that septic tank is going to be filled.

 

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GDP – Got Recession?

 

                Gross Domestic Product (GDP) the key measure as to the economic health of this country contracted by .3% in the 3^rd quarter. Good new, it was less than expected (which was in the .5% range). However  - economist expect it to contract further in the 4^th quarter. For some the measure of inflation is the GDP contracting for 2 or 3 consecutive quarters. Well – I guess this means to start counting.

                Consumer spending also contracted by 3.1% (the biggest decline since 1980) - remember it’s consumer spending that makes up a vast majority (70%) of the GDP – and with their homes (ATMs) tapped out and other credit lines shrinking – don’t expect to see any surge in spending. (side note: Credit Card defaults  - even for prime borrowers – has increased rapidly. Credit Card companies have already be offering deals to close accounts by having consumers pay off at a discount – as low as 70cents on the dollar – but if consumers are “Credit” spenders – how are they going to pay down any balance?)

                Inflation? The government report showed costs tied to consumer spending “Core” (excluding food and energy) increased 2.9% - the most in 2 years.

 

                However – the pundits are still debating if or how long this recession is going to last – silly I know. It’s like the definition as to whether it is GDP or jobless, inflation vs. spending, 2 quarters or 3 quarters, etc – is going to make a difference so that one “talking head” or “politician” can actually call it a Recession or just a BIG slow down. Of course it will be hindsight when a consensus is realized.

 

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Futures Pre-market

 

                The 50bps rate cut, LIBOR coming off, and the GDP – while negative – wasn’t as bad as economist thought – has sent a good jolt to the futures in the pre-market. Yeah – a euphoric rally in the middle of a recession. Don’t try to make sense of it – just realize the spread is huge at this point and expect the ARB traders to short the futures to buy the basket at the opening (if the spread remains) which will send a jolt to the upside in the market.

 

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Support / Resistance

 

                We rallied and sold off yesterday – testing resistances – just like we were testing supports. Again we are seeing a good jolt to the futures in the pre-market. Will it hold?

 

INDU 8000-8500 / 9500 (9000 is the pivot point, futures are showing a strong pop to the upside and 9500 is in the cards – the quest is do we close above that or sell off again.)

 

NDX 1200 / 1350-1400 (1350 is in the cards today if we get a hyper rally follow through this morning, but again it will be the close. We are getting a good pop with a 1325 opening – is it a selling opportunity at the opening or do we rally a little higher?)

 

SPX 900 / 1000 (We are getting a good rally in the pre-market the 980-1000 upper band is resistance and a place to get flat and those with gamma get short. We could touch that this morning – but it means more euphoric buying on a contracting GDP – hmmm.)

 

RUT 450 (500) 550 (We are just below a pivot point in this index. The RUT broke support and also didn’t get the kind of rally the other indices had – it is looking strong this morning in the futures market (above 500) – the question is do we CLOSE above 500 on our way to 550? – maybe a short-term rally could continue.)

 

Look at the close and the volume increase in trading. We saw some huge volume relative to the day’s volume right at the close with selling pressure.

 

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Conclusion

 

                GDP contracting, 50 bps cut (with Bernanke hinting he will cut even more), LIBOR still high, consumer spending slow down, and more credit and company problems – but we had a 10% rally the other day and look to have another strong rally at the opening. No – don’t TRY to make any sense of this – the market is still very foggy as to finding solid footing and hyper moves are to be expected.

                We also have a HUGE injection of volatility coming up next week – the ELECTION. NPR was reporting that depending on who gets elected we could see riots . RIOTS, are they kidding? Well it only took one man (Rodney King) to send LA and other parts of the US into riots – so I really don’t know what to expect – other than to share NPR’s concern. I hope nothing like that happens. It will be interesting to see the knee jerk reaction the market takes with whoever is elected. I can assure you that regardless of WHO is elected – don’t expect to see the economy to change for the next couple of months – however we could see some knee jerk reactions.

                My only message to you is to VOTE – make SURE to VOTE – regardless of your party or affiliation – just go out and VOTE. Make you voice heard. However – if I had one suggestion – please take the time to spend thinking about your local, state, and federal representatives – they WILL have a bigger impact on you than the president.

 

10/29/08 (The Bear Stands Up! 100 bps cut in the cards?)

Traders,

Well we tested the supports again – but in the closing session we had a massive rally. We had seen rallies going into the close before – but nothing like this. It was a hyper rally – but really on little to no news. The LIBOR rate is still in the 3.40-3.50 range, credit is still moving very slowly, and more layoffs expected. Other than the expect 50bps rate cut this week (which we were all expecting) there was really no news to drive the market into a hyper rally.
The word “Bear Market” derived from the method of how a Bear attacks. The Bear stands up on its hind legs and swipes downward, while a Bull on the other hand points his head down and lifts his horns up. In a Bull market you have a steady climb, with big moves down as the Bull lowers his head and attacks again. In a Bear market you have a steady downward move, with big moves up as the Bear stands up to swipe back down.
I would warn you – just because we had a 10% rally in a day – it doesn’t mean the “worst is behind us” and some traders are even looking at this as an opportunity to re-short into the market. We could climb higher into resistance levels – I would suggest if you are long this morning – get flat at the very least. For those gamma traders, taking a short position against gamma after the opening may be an opportunity. At the very least flatten those deltas.

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P&G another recession stock?

Certainly Wal-mart is proving to be a recession stock – while the stock price may get hit a little – it is certainly a survivor and will maintain revenue in a slow-down. So think about this – what does Wal-mart stock it’s shelves with? Lots of P&G products that’s for sure. Whether its diapers, dish soap, razors, shampoo, etc…you can bet that every American has at least one Procter and Gamble product in their home. In fact it is pretty hard not to buy a P&G product, not only do they provide many home “need” products – but they have many price points in several of those product groups (LUVS vs. Pampers is an example). Consumers may slow down their purchases of DVDs, video games, and other fun “want” products – but you still need to shower, shave, and change those diapers.
P&G’s earnings reported a profit that rose more than analyst estimates and net income climbed 8%. P&G had raised the prices on their good slightly to buffet against increase costs of raw materials – but those price increases we slight as to not affect consumer purchasing decisions. The decision to stay ahead of material costs helped increase margins that many analyst expected would cause pressure to returns. P&G CFO mentioned this morning on CNBC – they had planned over the last 18 months increase in oil and raw material prices that would affect both shipping and build costs and looked to cut expenses and/or increase costs or reduce package sizes as to not burden the consumers purchasing while also taking margins into consideration. Just a slight decrease in product size (say a .10 of a oz in a soap container) will decrease costs to build – while not having to increase prices to consumers to make up for the increase cost. Those little decisions on a large scale can make huge impacts to the bottom line at the end of the quarter. That foresight going into the ramping energy and material costs in the last 18 months – has now put them ahead of the game for the next several quarters as prices have come down. They can now even compete on price – if consumers become more pinched.
Squarely P&G is another recession stock - they are currently seeing a slight boost in the pre-market.

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FED CUT

The FED is expected to cut again, most are expecting a 50bps cut – but now there is talk about even a 100 bps cut. That would be rather shocking and good give the market a surprised follow-through boost from yesterday’s rally. The big problem is that while a cut is a clearly a move towards freeing up capital – if the banks will not lend to each other – it doesn’t matter if interest rates are set to 0. What will make a difference is the lending rate at the Discount Window – which will most likely come down in tandem with the Target rate. Since everyone is going to the Discount Window – any cut in rates is very welcomed.
Remember, Bernanke not only extended the loan to 3 months (matching 3-month LIBOR) – but he also significantly lowered the standard of collateral to borrow from the FED to include TOXIC paper (regardless of rating). Here is a fundamental problem that we can escape – the Discount Window usually charges a significantly higher rate than the target rate – to discourage borrowing from the Fed. However, that spread (which has been has high as 75-150bps over target) is narrowed to 25 bps – there is almost no incentive to lend to each other. Just go to the FED and borrow for 3-months and post all your toxic paper.
This cut may spawn a euphoric rally in the market – but it will not solve any problems. LIBOR has to come down (which it is – but still very high) and now LIBOR will have to play another 50-100bps catch up if the Discount Window is front running LIBOR on a race to ZERO. Who would ever go to LIBOR if you can borrow from the FED at 1% or .5%.
We are quickly turning into JAPAN – maybe soon every country will come to the US to borrow cheap money and we will be the CARRY TRADE? If that is the case expect long stagflation.

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Futures Premarket

They were down after the hyper rally yesterday, then popped on P&G news coupled with rumors of a 100 bps cut, then headed back down after that wave of euphoria subsided. I think ARB traders may want to stay slide lined this morning as the futures have moved up and down through fair value.

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Support / Resistance

Well we made a good haul to resistance levels yesterday – we could touch them this morning – but futures are starting to look rather mixed.

INDU 8500 / 9500 (We made a good run and could see a move a little higher from here. I would flatten ANY long hard deltas at this point and roll up hedges. Traders with gamma – a short play is in here and gamma will protect you against any upside move.)

NDX 1200 (1300) 1400 (We are at a good resistance point of 1300 – but has some pivotal action as well. Good place to get flat, and traders with gamma to get short – I would be careful getting short greater than 1:1 against gamma as the NDX is a hyper volatile index and a higher move could play out.)

SPX 900 (950) 1000 (900 is not really support because it was broken, but to the downside it is a place to start flattening out short-deltas. We could see a jerk move to the upper 900 band – a good place to get short against gamma. I would flatten deltas in this range and let my gamma work FOR me.)

RUT 450 / 500 (Unlike the other indices the broadest index has gone lower and also didn’t get the rebound we saw in the narrower based indices. That is not a good sign as to a continue rally – in fact it is a rather weak sign.)

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Conclusion

A 10% move to the upside is VERY big volatility – regardless of what the VIX says. Remember the VIX ONLY measures premium of options – it is not a very good indicator of actual volatility of the underlying. Think about it like this – it is the ASSUMED volatility of the market, rather than the actual market volatility. As the market goes down people panic and over pay for options as the market rallies they sell options. Some talking heads refer to it as a measure of FEAR, I guess in some respects you could infer that. What they don’t talk about – which is even a more important guide as to premiums – is the SKEW (which measures the premium / performance of the OTM (out-of-the-money) options are compared to the ATM (at-the-money) options. While the VIX does incorporate the skew (to some extent with its weighting system) – you can NEVER tell if the VIX is going up because the SKEW has increased or because the SKEW has remained the same and the ATM options are increasing. I have been working on my own model (HIDDEN VOLATILITY ) to get a better gauge of the action.
Yesterday was a gift from the BEAR – he took a break – it was/is the time to hedge long delta risk, get out of bad positions, roll up hedges, and ease some concerns. It wasn’t a time to jump into the water with both feet and “hope” the worst is behind us.

10/28/08 (18% interest rates? GM needs money!)

Traders,

Yesterday we rallied and showed some strength, but the last few minutes saw a sharp sell-off – which continued after the close in the late futures session for another 15 mins – sending fair value lower.
I was a little puzzled as to the sell-off at the close – perhaps it was short-term positioning that was closing. It wasn’t forced selling, but it was on big volume. I guess it will just be chalked up to another trade mystery in the world of uncertain market conditions.

The good news, while we did see a sell-off at the close the general support bands held. Additionally we saw ASIA rip to the upside in the overnight session – brining “hope” reflected in the future prices this morning that the late session sell-off was just fluke. Only time will tell.

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WE NEED MONEY TOO!

As banks and lending institutions are getting in-line for a chunk of the big bailout check, GM is trying to sneak in line too. GM has sold off and its net market capitalization is about 1% of Volkswagen! The GMAC finance division expanded from auto-loans to include mortgages as well and suffered for it. GM has many problems – and most of those rest on the balance sheets. Mainly a pension plan that killed the company, GM in recent years lead the world in sales and had the largest revenues in its history – but people forget it is NOT about revenues or how many cars you sell – it is about ONE THING – MARGINS! For every worker at GM, the company was paying pensions and healthcare on 4-5 retirees. There was no way they could maintain that model and expect to stay in business. They started borrowing billions per year just to pay for the billions in pensions and healthcare, in fact it got so ridiculous that they actually borrowed money just to pay the interest on the previous loans. GM was on a death spiral and GMAC and it’s loans were not helping. Sure – some blamed management – and they were probably at fault and need to take some accountability and responsibility. But 10s of billions in loans, 10s of billions in pensions and healthcare, a legacy system that would kill any company, topped with lending division that was giving out credit when the company was in massive debt – was headed for a cliff regardless of how many cars they sold.
Now CEO Wagoner is personally leading the lobby charge for federal aid and seeks to merge with Chrysler. They are eligible for the $25 billion for retooling plants – but they also need a good chunk of that $700 billion bailout package to get them through some of these credit problems they are having. However, Paulson would rather give them low-interest loans then hand them part of that $700 billion check. GM traditionally goes to CITI or one of the many other banks for money in some fashion from corporate bonds to over-night credit lines. However – with the banks tight with cash they too are going to the lender of last resort – The Government.
Can GM survive even with a merger with Chrysler? Will $10 billion they need NOW be enough? What does GMAC’s balance sheet really look like? Can they retool their plants quickly to meet the demand of lower MPG vehicles? There are many questions and the company has also been bogged down with Union problems – which will forever be its bane.

The concerning question is IF GM gets a chunk of that bailout check – others will want to get inline as well and feel entitled. Initially the bailout check of $700 billion was to take down toxic paper, but Congress agreed to let Ol’ Hank make his own decisions on how to spend that money. If he moves out of the realm of what the money was intended for – there could be some grumblings at Congress – but hey they gave Hank the check and the discretion to spend it has he sees fit.

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What happens in HYPER inflation?

Iceland collapsed a couple of weeks ago – their currency fell against the EURO and their banking system fully failed. Russia and the IMF came to the table to negotiate a loan or bailout package. Many economist watch Iceland as the “canary in the coalmine” because it is a small country with its own currency, banking system, and trade. It is very similar in many respects to the United States – in that it is a consumer nation based on deficit spending and consumer credit.
Iceland now is facing hyperinflation since their currency collapsed and the first defense against hyper-inflation is interest rates. Iceland secured a loan with the IMF and in a shocking move to defend the currency they raised interest rates to 18% - that is not a typo – eighteen percent. Many have said that may not be enough and may see rates go as high as 25% - since the currency has made significant drops against foreign currency baskets.
With IMF backing and the nationalization of their banking system (for the most part) – the question will this be attractive enough to draw foreign investments into the krona (Iceland’s currency). The raising of interest rates hopefully stops the flood gates from leaving the krona to safer pastures – the question – is 18% enough. The economy is expected to contract by 10% next year and part of the IMF deal was for the country to raise interest rates.
It is a powerful lesson to learn – dealing with a fiat currency. This nation saw interest rates in the 70s move significantly higher to halt inflation rise. The U.S. dollar is also a reserve currency, unlike the krona – and that should offer more stability. Yet – the pouring of money into the banking sector, the expansion of government debt, increase deficit spending, the contraction of credit lines is continuing to put pressure on CORE interest rates. We may see the PPI and CPI decrease in their “Headline” numbers because of oil prices coming off, but as Bernanke likes to focus on the “CORE” – that has already seen a rather surprising increase since last reported.
We may visit 1% Target Rates – perhaps even 50bps or 25bps or even 0 – but for how long before inflation starts to bite at our ankles in which we can’t ignore it. It is no doubt a tough balancing act between bailing out the banks and keeping inflation at bay. We have tipped 100% to one side of this scale – bailing out banks – the weight of that could and will send inflation higher.

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Futures Pre-market

We are seeing a good jolt to the upside in futures that had lost serious ground against fair value in the late session yesterday. It looks to be following Asia and Europe’s trend. Expect ARB traders to short futures into the opening and buy the cash basket which will send a good jolt to the upside when the market opens.
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Support / Resistance

We seemed to have rally off the support band – even with the late session sell off. Can we continue to the upside?

INDU 8000 – 8250 / 9000 (Closing above the 8250 area will give more weight to the support area. Keep an eye on the close.)

NDX 1150-1200 / 1300 (Again – it looks like we will be above the 1200 line – watch the close.)

SPX 850-900 / 1000 (A close in the upper 800s or even 900 would spell serious support.)

RUT 450 / 500 (The boarder market looks very sick – getting to or above 500 would show a broader sign of health and support.)

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Conclusion

We may be seeing some short-term support and could even rally higher to those resistance levels. It is going to take a while to see how well the money being poured into the system will unfreeze the credit markets. LIBOR 3-month came off some to under 3.5% - but still has a long way to go. Recession comes in waves – first we saw the Housing recession, then the bank freeze and market recession – next it is going to be the consumer recession which we really haven’t felt yet. It is quite possible for the market to find a bottom and stabilize at the lows – but we may also not see the kind of growth from the bottom as we once expected – even low single digit growth will be welcome. The problem is that consumers are tapped out of credit and it will take time (perhaps a year or two) before we see a bottom in the consumer recession.
I personally think we will see a bottom to the housing market mid 2009 and then it stabilize, we may see a bottom to the stock market around the same time (with lots of up-down volatility) – but it is going to take probably through 2010 – 2011 before we see a bottom in the consumer spending. That means companies will have to run very lean for some time – don’t expect a big expansion in fat middle-management anytime soon. Pay increases will be about doing more work and NOT seniority – many will be doing 2 maybe 3 or 4 peoples jobs. And easy credit will be a thing of the past for some time.
My big issue – is have we learned our lesson? Perhaps not – if the government is just reloading the system with money and “hoping” to get credit flowing again. This time maybe tighter regulations will be the rule of the day. Let’s hope the government can step back to their role as regulator and not participator. Hopefully the government learned their big mistake with Freddie and Fannie – however I am sad to think they have not.

10/27/08 (Powder Running Dry!)

Traders,

Friday looked to be a pretty severe day with the futures limit down prior to the market opening - but it was like the foot coming off the accelerator after the opening, in fact after the opening the market started to rally off the lows. There is definitely two types of sellers out there - FORCED sellers (margin calls, deleveraging, redemptions, etc.) and the other type Panic sellers.
The market has come off something fierce - almost like a slow motion crash. It would seem that many of the long holders have taken off a good chunk of their positions, there are even reports that there are some big cash reserves on the sideline. The market has become numb to these big moves. However - it would seem that there are still those that are either long and don't plan on selling or those looking for opportunity - amongst the selling.
So did panic subside on Friday or were they just really numb to the moves and it was just forced selling at the opening? We probably will never know. What we do know is that nothing has changed YET and we need the credit to on freeze.

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Powder Running Dry

Bernanke was on the steady-eddy rate cut - meeting after meeting - 25 bps per clip in the 4th quarter of 2007. In 2008 he really started to turn it up - bigger cuts and more surprised cuts. The last of such a surprise cut was the "Kombaya" rate cut of 50bps just three weeks ago - as world central banks held hands and "hoped" that a world rate cut would keep the markets and banks from falling.
While the rest of the world has plenty of powder left - it's the U.S. that took the lead and tossed inflation to way-side as it focused to help the banks - that has eroded the current target to 1.5% - and the dreaded-first-stop-shop Discount Window to the same 1.5%.

Bernanke is meeting is coming up and it is almost a sure-fire bet that Bernanke will cut, the question is how much? Most are expecting a 50bps rate cut to 1% - others say it could be as high a 75bps or even 1bps. Whatever the rate cut amount - it will not make much off a difference is banks are NOT willing to lend.

Many forget the Target Rate - is just that, a Target. It is the rate that the Fed wishes the banks to lend to each other - if they decide to lend. But what many are not focusing on is that when he cuts the Target Rate, he will also be cutting the Discount Rate (in tandem). The Discount Rate IS the RATE and the ONLY rate that matters. For the Discount Rate is the rate that the FED lends money to banks and currently it has moved from the last in line (lender of last resort) to the first in first in line - since the banks are NOT lending to each other.

So the rate cut is going to do one thing - it will give the banks and other borrowing institutions a cheaper rate at the Discount Window, as the Target Rate plays second fiddle.

This is NOT about rates anymore - it is about deleveraging and liquidity.

I think we may see rates go below 1%, maybe not at this next meeting - but they probably will. If (and when) they get to 0% - which is a very really possibility - the Fed has nowhere else to go.

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The Commodity Confusion

Oil is coming off hard and has lost more than 50% of its value from the high - even several metals and agricultures have been coming off. I would argue if we didn't have a credit crisis with a freeze of capital we would probably not have dropped this low. But we are seeing a race towards liquidity - to CASH.
Last week I talked with a trader in New York (as I mentioned) who said there is just a rush to liquidity (CASH) - they had seen everything - commodities, equities, ETFs, bonds, etc - being sold. Evening products with solid fundamentals or in short-supply.

The problems in agriculture we saw last year and earlier this year with food shortages has not changed, but if you looked at commodity prices you would assume that there is lots of food and the shortages have been resolved. The same is true about silver, if you look at the paper market (futures) silver is down below $10, but if you go out and actually by any silver you would be paying between 10-40% premiums over spot-price.

Even oil - Oil has come down over 50% from the highs - but what about gas prices - they are only down around 20%.

There is a disconnect, or so it would seem. There is clearly a rush to cash and everyone is selling anything and everything (regardless of fundamentals) to get much needed capital.

Jimmy Rogers pointed out last week - he has been long Swiss Franc and the YEN and remained short U.S. equities. But he also made an interesting observation as to the story that has taken a back seat - food shortages in many countries. He has been getting long agriculture after their recent declines - because while prices have changed, the need to eat has not. He pointed out the credit squeeze and capital problems are putting pressure on farmers, that means we could see a drop in production next year.

The point being, just like in equities (where some solid companies with good fundamentals have sold off) - commodities are seeing the same phenomenon and maybe one of the few financial products to see a rally in the coming future.

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Futures Pre-Market

The futures initially were getting hit in the pre-market, but rumors and talk about Bernanke's next rate cut is giving a boost and taking them off the lows. There is a spread in the pre-market, so we may see a little pop in the futures are ARB traders buy the futures and get ready to sell the basket.

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Support / Resistance

We broke through at the opening, but rallied back. We are certainly giving these support levels a serious test.


INDU 8000-8250 / 9000 (We again saw the 8250 level tested - but bounced off that on Friday. It is about the close and in the last several sessions we are seeing a rally off the lows going into the close.)

NDX 1200 / 1300 (It looked really bad on Friday morning - but again the market rallied above the 1200 market, just above it. )

SPX 850-900 / 1000 (We are right in that support band and we had a good rally after the opening on Friday. A close above 900 would spell a little more faith that we are seeing the worse and getting relief.)

RUT 475??? (The broadest index is looking very bad and it would be nice to see this back above 475 or even up to 500. This index has cracked and it doesn't really have any support down here. Watch the close on this index a close above 475 or even 500 would spell hope for the broader market.)

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Conclusion

There is no doubt that the economy is going to have some serious tough going over the next couple of years, we will probably not see double digit growth and consumer spending (especially credit spending) will seriously be curtailed. The problem is getting to the bottom - the REAL BOTTOM. That day will come - but only when we see solvency without printing more money and pouring it into the system. We need to see the financial institutions stand on their own balance sheets. But that will be harder to determine as the government becomes a bigger player in the system.
I am consistently hearing that capitalism has failed, but I would argue that what has failed was the ability to regulate. The most highly regulated market has been the mortgage market with Freddie and Fannie, both Congress mandated companies, both had tremendous government oversight and intervention. However, they also both had large lobbyist and have been steep in accounting scandals. The problem is NOT too little or too much regulation, the problem is our Government's ability to regulate. We NEED regulation - but we NEED to TRUST the regulators and our Congress who have completely run AMOK. This is NOT a Republican or Democrat issue - it is just a Government problem. You can't ALLOW the two biggest lending institutions that are regulated and overseen by our Congress the ability to LOBBY them! That is ridiculous and it was the catalyst for this problem.
The sheeple for the most part don't KNOW how to manage money - just look at consumer debt and consumer savings - which proves that point. If you are going to make credit available they you need to be a responsible lender, but that starts at the TOP - our Congress needs to abolish the Lobbyist - especially Freddie and Fannie.

I have an answer that would work after we get out of this mess. It is TWO systems working together.

1. Private Lending - they are NOT backed by the FDIC, are NOT allowed to be bailed out by tax payer money, are NOT given access to the Discount Window or any other government agency. They can lend to whomever they want, but when they fail - they fail.

2. Gov. Backed Lending - these are given FDIC, allowed to lend to each other on the Target Rate, etc. However, they can NOT LOBBY and are under strict lending guidelines. We can NOT allow the motto of the government "making home ownership available to all Americans" lower the lending standard.


It was the lowering of the lending standards - lead by our politicians and the belief of making home ownership easy and available to ALL Americans, regardless of credit ratings or their ability to pay that lead to lower standards.

Remember - the sheeple do NOT know when enough is enough. Give them credit and they WILL spend. Give them the ability to buy a home with NO MONEY DOWN and negative interest / interest only payments and they WILL buy.

Tighten up the lending standards by Government Backed institutions and we will not have this problem. However, that means that "home ownership will ONLY be available to those that can AFFORD it on 30 year fix mortgages!"

10/24/08 (LIMIT DOWN!)

Traders,


Yesterday was another test - and we rallied back at the close, just like the day before. But we are really not out of that safe zone and still testing these supports. This morning I got up and I saw it - LIMIT DOWN FUTURES. What does that mean? It means that the pre-market futures are down so much that the "circuit breakers" have kicked in to keep them from falling any further.

As I have said we really have not seen blood in the streets - because we really haven't hit a limit down situation or a intra-day halt. We have had big moves to the down-side, but those moves have been rather smooth - sure we move down - but we haven't had the big Gap Down. Today maybe the day we see that blood starts to run in the streets. It's been a long-long time since we have seen futures limit down before the opening.

These are the days where you better have your hedge on, there is not "Hope" that those STOP ORDERS will work - stop orders do NOT work on large gaps. As I have been saying - it is a race to liquidity - a race to cash.

It's FRIDAY - so we may NOT see that pop at the close - as people may NOT want to go home with long positions.

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Perfect Storm!

Commodities, equities, everything is getting sold. Don't TRY to make sense why a good company with solid fundamentals is going down, or commodities, or anything. It is simply a race to cash. We are seeing deleverage unwind, margin calls, redemptions, which helps fuels selling. Today is about deleveraging - massive deleveraging.

The selling started in emerging markets yesterday, big force redemptions and unwind of the carry trade. The unwind of leverage yesterday overseas was MASSIVE - yet our market rallied into the close. But remember the unwind happened during our trading session - which meant that when the Asian markets opened overnight we would see more unwind, and now we are seeing the futures in the U.S. market get hammered.

Sure - redemptions, margin calls, and deleveraging has been happening across the board - but it has been spotty. Yesterday was a large blanket unwind - do NOT try to make sense of this. People are selling, not because of anything to do with market values - but rather the FORCE selling from unwinding leverage.


Are we crashing today? - Well limit down means we can't go lower in the pre-market, until the re-open. We will probably open and very shortly after the open hit limit down in equities and halt trading for a bit - then reopen - if we head down another 10% from the first limit - we will halt again. These limits are set once a quarter - not from the opening or closing price.

Expect Paulson and/or Bernanke to make some surprising announcement today - to try to jump start the market (yet again). Yeah - we could have a surprise rate cut (today or over the weekend) or Paulson making a several $100 billion investment directly into regional banks. Who knows - but these are the type of days that they come out and do a cheer-leading routine to try to calm the market and get it rally again.


If you are hedged do NOT panic - remain calm. This is a sell-off of deleveraging – FORCED SELLING!

For those traders - today is a huge day of opportunity as those that are panicking are not concerned with price - expect volatility to explode and take advantage of the skew.

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Paulson has $700 billion burning a hole in his pocket

Sec. Treasury Paulson is planning to make direct investments in a number of regional banks - to help halt the freeze of credit. He is expected to announce his plans as soon as today. He has already injected an initial $125 billion into the nine largest banks, this would be round two. That would leave only $500 billion left.

The problem is simple - banks are seeing rising delinquencies in payments (auto loans, mortgages, credit cards) and as Paulson injects capital to free up credit (mainly for interbank lending to get them off the government nipple at the Discount Window) - the banks suffer more losses and the money that is injected is just off-setting those losses - THUS the credit remains frozen.
The regional banks (just like their larger brothers) are reporting more write-downs and more layoffs. National City Corp, Ohio's largest lender - reported a $700 million loss and plans to cut 4,000 jobs. SunTrust (the biggest regional lender in the south) reported a massive decline and authorized a sale of $2-$5 billion in preferred shares to the U.S. Treasury.

Clearly - the pipes are still clogged, but it will be hard to unclog the pipes with more money if the loans continue to fail. We still have a ways to go to find a bottom. The problem is that when we do hit bottom - consumers will not have any capital and very little credit available to them. That means we might see a stagnant market for some time once the bottom is found.

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LIBOR please come down!

The over-night LIBOR started heading back-up 7bps to 1.28, that is NOT what we need right now. It clearly shows what little capital was available over-night is now demanding higher fees.

There are two-spreads to watch. First is the LIBOR-OIS spread which measures the difference between the over-night and three-month lending - that widened 8bps to 262. We need the 3-month to come down. It was as high as 364 back in early October and was coming down, but it is starting to widen again. What really need to see is the 3-month LIBOR get closer to the Discount Window rate - this will relieve the Fed as being the "go-to" source for capital.

The second spread to watch is the TED spread, the difference the banks and the U.S. Treasury pay to borrow for 3-months. That spread is also widening - currently 261.

The LIBOR and the different spreads for borrowing are the barometer to see if capital is moving between banks and if the credit freeze is starting the thaw. As I mentioned the big one to watch is the 3-month LIBOR (not the over-night) and that 3-month LIBOR needs to get down - closer to the Discount Window.

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Futures Pre-Market

What can I say - LIMIT DOWN! There ARB traders will not be doing anything this morning - expect to see the market get smacked pretty good on the opening.

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Support / Resistance

Those supports are going to be wiped out at the opening - that means we could hit freefall with limit downs halting the market throughout the day. On the other hand - after the limit down and halt - we could see the market calm down and rally off the halt - which HAS happened in the pass. But it IS Friday - and the probability that anyone WANTS to hold unhedged positions over the weekend is probably pretty low.


INDU - 8000 - (We will probably hit the 8000 market this morning. The question is do we hold that. This is critical times.)

NDX - 1100 - (We will probably hit 1100 this morning - 1200 is a key support area that we closed above. If we bounce to only be down 20-40 points and close above 1200 that will be a good sign. A big close below that will not be good.)

SPX - 850 - (We will see 850 at the opening - the question is do we hold, halt then rally or sell off more?)

RUT - 450 - (Again that will probably be reached quickly - the question is do we hold)

THESE ARE CRITICAL AREAS - we could very well halt and rally - but do NOT bet on that being the case. Make sure you are hedged - the morning is going to be about panic selling and a huge pop in OTM premiums.

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Conclusion

For the last month we have been in a slow-motion crash - today we are going to see a move at normal speed - no slow-motion today. If you don't have your hedge on - it's a little too late. Panic selling will increase as forced selling (deleveraging, hedging, margin calls kick in at the opening). The question is does the FORCE selling end after the opening?

If the force selling ends after the opening (even if we do get an equity halt) we could see the panic selling subside and there is a small chance of a bounce. If force selling continues through the day - the speculation buyers will not be able to keep the market from falling.

Of course this could be one of those days were Paulson or Bernanke comes out with some Ra-Ra NEW PLAN to get a euphoric spur to the up side. If they don't do it today - the probability of a rate cut or something of that nature could happen over the weekend.

One thing you can count on is MORE volatility.

Jimmy Rogers on Bloomberg yesterday was asked what he is buying (or hedging) - he is still short the U.S. equity markets, long the Swiss Franc, long the YEN, and has started to buy commodities at these levels.

Remain calm today - you can't make good decisions when you are blinded with PANIC.

10/23/08 (CME Risk? Key Supports!)

Traders,

The market came off hard most of the session yesterday and had broken through many of the those support levels, but going into the close we saw a rally strong rally back up and in most cases they got their head up just above those supports. While that may seem like a bit of relief and it is - in some instances it was just above those levels which are critical - since there is really no supports below. Keep a close eye today - as we need to hold those levels. This could be a hyper move day - either back up off these levels OR if we break we could have a good jolt to the down side.

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Goldman's luster is tarnished

Goldman, which is the gold standard in the financial industry has also been facing issues. From needing capital with Buffets very one-sided investment in Goldman to today's news about big layoffs. Goldman will be cutting up to 10% of its workforce (3200 jobs) - that is alarming as the following quote pretty much says it all.

``When a lean and mean firm starts trimming, they're cutting into muscle. The fact that they are cutting 10 percent is quite indicative of the fact that there are still a lot of problems ahead.'' said Shaun Springer, chief executive officer of Napier Scott Executive Search Ltd. in London in a Bloomberg story this morning.

Citigroup has cut 24,000 jobs (more than any other bank), Lehman cost 14,000 jobs when they went bust, and Merrill Lynch (but not CEO Thain) will be shedding 10,000 jobs after their merger with B of A.

Most certainly jobs are being cut as firm hunker down for the rough road. They need to horde capital and shed expenses. But at some point, as the above quote states, cutting too much means cutting into muscle and that means higher risk of failed services. Service quality - from tech support to customer service will start taking on a bigger load and that WILL feed on itself.

Also - when more cuts are coming - it sure doesn't mean that the credit problems have been solved and it is more indicative of a coming and lengthy recession. If you don't believe we are already in one.

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LIBOR

Well it looks like the 3-month rate has stopped falling and there is still not an increase in capital flows in the over-night or the 3-month. We had a week of promising falling rates in both the over-night and 3-month (regardless of how much capital was available) - but today that 3-month rate has floored (for now?) and the overnight actually went up (after 10-days of falling). 3-month at 3.54% and the over-night climbed 9bps to 1.21%.

This is NOT a good sign that credit is continuing to move through the system. It could be just a pull back on the reigns as more job cuts announced and recent write-downs being reported by several firms. If that is the case - this could be just a pause - and the rates could continue down lower.

It's that 3-month rate that really needs to break down below the 2% level, in fact get closer to the Target, when we will see the money start to flow. Right now it is a catch-up game as the Discount Window has moved from the lender of last resort to the premier lender. This needs to change.

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The CME increases RISK?

They are few names known to those in the industry that carry serious weight, as to their opinion. Most retail investors and those not in the business may not of heard of these people, but take heed - they know their stuff and when they warn about something - it is TIME to take serious note. One of these such people is Tom Peterffy, the brains behind the first massive market-maker arbitrage firm Timberhill, involved in creating and investing in electronic exchanges, owner of Interactive Brokers, and the list his pioneering forays into the financial markets is long and well respected. He knows the exchanges (back-office and the floors), the market makers, how the entire framework fits and works together better than most. I had the pleasure of meeting him on occasion, even dinner back in the day when the PCX was looking to go fully-electronic and I was trying to lead an unsuccessful charge at the time for such an endeavor.

I remember being a market maker on the floor, still using paper and pencil, as these new traders took to the floor in their dark blue and red collar trading coats, they came with first tablet PCs and the swarmed all the exchanges in the U.S. as well as Europe. We had nicknames for them like "Box Boys" and some even called them "Borg" - however with all the frustration of these new unknown traders taking over the floors and Timberhill becoming one of the biggest market making firms on the block, there was a jealous respect for them and their unknown computerized trading system. There is one thing that no one can deny, Timber Hill is big and successful and that was due to Tom's ability of thinking outside the box, leading the way, and KNOWING how everything worked.

One thing he knows probably better than anyone that WORKS for an exchange and most certainly knows more than any politician or "talking head" on CNBC and that is absolute risks in the financial markets. I begin this segment with a little background about him - because most people outside the financial arena, may have never heard of him and while he doesn't make too many public "critical" statements, when he does we need to pay attention.

In a story yesterday - Peterffy comments about the CME (Chicago Mercantile Exchange) plans to clear swaps came under fire.

The CME proposal to use its existing clearinghouse to clear swaps would require exchange members (such as Peterffy's operations) to bail them out. These firms have put up over $100 billion to guarantee the futures and options now cleared by the CME.

"It would be a great mistake, Mixing the two types of fund will jeopardize the entire financial system." states Peterffy to Bloomberg. His concern is that CME's plan to guarantee credit-default swaps (now OTC trades) could put his entire $4 billion firm at risk.

The Federal Reserve is putting the pressure on to create an open market for these OTC credit-default swaps and the CME is in the cross-hairs and has developed such a plan. This OTC market is BIG, in fact it is enormous, and clearly - I think even Peterffy would agree it needs to have a listed auction market - to get better price discovery. The question is do we incorporate it into an existing exchange and ask the members to shoulder and burden a risk of such an enormous and rather unknown endeavor. That is where Peterffy and other respected members in the industry say absolutely NO! Maybe it would be better to create a new exchange and clearing house - rather than muddy the waters and certainly bring more risk to the table of the existing exchanges.

It doesn't take a genius like Peterffy to see the risk of CMEs plan, all you have to do is look at Lehman and how fast that collapsed under the weight of illiquid and non-transparent paper.

Take the time to read the story at Bloomberg, if Peterffy is concerned - we all should be:
http://www.bloomberg.com/apps/news?pid=email_en&refer=conews&sid=a2pK9HrK58_Y

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Futures Pre-market

The futures are getting his some in the pre-market, partly due to the LIBOR not coming off and possibly finding a short-term floor. Additionally, earnings for the most part are not looking great, while some are meeting expectations - companies are reluctant to guide forward and have all been critical of a slowdown. Combine that with the news of more layoffs in the industry - futures are not finding any support. The spreads are fairly narrow and close to fair value (30 mins prior to the opening) - so expect some pressures in the market.

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Support / Resistance

We are now in the key support bands and really need to hold. We could see some volatility down in these ranges - but it's going to be about the close. We saw strength going into the close on the weak session yesterday - can we find the same again today?

INDU 8000-8500 / 9000 (We are right at the 8500 upper support band for the INDU. Closing above this area is key - if we head down and close in the 8000 lower range - it may not look good for Friday. However, if that IS the case those are usually the type of days where Bernanke or Paulson will come out with the New New New Bailout and send the market spiking up again.)

NDX 1200 - 1225 / 1300 (We are right at the edge of that upper support a dip into the high 1100s is not going to be good and could mean a drop. These are key supports - watch the close.)

SPX 900!!!!!! (He we are - at the edge, just below 900 in the S&P. This is either the basing area of a big support to a bottoming area into a future rally or we are seriously looking over the edge. Above 900 close for today and tomorrow could bring the needed "hope" that we need.)

RUT 500 !!!! (The same is true for the broader index. This is it - either we close above 500 and build support into the weekend - or strap on a parachute and get ready. - it is about the CLOSE!)

The KEY regardless of hard deltas is to have your LONG GAMMA ON!!!!

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Conclusion

The economy has a long way to go to solve all its problems from credit problems, capital freezes, consumer spending, and yeah still big RISKS. When Petterffy makes public comments about exchanges taking on more liabilities and risks - that is certainly not a positive sign that things are getting any better - but rather a reshuffling of that risky deck of cards.

These are difficult times and they are going to get more difficult. If you have been reading this preview for some time you should of known this was coming and even if you didn't believe it (or didn't think it was going to be that bad) - you still should of been hedging those positions.


On a side note: I did get my Zimbabwe 100 billion dollar bills. They will soon be going into a frame with a picture of Voltaire and the quote "All paper money returns to its intrinsic value....ZERO!" That will be hanging in my office as a reminder of the FAITH needed in our government's ability to manage debt, budget, and interest to keep a FIAT currency afloat.

Just like the housing problem took time for the bubble to pop - and when it did it was the catalyst to this economic storm, when that FIAT bubble bursts - it is going to make this look like a joke.

10/22/08 (Even Billionaires can be fools!)

Traders,


The market pulled off yesterday - we got to that high resistance band the day before and really couldn't break through. Now we are heading back to the low support band.

Even Kerkorian gave up, in 2006 he bought a huge stake in GM - only to sell it for huge losses later. Then it was the failed $5 billion bid for Chrysler in 2007, and now it's his 1 billion bet in Ford. He bought it around a $7-$8 price average and started blowing it out last week for $2.50. It's like he hasn't learned his lesson, he does have a love affair with American cars - but come on - if you love the cars o much - just buy a couple cars. Don't blow billions in buying failing businesses. Maybe he should take a lesson from Buffet. Buffet took a big loss in US Air - it only took one loss and he learned his lesson not to invest in Airlines. Fortunately for Kerkorian there isn't another American giant car maker.

So should we all learn for Kerkorian’s three time failed bottom picking? Sure - it means several things - 1st don't go all in, 2nd don't keep buying the same failed business model over and over, 3rd ask someone if you have gone senile before making an investment.

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LIBOR

The talking heads and media keeping talking about over-night LIBOR coming off hard and now down below the Fed Funds rate, currently the over-night LIBOR is at 1.12%. Well - it's not the over-night that we are concerned about. It's the competition at the Discount Window - if companies can borrow for three-months for 1.5% from Ben, then why borrow in the LIBOR market at 3.5%?

Sure many companies use the over-night - but the money isn't flowing and many are trying to secure longer term money. Also - a overnight LIBOR at 1.12% sounds great - but how much money is really available at that rate?

The OIS spread measures the cash available over-night vs. 3-month and for the first time it did narrow yesterday. So it is showing that more money is available at the lower rate. However - still it's about how much money and not the rate that really matters at the end of the day.

Again - we need to see 3-month get down closer to Fed Target levels and also see MORE cash available at these levels.

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Next Big Wave of Toxic Paper is coming

First it was the housing paper that was toxic, the next wave is coming as we are seeing downgrades in credit ratings in Corporate Debt. The first real big measure of this next wave came in the form of Lehman debt - were investors of that paper are facing 90% losses and on a global scale from Iceland banks.

The debt obligations in the corporate credit markets is over $1 trillion dollars. Because of the increase losses we are seeing across the board in the financial sector and now because of the credit marketing freezing up it is creating balance sheet problems at businesses not in the financial markets.

We are now seeing the credit rating agencies setting their cross-hairs on this corporate paper (after they just blasted the mortgage paper). Will it get as bad as the mortgage paper? Well - maybe not all of it - but any of the paper in the financial sector (banks, brokerages, etc.) are sure getting hit pretty hard.

Think about this - a Bank holding toxic mortgage paper that is creating balance sheet losses and write downs - is out borrowing money (with their own bonds). Quarter after Quarter of write-down and losses, most certainly does bring their own bonds into question.

``We'll see the same problems we've seen in subprime. Banks will take substantial markdowns.'' Said Alistair Milne, a professor in banking and finance at Cass Business School in London - reported by Bloomberg.

Already with Lehman and some Iceland banks we are seeing the paper trade as low as 10 cents on the dollar. Expect more to come.

Think about this - Lehman borrowed money via the Discount Window too - so did many of these banks. If there paper in the open market is failing - do you really think they also made good on their debt to the Fed? The Fed has an endless balance sheet to absorb more debt and print more money.

The question is - when do foreign nations connect the dots and begin to ask themselves is holding paper on a debt ridden asset worth it?

Side note: Paulson spoke last night - mostly it was about a plea to the next president to maintain the glad-hand parade to China. We need China more than China needs us - that is for sure when you look at our nations deficit, debt, and balance sheet. Paulson is trying to keep that VERY important relationship in check.

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A Rush for Cash

I was talking with a firm in NY that has made some interesting observations in some of the trading positions. He mentioned the unwind at some firms is fierce as they race to get capital on the balance sheets. The leverage unwind is forcing some positions with no risk, in fact actual profits to unwind since the positions are carried with some level of leverage - whether it be Reg-T, Haircut, Carry, Loan, etc.

That creates a difficult value assessment if all products are being sold to convert to liquid capital and reduce margins. A company might have a great balance sheet, no debt, good revenues - but if there are more sellers than buyers - that stock is going down (regardless of the fundamentals). The same, he mentioned, was happening across the board in commodities (in which some cases leverage is steeper). Some commodities are in short supply - but if you look at the price action you would assume the opposite is true.

I came away with a simple conclusion - even with all the capital being poured into the system, even overnight LIBOR coming down - the credit markets and capital is in VERY short supply. The world has over leveraged themselves and now there is a race to capital. The secondary problem is that once they do get liquid with capital and unwind the leverage - they are hording the capital bracing for the slow-down.

This creates an interesting paradigm as there might be lots of capital on the sidelines that may stay on the sidelines because of the global slowdown and the inability to revert back to large leveraged positions.

Secondly - it does call into question valuations of companies with solid fundamentals as well as some commodities. It can make bottom picking a very dangerous game - as you might be right in the long run - but the stock could continue to fall in the short term. That is why I say ALWAYS hedge those positions. Naked long positions in this market is a fools game.

I am wondering if we will see a hyper rally in some commodites if and when the capital frees up.


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Futures Pre-market

The DJ futures are getting the serious smack down in the pre-market, followed by the NQ, ES, and TF/TO (new RUT futures). The spreads are fairly wide, but we may not see the Arb traders rush in too much to pick up the spread as it might be difficult to short the basket going into the opening. Expect to see some pressure at the opening.

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Support / Resistance

We hit that resistance bands and then we came off and didn't push through. We came down back to some pivot and support areas. The futures look like we could be testing those supports today. That doesn't mean to get long - but rather make sure to adjust deltas accordingly.

INDU 8500 - 8750 (9000) 9250 (Sure we had a big pull off yesterday, but we didn't even get to the pivot point of 9000. We will certainly break the 9000 area this morning (based on futures pre-market) they question is if we stay in the upper support narrow band of 8750. If we close below 8750 that is not a positive sign, however it is really the 8500 lower support area that we need to be careful of - watch your deltas.)

NDX 1200-1250 (1300) 1350-1400 (We fell below the pivot point and really took a big beating yesterday compared to some of the other indices. Watch the 1250 area - which we WILL test today. 1200 is the lower support area.)

SPX 900 (950) 1000 (Again - we did come off pretty big but didn't get to the pivot point, sure we will break down through at the opening the question is the 900 level. Watch the close.)

RUT 500 (525) 550 (Just like the INDU and SPX we really didn't even get to the pivot point. The 500 level is the big support area. Watch the close.)

For all the hyper volatility we are having we are still pretty range bound (abet the range is wide) - put the lower support levels in as alerts - if we hit those alert supports you better have your hedge on or at least some positive gamma. If you have some balls and want to Cowboy Up at those levels - do it fully and I mean FULLY HEDGED. Only fools will bottom pick unhedged.

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Conclusion

Well even billionaires can be fools - Kerkorian just like many retail investors got married to the US Auto-industry in a foolish love affair that will cost him a good chunk of his net worth. He was so in love with these companies that he not only went all-in, but had to pledge other stock assets as equity against the massive leverage he took in Ford. Again, he is the same guy that married a gal 50 years his junior that lasted only a month - so maybe at 91 senility has set in. Maybe he should just enjoy his wealth instead of playing the big investor game.

The market sure isn't getting a break and we just saw Wachovia report huge write-downs again - enjoy that pig Wells Fargo. It's like Wells missed out on the big write-down game and not wants to be a player. I wonder if any of these upper management people really take a look at the books and off-balance sheet positions before making a take-over bid. In the old days (just a year ago) companies would spend months reviewing the viability of taking over another company. Even hiring special accountants and lawyers to review all the data, balance sheet, risk, etc. Now days it's a weekend, a couple of handshakes, and a backing by the Fed and you too can buy a behemoth of debt. I think some of these CEOs (even the new ones that have taken over for the old ones) still don't understand the difference between price and value. Sure the stock price may LOOK cheap - but that doesn't mean it IS cheap. When a company takes losses greater than the entire net capitalization of company that should be the first clue that even at $5 or $10 a share - there is a mountain of debt trailing behind it. Some of these companies should be PAYING to be taken over, rather than be paid.

Don't forget consolidation also means consolidating MORE debt.

Still stay out the financials - regardless how low or attractive stock price may SEEM. Also - Airlines and Autos - both Buffet and Kerkorian (billionaires) showed us how easy and fast it is to lose money. If they can't make money in those sectors - what makes YOU think YOU can?

10/21/08 (Does Bernanke endorse Obama?)

Traders,

The opening was a little volatile with some up and down action - but as the session began to settle we got some strength in the market that continued to push into the close.

Even though the INDU had a big move - it wasn't a breakout move but rather to the top part of the range. It needs a serious follow-through to break through that 9500 level. Same is true for the other indices. We did have a good run, but we did NOT break through those resistance levels. Today is about either a continued move to the upside and we break through those areas, or another retreat back down.

While the VIX did come off yesterday, it certainly didn't mean that volatility left the market - actually it was the opposite - a 400 point move (up or down) in the INDU is BIG volatility. That is one thing we can expect - more volatility.


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SPEND SPEND SPEND SPEND SPEND

Christmas is coming and it looks to be a big dud this year. Credit is very tight, consumers are unable to get car loans in my neighborhood two homes did sell - but they both put down more than 50% to purchase the home. That's right - you need to put down 50% for some of these upper middle class / higher-end homes.
Also - we can't forget that the US is a consumer based nation in which 3/4s of the GDP is based on consumption. So how can we get consumers to consumer again? How about another stimulus check?

I am NOT kidding - they are talking about another stimulus check. The problem with this idea are numerous - but a couple of major issues are:

1. The FED and Treasury have gotten so comfortable printing billions of dollars and haven't seen inflation (according to the CPI/PPI) rear its head (YET). So it must be OK to print 100s of billions more, right? How much MORE debt is the government willing to create and it will affect the CPI, PPI, and inflation - but it takes time before we will see that. Again - back loading more dollar risk in the future.

2. Consumers still have a addiction to spend, rather than save. Additionally - consumers (of the most part) are lemmings and will buy wants (Flat screen TVs, PS3s, DVDs, etc.), rather than needs (food, fuel, and shelter). Of course this will help companies that make those products.

3. Artificial rise in the GDP and Consumer Spending. Economist reviewed the increase in consumer spending and the GDP back in the 2nd quarter and quickly realized that a big chunk of that came from a government surplus check. The government giving money to consumers to spend - is NOT really an increase in the GDP or consumer spending, but the models do NOT differentiate as to where the money comes from. Of course when consumer spending and GDP goes up - the cheerleading on TV will start again.

Those are just some of the key problems with a stimulus check. The FED and Treasury (along with Congress) are reacting to short-term knee jerks in the market, as if that is a guide if things are getting better or not. They have moved a little of their focus over to Libor - but they are still not monitoring the core problems of balance sheets, credit, risk. Rather they react when the market makes a big down move and cheerlead when it makes a big up move - as if THAT is the barometer of economic health.

The problem with using the market as ANY type of barometer, other than what it is (a psychological indicator of perception), is that we will never address the heart of the mater. Little did they forget that the market was just recently at very high-levels as these balance sheets had loaded toxic waste - remember the market is about PERCEPTION - until the Piper comes to town and asks to be paid up.

Pelosi is already on the band wagon trying to put together a NEW stimulus package together - hopefully before Christmas. What is very alarming is their belief that it may jump start jobs. WHAT? What kind of jobs are they thinking it will jump start - part-time workers at See's Candy for the holidays? It certainly didn't jump start jobs from the last stimulus check, in fact one could argue that in may just prolong a bigger layoff cycle that could have a bigger impact down the road.

Sure - it would be nice to get a big fat check to spend from the government - and I am sure there are some families that could critical need such a check. But we already have several welfare (state and federal) programs for those needy people. Giving EVERYONE another stimulus check to buy MORE flat-screen TVs is not going to create jobs, solve the economic problem, nor in REALITY give the GDP or Consumer Spending a REAL boost. It is further going to put real pressure on the dollar.

Since Obama is an out spoken supporter for a new stimulus package - ASAP - and now Bernanke has endorsed a stimulus package - several people have latched on that Bernanke has endorsed or supporting Obama and the Democrats. Interesting observation - it did create a heated discussion on CNBC this morning - that's for sure.

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LIBOR continues to come down.

The good news is that LIBOR is still coming off - the overnight rate is below the FED Target of 1.28% - which on the surface looks really good - but remember that is the overnight rate - it is the 3 month short-term that really needs to come off. It did come off 23 bps to 3.83 % and where a big chunk of the money is priced at. It still has a lot of room to come off.

We are starting to see credit flow - but so far the flow is just bank-to-bank. The consumers are not seeing ANY credit, in fact quite the opposite. 30-year FIX rates are up, Short-term car loans are up or not even available, Credit Cards rates are up. That is why we are getting so much talk about the a 2nd stimulus check. While banks are starting to see lending - they sure are NOT making it available to consumers. Not yet any way.

The question is - do we see consumer credit unfreeze and become available? If it does, is it only available to certain clients with many strings attached? How much will limited credit strain the GDP and consumer spending? LIBOR over night is BELOW the Target and 3-month is coming down - if the 3-month gets to the Target level will consumer credit unfreeze?

I am sure consumer credit will again be available, but the question is when and how much will be available. It may not come before Christmas and holiday shopping, that is where the Stimulus check comes in.

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Earnings

Earnings are still coming out and for the most part taking a back seat to the economic news. Earnings are mixed - but it seems that all companies are reporting slow-downs for the most part from either credit squeeze, slower consumer spending, or general economic malaise. Typically we would expect a few large earnings to drive this market higher or lower going forward - but I don't think we will get any drivers as economic headlines and credit lines rule the day.

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Futures Pre-market

Futures are getting hit pre-market - Expect ARB traders to buy futures and short the basket. The spread remains going into the opening a few points, will create some pressure at the opening.

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Support / Resistance

Moving into the upper bands - futures showing weakness- can we break through?

INDU 8750 - 9000 / 9500 (We need to break through and close above the 9500 area to see continued strength. A drop below 9000 is not a good sign and 8750 will have to hold. If we remain in the 9000-9250 band expect volatility to decrease and hidden volatility expanding as a big jerky move will more likely take place.)

NDX 1300 / 1400 (We are right in the middle of the rally back up to 1400 and need to see continued strength to get there, the futures are looking a little weak in the opening session. 1300 needs to hold - a break of 1300 and a close below would spell and end to the run up.)

SPX 950 / 1000 (The SPX looks to have a little more strength then the more volatile cousin the NDX. Closing above the 1000 area would be a show of strength - we made a good move up, we need to continue. A break of the 950 level and a close below will mean 900 is in the cards.)

RUT 500-525 / 550 (If we want to get to 600 we need to close above 550 with some strength. A drop below 525 means another visit to 500 and that will HAVE to hold.)

I was really hoping the euphoria would continue to drive us higher - but the futures this morning are looking weak. Things could change - but watch those short-term support areas. If they don't hold things could revert to the ugly levels again quickly.

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Conclusion

Another Stimulus check - please. Didn't the first one just blow serious tax payers money and did NOTHING to help ease the pain in the economy, other than give several companies more money. Bernanke is now endorsing another stimulus check - didn't he learn the first was a dud? Oh - well - expect another round of 100s of billions being mailed out before the holiday so addicted consumers can continue to give the gift that keeps on giving (the government handing out money). At some point doesn't it become the big joke or farce?

Don't forget, make sure to sign the gift cards "From Aunt Nancy", "From Uncle Ben", "From Daddy Hank", or name the politician that supports such an endeavor. Sure it might make the holidays a little brighter to get that PS3 or 50" Flat screen - but really - at the end of the day is it really creating jobs? Of course they will measure consumer spending - when it does pop - and it will after 100s of billions in stimulus checks - as a success. Fools, sad fools.

I have a sneaking suspicion that things maybe bright from X-mass, but the darkness will return and it will be a long cold winter - unless we can get a head of this economic problem (without the need of printing and giving away more money.)

10/20/08 (LIBOR lower? ML jobless! Double Bottom?)

Traders.

We had a volatile expiration cycle - the market rallied and then fell off into the closing session. After hours trading saw several stocks move higher or lower through strikes - making after hours trading and exercise notices a pain in the butt. However, there was some money left on the table and to risk to adjust coming into Monday.
We saw Asian and European markets rally coming into this morning’s opening and the weekend was pretty much without good or bad news for the most part.

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LIBOR down but not enough

LIBOR has been coming off, but not enough. There is a few stories about JP Morgan's adjustment of rates that may have made LIBOR look slightly better and if we take a measurement from the corporate bonds - that really isn't showing relief either. So what is the problem?

It is really hard to put a finger on it. You would think that with all the cash dumping into the system from the FED and global central banks that credit lines would unfreeze and pretty quickly (one would think) from the 100s of billions - in fact trillions injected into the system. But this toilet will not unclog it is jammed up something fierce.

Now we know the game that the banks have played in order to remain solvent has been the stepping of write-downs. See they write-down as much as they can without creating a full balance sheet unwind that would create an implosion, that is why we see it surface every quarter. Lower to a point that we can float, borrow more next quarter, and the cycle continues.

So - is the money being poured into the system still soaking up the write-downs? Or are banks fairly deep in capital and have just locked up their capital because they are unsure of their neighbor? This late in the game it could be a little of both, we saw Citi and Merrill writing down billions more this last quarter - so there is still dead meat on the table. And while Hank is cutting checks he still window shopping for the most toxic paper.

For now LIBOR is coming off - JP Morgan may have helped bring it down a little - but it is still very high. Until we see 3-month get down to 10-25 bps over the Target - money is just not going to flow and the Discount Window will still be the prime attraction for short-term money.

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Merrill to shed 1,000s of jobs in merger

It's amazing that companies replaced CEOs with the likes of Thain (ML) - who promised the public he got a handle on the problems, there would be no more write-downs, and Merrill's balance sheet is strong. Then to see him fold, as more write downs begin to sink his ship and he sells to B of A when the going gets tough. But Thain is no selfless dummy, he quickly secured his nice golden chute to his back - and landed nicely over at B of A - but not without some bad news for others....."it will clearly be thousands of jobs" for devoted ML employees as they merge with B of A.

Being a clearing member of ML - I am already seeing a little pain in the switch from 671 clearing to 551 clearing and the horrible new sheets. Not to mention the possible change in the near future as these two behemoths try to merge technology and back offices. It is already costing clients headaches. Big companies merging is always a slow and painful task for both clients and employees.

However - there is a new hidden concern - B of A is not just a clearing agent, but is deep in other vertical markets - from credit cards, loans, banking, and yeah that ugly giant Countrywide.

What does it mean for B of A's future? Well - more risk that is a guarantee. Sure ML will bring some more capital and better access to markets - but will that suffer as B of A will definitely need to shore up other leaks on this ship.

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Futures Pre-Market


Futures are getting a good pop in the pre-market. Arb traders will probably selling into the futures and buying the basket at the opening. Expect a pop in the market at the opening if the spread remains.

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Support Resistance

The indices are getting wedgy and that means a big bust out move is coming. Yeah it has been volatile - but as ranges tighten a bigger move will come. We could consolidate into the election and then make the violent move later.

INDU 8500/ 9000 (This is the narrow range a break out of this range will mean a faster and bigger move to 10k or 8k. If we stay in this range and tighten down further it will increase the size of the move when the break occurs. Be careful accumulating at these levels.)

NDX 1300 / 1400 (Looks like a double bottom is forming - but in a volatile market it is anyone's guess - there is really no hard technical’s to make that call. A double bottom means a good run to 1400, even 1500.)

SPX 900 / 1000 (A good double bottom? Looks like it and 1k is in the cards and even 1100)

RUT 500 / 600 (Again double bottom? Hmm not that there are any technical’s backing it up - but there is a lot of psychological levels. 550, 600 and yeah even 650 could be the area to hit.)

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Conclusion

Getting a good pop in the market, psychological the market is getting pretty sick of this volatility and really wants a solid rally. Could it be a double bottom - well sure - but as I mention good luck getting any volume, consolidation, market depth, GTC orders, etc to confirm that. However the market really wants to rally out of this whole for no other reason that it is sick of being down here.

Obama is getting good traction with "Hope" and "Change" - and while you might not agree with his politics or his party - there is no denying that he brings an optimistic message to the table and a promise, which is converting the masses. He is leading on the psychological element that the people are sick of it and want "Change" and Obama will bring change - I am fairly sure about that. The question is it the change we want or need, well that is a argument and debate to have with a friend over a beer or a BBQ.

But the message he brings is the similar optimism that market is seeing. Will the market rally (abet short-term) out of this hole? I sure think there is a good chance and we could create a double bottom for no other reason that the psychological reasons that Obama brings to the table .... "Hope"....

However, when the dust settles - even after the rally in the market, just like if and when Obama becomes president - will there REALLY be any change, or are we just left with HOPE. If the later is the case - expect the market to fall off after reaching previous tops.

I would not be surprised to see a big rally out of this hole and for it to continue for some time - only to get seriously kicked in the teeth and possibly go lower in the coming months, maybe January.

My concern is that just like with both candidates we are voting on "Hope" for change - but I don't think DC, Congress, or the Senate will really change. Also - there is that underlying dollar issue - and the printing presses overheating.

I really like Obama and I think he actually believes he can bring change - but change starts at home and that home is Congress and the Senate - my concern is that as much as Obama and McCain may wish to bring hopeful change - we will see little if any and both candidates may bring the change that might seem GOOD today, but will bring bigger problems tomorrow.

Just like knee jerk moves in the market, Politician’s can create knee jerk euphoria to the masses - but at the end of the day reality sets in and we sheeple go back to the daily grind.