Last Friday showed some volatile action yet the market closed up – maybe on anticipation of the inauguration. The market moves on perception – and the optimism and hope have been a driving force – not only for the markets but for the economy as a whole. As I turned on the TV this morning the 10s of thousands that are coming from all over the US to see this historical occasion is rather impressive. We wait to hear, with baited breath, the words of the new president. No doubt it will be a mix of the sour reality of the economy coupled with inspiring words of hope and optimism. That being said – the question IS, will the market buy into it and we see a rally or not. The inauguration will certainly be the test to see if our new president can create positive perception of a changing future or not – if you believe that the market is swayed by perception.
I would say the market this morning is already at war – the futures are down in the premarket as more bad news hammers down upon it. Can Obama bring hope to turn what looks to be a negative opening – into a positive one?
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Oil and commodities backing off again
The oil market (and it’s off-shoots) are moving around like a Dot.Com stock of the late 90s. The volatility on any giving day is pretty terrific – the latest being a slowdown in consumer spending (more reports of recession and slowdowns coming in from all parts of the world) is re-enforcing the perception that the NEED for oil is waning. Oil futures are off and below $35 a barrel. Exxon Mobil is getting hit pretty solidly in the pre-market. Aluminum is falling off as well – which is putting pressure on Alcoa.
We are seeing tremendous volatility at these low areas – at some point, just like equities – we will certainly base. The action is similar to equities after the take a blow of bad news and premiums jump – as people seem to always panic at the bottom. I am certainly not saying get “naked” long commodities down here – but we must not forget we are human beings and part of a society – that means while the economy slows and we are certainly in a recession – it doesn’t mean the world comes to a grinding halt. Just look outside – people still drive, buy and eat food, build, etc. They may do it more slowly – but it certainly hasn’t stopped.
Secondly – much of the pressure in the commodity sector is the recent bottoming and strength in the dollar – which in my book is very perplexing. Sure the global markets are seeing a slowdown as well – but they also are not on the multi-trillion dollar bailout train. Last week – in Bloomberg – an economist put is best, “Obama is damned if he does and damned if he doesn’t!” – referring to the bailout. The economist explained that by not bailing out banks, companies, and mortgages we could see a longer deeper depression – but to do so means that we will double the national debt (if not more) and send the budget deficit so far down that it becomes questionable if it can even recover in the next 50 years. That being said – what is amazing is that while we have been on the bailout train – the dollar remains strong.
It is a most interesting situation. We can draw a couple conclusions – one is perception of safety. If all nations feel that he US is the safe harbor – they MAY flock to US treasuries (even at flat to negative interest) to protect principal (thus lending our government the money needed to pay for the bailout without creating inflation). That implies that Obama really needs to sell the Hope – because the USD is a fiat currency and we need to sell the world that there is NO RISK in investing in the USD. That is certainly contrary to the math (from companies, banks, US citizens, and even the government) in massive debt. The biggest player in town (NOW) is China. With a population, manufacturing, etc – do they BELIEVE in the dollar or do they move to a more isolationist approach. Stories abound about their hording and purchasing of gold. If the world saw China making a large purchase and ramping up US dollar backed assets that could bring HOPE. However – the Congress has set a fairly strong and anti-China agenda – does Obama follow suit?
I think commodities will be a dollar game going forward.
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Fiat to take 35% stake in Chrysler?
It looks like one of the big three has found a partner in Fiat. Could this mean we see someone come into Ford or GM as a partner? Also how does this effect government intervention and bailout money?
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Futures Pre-market
The futures have been trading in negative territory all morning – as world markets saw negative pressure from the continual slow down. We should see Arb traders purchasing futures into the opening and short the cash basket – BUT being a big inauguration day – we should or could see a big boost to the upside. Maybe?
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Support / Resistance
Today could see a big move to the upside.
INDU 8200 / 8500 (We are just above support areas –sure the futures look negative but if Obama can SELL IT – we could drive higher)
NDX 1100 – 1150 / 1200 (We are RIGHT AT the previous resistance area – a break out means that 1250 could be in the cards.)
SPX 800 (850) 900 (Again 850 a pivot point – while futures look negative – we could see a turnaround.)
RUT 400 (450) 500 (Same as the SPX – can Obama push this market up on Hope?)
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Conclusion
If any day is a measurement of HOPE and Optimism in the market – it is today. Either, in face of all the negative news and economic problems, Obama can “sell” the optimism (which if any indication of the 10s of thousands of people standing in the cold to see the address is a sign) – we could see a rally. If the market instead sells off – it doesn’t reflect a positive note. Why is market reaction today a big issue? Because the entire world is going to be gauging their perception on Obama’s ability to inspire the people and bring Hope and Optimism. Banks, investors, etc. around the world will USE (rightly or wrongly) the market reaction as a gauge of perception and FAITH in the system. Please remember that our currency is a FIAT currency (based on FAITH) – that is important to remember – because Obama is planning on printing trillions of dollars to help bailout this nation (rightly or wrongly) – and he NEEDS foreign nations and investors to BUY treasuries to fund such an endeavor in order to avoid hyper-inflation. Today’s equity markets, the dollar, and treasuries will be a measuring gauge as to Obama’s ability to “sell” the faith to the World. I am pretty optimistic he can do it – at least we ALL need to hope he can.
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