I guess I was wrong about yesterday, as a friend emailed me “Buy the rumor, sell the news!” – how true that is. My concern is that Obama didn’t “Sell It!” – he may of sold it to the million people standing in the cold – but they certainly were not trading. What do I mean by “Sell it”? Well – the plan is simple – print money and start bailing out this country (regardless if you are for that policy or not), the problem is WHERE does that money come from? Well – actually it is created out of thin air – the country has two choices, A. finance it (by selling MORE treasuries or selling off assets) or B. Go further in debt. We would most likely love to sell more treasuries (especially to nations like China and others – whom we rely on for the credit lines). Since this nation utilizes a fiat currency (or faith backed) – Obama needs to SELL the confidence and optimism – not just to the voters – but to the market and the rest of the world (so they feel secured in purchasing U.S. debt). Suffice to say – the news of the increase in economic slowdown trumped Obama’s inauguration, which is a little alarming (as to the economy).
What was very puzzling was the dollar trade yesterday as it strengthen significantly against the basket – which is a paradox to be sure. A good friend emailed me a article that clearly delineates that we are seeing not presumed deflation but rather dis-inflation. I agree – but also believe that it is creating a hidden bubble of inflation. Certainly prices may come off against the dollar – but we are flooding the system with more dollars. The only magic trick being performed is the new dollar printed is quickly being absorbed into losses (of which the government is taking on.) What we ARE seeing is a huge shift of debt and liability from people and companies to the U.S. government (FED, FDIC, TARP, and Nationalized companies – AIG, Freddie, Fannie, etc.) – so what does that mean? I would argue that we may see a shift of presumed risk from corporate bonds to government bonds. OK – for some of you that may sound very perplexing – even crazy – for me to say there is more risk in government bonds than corporate. And it is – if it wasn’t for the big shift in liabilities. Think about this – a company is able to dump it’s toxic paper on the government and borrow money (therefore reducing its risk) – the company bond paper has less risk of default, since the risk has been moved OFF the books to the government. The government’s appetite for toxic paper and increase risk could be viewed in terms of the Treasury bonds – since owning those bonds you are in technically holding government debt. Of course the government will NOT default on paying off the Treasury bonds (I am not saying that) – what I am saying is that when it comes time to pay the government maybe in such a whole (debt and deficit spending) with revenue contracting (via taxes) – that they may have to PRINT more money to pay off existing treasury paper and that spells INFLATION. I would say corporate bonds (with a government back-stop) that interest is greater than pre-1990 CPI calculations would be the bonds I would opt for.
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PIMCO bets on Government backstopping GM
PIMCO (world’s largest bond fund) and it’s boss Bill Gross (the Bond King) – resigned from the committee to negotiate GM and GMAC debt for shares. Of course Gross spun it, ““We’re just not good committee members. We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.” – would say (after hearing Gross for years in interviews and in the paper) that if there was a good deal to be made he would still be there. What we DO know – Bill being on the committee got to see the play book and balance sheets. Leaving means he will have less insight and information – which clearly tells me that he is not interested in converting GM/GMAC debt at ANY level – he is betting on bailout by the government and nationalization.
Pimco pulled out of the GMAC deal to swap their debt for as little as 60 cents on the dollar. Pimco bet correctly that GMAC would get bailed out ANYWAY – because the government wouldn’t allow it to collapse – instead of 60 cents – the value increased to 80.5 cents on the dollar. Pimco is one of the largest holders of GM’s debt – stepping down from this committee has ruffled lots of feathers. You could say he is a hold out and so far he is making coin on the deal. Betting on the government backstopping GM is probably a sure thing (especially with the current administration and Congress) – the big risk is does that government nationalize the firm and wipe the debt holders out? Probably not – but while it may not be probably it is certainly possible.
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Futures Pre-market
We are seeing a bounce from yesterday’s smack down. The ARB trader’s will sell the futures to buy the basket as long as the spread is in – expect a gap up opening.
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Support / Resistance
We certainly headed down to those low support levels – are they support – that is the big question. Obama didn’t sell the confidence in the market as it expects the recession to get worse and more government debt.
INDU 8000 / 8500 (We closed right below 8000, but the futures are looking like a 8050 opening – watch the close. This is a big support area – if we fail it could get ugly quick.)
NDX 1100-1150 / 1200 (We are right in that support resistance band – we didn’t get down to the 1100 level, but we did break 1150. The futures are pointing to a 1150ish opening – do we close above it or does THAT become the new resistance?)
SPX 800 / 850 (850 was the pivot point, which I would now call resistance. We are right AT 800 – the market is showing a higher opening. Do we close and stay above it. Just like the INDU 800 is a big number. A rally off this is needed – if we break – things could get ugly fast.)
RUT 400 (450) 500 (We are below that 450 mark (pivot point) and still well above 400 – if this broad measure is any sign of support, I would say it is a good one. As the RUT didn’t get back to the same lows that the INDU or SPX did. Watch the close. A solid close above 450 would be welcomed.)
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Conclusion
I had read that yesterday’s market was the worse inauguration day move in history. I am certainly not blaming Obama for it – but rather the reality of the economic storm we are in. I was hoping, since he did so well in selling “Hope” and “Change” in the election that the world would hear his rally cry and that would bring more optimism, boy was I wrong. As my good friend correctly pointed out – “Buy the Rumor, Sell the News!” – he was right. We may yet – see the market rally off these supports – but the market wants ACTION NOW – it is down with rhetoric. Obama’s plans are vague at best – and it may be months before we begin to see an outline of what he plans. Now doubt he has inherited a mess – and I don’t envy his job. He is good at selling Faith and he needs to couple that with a solid economic policy that doesn’t further erode confidence in the economy. New Deal policies are a scary thought – as it means massive government debt – and we all know how well that worked out for FDR (unemployment sky-rocketed from 12% to over 19% and taxes went up from the high teens to well over 70%). Let’s not hope for history repeating itself – the disturbing thing is Obama and Co. seem to be heading down that path – as NPR reported he just picked up a FDR biography and started reading it – YIKES!
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