1/23/09 (How to spend Tarp Money, Global Slowdown?)

Traders,

Well we stayed up above the supports for the most part – even with the pull back and this morning it certainly looks like we are going to test them again today – the question will be about the close. Now doubt more bad news is coming out and it’s making it harder to determine the fundamental bottom of this market (and economy). Stay ahead of the curve – keep your hedges tight.

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How to spend your TARP money.

You may of heard that John Thain (CEO of Merrill) is now out of a job, but no worries – he is now starting a new late-night infomercial course “How to spend your Tarp money!” - I almost puked when I read the story the other day that Thain (who had come on board at Merrill to SAVE it during the crisis) spent over $1 million on his office as the company was hemorrhaging money and on top of that paid his driver $250k.

I was never a big Thain fan – he was lauded as a savor - he was the CEO of the NYSE, and CFO at Goldman. However – if you look at the trail of golden parachutes this guy has tailing him – the only thing he seems to be an expert in is milking the cow dry. What pisses me off on a personal note is that I have been a client of Merrill for some time and I really “HOPED” that he would come in a clean house – that obviously never happened. Between $300 million in Goldman stock and supposedly as much as $120 million as a 1 year (f’up) CEO of Merrill – he is getting fired – like he cares.

I don’t mean to make you sick over the weekend – so only read this if you have the stomach for it:

http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-87000-rug/

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Global slump seems worse

How do we measure economic growth is a very good question – and it really depends on what side of the coin your country sits. Your country falls into basically two buckets – a consumer or producer.

Now globalization is a good thing, but it also means we are married to each other. Our nation is a consuming nation, with 2/3rds of the GDP relies on us consuming. When China was opened in the 70s to produce cheaper goods for us to consume – it elevated all Americans with the ability to buy MORE junk. If wealth was measured by materialistic garbage this country is very wealthy. This nation now doubt judged socially by not only the consumption of goods – but the position of goods (bigger was better).

The problem was growth (in consumer spending) was eventually going to hit a ceiling – predicated on earned income. The explosion of the credit boom so we could buy more crap (even if we didn’t have the money) insured that our consumption could continue and thus GDP growth would not be stifled. Of course people complained about jobs being shipped overseas, but they didn’t complain that they could buy cheap junk at Wal-mart and Target (the birth of the cheap retail stores exploded in this country). It was a double edge sword – keep jobs here – but products more expensive. We the people – drove jobs overseas in our obsession to purchase cheaper junk.

The other countries for the most part are the producers – some countries sell their natural resources and commodities – while others are manufactures. Europe had also moved (for the most part) into a consumption venue – rather than the producers. In a nut shell – the world was producing junk for the US and the WEST to consume. When our credit lines ran out, our consumption slowed, which meant the producers also saw harder times (fewer people to buy the junk means they make less junk).

The other day I mentioned China – they are in at the tipping point – in the next few years they can internally (domestically) be a consumer/producer. All those millions of people want (or feel the need) to start consuming – and they are. Cell phones, computers, cars, movies, TVs, and more junk. They have the possibility to survive as an isolationist. They are however still connected to the U.S. and while agriculture (soft) commodities is not a problem – they do need massive imports of hard commodities to keep growth alive. China will no doubt slow and see difficult times – but they are also way more self sustaining than many nations (even with their massive population).
The big question for us is not that we will get out of this (we will) – the questions are:

1. How long does it take?
2. How do we get there?

The answer to the first question I think is fairly easy. It’s when all the leverage is unwound and we use actual mark-to-market, rather than mark-to-myth. There is still much fluff or juice in the marks. The second question is more difficult and more risky a proposition:

The new administration plans on spending trillions of dollars and New Deal Policies (or as Obama calls them “Shovel Ready”). I have read about FDR and sure he was a great president and most of the biographies about him are not very critical and most tend to avoid the math. The math reality of the New Deal – if we look at the numbers along – are very alarming. Taxes were eventually raised from the high teens to over 70%. New excise taxes (sales tax) on certain products, and unemployment ramped to almost 20% (all after 6 years of New Deal programs – problems got worse, not better.)

Competition was frowned upon and a special minimum no-skilled labor wage was imposed so high that most companies laid people off because they could not pay the high minimum labor prices – the poor got poorer under New Deal policies. The problem, like with almost anything, is that it looks great on paper – but when executed it could have drastically the opposite effect. Communism sounds great on paper – but we only have to look at how that faired under the Soviet Union – the people had enough after awhile (sure it wasn’t pure Marxist communism – some would argue – but it was an collectivism).

Total Unemployement during the Great Depression:

I would argue that WWII – as dreadful as this may sound – saved this nation economically and also saved us from heading further down the Nationalism / Socialism road. The problem – most of the FDR biographies don’t mention math or numbers – and WWII was an unavoidable out come. History is written by the victors. I will not deny that FDR was a great president – in some regards. But the New Deal failed to meet (based on math) anything it was really set out to do – so much so that after 6 years of New Deal policies FDR started changing course. One thing New Deal policies forget – just because you build it doesn’t mean they’ll come.

Dams, roads, buildings are all great – and true they can measure capacity = but capacity doesn’t equal revenue or profits. There is more to economic success than just building some roads and buildings (that is the cost, the question that New Deal policies don’t answer is how do we pay for it and how does it make money?)


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Futures Pre – Market

We are getting WHACKED – not good – things are looking to open on the lows and ARB traders will be buying futures to sell that cash. Expect downside pressure on the opening.

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Support / Resistance

Today is a serious test day on those supports – watch the close!

INDU 8000 / 8500 (We need to close above 8000 to see signs of strength – the close will determine it. A solid close below it means that Monday could get ugly)

NDX 1100-1150 / 1200 (We are above the weaker support of 1150 – close below it (slightly) is not a serious problem – but if we fall to the 1100 area and don’t hold – get out your parachutes.)

SPX 800 / 850 (While 850 seemed like a pivot point, I think it is becoming a resistance level. 800 needs to hold, just like the 8000 in the INDU – otherwise it’s ugly time for Bulls)

RUT 400 (450) 500 (The RUT has been holding up well – this is the only positive sign across the board. Watch the close)

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Conclusion

We have a tough road ahead and Obama has some serious decision making as well. I hope he does not forget that value of the dollar and the risk of inflation! He may be able to band-aid this by pouring tons of money into the system to find a mark-to-market bottom, however if he doesn’t watch the dollar, debt, deficit, very closely = inflation could be a bigger problem than the housing/credit crisis.