Yesterday seem like the market had gotten back to normal as volatility came in – not the massive swings we have become accustomed too – but don’t hold your breath we are deep in the middle of it.
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American Express – beating estimates?
These are the days when a company can report a 72% drop in earnings and make it sound rosy. American Express saw a huge drop in profits, however it beat the most pessimistic forecasts – I guess that is good right? The stock initial saw some positive after market moves – but who really knows what that means.
But if things are so rosy, how come they are tapping that TARP money ($3.39 billion)? And raising money ($6.2 billion) by selling certificates of deposit? And cutting 7,000 jobs. No – things are NOT good – consumer defaults at American Express are ramping fast.
While true, the company missed estimates by one penny, don’t forget they had massively lowered their forecast (several times) – to such a low number the bar was not that high to jump over – yet they still missed. It is going to be a very bumpy ride going forward – if consumers can’t pay back their debt – expect more defaults, the road ahead for consumer credit is not a bright one or is it. If the new stimulus package injects enough money (no one is going to say that this administration and Congress will UNDER-fund bailing out the American People)…
Which leads me to my next point….
We could see a good early kick in the pants and a ramp in consumer spending (even some paying their minimums) – thus many will get long American Express and the like. But I am of the camp that believes a stimulus doesn’t create jobs it just a band-aid that extends the party a few more months (did we already quickly forget last year’s stimulus package – a pop in the market/economy and when it ran out we went right back down). My issue is that a BIG stimulus will get a BIG rally and a bigger fall – which leads me to my next point (which the brightest minds in the room will disagree with me) – HYPER INFLATION. Formula: Bigger the stimulus (more money printed, more debt) = Bigger short-term rally (on perception and short-term data that reflects that we MAY be out of a recession) = SURPRISE! Hyper Inflation (The knee’s of the dollar buckle under the weight of hyper debt and printing) BANG we come back down hard!
Obama is a smart guy – if he could just look out to the future instead of the present, when it comes to stimulus planning – I would hope he could see the problem. The issue is do we want to suffer pain NOW or latter. Most people prefer to push off bad news and pain tell later. (Humans and society is always an optimistic procrastinator – we go to the doctors/dentist when it is too late, we sell our stocks at the bottom for losses, we ignore the mounting debt on our credit cards and wait until the collector calls us, we pay our bills at the last possible minute.) – I would argue that our Congress / Administration is doing the same thing (they KNOW that the stimulus will have dire affect on the dollar – they are just choosing to ignore it and will deal with it when it comes, but by then (I am afraid) we will be out of ammunition)
Coming back full-circle, for now we could see a rally in American Express and other credit, if coupled with a sizeable stimulus package that could give banks/lenders a break and get the consumers back to doing what they do best – consume!
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Dow Chemical pulls plug on merger!
It seemed only yesterday that Dow Chemical was on track to pick up some companies, they have an international presence, some impressive contracts, and a currency trading room that always seemed (via inside rumors) to be ahead of the curve. Then – they pull the plug on the Rohm & Haas merger ($15 billion) – that was expected to be done yesterday. The concerning part was the reason (which is still foggy) “uncertainties” in funding as a result of the global financial crisis – they also cited a Kuwait deal ($9 billion) that was canceled as the reason. However Rohm has responded that the K-Dow deal cancelation does not provide Dow with adequate reason for halting the merger. Now remember – they have a monster trading floor (in Midland Michigan) – or so I have been told. I am wondering if they took a hit on their currency desk (yeah I know it is a chemical company) – however if you have seen the action in theEuro/Pound/Dollar/Yen in the last year – they look like Dot.com stocks of old trading in hyper-volatile swings. I wouldn’t be surprised if they took a solid WHACK on their currency desk that handcuffed the merger – unless they get help.
Rohm & Haas has filed suit already – keep an eye on this.
Interesting article on about Dow Chemical and it's trading floor (how they manage risk and trade for profit): http://www.thefreelibrary.com/The+how+of+Dow:+managing+currency+risk-a021276643
Question: Did they get hit in the recent currency volatilty?
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Futures Pre-Market
The futures are up and flirting with fair-value. There is some volatility in the market this morning – Dow Chem news is not good and American Express is spinning gold. Expect a flat to slightly mixed opening.
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Support / Resistance
Well we are still above supports.
INDU 8000 / 8250 – 8500 (I tightened up the resistance range because volatility is coming in and we haven’t gotten above it in over a week. Not that I would get short at 8250, but I would flatten deltas.)
NDX 1100-1150 / 1200 (I really think that 1200 is in the cards and maybe sooner than we think. Flatten there and lean short if you have the gamma to do so.)
SPX 800 (850) 900 (I think the 850 could be a pivot point, but you also could treat it as a slight resistance – but with long gamma.)
RUT 400 (450) 500 (The RUT has been holding very well and now at 450 we are AT the pivot point which will probably be a better indicator to the narrow based indices that are being driven by over-weight individual stocks.)
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Conclusion
I can’t emphasize enough my concerned about the high probability of coming hyper-inflation. I know the smartest guys in the room and economist are talking about dis-inflation or deflation. They have valid points – but I think they are trying to figure out what is going on last year and what is happening now. Nothing wrong with that and I would not argue with their conclusions, but I am a trader (and have been for 20 years) – as an option market maker – option IMPLIED volatility could care less about STATISTICAL volatility – we price on forecast, not now or the past. Thus – we try to determine the possibilities of the future. Just like earnings – they don’t mean anything to us traders, other than it is a day of volatility – the earnings number is irrelevant because it is telling us what they DID, not what they are GOING TO DO. Sure – we may be seeing dis-inflation / deflation today – but what about 6 months or 1 year from now. The administration and Congress’s actions will have massive repercussions in the years, if not decades to follow.
Just like a butterfly flapping his wing, with a stroke of the president's pen today – we could see hyper-inflation down the road.
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