1/28/09 (Stimulus Coming! Wells Fargo Losses!)

Traders,

It was a relatively mild day with a higher bias heading towards those resistance points. The main focus in the economy, the market, and in D.C. is the big stimulus package. It is coming, it is big, and it will definitely inject tons of money into the system. The Fed has pretty much used up all the tools in their tool box (interest rates set to ZERO) – and now they are directly purchasing securities (and printing more money) injecting it into the system (in addition to the TARP).

Now the FDIC may create and run a bank of debt (or as Bloomberg calls it “Bad Bank”) to buy toxic assets. The FDIC would seem a logical choice, however as you may have read – I already have concerns with Sheila Bair (FDIC Chairman) and the current FDIC which they ran at razor thin deposits vs. coverage – believing (before and now) that they carrying such little capital vs. coverage is O.K. – the irony that they would NEVER allow a bank that they insure with such very low balance sheets, should not escape you. Additionally – their brilliance at risk management and foresight have sent THEM (along with a string of others – including Freddie and Fannie – both government regulated) – to the Treasuries door for just a little more money (billions).

The problem is that our government doesn’t KNOW how to run business because they believe they have an endless supply of money (therefore the MARGIN FORMULA is not ever part of any discussion – I don’t even think Frank, Dodd, Bair, Pelosi, Reid, etc. know what the word, Margin, means). Simply SWEEPING debt and losses (from the banks – auto loans, business loans, home loans, student loans) into a “Bad Bank” doesn’t mean it goes away. The only thing it does is GIVE the perception that the economy is doing better, once they sweep the debt under the rug – they’ll forget about it.

President Clinton played that game with Social Security (taking it off the balance sheets and moving it into a trust) – on paper it reduce the national debt and deficit – because it was no longer counted in the official budget – it was now a trust. It certainly SEEMED that everything was better and they (and we) just forgot about the DEBT that Social Security was and is. The problem – the dollar WILL break if we load it too much with debt and deficit. More bailout money is like pushing on a string – if the debt is NOT paid down. We are CREATING the next big financial CRISIS – it WILL be the dollar.

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Wells Fargo – lemmings chasing losses!

Wells Fargo (no the second biggest U.S. home lender) reported its first quarterly loss since 2001 – after acquiring debt ridden WHACKovia ($2.5 billion / 79 cents per share). At one time Wells Fargo seem brilliant they had avoided the big home collapse, managed their risk, tackled the default rates on their credit cards. But something happened and they drank the kool-aid and jumped into the water with their acquisition of Wachovia. Now they are no different from the rest – with close to $13 billion in overdue mortgages with more to follow, coupled with a rise in credit card defaults.

Wells was also in line and received $25 billion in bailout and also raised $12 billion in stock offering. They now have a little cushion to carry the debt and getting ready for more write downs for next quarter (as the cycle continues). Many expect a cut in dividend as well.
However, the “worst is behind us” talk is already starting up and the lemmings are flocking to Wells Fargo in the pre-market already driving it up $3 dollars. Who knows – but many people don’t know the difference between value and price. If I was long I would flatten or hedge my position up here at $20 – look at it as a gift and nothing more.

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Futures Pre-Market

The futures are getting a good early morning run – on the back of the big stimulus that is coming. The spread is fairly wide, so expect the Arb traders to short futures and buy the cash into the opening – creating some upside pressure in the market.

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Support / Resistance

Getting close to resistance?

INDU 8000 / 8250 – 8500 (We will probably be above the 8250 line this morning as the futures are predicting it. Continue to lean long, but roll up hedges at 8250 – sure 8500 is in the cards, maybe not today – but we could easily see it. The question will be at the close – above or below 8250. A strong close above it means that 8250 turns into a pivot and we could head to 8500)

NDX 1100-1150 / 1200 (We are going to punch through the 1200 line this morning – 1250 is the next level up. Watch the close if we come back off and just close at or slightly above 1200 don’t read too much into the rally – if we close on the high we could get a continued run to the 1250 marker.)

SPX 800 (850) 900 (850 was the pivot point and we are seeing a good injection in volatility this morning with a solid run up. 900 is resistance and if the hyper extension happens today – we could see it. Watch the close and 850.)

RUT 400 (450) 500 (Watch the legs in this index and how we close in relation to 450. It has remained strong recently - closer to 450 at the close means we may not get the follow through in the narrower indices if they over shoot.)

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Conclusion

It’s all about perception and the government riding the rescue to keep the spending party going – the stimulus package is coming, just like last year it will give a solid bump to the market. We could see a 2 quarter rally – but when the money runs out we will fall just that much further (until stimulus part 2 happens). Stimulus can only carry you so far – people are losing jobs and no amount of stimulus will change that. Those that are working are getting paid less. At some point stimulus turns into government welfare. We are nationalizing not just businesses, but entire industries (bond insurance, mortgages, auto-loans, etc.) – the government is sucking down insane amounts of debt – but the government has NO collateral – the dollar is based on one thing – FAITH. There is not GOLD, SILVER, or anything backing it – just lots of paper, ink, and the hope people continue to find value in it.

I believe we could see a fairly stable if not bullish market going into the summer – but come late 3rd quarter or 4th quarter when the money runs out from this stimulus – we could be in for a serious SHOCKER – when the government goes back to the printing presses. You can only go to the well so many times.