Well the first trading day of the year (last Friday) – was a great start. Let’s hope that it is a sign of more positive outcomes in both the market and the economy. Additionally we saw some strength in the dollar, as optimism that Obama’s plan will bring hope and growth to the economy. The stimulus package may not be ready for him to sign by the time of his inauguration, but should be shortly thereafter.
I read a very interesting article on the Smoot-Hawley in the Economist (week of Dec. 18th printed edition). Tariffs to subsidize debt is a dangerous road to travel, including a shrink in trade. During the 1930’s protectionism, tariffs added more stress to the economy and our largest trading partner Canada, with the threat of U.S. tariffs, imposed extra duties on American goods, while cutting tariffs on imports from the rest of the British empire – thus further stressing the trade balance. Are we headed down a similar path, no doubt history is worth visiting – if we are doomed to repeat the past or are we. Here is the interesting article:
http://www.economist.com/finance/displaystory.cfm?story_id=12798595
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Oil – Gaza – Russia - OPEC
It looks like oil is moving back into the lime light. The fighting in Gaza is heating up, and while not an oil rich area it is surrounded by nations that are sympathetic to the Palestine plight – and have offered aid (both overtly and covertly). Small conflicts in unstable regions usually spill over – and with that – trade of ALL goods begins to suffer. For a simple delay, a diversion of resources, to trade routes actually coming into harm’s way. Oil has made a good jolt on the uncertainty that defines the Middle East.
Now Russia and the Ukraine are in a energy stand-off. Initially when the Warsaw Pac broke up and agreement between the East and West was made not to include more ex-Eastern Bloc nations (now independent) into Western alliances. The Soviet Union may have fallen, but they also didn’t want to see a rise in Western power. Initially everyone played nice in the sandbox, but then the West must of forgotten about the agreement, because it has been aggressive inducting those ex-Eastern Bloc countries into their club, all the while provoking Russia. Why do people want to continue to poke a big bear with a sharp stick – while it tries to sleep. I’ll never know. However, the cut-off of natural gas may just be the first step (or threat) to a larger cut-off of energy into the West. Russia is playing with a double edged sword, a economic threat of starving the west from much needed energy (natural gas and oil) may work in the short-term, but with low energy prices they also need to sell that precious energy to someone. This too is sending some volatility into the energy markets – who blinks first and can Russia hold tight as revenue dries up – or does the West break as energy dries up? Obama has not taken the stage yet – so he is a none factor – for now, but no doubt he is gearing up for trying to solve this relationship issue.
Lastly OPEC, such a bad club for sure. The cutting production officially, while members secretly continue to sell beyond quota makes anyone trying to correctly measure supply and demand crazy. No doubt these nations are hurting as their budgets expanded based on the increase price of oil and then for it to contract so rapidly has left many countries facing mounting debt. Selling black market oil is something many of OPEC members are not proud to speak of, but there seems to be a little up happiness in the richest club in the world. Sure it would be great for them to see oil prices rise, but for now they have huge bills to pay. What to do ? The internal wrangling in OPEC also may contribute to some volatility in oil.
One thing for sure – while we may see lower lows in oil in the near futures – volatility is still the big player as no one should be shocked to see $70 oil or $30 oil any given week.
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Profits drop ….
It looks like we will see profits drop across the board (in almost all sectors) for the 1st half of 2009 – who knows what will happen in the second half. The relationship between the U.S. and the rest of the world is going to create a global slowdown. Nations are no longer isolationist – thus relying on their own natural resources, manufacturing, and consumption. The U.S. has been for some time a net importer of goods, from natural resources, durable goods, even food. However, as consumers (and companies) deleverage and run out of available credit, thus the ability to spend – the contraction means those foreign nations that rely on shipping us those TVs, washing machines, bananas, and oil are starting to see their own exports contract and that means less revenue (which means less profits).
We did see a glimmer of hope – when the dollar fell in the early – to – mid year of 2007 – exports in this nation were on the rise in China. China also so domestic spending on goods increase (as more Chinese moved from rural farm lands to the massive growing cities that dot the nation.) No doubt China’s growth has slowed, and will into 2009, but it is still growing. China may be able to rely on domestic sales and internal growth to absorb much of the slowdown in exports (even though that is a huge chunk of China’s revenue).
While some U.S. companies may see exports (especially into China) as a life-line to keep the profit wheels turning, many companies are good to see leaner times. The problems that face companies are several fold.
1. Lower consumer demands. This means a shrink in revenues.
2. Volatility in energy costs – for sure with shrinking revenues, overheads play a key part in determining margins – expect energy prices to pay a bigger impact role.
3. Debt – many companies have large amounts of debt and now the ability to refinance (rolling debt) is harder to obtain as banks have run dry and are going to the Discount Window or TARP.
This collective forces mean we should expect to see more lay-offs in the coming quarter, higher prices in the junk bond market as companies try to finance themselves through rough times, mergers (not for profits but for survival), and also more bankruptcies.
This year means for long-term investors it is time to do serious homework when purchasing stocks to hold onto. It also means looking at pro-active hedging tools (like puts-n-stock, collars, and synthetic stock positions) to make sure that capital positions are secure but also used effectively.
I expect fewer winners, but in a bear market, just like a bull market – we are going to see HUGE upward moves. Usually in a Bull market, the market climbs higher on a steady course with big down gaps ever so often. In a Bear market, it is the opposite, steady down move with gap ups. This means be careful of knee jerk moves – these are the times when fundamentals of the company carry the day – not stock price.
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Futures Pre-market
We had a good rally on Friday, but the after-market session saw some quick paced sell off. The futures are also seeing some pressure in the pre-market – so they are down below fair value. The spreads are wide, so expect the Arb traders to buy the futures into the opening and short the cash basket – putting pressure on the market at the opening.
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Support / Resistance
It’s the New Year and with the hard rally on day one – it’s going to be hard to call anything at this point. These are some rough numbers to start us off.
INDU 8500 / 9000 (Ok – I know we are above 9000, but I think we could retrace that this morning. If we close below 9000 today, think of 9000 as a resistance (and 8500 as support). If we close strongly above 9000 it will be a new support. It will be about the close!)
NDX 1200 (1250) 1300 (We had some huge volatility and big moves in this index. It’s anyone’s game between 1200-1300)
SPX 900 / 950 (I really don’t want to give too much to the upside or downside. Fundamentally speaking the companies are going to look fairly week going forward, but the stocks don’t always care about the fundamentals – but rather move on perception.)
RUT 450 / 500 (Like the INDU we did close above 500, but I am still not sure if 500 is the new support or resistance – watch the close.)
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Conclusion
A new year, new surprise, and more volatility. While 2008 was the year of volatility – 2009 will be the year of struggle. I seriously think – as far as the financial sector (lenders, banks, etc.) we have – for the most part seen the worst of the big draw downs (that is not to say there will be more and a couple of surprises) – but I think we have absorbed the sticker shock. However, it is going to be a struggle to find a bottom and fundamental stability going forward. There is no money to lend as the money being poured into the system is sucked up by the leveraged losses as the massive worldwide deleveraging continues.
It maybe the year of the dollar – no doubt the nation is creating massive debt – MASSIVE. We are not talking about Katrina level’s of spending, or even the Iraq war levels. These are crazy numbers 100s of billions and now trillions of dollars in a very short time. A new stimulus package for $800 billion is on its way, but what’s another $800 bill? The question is now much debt can a nation sustain before it crumbles. So far the worldwide faith in the dollar is holding very well, despite everything. Maybe we should be asking if it is because nations have not choice or are they too blind in their faith to notice. I think China, who had in 2007, already spoken as to their loss of faith by not renewing U.S. debt as it came due. Other nations may not be in such a position to make such a bold statement.
While it may seem like deflation, I personally believe we could see inflation very quickly. I would argue that what seems like deflation is just an unwinding of massive leverage – as leveraged losses are moved onto government’s books. Maybe hedging the dollar is not a bad idea, hedging long stock positions certainly wasn’t a bad idea in 2008.
The market doesn’t know hope – it doesn’t know up from down.
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