Traders,The market slid some more yesterday – and we stuck our head down below those November lows on some of the indices. The INDU is at a 6 year low and we may have seen some capitulation yesterday (from the long-term traders.) Today is the last trading day before expiration – we are already seeing some volatility in the pre-market futures and some individual issues. Don’t expect pin risk from hedging to force stocks to strikes – which means get in FRONT of your hedging.
Chicago Tea Party? Yesterday a video of Rick Santelli had made the rounds (I even sent it out to a few people). Even the Press Secretary was asked about it. Pretty much Rick said, who is the government to decide WHO gets a mortgage bailout and who doesn’t – with OUR money? He even made joking reference to a Chicago Tea Party. If you haven’t seen the video – here it is: http://www.cnbc.com/id/15840232?video=1039849853&play=1
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GM – the good, the bad, the ugly!
At one time GM was buying up, partnering, or investing in some of the world’s smaller auto makers. Now since they can’t manage their own business they are letting many of those same auto makers fail. This week the CEO of GM said that if they could not sell Saturn or Hummer they would wind them down (that means shut them down – within 6 – 18 months). Saab is the first to fall – after their parent company (GM) just cut their ties to let them float on their own – Saab filed for bankruptcy. I am sure the Swedish car maker is kicking themselves for ever getting into bed with the GM behemoth that couldn’t even get out of its own way. However, while it sounds bad – it is actually longer-term good news. Saab’s plan to file (thus fully severing the umbilical cord from GM) and bringing back the company to its motherland means that have an opportunity (being independent) to stand on their own – yet again. Being small, nimble, and working on a business plan (without being held hostage to the larger sinking ship of GM) means they HAVE a future.
Some however are saying that Saab’s marriage to GM was too long and that Saab will need serious help to get back on their own feet. But let’s be optimistic – once they cut the ties – rework their business model – (look at the formula Revenue – Cost = Margins) they may have a good chance of raising money, issuing a bond, or even receive government aid (Sweden is a socialist country remember).
Good news for GM as well – there is one less mouth to feed.
The question for GM – can they shed Hummer and Saturn as well?
I am all for having more small independent auto makers (competing) – rather than just the Big Three pushing out the same car with a different label on it.
GM stock is down in the pre-market on the news, but I wonder if it is just the Bankruptcy and people not looking as to the benefits to GM with cutting the ties?
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Corporate Debt – the new bubble?
Everyone is trying to figure out where to put their money, safety first and yield second. Treasuries are assumed safe, but they pay nothing. Stock market doesn’t seem safe, and it’s going down. So what next? Well if the government is not going to let anyone fail – why not corporate debt? If the government is backing the company, some would say it is as safe as a treasury – however they PAY a yield. The demand for this paper is out of control (just like the Dot.com, Housing market, and CDO) – investors are rushing in as if it is the new new thing. Again, I am SURE investors have NOT read the fine print – which CLEARLY state’s YOUR PRINCIPAL IS NOT PROTECTED. They just skip over that part – just like they didn’t bother to look to see if a Dot.com company had any revenue, housing prices never go down, and CDO’s have a AAA credit rating (by the way none of that equals math).Being human we are stupid and greedy (case in point lotteries, casino’s, sports betting, gambling, beanie babies, etc.) – I wager that understanding risk and probability is not a intuitive trait among us humans.
That being said, Corporate bonds (just like stocks, homes, CDO’s and other investments) – can work, can make you money, have some degrees of risk – you just need to DO THE MATH and home work before you invest.
Roche Holding, Honeywell, and others led about $34 billion of U.S. corporate bond sales – the companies need for cash and the investors appetite are meeting and we are seeing supply and demand again create flow. However, remember the PERCIVED risk of the company is based on a credit rating (the same credit rating and credit rating agency that rated those failed CDOs). But with rates at 4 to 5.5% investors are rushing in and ignoring everything else.
Will Roche, Honeywell, or others fail – probably not and thus your bond is probably could. But remember – it might be improbable, certainly doesn’t mean it’s impossible.
There ARE ways to hedge the corp. bond paper. The smart money will.
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Futures Pre-market
The futures are getting hit fairly well in the pre-market. We broke some lows yesterday and that is sending some people for cover. There is enough spread in the game for the Arb traders to buy the futures to short the basket – which will create some downside pressure on the market at the opening (if the spread remains).
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Support / Resistance
OUCH!
INDU 7500!!!! (We broke down below 7500 and now at 7465 – a 6 year low. We will be even lower this morning –base on the futures. However, we could rally and close above 7500. Today is a key trading day – psychologically. Do we close above 7500 or are we on a race down to 7000?)
NDX 1150 – 1200 (We will probably touch the 1150 today. 1140 is really more the support area. Still above the 1100 area – which we could well be on our way too. Watch the close, above 1150 could show some support.)
SPX 750 – 800 (Unlike the INDU we haven’t hit that ugly 750 support level yet – but we are below 800. A visit to 750 is in the cards, but do we bounce?)
RUT 400 – 450 (Just like the SPX the RUT is heading down – it was floating around that 450 area for weeks – but it couldn’t hang on. 400 is key. If we can see some strength in the broader market it might mean that the narrow based indices are just getting a little short-term shock to the down side.)
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Gold 1000? (We have moved up hard from the 900 area and in a week almost hit 1000. What is surprising is the dollar remains strong – chalk that up to short-term deflation, which could quickly turn into inflation.)
Silver 14+ (We are going to be ripping through 15 soon – it seems. I still think Silver is way undervalued as priced in dollars.)
Oil 35-40 / 50+ (The shocker on the inventory numbers send a little jolt into the oil markets – but 35-40 range is support and I think if the dollar breaks we could see oil rip up – regardless of demand.)
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Conclusion
There are many forms of inflation – some measure it by price, other measure it by supply, there is also currency rates. The man on the street doesn’t care how it happens – it just means to him that his dollar doesn’t buy what it dead. In Iceland when their currency broke – it took several days (weeks) before the man on the street felt it because there was still inventory in stores to purchase at current prices. However, when they started importing MORE stuff to fill demand THEN the man on the street REALLY starting feeling it.
Inflation is traditionally a measure of buying power. How much did that widget cost last year, as compared to the price this year? Well ask yourself this – if they don’t want your dollars (at ANY price) for the widget – is that inflation?
I am not saying we are experiencing inflation right now – we certainly are not. But as a trader we don’t focus on today, we try our best to forecast the future and make value decisions today based on our forecast. People constantly tell me – why are you worried about inflation, we are experiencing deflation or dis-inflation? It’s tomorrow that I am concerned about, it is tomorrow that I am forecasting, it is tomorrow that I am planning and trading for – not today.
Just like earnings – I really don’t care what the number is or how a company DID (key word is DID past tense) – I want to know what they will DO in the future.
I think that is what separates the traders from the economist. The economist like to explain what is happening now, people like Rick Santelli (or traders) are explaining what will happen in the future.
Just like our government (and why Rick was upset) focusing on the present and paying no mind to the consequences of their action in the future!
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