3/16/09 (G20 Pow-wow, Banks vs. Gov, AIG Bonus?)

Traders,

I did get some feedback from a few people last week about the Chinese Premier announcing his concerned about purchasing U.S. treasuries, along with Hillary Clinton urging China to purchase more treasuries. My concerns for the last couple of months, recently echoed by Buffet, Faber, Pimco, and Rogers is that inflation is coming (as soon as 2010 according to Pimco). In 2007 China announced it would reduce its U.S. 2 year notes (considerably – and not repurchase them), 2008 they purchased record levels of gold, and now they mention their concern about the U.S. debt. I received 5 emails – all with the same theme – U.S. dollar IS strong and as other countries economy worsen that they will purchase more U.S. dollars because it is “safe”. I believe that view is more patriotic arrogance, rather than simple math. I WISH that were true – but at the end of the day China’s action, statements, and math means otherwise. It’s time to get focused on the dollar – it’s not IF inflation is going to happen, it is WHEN is it going to happen.

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G20 Pow-Wow

Usually the members don’t see eye-to-eye. Europe is usually more concerned about inflation and strong Euro policies, the U.S. is usually pushing reduce import prices and lending (bailout), and of course there are the fringe members (from one extreme to the other). Concerns going into the G20 meeting was the U.S. bailout train and flushing the system with money – some believed that many members would create some flak as to the Geithner’s method to his madness. However, it looks like they are all on the same track – for the most part – the focus – get the money flowing by relieving banks of toxic paper. They all seem to be on board – the question is WHO is going to buy them. There is a little bit of a circle at play – since government money could in the end be just buying down the debt, as they give one bank bailout money – that buys another banks debt and in the end (some would argue) it is just shuffling around the risk (with the government burdening most of it). The real issue is HOW to we get the toxic assets to FAIR value (real value) – rather than mark-to-myth levels. Some analyst believe that the assets still need to be marked down as much as 40% before we find a bottom (while others need to go to zero – as they have fully defaulted and the equity line securitization may also be in debt.) Finding the bottom is the hard part.

The U.S. is taking an additional step – which has many concerned – the Obama administration is looking to EXPAND the Federal Reserve powers to impose their own capital requirements (the argument is this could go both ways – stiffer regulation or more lax regulation). Again – the members of the G20 are in agreement that they all need to get to the same place – the question is which road to take.

At least they all agree something must be done – bringing confidence to the table is a powerful tool in optimism. Now the trick is proper and timely execution.

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Governments Vs. Banks

Several articles from Bloomberg to NPR have been reporting that some banks do not WANT the TARP money, while others that accepted it want to return it. The reason, too many strings attached. There is also the assumption (according to the CEO of Wells Fargo) that ALL banks NEEDED the TARP money – but as more of the story becomes clear, the government forced several of the large banks to take the TARP money – even if they didn’t need it or want it. The government’s plan was to get capital flowing again.

In the Bloomberg article this morning, CEO Kovacevich (Wells Fargo) said. “Is this America -- when you do what your government asks you to do and then retroactively you also have additional conditions? If we were not forced to take the TARP money, we would have been able to raise private capital at that time” and not needed to cut the dividend to preserve cash. Goldman and others are echoing similar thoughts.

However, NPR pointed out in their story this morning – those that DID take it and want to return it may receive BLACK marks next to their names by the government. Meaning that regulators may make things difficult for those banks that were not seen as working WITH the government. What has these banks upset is the continuing conditional changes as to the money being lent.

The banter is heating up.

Treasury spokesman, Isaac Baker, said their new stress test will protect the banking system. “This program will help ensure banks have the capital they need to continue lending through an economic downturn that is more severe than expected and help restore confidence that our financial system is sound.”

Of course Kovacevich’s reply was clear, “We do stress tests all the time on all of our portfolios. We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”


There will be some more fallout between banks and the government. Some banks cannot speak up, like Citi – regardless of how they feel about TARP – they need all the help they can get. Those banks that survived or are even doing well – want nothing to do with the government’s bailout and conditional arrangements.

We could easily see a new two party banking system those that are part owned by the government and those that are independent. Of course I am sure the Fed as well as the Senate Banking committee have a few of their own ideas.

Expect more uncertainty and volatility to surround the banking sector and future bailout money.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayqseC8JU2.I&refer=home

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Futures Pre-Market

It looks like we have some good advances in the pre-market. The spreads are in – so expect the Arb traders to send an upward jolt to the market at the opening.

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Support / Resistance

Heading higher?

INDU 7000 / 7500 (7250 looks like a pivot point – maybe good to get neutral. At the 7500 area – any deltas with gamma should be flat to short. Expect a good upward jolt at the am – if the spread remains in the futures.)

NDX 1100 / 1175-1200 (I think we may see a little difficulty at the 1175 area moving into 1200. I think using flat to short deltas against gamma is the game.)

SPX 700 / 750 (I want to say 800 – but 750 feels pretty sticky. I don’t want to be long or short at this level – rather flat with gamma. 750 seems like a pivot area – with some resistance.)

RUT 350 / 400 (We almost got to 400 – if we don’t break through and start to fall off –it will create downside pressure for the narrower indices.)

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Gold 900+ (Last week the Chinese concern for the treasuries helped push gold higher. However, I don’t think it was enough. 900 is still support – for now.)

Silver 12+ (Just above 13 now.)

Oil 35-40 / 50+ (Still in the mid range around 45, pulled off as OPEC said they would not be cutting – but still above that 40 support band.)

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Conclusion

I think the story going forward will be the banks and the government. We seem to have brought some optimism to the table and got a great rally. This is a great time to hedge your positions. The government is flexing more power and are changing bailout conditions – additional power given to the FED may also create some interesting relationships between Congress and the Fed – as they have been trump each other over the last year.

AIG – (80% owned by the government with the biggest single quarter loss in U.S. history) – is paying out contractual obligated bonuses to staff – Congress is pissed (rightly so) – however regardless of how wrong the bonuses seem, they are protected by contract. If Congress interferes – it will send a shiver down the spin of all companies and challenge contractual law. This will be an interesting story as it plays out.