3/17/09 (AIG = Mad as Hell? Mexico = No Holds Bar!)

Traders,

The AIG bonus is getting all the headlines…. Don’t miss understand me – I am as pissed about it as the next guy. However, there ARE a couple of issues. First, our government has continued to give them MONEY, they KNEW about these bonuses (they are no surprise), and second there is another contractual bonus for 2009 (about $200 million). The government (WE) own 80% of the company. The government got into bed with this company, owns the company, and continues to give it MORE money.

Why are we not pissed off at the government? At the end of the day – the media gets us (we the people) fired up over the mundane crap. I received many emails about how everyone is pissed off about the bonus – however come on its only $160 million and the government is into this company for $100s of BILLIONS. For the flak and crap I hear in the media, from people, and in emails that are sent to me – how come people are NOT pissed off at the government?

Come ON people wake the hell up! Who is the more fool, the company for giving out $150 million in bonuses, or the government that has given 100s of billions to the company (not once, not twice, but three times)? Not only that – our government KNEW about the bonuses, KNOWS about the coming 2009 bonuses – yet they are STILL giving them money. At the end of the day – it is really silly to be mad about $150 million in bonuses and not get really Pissed Off at the government. We are entering the realm of silliness.

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Mexico Flexes it’s muscle

For all the crap we dump on Mexico and Mexicans – this nation treats them as second class citizens, we don’t want them coming over the border, they are looked upon as day labor, we think their currency is a joke, they government is screwed up, etc. We are a really arrogant and hypocritical nation. Well – Mexico is getting pretty sick and tired of it and with the U.S. down on the mat – they have no problem with the No-Holds Barred approach.

President Clinton passed NAFTA and part of that deal was to allow Mexican trucks to cross the border to deliver goods into this country, just like they let us. However, that part of NAFTA was never fully recognized and Congress was given the squeeze play by the U.S. truckers union and shipping companies NOT to let Mexican trucks into this country. After a decade, under the Bush administration, Congress finally agreed to abide by the NAFTA agreement and let a pilot program of a few Mexican trucks entry this country.

Well, the Obama administration and Congress just shut down that pilot program (under all kinds of pretenses – Buy America, etc.) and thus not honoring the NAFTA agreement. Mexico decided to fire back and raised tariffs (taxes) on over $2 Billion worth of U.S. exports into Mexico. Analyst believe that will seriously hurt several companies that rely on exportation to Mexico. Congress is backing up fast and trying to come up with something to appease Mexico, after spitting and walking on them for decades (never concerned that Mexico would raise a finger) – this is a very BOLD move by our neighbor and would serious hamper exports. Economist have indicated the tariffs (if allowed to remain) will increase job losses and revenue (shrinking margins) in several U.S. sectors.

But the bigger news – while this story may not get the air-time it deserves – other nations just got a wakeup call. Mexico just punched the U.S. very quickly in economic retaliation. That means the U.S. needs to STOP and THINK before passing legislation that could affect other countries and NOT expect to them to react. I am sure China, Ireland, Russia, Central and South America were all surprised to see that round-house coming. It was a big blow – (A pilot program of a few trucks canceled and Mexico responds with a $2 billion tariff!)

Protectionism just got some mud on its face.

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Alcoa (AA) falls

The largest U.S. aluminum producer is in a serious pinch. Planning to sell stock and bonds to raise cash. Aluminum prices we the hardest hit as commodity prices fell. However, some analyst believe that it is rather Alcoa’s fault , rather than aluminum prices – since Alcoa didn’t manage future risk as pertained to prices. Alcoa should not be cash strapped – but they over extended. Unlike the auto industry or the financial industry – if Alcoa gets their books together they are in it for the long haul. I would NOT be surprise if Alcoa is putting in the lows.

AA down 10% in the premarket

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Morgan Stanley (MS) cut

Morgan got hit yesterday as its rating by Bank of America was cut to “under perform”. Morgan had a good run from $10 (last Nov) up to $25 just last Friday. However, regardless of how it got to $10 – making a 150% rally in 5 months is very nice and it’s not time to be greedy. Banks (all banks) are not out of the woods at all. Morgan Stanley, JP Morgan, and Goldman are the current leaders – they may have a cleaned up balance sheet and generating profits.

No matter how good their books look or their revenue – it’s NOT about them – it is about the economy. If people can’t spend or borrow money – companies have problems posting equity. Well – there is only so much a bank can do. Expect even the good solid financial firms to have a difficult time – regardless of how well they are run – until these economic conditions change – expecting any bank or financial firm to have a 100% rally in their equity in 6 months is a little absurd. Sure these companies have sold off hard (and probably rightly so) – but if you didn’t catch the ride since last Nov / Dec – don’t expect too much more upside in any of the financial firms – for now any way. Of course my view is very short-term.

MS down 3% in the premarket

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Futures Pre-market

The futures have remain unchanged – slightly below fair value. Expect slight pressure to the down side at the opening.

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Support / Resistance

We gave up a 3 digit gain in the INDU – yikes.

INDU 7000 / 7500 (That 7250 remains a pivot point – we a slight negative bias. We stretched our legs yesterday – only to see the index snap back down to the 7250 line at the close.)

NDX 1150? (The previous upper band at 1150 seemed like a magnetic point as the NDX moved quickly there.)

SPX 750 (A topping area – we moved up but snapped back down. If we don’t close above 750 – look for a lower session – maybe down to the 725 area.)

RUT 350 / 400 (We we touched 400 – oh well now we head lower.)

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Gold 900+ (Gold on the move higher)
Silver 12+ (Still above the 12 line)

Oil 35-40 / 50+ (OPEC not cutting hasn’t smacked the oil prices that hard – they have recovered and started moving higher again.)

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Conclusion

The honeymoon is over – as Bloomberg reported last night that Obama’s approval ratings are dropping fast – some polls have him from the 70s already down to the upper 50s. Most of it seems to be rather an economic reaction – and sometimes I don’t think there is anything Obama could do change that. We need to find a bottom and all the government injections are just making it harder to SEE, let alone FIND a bottom. Is AIG, Freddie, Fannie, Citi, etc really on the road to recovery? You’ll never know because the balance sheets have run AMOK with different types of loans, bailouts, and funding – new interest payments, who’s first in line, are they preferred A, B, C shares or common. Who has warrants. I mean it is a mess and the government is not spending any time cleaning the mess, but rather making it harder to see.


That makes it MORE difficult for Financial Advisors to do their job – how do you tell if the company is standing on its own balance sheet or not. Is there risk of nationalization or bankruptcy? Who knows. A Financial Advisor friend of mine made an interesting observation, he said – the government bailout has muddied the waters – the wisest course is not to even step into the water. He’s right – but then WHERE do you put your money? Certainly NOT into U.S. treasuries (which are defacto debt of the same companies you are bailing out). Then where?

That IS the magic question – only time will tell. We will KNOW who made or lost money when this is over. The only smart answer is to hedge your assets in case you are wrong. And I HAVE been wrong before (as we all are)– it’s ok to be wrong as long as you are hedged!