Yesterday as all eyes were on the testimony of the AIG CEO getting grilled by Congress (on what Congress had responsibility to know in the first place), Bernanke came out and pushed “All In”. Everyone was shocked, because while he did “SAY” it was an option back in February – no one thought he would pull the trigger all at once. As Buffet, the Chinese Premier, and other’s have sounded their concern about the possible inflation (or weak dollar) – yesterday Bernanke confirmed it. Everyone that had done the math KNEW that Obama would NOT be able to fund a $1.7 trillion budget, the Treasury planned to sell $1 trillion worth of debt this year into the market (many analyst said even $1 trillion would be impossible). The only answer, was for the Fed to “print money” and buy our own debt. The Fed is taking down $300 billion (30% of the debt). So really we are hoping to only sell $700 billion this year (Still a massive number – which many think will be difficult). The Chinese premier was correct in his concern – the government is just printing money and thus at some point the value (or principal) comes into question. Of COURSE the government can pay its obligations, but the question is NOT whether they can pay, but HOW. If they pay off debt with “printed money” how much is the money really worth? That is what is on everyone’s mind. At some point a FIAT currency (of FAITH backed) currency – needs FAITH. Faith is the only value the dollar really holds, for it is not redeemable or backed by anything (other than the good faith of the U.S. Government and their various departments).
The gold and currency markets reflected that concern quickly as we saw some of the biggest single day drops in the dollar against the Euro, Pound, Franc and others. Additionally gold rallied 50 points. The big shocker wasn’t the dollar slide – it was the treasuries exploding to the upside (with the yield in the 10 year making the BIGGEST drop since the 1987 market crash). Who is really buying? We know that the FED is. A bond trader said if you didn’t think there was a bubble in the market before – well….
The market also got caught and we saw short covering across board as bears and short positions got caught by the surprised and quickly started to cover. The Futures massive intra-day pop on a few big trades caused a scramble on the basket traders – rushing to cover. Like the tail wagging the dog. We are well into those resistance levels – it is now time to see if those become supports….but keep an eye on monetary inflation.
Buffet said when asked on CNBC if he thought that inflation was coming and if it would be worse than the 1970s, he concluded his answer with: “The only party that can leverage up is the US government. They have the ability to take on anything because they can print money as long as people will do business in US dollars. So it could be--it could be worse. And, you know, in economics there's no free lunch.”
Bernanke (IMHO) just pushed “All In” with a 7/2 off suite. Now we can only HOPE for a good flop – but I have a sneaking suspicion he might be drawing dead.
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FedEx sees profits fall 75%
The company is looking to extend pay cuts as well as more jobs. It is looking to cut $1 billion from operating costs by next year – which will include a $100 million 4th quarter charge. Not only did profits fall but sales fell for the first time in over 10 years.
While the market may see a bottom – the long term concern is stagnant (or flat to negative growth). That means cutting costs now. Additional concern is ramping oil prices and a weaker dollar.
FDX is down 7% to $40 in the pre-market.
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Alcoa buy recommendation
I reported last week that Alcoa got hit pretty good with the selloff in the commodities market. However, it’s commodities and society needs them. Additionally with massive international sales a weak dollar could help the bottom line. JPMorgan raised them to a “overweight” based on higher earnings going forward.
AA is up in the pre-market by 5% to $5.70.
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Oracle following IBM’s lead?
IBM moved out of the manufacturing business and moved into the service business. They had realized some years back that consulting and support have very little over-head in comparison to manufacturing (additionally it wiped out the massive R&D budgets which required a company to rebuild their computers every 18 months to keep up with technology.) Well Oracle has been in the software business for a long time – but they too have increased their support and consulting services which continue to increase the bottom line with very little additional costs.
Oracle surprised analyst by beating estimates and but a closer look shows that consulting revenue helped make up for slowing software sales.
ORCL is up 7% in the pre-market
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Futures Pre-market
The futures have been swinging around fair value a lot this morning – up then down then up then down. Most Arb traders will be on the sideline. The opening market looks pretty flat or mixed for now.
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Support / Resistance
We are solidly in the resistance levels right now – question is ARE they resistances or new supports. Nothing is confirmed for now.
INDU 7000 / 7500 (We are just below the 7500 level – the market rallied (with help from big short covering) after Bernanke went Rambo style. Do we close above 7500?)
NDX 1150 / 1200 (We are just above the 1200 level – a couple of stocks are looking strong in the NDX this morning – ORCL being one of them. We may stay above 1200.)
SPX 750 / 800 (There is a lot of action on the 800 strike so we could see pin risk going into expiration.)
RUT 400!!! (420 looks like another small resistance area – but keeping the RUT above 400 means we could see solid strength in the other indices and convert some of these resistances into supports.)
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Gold 900+ (We made a huge move $50 points to 950 after the dollar started sliding against foreign currencies.)
Sliver 12+ (After selling off sliver rallied up and now through 13)
OIL 50?!?!?! (Oil sat in the 35-40 area which was broad band accumulation support area – the run to 50 has been quick. The dollar coming off help push it quickly above 50 – is that now the new support?)
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Conclusion
Well Bernanke has gone from weak (baby steps last year) to full-on Rambo. For the Fed to print $1 trillion ($300 billion to buy already printed money – note the circle of debt) was a shocker to everyone. The bond traders went nuts on the 10 year with one of its biggest moves since the crash of 1987. A serious bubble is building into that market – coupled with the dollar bubble which lost some serious air yesterday (seeing currencies make those kind of moves in a few minutes is shocking and scary.)
The market got sucked in and over the last couple of trading sessions the bears are getting sucked out (as seen with the decrease of short interest across the market). A couple of other important notes – for the rest of this week we MIGHT see some pinning to the strikes with expiration on Friday. I say MIGHT because all the news seems to be out – Bernanke can’t really offer any more surprises now. Additionally – month end is also quarter end. We are starting to see some order flow into equities and we could see some ramping as money is redeployed.
Keep you head down – the news is out and while we might of bought the rumor it is a question of selling the news. I am unsure about what is about to happen next – but expect volatility. The real cards will be played after expiration and if we close on some strength after expiration (above supports) we could get some optimistic follow through.
Additionally – we will eventually see foreclosures and jobless claims diminish (because it is finite) – however it may take a long time before we see growth. Also – watch the treasuries and currency markets. We have pushed our ability to fund of deficit to a breaking point – enough so that the Fed has to buy $300 billion of our own treasuries, confirming China’s concern about this nations ability to continue to fund bailouts and spend.
We are coming to some pivotal times in our nation’s history. Bernanke has gone full RAMBO!
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