3/2/09 (AIG Gorilla, GE cuts? Pay to Play!)

Traders,

Last week we were not able to get off the mat – the market would struggle higher – only to get smacked back down as another tid-bit of news created more uncertainty on the horizon. The first quarter is not even completed and we are putting into some lows. There is good news – over the weekend on Bloomberg an analyst was revisiting their investment strategies and made an interesting observation. Several companies that are in the black (positive revenues) even in the slow down have one other additional advantage – positive cash on the books and little to no long-term debt. Comparing the balance sheets to the stock prices – the conclusion is that these companies are being tossed out with the bathwater (being that they are trading under book value). In a couple of cases he said if the company were to liquidate today – their balance sheet exceeds the stock price.

That being said – it means there is opportunity in this mess. It means we have to do a little MORE homework than just watching Jim Cramer, getting a tip on a blog, or reading the paper. There ARE the times of opportunity – many investors ( I would argue most) are making bad decisions. They fail to hedge, bottom pick, or make emotional decisions. Keeping a clear head and doing some heavy lifting may find some diamonds in the rough. However, don’t ask me for any stock names – you need to do your homework yourself. I don’t want to be considered a tipster newsletter.

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AIG rumor was true…

Last week I reported that AIG’s quarter was rumored to be a $60 billion loss, it came in at $61.7 billion in losses. Of course we have heard it all before, they are too big to fail. The government has already tossed $150 billion into the loser and now is looking to pony up another $30 billion (in the new and improved revised bailout). The government has RELAXED the terms of its bailout package to “reduce the pressure” – great.
At this point it is not really a bailout – the government has FULLY assumed ALL current and future downside of AIG. But the new $30 billion will probably not be the last – expectations are from $20 - $100 billion more over the next year. The government has been convinced that they ARE too big to fail and would create a global meltdown if allowed to fail. I would argue – they ARE failing and all we are really doing is shifting that failure onto the government’s books. Thus more stress on the economy, the debt, the deficit – and worst the dollar.

All eyes are on how we are able to finance the $1.7 trillion (along with additional debt) – icing that cake with AIG, Freddie, Fannie, Citi – is creating serious questions as to the government’s ability to finance the continuing mountain of debt.

AIG has failed – you don’t blow through 100s of billions and continue to get money if you haven’t failed. It is not a question of failure – it is a question of WHO takes the blow? Which is more and more looking like the government (and the USD).

The futures in the pre-market aren’t too happy about it.

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GE to get ratings cut?

GE cut its dividend (first time in 70 years) to improve the balance sheet and keep it’s coveted AAA rating - which became threatened. However – it may not have been enough. They cut the payout by 68% - but many are saving it’s just not enough (even if the cut the dividend all – together). The forecast and guidance going forward continues to remain weak and as one analyst pointed out – GE suffers from its complexity and over-diversification into the credit markets. Some have suggested spinning off some of its divisions into independent companies. It is GE has a whole that has issues – but looking at separate vertical markets they participate in – it is clear to see the winners, losers, and survivors. What’s next?

The news – is putting pressure on the futures in the pre-market. GE is down a couple of percent as well.

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Futures Pre-market

The futures are getting seriously hit, but are up a little from the lows. General economic forecasts do not look like they are getting better by the 2nd quarter – world markets were down and the AIG and GE news is putting more pressure on the market. The spreads are in – so expect the ARB traders to buy the futures and short the cash – which will put downside pressure on the market at the opening.

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Support / Resistance

We are testing those support levels after the slippage on Friday. These are important levels – if we do NOT close above them we could be looking at bigger draw downs across the board.

INDU 7000! (We already broke the November lows – now it is just psychological – the GE news is NOT going to help this morning.)

NDX 1100 (We will probably test this area – we are not at the 1000 level we saw in November – but that could change fast. A good close above the 1150 area would show some strength in this narrow index.)
SPX 730-745 (We are RIGHT AT those November lows – we need to hang on here and close above it. The futures are showing a good punch in the gut at the opening – but watch the close!)

RUT 400 (We are below the 400 marker and 370 was November low. A good pull up out of this to close above 400 would give the other indices a show of strength.)

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Gold 900-950 (We came off the 1k mark last week and looks like we stalled at 950ish a little pop in gold this morning.)

Silver 13+ (Silver slid with Gold – see if we get some follow through.)

Oil 35-40 / 50+ (We moved up to the 45 level – but oil is already off about 2.50 this morning back to the 42.50 area.)

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Conclusion

Things are starting to get a little rough – we are testing some November lows and the look over that cliff is not pretty. GE and AIG are both bringing some negative pressure to the market this morning. We need to see some strength in the broader market to help hold these levels. But this is not the time for hope – but rather pro-active hedging and looking for opportunity. There IS opportunity – so take the time to seek it out.

The government has shown it’s play style – there is no changing that – more spending (regardless if you are for Social programs are not) the debate should NOT be one of Democrat or Republican, Socialism or Capitalism – regardless of your political belief – the reality is we do NOT have ANY MONEY to pay for it. As we expect companies to cost cut and manage their balance sheets – the government needs to do the same. I have received several emails that disagree with me about my anti-socialism stance. Fine – I think that is a valid argument and we could debate the merits of national healthcare. However, right now we do NOT have the money – even if we ALL agreed that we need national healthcare. The government NEEDS to get its balance sheet in order before it ventures down the more spending road. Let’s get our balance sheet, debt, deficit spending under control FIRST – THEN we can have the friendly debate about social programs.

Right now we can’t finance ANYTHING – I have a sinking feeling that there is no one that wants to buy 1.7 trillion in US debt! Think about this – when the market was rolling along and everything was great – the government had a hard time in the primary debt market selling $500 billion in debt, now things globally are a hell of a lot worse – you really think they can unload $1.7 trillion? We are running that Chinese credit card at its limit – let’s hope they extend it.