Yesterday was very interesting action – the market up after the largest 3 week run up in 17 years started giving way when the Treasury Auction saw some problems as yield went up (even after the Fed bought 7.5 billion). Then at the close the market rallied (across the board) to close up. Meanwhile the VIX and implied volatility decreased (as statistical rose) creating havoc in the options market. Additional – end of the quarter is seeing a ramping of funds moving back into the market.
Geithner goes in for round two today – and will be requesting more power to manage AIG or Lehman type issues. There is will be lots of give take with Congress on these requests – as it moves the authority for decision making from Congresses hands into the Treasury and/or Fed. He will pled his case today….
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GDP Shrank
Gross Domestic Product (GDP) shrank by 6.3% (annual rate) from October to December (the weakest since 1982). Profits dropped by 16.5 % the most since 1953. It is clearly evident that the economy is still contracting – the question is when does it stop contracting and find a bottom. The second question is when does it expand. I think the first question can only be answered when the deleveraging unwinds completely – which could be 1, 2, or even 3 more quarters. After the bottom is found, the answer to the second questions is going to be resting on the government’s budget deficit and policies. More taxes, less taxes? Expansion of the debt? What? Any growth will be determine by government policies to allow business to expand.
70% of the GDP is fueled by consumer spending, which contracted 4.3% the last quarter (the first back-to-back drop since it was measured). The problem with the government plans and budget deficit is that it will expand by over 100% of the GDP. Obama’s forecast is that GDP will grow by 2.6% and make up for the Deficit and Debt – but that is a big if.The World Trade Organization predicted global trade will decline by 9% this year – which if we expand out that means we should expect to see consumer spending also shrink. So GDP doesn’t look to be expanding anytime soon.
The jobless claims additionally continue to be an issue with over 1.2 million jobs lost this year. The jobless claims continues to grow – so add that number into the equation and it confirms that consumer spending should continue to shrink (at least through the next quarter).
Nouriel Roubini (The economic professor that has predicted what has come to pass and been dubbed Dr. Doom) continues to see serious bumps in the road and that the economy will continue to contract through 2009. Expectation is for more banks to need more money (bailouts) and possibly nationalized. His expectations remain at $3.6 trillion in losses – which we are not there yet.
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GM up – cuts more jobs
GM is up in the pre-market as the company has “persuaded” more than 6,000 UAW members to take buyouts.
However, while it has reduced the overhead considerably – expectations are that additional funding will be needed by the government.
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Futures Pre-market
The futures rallied in the pre-market prior to the GDP and Jobless, then it saw some up-down volatility after the numbers came out with slight down pressure. The spread is in for now – but volatility is showing that can change. Expect a higher opening unless it changes.
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Support / Resistance
We had some serious whipsaw action yesterday – still testing the resistance or is it support area.
INDU 7500 (7750) 8000 (7750 seems more of a resistance point – but also a magnet at the same time. Watch the close.)
NDX 1200 / 1250 (Again closed almost unchanged right between the 1200 – 1250 area, it looks to move higher at the opening.)
SPX 800! (The 800 line which was tested yesterday – is a short-term support that could easily become resistance.)
RUT 400 (425) 450 (It looks like we may open higher – but volatility with the GDP is uncertain.)
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Gold 900+ (It seems that gold gets stuck at the 900-950 range and hasn’t made a move higher or is having problem. However if it breaks 1000 I think we could see a big knee jerk up move.)
Silver 13+ (Silver is Gold’s little brother)
Oil 50+ (It’s moving higher now to 53.50 this morning.)
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Conclusion
The budget deficit at about 3.5 trillion (that’s trillion with a T) is creating some waves. It may look like the administration will push it through it’s agenda with a Reconciliation. Obama is on the campaign trail to sell his massive deficit – tonight he will have a town hall meeting online. Many “Blue Dog” Democrats are also having problems with it. It is going to be a fight and it’s going to be all up hill. The big concern is that if it does pass close to what it looks like now we could see more instability in the dollar, which means that $300 billion may not be enough for the Fed to keep interest rates at zero. They just had a problem yesterday – as yields went up and the UK auction failed, giving the Chinese concerns more weight at the G20 meeting in London next week. If the UK and US can’t even finance their own debt – then a new world currency maybe in the cards and if no one wants to play in the sandbox – we could see more nations take a tariff / isolationistic stance to protect their own economic issues.
We have had a massive rally – over 20% in 3 weeks (with 5% to 7% moves in a day) – the financials have moved almost 50% in most cases. The short-interest in the last few weeks by 25% - and every knee jerk up is additionally fueled by more covering. We are seriously testing those first resistance levels and we could go either way – the more we hang and contract at these levels more the hidden volatility is injected into the market. Long equity funds are open at the end of the quarter and looking for deployment – so we are also seeing more buy side investor volume come into the market.
While true the news has been miserable there are a few rays of sunshine – but even those are questionable as anomalies. Faith is a powerful thing and right now it is faith that we will get through this and buyers are willing to take equity risk – regardless of fundamental data (including today’s GDP and jobless numbers).
So the question that we need to ask – is this a short-term bear market rally or have we really found a bottom. Market perception is that it is a bottom, but after the 20% rally – many are starting to take a second look.
What is certain is that options volatility (VIX) at 40 is expecting a 10% monthly volatility –however the market is moving as if the VIX was priced at 65. And the expectation is that it can continue to make large moves up or down.
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