3/3/09 (JP Morgan Profits! Buffet Bottom?)

Traders,

Yesterday was one of those market days that your stomach just sinks. You really would like the market to find some certainty or bottom – and we just receive more blows. Anything and everything was taken damage and in some cases the baby was tossed out with the bath water (if you get my meaning).

However, it is harder to find opportunities because it means doing some real homework. No longer can we rely on a tip or market recommendation and ride along – now investors have to take time, do some home work, and research. Or – your financial advisor or broker does. Additionally – most (almost all) investors are long only type investors. On the floor we called them “Long and Wrong” . There is nothing wrong with taken long positions in stocks – but this market is proving that those that do NOT proactively hedge are the ones that suffer. There is nothing wrong with being wrong, if you are hedged and know what your risk is.

You better get your hedge on!

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JPMorgan makes money?

Bloomberg is reporting that JPMorgan ported $5.6 billion of total profit in 2008, and insiders are saying that came from their OTC derivatives desk (even those they are not authorized to divulge figures.) Part of the advantage was the choices on the STREET shrank after the fall of Lehman and Bear Stearns – which cut out competition. JPMorgan looked for opportunity as others were trying to keep the ship from sinking.

JPMorgan’s book is growing as the other’s fold and is now the biggest OTC derivatives desk on the street, with a reported $87 Trillion (that’s trillion with T) worth of outstanding OTC contracts as of Sept. 2008 (according to Bloomberg). That is a very big number. How do I see it? The profit is all real – however it is predicated on the counter party risk. If the counter party fails what are those OTC contracts worth and who takes the losses. $87 TRILLLION is a big nut to hedge and there is most definitely counter party risk in this market (Bear, Lehman, any others). Note: B of A and Citi are the next two large OTC holders (which you KNOW they are holding some cross paper with JPMorgan.)

The news is good – for now.

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The Buffet Bottom?

When Warren Buffet said the economy is in “shambles” and his firm has been taking losses and he too is laying off staff – I guess you could call that capitulation? Who knows – but I am sure that more than a few points of the drop yesterday could be attributed to Buffet’s remarks.

So are we going to see a short-covering (short-term) rally out of this? Why not – the shorts didn’t cover as interest has grown and not contracted. That means some opportunity to lock in some gains, roll up hedges, and take off some positions maybe in the cards.

Look for a knee jerk bump that could happen from the over panic selling yesterday.

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Futures Pre-market

Futures are seeing some gains across the board – the bank sector as a whole. The spreads are in – so expect some upside pressure as the ARB traders buy the cash basket at the opening against the futures.

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Support / Resistance

New supports?

INDU 6500 (I heard it this morning – 6500 on the trend line for support – if you believe in that sort of thing. But at these levels who really knows.)

NDX 1000 (We have not gotten to the November lows YET – however it looks like we could see a little pop this morning. Can we close above the 1100 line?)

SPX 700 (If for nothing it is a whole number – again who knows since we have broken supports.)

RUT 370 (We are just below that November low – a good move up and close above it could bring some hope to the narrower indices.)

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Gold 900 (We might stall at 900 – and 850 is in the cards as well)

Silver 12+ (We are just below that 13 marker – and could see a pull back to 12 flat.)

OIL 35-40 / 50+ (We got up to 45 just to pull back to 40…..Again 35-40 is the support band – the OPEC line in the sand?)

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Conclusion

We got a good sock in the got yesterday and it seems everyday more and more are reviewing the 1.75 trillion budget deficit. While people line-item complain about this or that (from curtailing donations to charities to raising taxes on small businesses) – what everyone is seriously wondering – how are we going to pay for it? The tax revenue (even if you raised it 50%) will not solve the problem of financing the debt today – we need to unload it into the treasury market FIRST. Remember – taxes are revenue, but we still need a loan today. That is the sticky-wicket as they say. Where do you borrow 1.7 trillion today – and HOPE to pay it in the future with taxes.

The world waits and watches – the ability to take down that kind of debt paper is the uncertainty that we are all waiting and watching. Can we sell it? That is the real wild card.