4/21/09 (Tsunami? Not Super Tuesday! Lost?)

Traders,

Yesterday saw some serious sell pressure and there was not the typical last minute rally that many had expected in the resent run up. No sector was spared yesterday and it seemed that we also saw some premium return as the VIX and VXN moved back up towards 40.

Reality seems to have pierced the vial of optimistic euphoria as investors realize that the banks are reporting only paper profits (thanks to moving assets off the balance sheet, relabeling them, and new accounting standards.)

The big story, or at least I thought it was a big story – was when the WSJ a couple of weeks ago wrote an article about the doubling of commercial paper defaulting. I did a little more reading and saw that it is fairly significant and a vast liability on the books at many of these banks. The nail in the coffin for me (reflecting it was more than just a story in the WSJ) was when General Growth (one of the largest commercial real estate holders – over 200 malls) filled the largest real estate bankruptcy in history (over 25 billion) – yet it still seemed to go unnoticed as people were more excited about JPM earnings and the market rallied higher.

This morning on CNBC – we are started to see the “prime time” talking heads start to talk about the Next Economic Tsunami, “Commercial Real Estate” – Hello – where have they been? http://www.cnbc.com/id/15840232?video=1098780352&play=1

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Super Tuesday

There are many “Super Tuesdays” – but in the earnings cycle – today is the day when (I believe) over 5 Dow Jones companies report their earnings, as well as some other big hitters.

Caterpillar posts their 1st loss in 16 years. They also lowered their forecast for 2009. I still think Caterpillar is a great company and if they can get a solid footing in China and India (they have but I think they need more) – we could see a good future in Caterpillar. As China and India continues to build (regardless of pace) they need heavy equipment.

DuPont reported earnings that beat estimates – but it is also lowering 2009 forecasts.

IBM missed sales estimates by almost 4% and they expect weaker computer sales in 2009.

Merck also missed estimates and reduced full year forecast for 2009.

The theme seems to be the same – missing estimates and more importantly lowering 2009 forecasts.
Which seems to go hand-in-hand with Goldman’s very low and slow growth estimates over the next 3 years.

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Where are we going?

While I am not in agreement with Roger Altman (former Deputy Treasury Secretary under Clinton) political views on what should be done, I think he is right about the economist expectations. He explains the nature of the recession – which is spot on. He states that Goldman’s real GDP growth is probably the most accurate (1.9% in 2010 and 2.3% in 2011) – when many others are in the high 3% or even 4% range.

The reason is that consumers make up 70% of the GDP – but with job losses, no access to credit, negative savings, and massive consumer debt – it is going to be a VERY slow recovery. He stated it is NOT the traditional type of recession and he is certainly right about that.

The question we must ask ourselves (if we believe that Altman and Goldman are right) – is what is the best course of action. Altman is for more government intervention and programs, fully supporting Congress and the Administration. I do agree with him that that government can multi-task and I appreciate that while he is for National Health care he is real enough in his view that any payment or commitment should be delayed. That being said – they should still work on the program so that when it able to be funded it is ready. While I am certainly not of that view, I must say that Altman is painting a picture of the economy that is more realistic than what we have heard from the Government, Congress, Treasury, or Fed.

Here is the video: http://www.cnbc.com/id/15840232?video=1098784408&play=1

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Futures Pre-market

The futures are getting hit as the earnings coming out are showing concern about their forecast. The spread is in – so expect some pressure on the cash when the market opens.

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Support / Resistance

That questionable pivot point (of whether it was support or resistance) seems to be tested yesterday.

INDU 7750 / 8000 (The 7750 level seems to be near-term support – next stop down below that is 7500. The question is can we get a bounce off this 7750 – 7800 level. The earnings are not great and putting pressure on the futures in the early morning. )

NDX 1300? (1300 will be the first test – if we can’t hold than 1275 is the next support area. Earnings seems to be the driver this morning.)

SPX 800 – 815 / 835 (We are at the 835 pivotal point that we need to either rally above or fall down to the 815 area.)

RUT 430 / 450 (We are just above 450 which is a support area – but could quickly break. Watch the close to see if strength can return.)

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Gold 850 – 900 (We got a good rally in gold up to the 880 area – do we stay range bound or break out?)

Silver 12+

Oil 45! (We stopped at 45 it seems pivotal – either to 40 or 50.)

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Conclusion

The shine of optimism seems to have lost its luster as reality seems to have sunken in. The banks still have massive problems and new accounting changes and the “go fish” method of balance sheets have only fooled themselves – because labels and accounting changes doesn’t change math. 2+2=4 and it doesn’t matter if we take one of those 2s off the balance sheet.
I think the big concern is can the administration get another 750 billion reload of the TARP fund – which is certainly needed as the next wave (commercial paper defaults) is ramping. I think the administration is very concerned that they may not get the votes in Congress to get another 750 billion and thus we are hearing lots of talk about converting preferred shares into common shares (government taking a bigger stake) – maybe giving them some help to raise some private money (getting government out of the preferred line).

The political game of getting Congress onboard for a big reload of Tarp is going to be hard. Regardless of what you thought about the tax tea-parties throughout the country (Yeah – John Stewart and CNN spun it into some Fox movement – but as videos showed there were many Republican and Congress haters as well as many Democrats marching as well – and as Fox pumped it up, CNN tore it down. The battle of the networks – great. Maybe we could get some NEWS instead of what CNN, MSNBC, and FOX pass for news.) – anyway (enough rant) – the reality is that giving 100s of billions to the banks and auto companies is NOT POPULAR. And now people are seeing it is NOT working and they are going to NEED more. Maybe those people (Republicans, Democrats, and Independents) marching in the TEA PARTY have a point, What is Congress spending TRILLIONS of our money on?

I thought he meant - Trap?