Friday was slightly up – but not the kind of strength we had seen up to this point. The G20 is over and Obama is now visiting Turkey – there is a little rumblings about Afghanistan and not getting the support that the U.S. needs – I am certain that Obama will speak with Turkey about this. The G20 seemed more of a photo op and the only big news was the infusion of $1 trillion into the IMF – but for the most part all parties stood their ground. Sure they all want the economic crisis to end – they just have a different idea of how to solve the problems.
What DID overshadow the G20 and Obama’s first big trip to Europe as President was the launch of the North Korean missile – which quickly dampened the mood. The WEST (and U.S.) had a few tough words – but other than that – nothing (not that we necessarily should – but you IF you are not going to walk the walk, don’t talk the talk). Oh well – we might threaten them with some sanctions (like Kim really cares about that.)
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IBM and SUN breakup!
It looks like the IBM and Sun micro talks have ended – as nether side could come to a deal. In these times it is hard to push the envelope as the other side may not be as free with the capital as they once were. Things could change – but for now Sun micro (JAVA) is giving it all back – stock is down almost 2 points in the pre-market. ___________________________________________________
Banks need more?
The news hitting the futures this morning is the REALIZATION that the banks WILL need more money. No one should be surprised by this because both Obama and Geithner had said as much – as if warning that financial stocks are a little overheated after rallying as much as 50% in 3 weeks. Mike Mayo (Calyon Securities’) made the comment that pretty much hit the cord with everyone this morning on Bloomberg “Bank loan losses will exceed levels of the Great Depression”. Back to reality.
Financial stocks are also getting downgraded as well – we are seeing the entire sector this morning with some sell pressure per-market. Expect the sector to be under pressure not only from the recent downgrades and Mayo type comments – but these stocks have made a huge rally and some longs may wish to sell to take some profits.
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Bond default risk?
Wonder why some high-yield bonds pay a high yield? Well, Jim Reid (of Deutsche Bank) will tell you – his predictions are for 53% of U.S. companies that issue high-risk, high-yield bonds will default over the next five years. Yikes! During the Dot.com bubble the rates had been reached 40% and the Great Depression saw 45%.
It seems that Jim Reid and Mike Mayo may have gone out to the bar this weekend and had a chat – because nether of their forecasts come up roses.
Moody’s is looking at the 12-month default rate rising to 22.5% in Europe and 13.8% in the U.S. by year end. And after Obama’s threat of GM’s bankruptcy – the previous thought of buying bonds in companies that the U.S. government backs may not be a great idea after all.
Unless they are convertible (and fully hedgable) – I would be wary.
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Futures Pre-Market
The futures are getting hit – the bank forecast has sent the financials down – and thus the whole market is under a little pressure this morning. Expect the market to gap down at the opening.
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Support / Resistance
I am still saying resistance for now – because while we did close above the big numbers on Friday – on day does not make a support in my book. Not that I like to take direction – but I sure would not want to be long at these levels.
INDU 8000! (We are above it – but I think we need to watch volume and price to determine if this resistance is now or will be support. I am think resistance still.)
NDX 1300! (Again – same here- sure we are above it – but I am thinking it still resistance.)
SPX 800 – 850 (We are close to 850 and almost hit it on Thursday 845 – but I think we are going to see some resistance in this 840-850 area.)
RUT 450! (Again – nice to see it above the 450 area – but I let’s see if it can close above it.)
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Gold 900! (We just fell below the 900 marker – 850 is in the cards and a great support area – while we are just slightly below it – I wouldn’t count 900 out yet.)
Silver 12! (Just like Gold – silver is looking like a support at 12.)
OIL 50+ (We had broken down through 50 and then so it jolt back up last week – 50 is a big area and we are seeing oil come off this morning and test it.)
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Conclusion
We had an amazing 3 week rally – but I don’t think anything “fundamentally” has really changed – Obama still has posts to fill, Congress is now on break, GM and Chrysler have had their hand-slapped with another extension, Kim is firing off his rockets, and G20 seemed more of a photo op than anything else.
The Bank and Bond forecasts don’t look that good and the WSJ article last week (or was it the week before) that showed that commercial paper default rate has jumped 100% - is a sign that more toxic paper is on its way - I think we had some more bumps before this road smoothes out.
Stay in front of it – and don’t be surprised if we see more volatility.
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