4/8/09 (Pulte Merger, Alcoa Earnings, TARP expands!)

Traders,

The market saw some losses yesterday and we got to some short-term supports in some instances. George Soros sure didn’t help with his comment yesterday expecting the market to sell off further.

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Merger Pulte buys Centex

Mergers become frequent under two circumstances – to expand a business or save your butt when things are bad. Pulte is not expanding business because home sales and building is looking to grow at some stellar rate – they are in the ass-saving situation has homebuilders are hemorrhaging money, cutting jobs, and looking anywhere for financing.

The deal is a straight stock swap worth $1.3 billion (so Pulte didn’t have to come up with money out of pocket – I am sure if that was in the equation there would be NO DEAL.) It’s a toss of a life line to stay afloat – nothing more. Vicki Bryan (a bond analyst) put it best when she said “This is really good because not only are there too many homes, there are too many homebuilders. Cash is king and this gives them $3.4 billion, which means they don’t need the banks to survive!”

So don’t read into this for anything other than what it is – a game of survivor!

For traders there is an arbitrage opportunity – but the spread has collapsed this morning and is fairly tight.

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TARP EXPANSION

First is was the banks, then the brokerage firms (becoming banks), then credit card companies, then auto-loan companies (GMAC), now the latest group to join the Tax Payer money club – Insurance companies. It looks like we are going back to the well to raise more money – great.

However, with the money flowing into these institutions at record rates – it seems that a few Congressional members are waking up (FINALLY) and suggest liquidating some of these failed banks. However they also want to start firing executives as well. I think while a small light has gone on that they should not prop up failed banks, the suggest executive firing doesn’t seem to be addressing the problem – which is clearly a failed business model. Certainly the new CEOs that have been brought on at the string of firms that are getting bailout money have not been trying to fix their business model – but rather think that CUTS are the only answer.

Harvard Law Professor, Elizabeth Warren, who heads the Congressional Panel is still not sure what is going on – because there is little if any transparency at the Treasury (or Fed). In an interview with Bloomberg she made that clear and implied that addressing any problem – one needs to see the problem. Cutting illiquid banks and winding them down is the first step (but who makes the cut) – the executive firing is fine (if it addresses the business problem) – firing one to bring in another may seem on the surface like a good idea – but it certainly doesn’t solve the problem at its core.
So while the panel is looking into ways of solving the problem and getting better transparency – Geithner is in the next room adding more companies and sectors to receive TARP money. He needs to gear up fast - because he is going back to the well and needs to make sure that Congress is on board to spend MORE money.

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Earnings begin……

Alcoa is always the first out the gate during earning seasons that everyone likes to watch – well they fail flat on their face with their first back-to-back losses in 15 years. The problem was a quick expansion as prices rose and the failure to contract as fast as aluminum prices fell. The company is focusing on cost cutting and expects to see expansion in China in the coming year – which should help expand the margin spread and get them going. However consumption has dropped and is expected to fall 7% in 2009 – the question is where is the growth and how to focus there (China and India). Sure they are having problems now – but they have a large consumer base that have been barely tapped (certainly not with credit spending).

However – it seems that the low expectations are set into the price and the stock is seeing a slight rally in the pre-market. Is the worst over for Alcoa, I certainly don’t know – but I have a sneaking suspicion that the world will continue to use and consume aluminum.

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Futures Pre-market

The futures had been down over night (as much as 100 points in the INDU) as Asia and Europe were getting hit and Alcoa initially looked in the aftermarket to fall flat on their face. However, the market in the last hour has made a complete reversal and is heading higher as maybe the Alcoa news wasn’t that bad. Volatility in the futures mean we may see a little mix in the pre-open – for now expect the market to make a small gap up.

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Support / Resistance

INDU 7500 (7750) 8000 (We almost got to that 7750 short-term support / pivot point yesterday and it looked initial based on the futures that we were about to head down to 7500 – but things change quickly and it looks like we may try to move higher. Who knows at this point – but based on the futures action – 7750 is a pivot point.)

NDX 1250 / 1300 (We fell below 1300 and half way to 1250 (exactly at 1275) – where to now?)

SPX 800 / 850 (We seem to be wiping around between the levels as knee jerks the trade action in the futures in the pre-market.)

RUT 400 / 450 (Again falling between the lines)

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Gold 850+ (We are seeing a slight rebound in gold this morning – will it get back above 900?)

Silver 12+ (We got just below 12 yesterday – but are heading higher now)

OIL 50? (We headed down through 50 are we likely to see 45 or back to the 35-40 accumulation level?)

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Conclusion

Expanding the bailout was expected the government is ramping in that direction – to include insurance companies now. What next – home builders? The action in the futures this morning was pretty volatile down pretty big and now back up into positive territory?

I saw briefly that David Walker (Ex-comptroller of the U.S. government) was on CNBC this morning – I wish I could of heard more of him before heading into work. He was making the case about two issues – future inflation (that is coming – just how much is uncertain) and the failed definition of Stimulus. The government keeps calling it stimulus, but as Walker said it is only stimulus when it is focused and quickly deployed, otherwise it is just more deficit spending. After reviewing the stimulus he pointed out that only 20% will get deployed by September – which is way too long. The rest of the budget deficit is investments in the future based on VERY low interest rates today – when inflation comes – interest rates will rise and seriously put the government behind the eight ball.

Just like with interest only home owners on a low rate – 2 years later when they have to refi at a higher rate they can’t pay and foreclose (or bankruptcy). The government is printing money at some of the lowest rates in history and printing more money than at any time in history. Expectation in the future for any increase of rates puts the government at 400-800 billion annual interest levels which will be unaffordable.

David did whip out a Zimbabwe 10 trillion dollar bill (I have a 100 billion dollar bill) – and Becky said – could this happen here? Certainly we will see inflation – the question is how much. Zimbabwe is the extreme – certainly. But as the saying goes – it may be improbable, but not impossible.

Many of you watched “An Inconvenient Truth” about the environment. Maybe it’s time you watch “I.O.U.S.A” about our economy….

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