Yesterday seemed like a mix bag in yesterday’s action. The market seems more reactionary to government policies – rather than fundamental and/or technical. The government does some and the market determines if it is good or bad (in the short-term anyway). I guess at some level you could say we are trading government policies or forecast policies.
There are more things in the work – so expect more surprises – both up and down.
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Wells Fargo – SURPRISE
Wells Fargo (WFC) says it expects to earn 55 cents a share in their quarter – doubling estimates. Which sent the futures rocketing up (along with other banks) in the pre-market. Reports says it’s based on mark-to-market basis - but one report says the expected return is based on the new accounting rules – which created the significant difference.
For now the market is taking this as serious positive news and there is nothing more than just that. What may have helped was the purchase of Wachovia – which turned them into the second biggest U.S. home lender. However, there is some confusion as to where the increase of margins have come from – as the recently as last week forecasts going forward in both the residential and now commercial mortgage market remains weak (with the recent report in the WSJ about commercial paper default doubling) – but the CFO Atkins is now reporting an exceptionally strong mortgage banking results. I think it is more about new accounting rules – because the data is NOT showing an exceptionally strong mortgage market. Confused yet? One analyst said it sure is a “head scratcher” – but let’s not look a gift horse in the mouth.
The news has sent WFC up 4 points in the pre-market as well as all the banking stocks – which are seeing a massive rally to the upside in the pre-market. Let’s hope that this is not some “tom foolery” on some new accounting method and that they did the math correctly.
The question we should be asking is: Why the HELL are we giving banks tax payer money? Based on Wells Fargo statements they sure don’t need it. $3 billion net income – that doesn’t sound like the bank needs any help.
New Math?
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Trade Deficit Plunges and Jobless rate rises
One thing about consumers not having jobs or money, they can’t spend what they don’t have. The Trade Deficit plunges to the lowest level in nine years. The slowdown was primarily seen the foreign auto and electronics sales. Forecasts expect the decline to continue through the rest of the year. Predictions range from a 6 to 9% drop for 2009.
As consumers stop spending – companies look to cut costs. According to the Labor Department cut 663,000 jobs in March – sending the jobless rate up to 8.5%. Economist predict that the jobless rate will not find a bottom until the Trade Deficit bottoms as some believe there is a direct correlation between them.
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Wal-mart says forecast on target ....
Wal-Mart reported that store sales fell within its three-month projections. The big help was the diversity of goods – as groceries are picking up the slack for other retail merchandise. One stop shopping is saying time and money. Additionally their drug centers have seen a slight percentage increase compared to competitors – some attribute this to lower cost prescriptions combined to a one-stop shopping.
One analyst said part of the new allure of Wal-mart is that being frugal is the new thing, “it’s hip to shop at Wal-Mart.”
Regardless – the forecast on target at its core is still very low and thus we are seeing some selling pressure in Wal-mart in the premarket.
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Futures Pre-market
Futures were flat to selling off before Wells Fargo announcement which sent all futures across the board spiking up hard. The spreads are in – so expect the ARB traders to short futures and buy the basket at the opening – putting upside pressure on the market at the opening.
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Support / Resistance
Back to resistances?
INDU 7500 (7750) 8000 (We had visited the pivot point of 7750 a couple of times and got a good bounce yesterday above the 7800 line. Futures had looked slightly up – but the Wells Fargo news is spiking the DJ futures - 8000 is in the cards today at the opening.)
NDX 1250 (1300) 1325 (We are testing the 1325 level again this morning after closing at 1300 yesterday. Most of the jerk to the upside in the pre-market has come from the Wells Fargo news.)
SPX 800 / 850 (SPX is heading higher in the pre-market – short of the 850 line – but that could touch there today.)
RUT 400 / 450-470 (We were testing the 450 line earlier and we look to be at 450 at the opening.)
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Gold 850 – 900 (We are still below 900 and above 850 – Bank of England remained unchanged on their interest rates – but we are not seeing any action in the gold market this morning.)
Silver 12+ (Silver holding at 12)
Oil 50? (We had broken down below 50 and now are heading back above it – it seems to see some volatility around 50)
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Conclusion
Futures looked flat – before the Wells Fargo news – which has sent the futures rocketing up. While it looks like the trading desks did put some more green on the table – the questionable contraction was expected to come from the mortgage sector (as commercial paper is seeing a ramp in defaults). One analyst on Bloomberg said they expected to see an increase in revenue from the traditional banking and trading desk side with the acquisition of Wachovia – however the contraction in the mortgage section is what lead estimates in the 20-25 cent range. Additionally – is this based on traditional mark-to-market or is this on an adjusted accounting method?
If it IS an adjusted accounting method (regardless of reality) we could see similar reports come out from the other banks as they are able to use a more lax method for valuing their assets. Of course for those long investors in financial, we shouldn’t look a gift horse in the mouth – but this is an opportunity to take some profits off the table.
The increase in the commercial paper default which has been reported in recent weeks. As I said – based on Wells Fargo reports WHY are we giving them tax payer money?
Flash: Headline just came across the tape – “All 19 US Banks Passing Stress Tests”
I got an email this morning from a financial advisor: “How is that possible? Is the whole test just a sham?” My answer: Maybe they let Barney Frank do the math.
Have a Happy Easter / Bunny Day!
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