5/29/09 (Bulls vs. Bears, GDP shrinks!, Dell!)

Traders,

Yesterday saw interesting action, down, up , down, up, - certainly some intraday volatility. Bloomberg released news that insiders said that GM’s bankruptcy WILL be filed on Monday which created some volatility intra-day. It would seem that the bull vs. bear fight continues and we are at another crucial resistance point in the market. Interesting enough I have friends on both sides.

The bull argument is that the worst is behind us, Obama’s plan is starting to see green shoots, and the government data is showing slowing signs of a recession. Many stocks have been oversold or are under value. The core ingredients is optimism and faith in the government and the Fed controlling rates. They don’t believe that inflation is a threat and if it were to rise the Fed would be able to contain it.

The bear argument is that it is true that government data is showing signs that it is slowing down, but it certainly has not found a bottom or signs of a recovery. They argue that the PE ratio of the S&P has skyrocketed and while true that stocks may have BEEN (past tensed) undervalued that the recent rocketing rally has put them into an overvalued state. They also point to the yield curve on the 10 year expanding, inflation threat is looming, and accounting changes in the banking sector reflects paper profits ONLY.

There is truth in both views and I think that is why there is the push pull that we are seeing. However, the bull argument is going to need a little more meat pretty soon. We can be optimistic about the recession slowing down, but eventually we are going to need some good news (not just less bad news). A bottom and signs of a recovery. The bull’s argument certainly has some legs – but with the yield curve steeping and the dollar getting weak – coupled with GM’s bankruptcy – well that could diminish the optimism a little.

And the saber rattling in North Korea is a little unnerving as they tested another missile and have ended their “truce” with South Korea. Let’s hope it is only saber rattling.

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Economy Contracts more than expected….

Commerce Department showed that the U.S. economy contracted 5.7% in the first quarter and revised the last quarter of 2008 to a contraction of 6.3%.

The big problem seems to be consumer spending which rose significantly less than expected at 1.5% vs. 2%. The second quarter doesn’t seem to look any better. The housing starts have fallen, unemployment while slowing still increased, and credit lines are diminishing – and it looks like contraction will continue. Another way of coming up with a forecast is that the majority of earnings reports show reduced revenue expectations for the next couple of quarters. Certainly consumer spending has contracted and it doesn’t look like it will expand any time soon. Some companies have done well in managing the decrease in revenue and costs to keep margins in the black, however on the economic scale it is certainly not a sign of a recovery in 2009 (unless something changes).

The concerning news is the bond yields and the weakening dollar and the news of contraction has investors looking elsewhere for safety or returns. Dollar based commodities are also making a run and I believe that the dollar has a bigger impact to the rise than demand. Inflation hedges are also on the rise, Gold breaking 975 and Silver above 15.

There has been some controversy as to WHAT is the mandate of the FED as we initially thought they would defend the interest rate, but they have not. That is sending concern to those investors in risk-free assets and the trust that the Fed will defend it is waning. The Fed’s plan to keep rates low and help the mortgage market is actually slipping fast. 30 year fix rates made a big pop from the 4.7% to 5.3% as it would seem that rates are continuing to climb. Questions of the Fed and their “Quantitative Easing” Policy abound. Certainly the demand for long-term paper has significantly diminished.

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Dell earnings…

Dell saw a significant slump in revenue and profits, but did beat analyst estimates. The question really came down to the future expectations, rather than beating their already low guidance. The forecast is looking very slow for the next two quarters and they are guiding their revenue numbers down. They have focused (like other companies) on cost cutting to keep margins wide, but as revenue contracts and computers turn more into a commodity (as prices collapse) headway is going to be hard in the U.S. – good news – Dell has redoubled their efforts into the Asian markets and expects to be the PC leader.

The stock saw some after market volatility trading as low as 10.80 and as high as 11.80 – however it has settled in at the 11.50 range and looks to open slight higher.

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Futures Pre-market

We saw the futures on a good gain in the pre-market, but the GDP contraction news (worst than expected) as consumer spending continues to contract saw them pull back hard. It looks like a flat to slightly higher opening.

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Support / Resistance

INDU 8250 / 8500 (We had a volatile week from 8250 to 8500 – we are looking a little higher – but the GDP news is showing some pressure.)

NDX 1350 / 1425-1450 (The overweighs seem to be the driver in here recently – primarily AAPL which has made a good run.)

SPX 881 / 930 (The 900 level seems to be a good pivot point we look a little above at the opening.)

RUT 475 / 500-515 (The RUT didn’t make a big move to the upside like the rest of the indices yesterday. In fact it looked to close lower on the day until the end of the session.)

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Gold 975+ (We broke that 950 range and as talk of inflation and weaker dollar starts hitting the airway we are seeing a run for gold)

Silver 15+ (Didn’t buy enough at 10 to 12, but at 15 it still seems cheap in relation to gold.)

OIL 65+ (Oil broke over 60 and then 65 - up 80% from its lows. I think the dollar is playing a bigger role in this.)

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Conclusion

The push-me-pull-you of the bull and bears in the market, both with valid views are now having to face the math eventually and the GDP numbers this morning didn’t reflect a recovery anytime soon. I think we could see some volatility on Monday when GM files for bankruptcy – there is that 11th hour government massive bailout, extend the deadline, loan, etc. that could happen (for the good of the country and UAW). It’s a long shot, but certainly not out of the cards and if that were to happen it could inject another general market euphoric rally.

5/28/09 (Reality, Government Data, Bond market)

Traders,

We had a pull-back across the board after the one day Consumer Confidence rally. Volatility (VIX) has been in a tighter range around the 30 level, but the skew in the OTM puts is getting higher – reflecting that there is some down side concern.

I did receive several emails about the hyperinflation talk by Faber and the 79% of Debt vs. GDP and the possible downgrade of U.S. credit. Most of the emails were in the vein of we will not see inflation, FED will manage it, I am overly skeptical, or overly pessimistic. I think those all would be fair arguments if we fail to see what this economy is going through. Need I remind that AIG, Freddie, Fannie, Lehman, and Bear are gone (or taken over by the government), Chrysler is gone, GM is about to file bankruptcy, Countrywide and Merrill were taken over last minute before failing, the FED’s balance sheet while unknown is expected to have on/off balance sheet liabilities that exceed 5 trillion and the government has also spent a couple of trillion. This is only to serve as a reminder of the recent economic events and while I agree that we will find a bottom sooner rather than latter, that doesn’t or should not elevate concerns of the value of our currency or the national debt.

Wouldn’t it be wiser to hedge against such risk than to argue that those like Rogers, Faber, Schiff and others are wrong (who we must agree have been right so far). Having a 5 year son, I am seriously concerned about his future. I certainly don’t want inflation or as Faber suggested hyper-inflation to reach our shores. Nor do I want the dollar to fail or the credit rating of this nation to be downgraded. It would be foolish for anyone to wish that. On the other hand to ignore those possibilities is equally foolish. Hope and optimism is important. We hope that we don’t get sick, but we still buy health insurance. We hope we don’t get in a car accident, but we still buy auto insurance. We should hope that inflation (or hyper inflation) doesn’t reach our shore, so shouldn’t we hedge against that possibility.

The problem with looking at economic data that reflects negative impacts to the economy and pointing those out – you are quickly labeled a pessimist. How about a realist that HOPES that it doesn’t happen and looks to hedge against those risks?

Please don’t view everything with Eyes Wide Shut. Optimism and Hope have their place and are important, but more is needed to secure our future.


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Government Data

Durable goods orders rose 1.9%, which initially seemed better than forecast, but the revision for last month was a shocking revision lower of -2.1%. If we don’t combine the numbers the April numbers look great, but the revision in March look bad. If we combine them they come in line with expectations.

Jobless claims were down 13,000 to 620,000. While showing signs that the layoffs are slowing, we are not seeing new job creation to take those that lost their jobs to get back into the job market. We continue at record levels over 6.8 million remain on unemployment. The big question on the horizon is GM’s pending bankruptcy and the domino affect (from closing of the plants, dealers, and supply makers) is expected to drive unemployment higher.

We must view the numbers from to vantage points. First is the contraction and the recession worsening, slowing, or hit bottom. I would say it is slowing (a good sign). On the other hand we have to look at it from a recovery perspective, but that can only happen after we hit bottom. We are certainly not seeing any recovery yet.

The jobless claims down is a good sign, but the millions that remain on unemployment is showing that a recovery has not yet happened. Additionally the revision lower in the Durable Goods Orders from last month is not a good sign even with this month’s increase – it is too conflictive (either they didn’t get an accurate reading or failed in math) – it is not very good resolution and hard to make any reasonable conclusion as to what they really are (because April could be revised down or up next month as well).

http://www.bloomberg.com/apps/news?pid=20601087&sid=acxRhu6PF8V8&refer=home
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Government Bonds

The talk on Bloomberg and CNBC is the concern with the long-term government paper yields on the rise. The Fed has been purchasing more and more of the treasuries (for two reasons – first there is not enough money to buy the treasuries being sold and second to keep rates in check). However, the 10 year yield has popped in the last couple weeks from 3% to 3.68%.

Why and what does this mean.

The why: I think China has articulated their position that gives clear resolution as to why we are seeing the spread between the 2-year and 10-year expand, it is simple. They are concerned about the dollar and inflation. They have made a request for an international reserve currency instead of the dollar, they have publicly made concerns about the bailouts and printing of money in the United States, and they are concerned about the future as it seems to be more uncertain. They have not stopped purchasing U.S. debt, but they have changed their positions into short-term paper and have significantly reduced all their long-term maturities. China is not the only one – several other sovereign funds and large firms are taking a similar position. If future inflation is an unknown (while many agree that it is coming – they don’t know by how much), then why lock in capital on long-term paper at very low rates. Ironically that means the Fed has to print more money to make up for the slack of foreign buyers (thus creating more debt) – a silly circle.


What does that mean: It means that long-term paper yield rates are going up and that trickles down to companies and consumers. We are seeing mortgage rates go up – in fact they made a significant jump recently. That means that housing prices have to come down to off-set higher rates. As per companies and small businesses – it becomes more expensive to borrow money – when they need it the most. Additional consumer credit lines will see higher rates.

For the government’s economic plan to work it needs low rates, very low rates. Obama’s deficit is based on low rates and Bernanke’s policy is to keep them low. However, the bond market and the money we are talking about may be too big.

Keep an eye on these rates as it could mean larger concern for the economic recovery. As well as creating some problems for companies that are relying on debt financing.

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Futures Pre-market

The futures are pretty flat in the pre-market. Expect a mixed opening.
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Support / Resistance

We were at support, then resistance, and now back in the middle – where next?

INDU 8250 / 8500
NDX 1350 / 1425-1450
SPX 881 / 925
RUT 470 / 515

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Conclusion

It seems that we are in a unknown period and everyone is holding their breath with GM and how that unfolds. The economic data still shows a recession, but that it is slowing down. Previously less bad news was good news, but now investors need to see some actual good news (not just less bad news).

Remain skeptical and hedge against risk now, not when you have too.

5/27/09 (Shoeshine boy? GM's nail in the coffin!)

Traders,

Wow, what a ride. A friend of mine said that he received a call from the Consumer Confidence board to participate in the poll. He said they had some qualifier questions before he could take the poll:

First did he have a job? YES
Second did he ever work in the real estate or the mortgage business? NO
Lastly does he live in Detroit, work or has family members that work in the auto sector, or a member of the UAW? NO!

Great he qualified for the poll. Ok that was a joke – but I found it rather shocking that the poll of 5,000 people should show such optimism. We started to think back to that JP Morgan story and the shoeshine boy – was this a similar sign?







When I read the headline on Bloomberg, the two following headlines read “New Normal of 2% GDP growth and Unemployment greater than 8%” and “Home Prices in 20 U.S. Cities Fall more than Forecast”. He said – do you think they were selective of who they polled or is optimistic euphoria trumping economic reality? I said – faith is strong in this nation. It’s not that I am pessimistic, it just that reality and perception continues to show a widening disconnect. GM is about to file bankruptcy, credit card default is on the rise, jobless claims are expected to surpass 9%, and revenue is down. After looking at the PE ratio of the SP 500 – it is rather toppy.

So I come full circle, is this a sign like that JP Morgan and the shoeshine boy? Who is left to be optimistic (or buy) when the shoeshine boy is at the bottom rung. I think I need to swing by the coffee shop and ask the barista what his view of the economic conditions are – if he is very bullish, maybe it is time to get short.

Additionally there was some massive intraday short-covering on the number in the futures market. Which trickled over into the baskets. The volume spike and the arb widening looked as if someone got caught out – you don’t see those kind of prints unless something else was going on.

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GM – First nail in the coffin!

Of course GM failed to get 90% of the bond holders to swap out their debt for a 10% stake in the new company (as the government gets 50% and the UAW gets 40% and billions). Of course if you were a bond holder you would not take that deal – especially if you have the position hedged with credit-default swaps. It is a little irritating that the Obama had called these bond holders “speculators” and inferred to them as the bad guys. These bond holders include pension funds, mutual funds, banks, individual investors, and others. They had LENT GM money and expected to get it paid back. Why should they get only 10% when the government (who came late to the show) and the UAW get the other 90% plus billions?

So this was the first nail in the coffin on the way to bankruptcy. The executives had already sold almost 100% of their holdings earlier (around $2 dollars) – they KNEW that the bond holders would NEVER agree to such a ridiculous offer.

It is almost 100% certain that GM will file bankruptcy on Monday – what will save them? Certainly not bond holders or anyone else, but there IS a wild card, the Government. The administration has extended the deadlines for GM time and time again. They have given them billions, more billions, and more billions (just recently). The Government COULD say for the good of the country (and UAW) that they will give them ANOTHER deadline and MORE money. That is the wild card – if we take the government out of the deck – bankruptcy is 100% certain. That is probably the only reason the stock is trading above $1 – it’s that unknown government wild card.


Stay away – there could be psychological fall out on Monday when (IF) they file.


http://www.bloomberg.com/apps/news?pid=20601087&sid=aqtJh9SdO52s&refer=home
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Futures pre-market

We are seeing a little volatility in the morning in the futures – waiting for some home sale data. Expect a mix opening.
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Support / Resistance

Yesterday we were testing short-term supports and then the consumer confidence number drove the market higher to those resistances.

INDU 8250 / 8500 (We were just at 8250 and now up at 8500 – do we break through?)

NDX 1350 / 1425-1450 (Again a pop back to those resistance levels)

SPX 881 / 925 (Again a similar action.)

RUT 475 / 500 (Another pop to resistance)

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Gold 950 – we up there do we hold.

Silver 14+ - has been making a bigger run than gold.

OIL 60+ - seems more of a dollar factor than anything else.

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Conclusion

Action yesterday was as if the sellers stepped away and some big prints were unusual that help spur some short covering. Too much too fast? Could be – the rest of the world did not have that kind of reaction and the news (other than the consumer confidence) was not positive. So to put all this on just the consumer confidence in the face of all the other news yesterday was strange at best.
I remain skeptical – watch those resistance levels.

5/26/09 (North Korea, GM's last days, False Profits?)

Traders,

No doubt an eventful weekend with North Korea. Even after the Obama Administration had previously mentioned that it would be open to talks with ALL nations – North Korea decides to test a nuclear weapon (supposedly from some reports 10 to 20x larger than the one they had set off a few years ago). Of course the rest of the world (and the U.S. of course) denounced the test – but guess what – North Korea didn’t care an went ahead the following day and tested two missiles.

What can we make of this? We have little facts (other than the test) so we can only surmise with reason of the North Korean posture. They are not doing it for attention (unlike the Bush administration the Obama administration said it was open to talks and was already working on the 6-party talk with North Korea). So it would stand to reason that they actually WANT to have nuclear weapons and must feel the WEST and their allies are a threat to North Korea. They have been shut-down, sanctioned, scolded, etc before. Certainly sanctions stop food and other products from getting into North Korea, but seems to only hurt the commoners – since the “party” seems to be getting all the food and products they want. So sanctions just hurt the people, not the elite, and certainly has done nothing to change their mind.

So what next and how do we respond? China has mentioned that “tough talk and sanctions” don’t really work. And some have said that China wants to keep the military card ON THE TABLE.

This is a market preview – not a political analysis – so the question we must ask ourselves is how does this affect the economic conditions and market?

The first thing we saw was the dollar gain some strength against the Asian currencies – mainly the South Korean. The dollar had been weak – but the order flow seems to reflect a short-term run to safety out of Asia. The initial dollar move is putting some pressure on dollar denominated commodity prices (Gold, Oil, etc.) out of the gate – but not that much. Additionally – we are seeing some flight to quality plays out of equities and into bonds – which seems to be wanting to avoid volatility.

Asia and Europe had been under-pressure, dollar is up, commodities seeing negative pressure, and futures are seeing some negative pressures as well.

It’s the West’s move now. It seems it might take more than just some tough talk – we wait.

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GM’s final week.

This is a week of daily news for GM.

Today: Debt exchange deadline. Debt and Bond holders seem to already reject the deal – but we find out today.

Wednesday: OPEL – how much did it sell for and who bought it?

Thursday: Auto-part supplies getting paid billions – who and how much need to be determined before any bankruptcy.

Monday: Deadline = bankruptcy filing date.

However, the government is still on the “Aid Train” – giving GM ANOTHER $4 billion in Federal loans to work through this process. Three deadlines and 4 payments latter – the government (tax payer money) has given GM over $19 billion. For what – them to file bankruptcy?

But that’s not all – reports now show they need over another $7 billion next Monday after the bankruptcy – to help them while in bankruptcy. Even GM admitted in their report to the government earlier in the year that they may need as much as $30 billion when all is said and done. However = analyst said that for any restructuring it is going to cost almost double that.

The government is doing everything it can to keep GM from sinking – but it doesn’t seem to matter. The business plan is a failure and until they realize that we will keep tossing money into the hole.

It is going to get messy very fast. No doubt it is complex and I don’t think ANYONE has ANY IDEA of the outcome or cost – other than it is going to cost tax payers 10s of billions, money that we will never recover (especially if they file bankruptcy). And if you believe that we will recover the money - you need to stop drinking the Kook aid.

Do NOT buy GM stock – this is something to watch from the sidelines.
While it may not have a big mathematical impact to the market – it could have a tremendous psychological effect. Certainly there is no “Green Shoots” growing in Detroit.

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JPM getting excited over false prophets….

Profits are profits, you can’t change the math, but you can change the accounting rules! You got to love it when you can just change the rules and move losses over into the win column. Are we really that stupid to get excited over that. If I was at JPM I sure would not be blowing my horn about accounting rule changes to make me look better.

It seems that the new rule allows JPM to change the failed bad loans it purchase from Washington Mutual into income. This new so-called “accredtable yield” is the difference between the “value” of the loans on the banks balance sheet and the cash flow they expect to produce. Guess what – the expected cash flow didn’t change and the loan risk didn’t change. It is just a “value” assumption.

At the end of the day the company spent X dollars buying bad loans. The loans expect to generate Y dollars. Changing the value of the loans doesn’t make the bank any more money (for REAL) – but in accounting fantasyland it looks to make them BILLIONS.

JPM isn’t the only one to benefit from this legalized book cooking, Wells Fargo, Bank of America, and others stand to benefit as well.

So what does it REALLY mean and how does it benefit? I think we have shown that it doesn’t generate any tangible REAL money, but it is just a valuation. So how does that help them? Well – it gives them more capital to leverage. That’s right leverage up again! Haven’t these guys learned anything?

Stupid games being played by the banks, regulators, and government. Thinking that padding the balance sheets with valuations will make a difference. It’s just reloading the leverage gun – because they haven’t figured out that it is NOT the accounting rules that need to be changed, but the business model.

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Futures Pre-market

The futures were down pretty good early on, but seem to be coming off their lows. Still negative will put some pressure on the market at the opening.

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Support / Resistance

The market is at a critical point in the short-term.

INDU 8250! (This is a short-term critical point. It looks like we will open below it, but watch the close. A snap below could spell 8000!)

NDX 1340! (This too is a short-term bottom area, we are above it and are looking at a 1355 opening from the futures – watch the close.)

SPX 881! (I keep hearing about the 880 level in the short-term. Blackrock said this morning that 850 and then 800 is the near-term low or support. But didn’t think we would break below that – as it is a level to start buying at again.)

RUT 470! (This is a big support area for the broader index. See if we can stay and close above it.)

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Conclusion

Between GM and North Korea – it looks to be a week of volatility. It is also a short week. What happens to GM and how does the world respond to North Korea?

The dollar is seeing some short-term specific strength which is putting pressure on some commodities. However, it is tepid because of the massive debt. I think large players (and nations) are trying to figure out the SAFE HAVEN, which traditionally was the dollar – but now there are more skeptics than before. We already saw China ask for a reserve currency and almost halt their long-term dollar holdings and concentrate on short-term paper (that is the get out of jail QUICK play). More short-dollar plays are making up the trade to allow for a quicker exit. So where is the safe haven? Gold? China and others seem to think so – but not everyone.

5/22/09 (Sears Shocker! GMAC Epic Fail! )

Traders,

Yesterday we came down to those support levels – in some cases they broke. However, going into the close we had a decent rally (light volume and seemed more like covering) – but it did get off those support levels. The news about the S&P downgrading the UK and possibly lowering their AAA credit rating, created concerned. Bill Gross (PIMCO) said the US will eventually lose their AAA credit rating and US debt will reach 100% GDP. Geithner, in response said on Bloomberg that the US must reduce its deficit by at least 3%. Of course that seems to me predicated on the optimistic growth forecast by the administration economist. I would think it would be closer to 15% - if any measure of inflation is to be added to that calculation.

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Sears shocker!

Sears, the largest U.S. department store was expected to have a loss this last quarter as consumer spending, jobless claims, and retail sales continued to slow. However, Sears dug deep – with huge cuts to advertising, lay-offs, and inventory management. Additionally they amended some credit agreements as well as restructured debt. No doubt that revenue is contracting and it is about margins – Sears seems to have management in place that understands that is the core formula.
Expectations were for losses of 87 cents per share, so when Sears reported a PROFIT of 38 cents a share – a jolt to the stock in the pre-market sent it up fast and hard. Stock is up over $10 (currently $61 a share). An analyst on Bloomberg wants to take a closer look at the credit agreements to see how much of the profit maybe a onetime event. Concern going forward is also contracting revenue going forward – which is forecast lower. However, he concluded – that if Sears is able to continue to manage the margins efficiently they could maintain decent profit levels – even in a contracting revenue landscape.

Sears is driving higher and has pulled up some the index futures in the pre-market. Maybe the government could take a lesson from Sears and realize it is about MARGINS!


Personally – I love wondering around Sears tool section. I remember decades ago my dad said that if a Craftsman tool broke you could take it back and they would give you a new one, they are guaranteed for life. I didn’t REALLY believe that, so I had chipped Craftsman screwdriver and took it to them (to SEE if my father was telling me the truth) – the guy a Sears didn’t say anything and just gave me a new one with a smile. They had me for life! Now if I could just take in my broken DVD player and get a free replacement….

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GMAC – a failed company that continues to function.

Rumors about GMAC’s demise has been making rounds the last couple of weeks. A couple of articles (in Calculated Risk and Seeking Alpha) indicated that they actually FAILED the “Stress Test”. GMAC was not just LOW on capital they have NEGATIVE capital. They are technically DONE! Talk on the street was about the coming collapse and bankruptcy. The private sector would not touch them and so it would be hard to raise money.

While Wells Fargo, Bank of America, and others (also needing money to meet “stress test” levels) sold stock, sold assets, and raised debt – to meet those obligations. However, GMAC had nowhere to go. So to many people’s surprise the Treasury just gave them ANOTHER $7.5 billion to expand auto lending at Chrysler and also cleared to sell government-backed debt. WHAT? Their debt is rated at junk and they have negative capital. This is just insane…

A closer look reveals the truth – we all know they didn’t pass muster – a large portion of the “Funds to originate loans” is REALLY to meet capital requirements – to get them from negative capital to positive capital. The government is also going to let them sell debt that is backed by the FDIC. Also access to more money from the Federal reserve.

The spin coming out the administration is that it is to “stabilize” GM and Chrysler and help consumers finance vehicles.



Look – I understand the “Stress Test” and the need to raise capital. Other banks are now going it alone – selling assets, selling stocks, raising debt. Why did the government just dump MORE money into GMAC (and not other banks), allow them (while the debt is rated junk) to sell FDIC backed debt, and give them access to MORE money from the Federal Reserve?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRAYMq4..L8w&refer=home

Speaking of auto related companies – the story that GM may get some Treasury funding to help them pass the June 1st deadline to avoid bankruptcy. It’s just a rumor – but after reading about GMAC this morning – I wouldn’t be surprised if we give GM a 4th chance to get there business fixed and give them a few 10 billion more.

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Futures Pre-market

Futures are slightly up above fair value – Sears helped. But the possible credit rating drop in the UK and possibly the US is causing some concern. Also many don’t want to go home long positions.

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Support / Resistance

INDU 8250 / 8500 (We tested 8250 – but it held and rallied – do we revisit today and hold?)

NDX 1350 / 1400 (We got close – but also rallied off of 1350.)

SPX 881 (The 881 level is the talk on CNBC and Bloomberg – we closed above it)

RUT 470 (Again – rally at the close )

Interesting going into the 3 day weekend – we might have light volume – question is do we see people getting out of positions before the weekend or looking at yesterday’s sell off as an opportunity.

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Conclusion

Good news is that some companies (Wal-mart, Sears, etc.) are getting done and dirty – cleaning up their business with the massive contraction of revenue. They KNOW it is about margins that determine profit/loss. Sure we maybe in a recession, but that doesn’t mean to give up – it means that you have to tighten your belt.

Bad news is that our Administration, Congress, and Federal Reserve continues to toss 10s of billions at these FAILING companies. The government is already planning on wiping out the 50+ billion of debt they loaned GM if it files bankruptcy (that is permanent loss money to the tax payer). UK was downgrade and is facing a high possibility that they lose their credit rating and Bill Gross (PIMCO) – not to be ignored – said they US will eventually lose their credit rating. Sound crazy, maybe – but if we (and Congress) doesn’t even have a clue as to the kind of money, risk, and losses over at the Federal Reserve and they continue to print money and loan them to the likes of GMAC – it IS inevitable. Geithner asking for a 3% reduction in the deficit is a paltry suggestion as if that would make a difference.

Our Congress needs to get down and dirty like Wal-mart, Sears, and other companies that KNOW you can’t spend money right now and need to get on top of the balance sheet. If we don’t we WILL lose our credit rating.

5/21/09 (UK downgrade? Jobless Claims! Fed Reality!)

Traders,

Running out of steam….two days in a row we rally above those resistance numbers and look strong – then we fall right back down into the close. Yesterday we also saw the VIX get CRUSHED intraday as the market rallied (from 29 to 26.5 = almost 10%) as if the green shoots had taken root and there was no fear. Then as the market fell back off the VIX retraced back. We are certainly at a struggling level to go higher or pull back.

Hidden volatility is ramping – the VIX is pricing in a 1.5% daily standard deviation in the S&P, but yesterday the S&P was trading on a 2.5% standard deviation. The volatility is getting cheap relative to the statistical volatility – that to me spells short-term concern. The options premium is getting cheap (over-all) relative to how the indices are actually moving.

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S&P downgrades the UK!!!

S&P lowered its outlook on Britain from “Stable” to “Negative” – indicating that it might lose its AAA credit rating as their nations debt approached 100% of their GDP (S&P say it is a 1 in 3 chance of credit rating drop). I ask myself how much debt vs. GDP do you really need to lose a AAA credit rating, seems a little subjective. One analyst on Bloomberg said this morning, if S&P is downgrading the UK, the US is probably next in line (with all its printing of money), if debt vs. GDP is a consideration.

Could we see rates increase on UK bonds to attract investments as the UK needs to finance more debt? Also what happens to the Pound vs. Dollar – we recently saw the Pound make a good run up against the dollar – getting close to that 1.60 level.

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Weekly jobless claims

The futures are seeing a little pressure as weekly jobless claims fell by 12,000 to 631,000, from a revised 643,000 the prior week (higher than initially estimated – which was expected to be about 625,000). Additionally – the number of Americans on unemployment benefits hit another record, over 6.6 million – which seems to be increasing. Economist have been slowly raising their unemployment forecast from 9 to 9.6% in 2010.

Chrysler’s collapse and respective job losses was partly to blame, but economist had included that in the forecast. Clearly the job market is not improving, while some of the economic data is showing the decline showing.

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Fed speak –

While it is hard to make heads or tails out of Fed speak – for the most part, yesterday it was clear the that Fed is unconvinced to the economy’s “stabilization” to persist. An analyst on Bloomberg this morning – said the government intervention did show serious signs of improvement and stabilization, but the focus was concentrated in the banking/financial sector only and while it did slow down the hemorrhage of the auto makers, it didn’t keep them from collapsing.

Let’s look at the consumer and think about them as a collective and business. The consumer is over 70% of the U.S. GDP and about 17% of the world GDP – and it is really the foundation of the economy. The consumer balance sheet is the biggest and the most over leveraged – which recently lost trillions of dollars. The consumer is also seeing a massive shrink of revenue – as jobless claims continue to rise, at that means less revenue to the balance sheet. Most of the credit lines are tapped or shrinking and the equity for the most part (being housing) has been wiped out.

The consumer really has to find a bottom and continue to deleverage before we can see growth.
It seems to me that the Fed is coming quickly to that realization. No doubt they have significantly helped the banks from collapsing – giving them access to the Discount Window, special loans, TARP, etc. But that is NOT filtering to the consumers and that is something they are concerned about. There is some skepticism about the LIBOR as well as a sign of credit easing, on CNBC this morning a regular guest indicated that LIBOR fell because there is no liquidity. Firms have been getting 10s of billions from the government at very low rates, lower than LIBOR – there is no reason to pay up in the LIBOR market if you are getting it cheaper elsewhere. LIBOR is contracting because there is no liquidity. It would rise if the government closed the taps and banks had to go back to each other to get the float.

The FED is seeing this as well and the massive printing that comes with bailing out. The report released yesterday indicated that they are ready to buy MORE treasuries (another $300 billion) should the economy deteriorate further. Clearly the retail sales down, housing starts down, and jobless claims rising – while all slowing – still haven’t found a bottom and more funding is clearly needed. The FED also become more skeptical to their earlier expectations of a recovery and indicated that the jobless rate may remain as high as 8.5% well into 2011. This morning’s weekly number indicates that it might even be higher.

The report certainly sent a negative jolt to the market and saw government bonds rally – as investors expect the FED to print more money to buy more treasuries.

It would seem that the FED, Congress, Treasury, and Administration have all but forgotten about the consumers and have been focusing on Wall Street and the Auto companies. The reality is the consumers of this nation make the wheels turn and drive revenue to companies and is also the prime source of government revenue (TAXES). Unless more focus is geared towards the consumers and the government reduces the consumer debt load – by bailing out banks – it is going to be very slow growth.

To sum it up – the Fed’s report does not spell a rosy picture as to a recovery and is lowering their forecasts.

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Futures Pre-market

The futures are seeing pressure this morning – after the FED report and weekly jobless claims show a recovery further off. Expect negative pressure in the morning.

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Support / Resistance

INDU 8250 / 8500 (We had two days of flirting above the 8500 level – but it really couldn’t close above it – yesterday it was hit into the close and now we are looking to head a little lower at the opening.)

NDX 1350 / 1400 (Again – 1400 seemed to be the area that support could have been built going forward – but we couldn’t keep our head above water. Futures looking lower at the opening – but watch the close.)

SPX 900! (We closed above it, but all eyes are on that 881 level to see if it holds – that is very short-term support. Watch the close.)

RUT 470 / 500 (That 470 level is key – we couldn’t stay above 500 – but watch the close.)

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Gold 950 (We are slowly moving towards 950)

Silver 14+ (We are above 14 – the question is really going to be on the dollar – which continues to show signs of weakness.)

OIL 60+ (Oil came off this morning but is still above 60. I think the dollar today will play a bigger role in oil prices in today’s action)

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Conclusion

Today seems like a test day – we couldn’t close above those resistance levels – and we did make some very solid tries over the last two days – only to close lower. The question is do we visit those support levels this week. It is certainly becoming more volatile, even though the VIX shows different. The disconnect between the implied volatility vs. statistical is reflecting that option premiums are oversold vs. expected standard deviation.

I think today could be a pivotal day between getting back to those resistances or making a good move down to support areas. Those short-term supports in the SPX and RUT is to be watched.

Recovery seems to be further off and even the FED is now on board with that notion.

5/20/09 (Fed Power!, Deere in the Headlights?)

Traders,

Yesterday was interesting action – it seemed that we were to stretch our legs and continue with Monday’s rally to the resistance levels, but going into the close we headed back down sharply back to and through those levels. It was as if a magnet pulled on the indices back down. Even with that action – the VIX contracted more – below the 30 level.

Interesting that the dollar is becoming weaker as the Euro, Pound, and Franc – along with Gold, Silver, and Oil continue to push higher. Oil got back to 60 and this morning is pushing through 60. Silver broke through 14 and pound is almost to 1.55. Are commodities getting to far ahead of themselves or will we see some contraction in the equity markets?

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FED more power?

The Fed’s mandates and power seem expand. Not that it would normally be alarming for giving an agency any more oversight or power, however the concern is the transparency issue. The FED has been repeatedly asked (even sued by Bloomberg) to be transparent as to how much it has printed, who they have given money too, and what risks they have on their balance sheets.
The video of the Congressman asking the Inspector General of the FED (who SHOULD have oversight and be able to give SOME level on assessment), was embarrassing. She had no clue and we are talking about trillions of dollars. If you haven’t seen this video, it will seriously make you sick to your stomach. http://www.youtube.com/watch?v=PXlxBeAvsB8

Now the Obama Administration is thinking about stripping the SEC (which has proven their failure of regulation) power and granting those powers to the FED – giving it even broader and more sweeping power. It is interesting how critical Congress was of Bernanke as he handled the Bear Stearns, Lehman, TARP, Discount Window, etc prior to the election. If you watched his testimonies last year – it was as if he was Bush’s crony. Now all that criticism seems to have disappeared and they are looking to give the Fed more sweeping powers.

The problem is clear – it is not about WHO is the regulator as long as they can regulate. The further problem is the Fed is not “really” a part of the government, rather than a separated partner. That is where the concern lies – if we ask any agency to expand their power to oversee and enforce regulation – the Congress should be able to (needs to be able to) question and receive transparency as to what the Fed is doing and their balance sheet. If the video is any indication of how things are currently managed – we should take pause before giving them MORE sweeping power.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7YbbxHUZRqg&refer=home

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Bank of American – raising money…

The “Stress Test” revealed that several banks (more than half) need to raise more money to meet the government guidelines. The problem is that TARP is tapped and it would be hard to get Congress to approve more money to give to the banks. So what to do – we are seeing a three-prong approach. 1. Sell assets (a couple of banks have sold of positions and assets – some that are profitable – just to increase their balance sheet). 2. Sell bonds (this is a little harder, some have been successful – but without insurance or government guarantees the interest rates demanded for some of these are rather steep.). 3. Sell stock (No one really wants to do that – as it dilutes the equity position of the company, increases supply, and puts pressure on stock price.)

B of A had sold some assets, but it wasn’t enough. Now they are selling $13.5 billion worth (issued 1.25 billion shares at $10.77 price avg) below the current market value. Wells Fargo and Morgan Stanley had recently sold shares as well to raise money. Actually – why not – the stock prices have made huge gains off the bottom. B of A, which needed to raise more than the others – says they will probably have another round of stock selling to raise another $10 billion.

The problem is that while they may raise the $34 billion needed to meet the government threshold set by the “Stress Test” – they still face significant potential losses of $136 billion for 2009 and 2010. Of course that is all based on economic conditions. Of course the CEO of B of A (Lewis) said the “Stress Test” was based on a much worse economic condition than what most experts projected. Actually that is more spin – the reality is that it face more criticism and many said it wasn’t much of a Stress Test (Unemployment is almost at 9% already). That means that if the government’s projection is right – B of A has lost potential of $136 billion – but for those that believed that it was not necessary reflective of real stress- the potential losses could be much larger.

That brings up the second concern about those re-paying the TARP, which that request was delayed by officials yesterday. What happens if the economy continues to contract OR does not recovery as optimistically as the government “hopes” for? Will they need to come back to the well again (after they repay)? It would be mud in the eye of regulators if that was the case and it could mean a larger fall-out between Wall St. and Pennsylvania Ave.

For now – the banks are able to raise some money – maybe not enough. Loss expectations ranges are skeptical and while credit seems to be flowing via the contraction of the LIBOR – it is certainly not making it out of the coffers to the consumer level – which continues to contract. A clear sign of that was the retail sale contraction and the housing starts falling to a record low. Consumer are tapped.

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Deere in the headlights....

John Deere (an American icon company) – saw profits fall 38% for the quarter. The problem seems to be the commercial side according to Deere’s CEO. Certainly credit line contractions is curtailing farm equipment purchases – additionally forestry sales fell 55% and are expected to fall 42% on a year-over-year basis.

The big problem is revenue which is contracting (expected to be 1.1 billion this year, down from 1.5 billion last year). That means belt tightening to keep margins up. If revenue falls – then cutting costs is the only way to increase margins.

Deere does have a large global presences over the last decade – which may help off-set short-fall in revenues in the domestic market, a weaker dollar could help – if they can raise their percentage of sales oversea.

For now – forecasts are looking rather conservative.

DE is down in the pre-market.

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Futures Pre-market

We saw a fall in the futures after the close yesterday, but they are making a short rally this morning which has closed the gap on fair value into positive territory. Expect a slight pop in the market if the spreads remain positive.

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Support / Resistance

INDU 8500 ? (Above all day it seemed until the close and they we went negative and back down through it. Futures are pointing to a 8500 opening again – but can we remain above it?)

NDX 1400? (Just like the INDU we were above it and was the only index to close up on the day, but at the close if fell down through 1400. Futures are pointing at a 1400 opening.)

SPX 900? (We closed flat to slight negative, just above 900 yesterday. Does it hold above it?)

RUT 500? (The RUT fell below the 500 level – it is making a run in futures this morning – but still short of the 500 level)

Watch the close. We did sell off yesterday above these levels – do we see some selling pressure above these levels again?

Gold 950? (We did make a good run – but it is 950 that all eyes are on.)

Silver 14+? (Silver is making a good move higher – does gold continue to track higher as well?)

OIL 60+? (We are back here – do we fall back down to the 55 or 50 level or continue to head higher?)

The dollar seems to be the answer to the commodity market – as it has been falling. Does it continue to slide?

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Conclusion

Geithner and the Economic Advisory committee meet with Obama today as well as Geithner’s testimony. There is still many questions out there and this morning – some members of the Economic Advisory committee said we seem to be on the right track – but the economy remains negative and fragile. If the government’s data is any gauge it is certainly showing a continued contraction, while slow. When is the bottom?

The VIX broke down below 30 and could head lower. Certainly the market doesn’t seem to be concerned about the market and is rather optimistic. Is it too optimistic?

5/19/09 (TARP pay back?, Buffet All In!, What's Next?)

Traders,

As I mentioned yesterday it seemed like last week’s sell off was controlled and low key – there was no GAP DOWN or panic. Even the VIX indicated that the selling was controlled. In that kind of an environment – there is more confidence at buying on the dips and optimism that it was just a slight correction.

Couple that with yesterday’s bullish news – Lowe’s getting on track, LIBOR spread decreasing, and Buffet’s investing in Wells Fargo – the futures were already to a good head start in the pre-market. The market rallied throughout the day across the board (3% rally) and we are now quickly back up to those resistance levels of 8500 in the INDU, 1400 NDX, 900 SPX, and 500 RUT. The question on everyone’s mind – are those just being tested again – or do we have room to again stretch our legs further.

The repeated concern is the disconnect between the market place and the economic conditions. Certainly the man on the street is not feeling the same bullish optimism that the market is seeing. Several companies announced more lay-offs, including a big cut at AMEX, meanwhile GM is knocking at the bankruptcy door, and lastly consumer spending and income is still contracting.
Why the disconnect? I would say that there was a general Doom & Gloom feeling coming into 2009 and when economic data should that the decline was slowing down (rightly or wrongly) the perception was that the market, primarily in the banking sector, was oversold and undervalued, hence the big rally. However, what is still the big concern – is the recovery – which economist and analyst continue to push out – from the end of 2009, to 2010, and now some are saying 2011. We certainly will hit bottom sooner, rather than latter, but the recovery and growth seem further off.

It is the reason that for long-term holders the focus should be on companies with solid balance sheets, revenue, and a management style that has come to reality that growth and revenue will continue to contract and how to expand margins. Lowe’s indicated as much yesterday – they have come to reality – the revenue is slowing down, they are not expecting a boom in housing, they are not expecting a boom in major renovation – so how to capitalize on that? Focus on what does move- people are fixing instead of replacing, painting instead of new cabinets, and homes are consistently in repair. Managing a business to those expectations and understanding margins are going to separate the solid companies from those that are still clinging on to failed business models (like GM or Chrysler).

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Pay back the TARP?

Goldman, JP Morgan, and Morgan Stanley had indicated in the past they wanted to pay back the TARP – especially after Congress slapped on all sorts of rules and penalties – from pay to board members. However, when Goldman and the other had indicated or attempted to ask to pay back the money (in full or in part) – there was Administrative and Congressional push back. Why, well some conclude that it may make the banks that cannot pay back look worst and others argue it is a ideological reason that the administration and Congress want to revamp and put in check the banking industry – beyond regulations. Regardless of the reason, they have not been able to pay it back – yet.

While now they have officially applied to pay back as much as $45 billion collectively and tax payers should rejoice – getting back that money that may not have been needed in the first place. It would also allow these banks to break away from some of the more troubled banks like Bank of America or Citigroup which have tremendous stress from acquisitions and other vertical market debt.

They question now is will they be allowed to. The administration, Congress, Bernanke, and Geithner are playing some spin games for sure and their motives are rather uncertain. Geithner said the other day he would welcome the payback of the TARP funds, provided the regulators sign off. Barney Frank made similar comments and added lots of buts and ifs. Certainly they know that the TARP’s strings are powerful and they don’t necessarily want to cut those strings. Some are afraid they may have to come back and get the money back if the economy nose dives again.

For now – the news had given Goldman, Morgan Stanley, and JPM a serious boost yesterday – but this morning they seem to be giving up a little ground.

One interesting observation I heard on Bloomberg – was that IF these few are able to pay back the TARP and others do not – will there be a disconnect in the financial and banking indices in which we could see a spread in price between the Non-Tarp vs. Tarp. Hedge fund traders are already looking into correlation risk and rewards and it could certainly bring some interesting volatility into that sector.

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Buffet - all in?

Buffet has been the face on the financial news over the last year. He made a bold investment (with some excellent strings attached) into Goldman ($5 billion), he had supported Obama, he had seemed to be on top of his game in the face of this massive economic slowdown. However – things are looking rocky over at Berkshire. Likes take a look….

1. He called derivatives, “financial WMDs” – but the primary business is insurance and he also placed the single largest derivative trade on the S&P 500. He sold $4 billion worth of out-of-the-money puts in 2007 – which recently went against him costing Berkshire $6 billion and causing criticism.

2. His Goldman, Wells Fargo, and GE holdings have been extremely volatile, even though they have gained recently.

3. Criticism from shareholders as they want to know his successor, but he will not give any definitive answer.

4. Berkshire lost its coveted AAA credit rating.

All these concerns have been reflective in Berkshires shares dropping significantly in price.

Buffet has stumbled in the past – in the airlines and financials, but has always recovered. He is certainly one of the brightest and most successful investors in history, but that doesn’t make him infallible. Recent, and fair, criticism has been his recent spending binge and risk taking in the economic times. The positions maybe too big or “all in” type beats. Not that his decisions are bad – but maybe just too big.

No the problem is that Berkshire’s cash holdings are dwindling fast and Buffet who is used to making decisions and investments without being handcuff is now being forced to reduce investments because of the drop in cash holdings. As one report in Bloomberg reflects – “He’s tapped out!” he spent over $600 million in stock purchases in the first quarter, but had to reluctantly sell other holdings to finance his new purchases. He is fully deployed, unless he sells something.

He does drive some of the best deals on Wall Street – from massive warrant attachments and high interest payments coupled with equity in his GE and Goldman deals. However, those were whopper positions – that certainly help dry the well.

Even Buffet admitted he had to sell three stock holding to fund other deals, that he preferred to keep.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ak_yonqvS.yg&refer=home

Why all the Buffet concern or “Buffet Watch” – just like the President – Buffet is very influential regardless if you’re an investor or not. He is closely watched and regarded – because if his perception or circumstances change – what does that mean for the rest of the market?

Keep an eye on his positions and media exposure – a friend of mine calls him “the billionaire economic gauge”.
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Futures Pre-market

The futures were up in the pre-market, following yesterday’s rally – but have come off sharply as U.S. Housing Starts (just released) unexpectedly fall to record low. Futures pointing to a lower opening.

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Support / Resistance

Resistance test?

INDU 8500 (We just got there – it looks to be a resistance level and housing starts down is showing a lower opening now. Do we close above or head back down?)

NDX 1400 (We are just below the number and futures looked to initially test it this morning – until the housing starts sent futures down. Watch the close!)

SPX 900 (Closing just above it and looking higher – but now futures are pointing lower. Watch the close.)

RUT 500 (Closing just below it after the big rally yesterday – does it get above it?)

It looks like the reality with the housing start data is sending optimism to the sidelines again and the resistance points will not see the hopefully breakout futures had been pointing too.

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Conclusion

The battle still seems to be between economic reality and the optimism that we are finding a bottom. Not that one is wrong or the other is right – the concern should be the spread or the disconnect between the market and economic conditions. There are 3 outcomes:

1. Economic conditions rally and we don’t just slow down but start a recovery with new jobs which closes the spread and reflects the market optimism – which seems unlikely.

2. Markets remain neutral to negative with volatility contracting as the economic conditions slowly improve and eventually over time (6 months, 9 months, 18 months) the spread narrows – seems more likely.

3. Market correct and head down quickly to meet economic reality as a recovery seems further off and then the market finds a bottom as the market and economic realities begin to track each other again – seems likely as well.

I think the only answers are 2 or 3 – because it will take a long time to see the economic conditions on the ground for the U.S. consumer to change. It doesn’t happen overnight and takes months, if not years.

If we see the flow of money (in and out) dwindle in the market we could have scenario two – where the market’s volatility and range decreases – up or down 5-10% annually – a neutral, range bound, or slightly negative market condition until the economic conditions can catch up.

Scenario 3 will only happen is the optimism and hope begins to fade – the economic data (like the recent housing starts) reflect negative conditions and with a GM bankruptcy that could be the straw that fades that hope and optimism we have seen the last 10 weeks and that could mean a correction in the cards – where the market quickly snaps down to reflect the current economic conditions and concern for growth.

I think if optimism and hope can continue – that scenario two is the most likely, but there are pretty high odds that 3 could happen. The problem is that when 3 happens – it happens when you least expect it. That means – be prepared.

5/18/09 (Well's Fargo, LIBOR?, Lowe's survives!)

Traders,

Last week the market saw the first stumble in its 10 week rally. Mostly the news showing that the economic contraction is slowing down – has been seeming to slow – coupled with the banks not needing as much as one had thought – has all come all. Last week seem to be digesting the news time and see where we are to go from here.

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Wells Fargo gets a boost…

Berkshire Hathaway already had a large holding in Wells Fargo, after the “stress test” and recent news, Buffet is now increasing his holdings – which is given a huge vote of confidence into the banking sector. Berkshire will be one of the largest shareholders of Wells Fargo.

Expect to see some positive momentum in the banking and financial sector – as this is a clear vote of confidence by the billionaire.

WFC is up .75 in the pre-market

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LIBOR – show me the money

The London InterBank Offered Rate (LIBOR) the cost of borrowing dollars between banks contracted again. Showing that credit lines of the larger banks is improving. While this is a good sign that credit is easing – there remains two problems. First, there is a liquidity question. On Bloomberg an analyst mentioned that it was good to see it contract – showing that credit is available – the problem is the liquidity is far less than in the past. We need to see it continue to contract and more banks lending to each other. Second, the money (credit) is not getting down to the consumer level. Consumers – the core of GDP and consumption – is still not seeing credit lines or available liquidity increase. Where is the money going? The analyst indicated that it is still being used to maintain or expand existing holdings and used to off-set write downs. If there is anything left – the banks are holding on to it tightly.

Again – the news is good and a step in the right direction – we just need to see more volume, continued contraction in the spread, and credit available on the consumer level.

The news is helping to boost the financial / banking sector in the pre-market, coupled with Wells Fargo news – we could see a good boost at the opening.

GS, MS, JPM, BAC, etc – are all up in the pre-market.

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Lowe’s beat estimates…

Certainly, like others (especially in the construction / home sector) – have significantly lowered their forecast in 2008 going forward. However, maybe they lowered it too much.

Lowe’s first quarter profit fell less than expected – profit dropped over 22% year-over-year, to $476 million (32 cents a share). Even though revenue contracted significantly, Lowe’s cost cutting measures and inventory management help increase margins almost 1% year-over-year.

Lowe’s has been seriously reinventing itself – focusing on the smaller home projects, repair, and needs – rather than the bigger ticket item or renovation. Cutting costs, jobs, and inventory – keeps them running lean. They raised their annual forecast to as must as 1.25 (from their previous 1.20 – what was significantly cut). It is a boost, certainly not back to where they were, but any boost in this economy means that the company would seem to have a handle on revenue, costs, and margin expectations.

The question is how does their big brother Home Depot do, which reports tomorrow?

Lowe’s is seeing a slight pop in the pre-market.

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Futures Pre-market

The futures had been flat-to-down until the news of Berkshire and the reports of the LIBOR spread which seems to have boost the confidence in the banking / financial sector. Lowe’s is also helping. The spreads are in – expect ARB traders to short futures and buy the cash – giving a boost the market at the opening.

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Support / Resistance

INDU 8000 (8250) 8500 (We came off from 8500 to the 8250 level – which seems to be a pivot point. The futures are showing a good 100 point boost in the pre-market. Do we hold – it will depend on how solid the investment community feels about the news this morning.)

NDX 1300 (1350) 1400 (Like with the INDU – we seem to have had some profit taking and a little digesting of the recent run and economic news. The futures are showing a boost in the pre-market.)

SPX 880 / 900 (We are getting a boost in the futures to 890 in the pre-market. 880 is that 20 day moving average – that I keep hearing that has hold by the tech analyst. While NDX and RUT have not – there seems to be eyes on that level. Take it for what it is worth.)

RUT 475 (We we looking at a 480 opening, but it is that 475ish level that the broader market needs to hold to see some level of support.)

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Gold 900+ (We have moved into the 930 range – the question is do we break through 950?)

Silver 13+ (We keep bouncing up against 14 – we could break if we could also see gold get through 950)

OIL 55+ (We made a good run to 60, pulled back off, but now are heading back up. There is volatility in here – as the dollar value vs. oil demand is a push-me / pull-you.)

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Conclusion

We had a slight pull back – it was controlled and volatility did not spike – which clearly reflected there was no fear and that brought in some perceived buying opportunities. The news this morning is certainly confidence building in the financial sector – but it still doesn’t address the economic concern in the big picture. Lowe’s news was good as it seems the management is getting to grips with the slow-down and trimming the fat – however a 22% drop in profit is still a shocker, no matter how you cut it. The realization is that the past growth is probably not a realistic goal over the next couple of years and any growth is a good sign.

We are seeing a good pop in the futures at the pre-market, the question is – does the news maintain that optimism? That is the question – the economic vs. market still shows a disconnect as consumers struggle and we see contraction in the revenue. It is now about managing margins and coming to realization that revenue will continue to be down.

5/15/09 (CPI, GM 11th hour, Jack speaks out!)

Traders,

A mixed market with a slight rebound after the sell-off. Tech. Analyst talk is that the SPX did NOT break that 20 day avg, but it did get close – and a test of those levels are still in the cards. RUT and NDX did not get back above it, despite the rally. It would seem the talk of “green shoots” is starting to turn to “weeds” on Bloomberg and CNBC, even the Economist is printing articles that said it is prudent to remain cautious.

I think that it is prudent to remain optimistic that the economy’s fall has slowed – but optimism needs to be combined with reality and caution. My concern is not that we will find a bottom or when or how far down it will be – we certainly will get to the bottom – probably sooner, rather than later. My concern is when will we see a recovery and the more I read and hear – the more I have a sinking feeling that it is certainly not going to happen in 2009, less of a chance in 2010, and we might be lucky to see it in 2011. That is NOT to say that the market and economy will continue to go down, but rather we will see a longer road of stagflation – and possibly follow in the footprints of Japan – the lost decade.

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Consumer Price Index (CPI)

Inflation, on the consumer side, according to the CPI was unchanged, but the core was up .3%. However, last report it was down and while it did come in line with expectations, it was the higher end – as many of those deflationist thought it would continue to contract.

I am becoming more convinced that we may be seeing the bottom in the deflation arena and that we will start seeing (like with the PPI) and increase in inflation at the consumer level.

Why? Well – we certainly will have a contraction of the CPI has existing inventory is moved out at a significant discount. We saw that with autos, electronics, and higher price ticket items. Certainly in homes and rent. But here is the tricky point, many only want to measure inflation from one variable – prices increase or decrease on a fixed value. However, the hidden volatility in the CPI is the strength or weakness of the currency as well as the amount of money that is pushed into the system (via printing of money).

The horizon at best if uncertain. On one hand – we are certainly printing tons of money and the risk of the dollar weakening is increasing – both spell inflation. On the other hand – consumer credit and income – which determines buying power is getting wiped out. It is almost like we will have inflation and deflation at the same time – or something new. Whatever the case – I certainly think the dollar will eventually be under serious strain.

For now – inflation seems to be in check and deflation is not getting worse – but at some point that will change and I am afraid it will change quickly.
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GM – is it the end?

GM insiders have been selling shares as June 1st deadline approaches, the probability of bankruptcy is increasing as the minutes tick by. The big news – and another job drain on the economy – is GM’s announcement of terminating over 1,000 U.S. dealerships – that means more job losses across the country and confirms that GM does not expect that auto sales will be increasing any time soon, regardless of how they spin it.

Tic-Toc….

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TARP – join the club

The latest group to join the government bailout group are the insurers, Prudential, Harford, Allstate, Lincoln Nation, and more are now approved and will soon be receiving billions in bailout money. Interesting that the banks are wishing they didn’t head down that path and make that deal – now the government forbids some of the banks from repaying. The government is putting pressure on B of A to fire the CEO and starting to set more policies at these banks that have received TARP funds.

Jack Welsh this morning on CNBC was shaking his head – and is very concerned that the government is getting into too deep and it could remain permanent. He made the interesting point – once the government does something and says it is ONLY temporarily, is it ever? One would think other companies would learn from the banks lesson, but as Jack pointed out – the ONLY reason you would ever get involved in the TARP is because you REALLY need the money and that means the company’s balance sheet has some serious problems.

Listen to Jack’s concerns: http://www.cnbc.com/id/15840232?video=1124823872&play=1

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Futures Pre-market

The futures are weak in the pre-market, but the CPI data gave a boost off their lows. The spreads are narrowing and if they continue to contract – expect a mix to weak opening.

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Support / Resistance

INDU 8000 (8250) 8500 (We got a little rally off that 8250 pivot point – but we can revisit that 8250 level – it is still a pivot / short-term support area. Watch the close.)

NDX 1300 (1350) 1400 (We closed up above the pivot point – the futures are pointing to opening RIGHT on that number. Which way do we go?)

SPX 900! (We closed below it – but we are right there – it is a pivot point – watch the close.)

RUT 475 (We got hammered in the RUT 4% the other day compared to the other indices and we didn’t get that big of a bounce, we are below the 500 level and futures are pointing to that 475 level.)

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Gold 900+ (We are above 900 – but to see some carry through we need to get through 950)

Silver 13+ (We are at 14 – and have made a good run – does it have legs?)

Oil 55+ (We are still above 55, had a good run to 60. Oil is coming off a little from the CPI data – but is still above 55)

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Conclusion

Jack Welch is right this morning on CNBC – some of these policies are going to serious curtail growth and some of the knee jerk and ideological policies coming from the administration is very short-sighted. Sure it may save a company via a bailout or solve some short-term problems – but it certainly is not building a foundation for this country to grow.

Ron Paul was on Joe Scarborough this morning – mentioning his concern as well – note, Joe read Ron Paul addressing Congress in 2003 – predicting the housing bubble, the collapse of Freddie and Fannie. Joe made an interesting observation, why do Congressional members say they DIDN’T see this coming, why did Bernanke say he didn’t see it coming? How come Ron was able to see it and not them? Ron’s answer – if you believe in something like Keynesian economics – you don’t want to see the truth or the math. Faith is certainly stronger than math. Ron when on to make another interesting observation – if these SAME people didn’t see the WORST financial crisis coming are we to believe them that we are now seeing a bottom, “green shoots”, and we should be back to a 3+ % GDP growth by the end of the year?

These are both smart people – we should take pause and listen to their concerns.


Jack Welch – CNBC this morning: http://www.cnbc.com/id/15840232?video=1124823872&play=1

I wish I could find the Ron Paul clip this morning…

5/14/09 (Wal-mart! Green shoots yellowing?)

Traders,

Yesterday we saw the short-term supports that were tested the previous day not hold and the indices continue to move lower throughout the day. Whether this was a short-term retracement or the beginning of a correction has yet to be determine – 20, 30, 50 day averages have seemed to hold but could easily be tested.

The concern is that while all seem to agree that the contraction in the economy has slowed the recovery seems to be farther off. Consumer spending seems to be the driver that all eyes are on. It is the consumption of goods that drives the wheels of the economy. With a trade deficit widening and shipping traffic at anchor it is clear that the consumption continues to contract. Revisions of growth for 2009, 10, and 11 continue to be lowered – which is alarming on the national deficit side – as the administration expects (or hopes) for growth in the 3+% range – which is needed to reduce the debt and deficit.

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Wal-mart – stays inline…

Wal-mart the recession company – as people of all consumer class steps down to Wal-mart to buy their essentials. Wal-marts might is their many vertical markets – from food, clothing, pharmaceuticals, etc. They are the one stop shop and prices are competitive. As consumers have less to spend – a one stop, low price shop is the answer.

But even Wal-mart is seeing contraction in growth. While they are gaining market share – the consumers are still spending less and focusing on essentials, rather than big ticket items (like TVs). That realization was also seen in Sony’s recent report of losses as revenues drop and lower prices to move merchandise means leaner margins.

Wal-mart reported their profit was in line with estimates (note: those estimates had been lower). Their revenue dropped by $2 billion in the quarter (from 96 to 94 billion) and while margins determine profit potential – it is revenue that drives in the money. Business formula is simple, if revenue drops then cost cutting is necessary to keep margins in line.

Expectations for next quarter [83-88] bracket the analyst estimates of 85 cent per share, which is good news that Wal-mart didn’t lower guidance.

Wal-mart still seems to be the leader of the retailers, which the retail sales report showed a surprising drop. Wal-mart now needs to focus on gaining market share, keeping it, focus on the margins of essential goods, and manage the high ticket items. They will no doubt remain a foundation in a contracting economy and have continued to beat the INDU and S&P.
While I wouldn’t get long retail stocks in general, Wal-mart is the exception to the rule. Make sure to hedge and use options for short-term yield enhancement.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aetDKT5OYyMM&refer=home

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Jobless and Inflation

Jobless claims were up by 32,000 and the total now on unemployment have risen to over 6.5 million.

Producer Price Index (PPI) which measures inflation at the wholesale level among producers was up .3%.

Both indicators released today, after the lower retail numbers yesterday, are starting to bring a skeptical eye to those “Green Shoots”. The talk has turned from short-term optimistic view of finding a bottom, to a skeptical concern about the long-term recovery.

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Future Pre-market

Futures seem to see a little volatility in the pre-market, up a little to slight better than fair value, to head back lower. The Wal-mart numbers – combined with the Jobless / PPI numbers injected some down/up knee jerk action. The ARB traders are sitting on the sideline as the opening looks mixed and Asia / Europe looked weak. Look for a mixed opening if the fluctuation remains.

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Support / Resistance

We didn’t hold the recent short-term supports, but the sell off - while broad – was contained and mild. The VIX, while higher, didn’t spike. I gauge the sell off as a controlled profit taking and certainly not a panic. But if we get a follow through to the downside – we might begin to spark fear and see a rise in the VIX. The question today – is this a buying opportunity or was yesterday a confirmation of a profit taking indicator?

INDU 8000 (8250) 8500 (We are in the middle of the range – and waiting to see a move up or down – perception and renew concerned will be the driving force.)

NDX 1300 / 1400 (We are in the middle as well – which way do we drive?)

SPX 875? (We are just above the 20 day moving average – which this is a fairly good bottom support measurement of the recent rally. It is 879, which we closed just above. While the self fore filling prophecy of moving average watchers that causes concern if we close below it? Watch the close – so far it has closed above it since March 12th. – make of that what you will.)

RUT 470? (Unlike the SPX the RUT seriously broke the 20 day – and as a broader measure of the market – it didn’t look good yesterday. Pressure is on. If the RUT is any indicator yesterday of the SPX, than expect the SPX to visit and pass through that 20 day.)

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Gold 900+ (Gold is still in the 900 plus range and some have said it looks like it may have broken support. But I didn’t see it make the serious leg up yet. I would like to see 950!)

Silver 13+ (We broke 14, but came back a little just below.)

OIL 55+ (Well it was a one day visit to 60 and now we are heading back down to 55. Dollar value vs. supply & demand. There are two factors playing on oil price)

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Conclusion

The sell-off yesterday was mild – sure it was over 2% in most indices (and 4% in the RUT) – but it didn’t GAP down, it was a controlled sell off. The VIX did move higher – but not in a knee jerk panic sort of way. And investors had time to sell out positions through-out the day. So as the jobless and PPI information is absorb the market participants will have to determine is today a buying opportunity or was yesterday a reminder to maybe take some profit off the table.

Certainly the contraction in the retail sales, jobless claims up, and inflation starting to see signs in the PPI – are not economic good news. However, the market moves on perception. Yesterday I mentioned that there is a wide spread between recent market values and economic reality. Sure the spread can widen more (stock can go up or the economy get worse) and it is also questionable as to when they start tracking each other again. But as the commentator on Bloomberg said as he reported the jobless and PPI numbers, “The green shoots are starting to yellow.” – It is now up to the market participants on how to absorb that news.

For those long equities, it is probably better to lock in gains and hedge positions – as the data continues to show a contraction in the economy, regardless if that contraction is slowing.
I don’t think the move yesterday reflected the hidden volatility that is building. I was surprised that the VIX didn’t even make it to 35 - which clearly showed that there was little concern, or as the talking heads say “Fear”. As optimism rises and fear subsides , in the face of poor economic data – that should be a warning sign.