5/1/09 (Stress Test Delay? Bond Risk! A Pause?)

Traders,

We got an initial jolt to the upside at the opening – but late in the day it gave up and for the most part closed flat to lower. Maybe it was the reality – finally sinking in – that one of the “big 3” auto makers is now gone. Bankruptcy and on a small hope that Fiat will be able to absorb (or merge) what is left. However, now even that is seeming only a faint hope.

Questions now surround GM – is it the next to go the way of Chrysler? A guest of Bloomberg yesterday said that not only would a bankruptcy of the automakers create an impact to job losses and moral in the U.S., but there will also be some outrage as to why the government invested 10s of billions again and again, only to see them fail and create a loss to the tax payer. This may lead to concerns with continued bailouts to the banks (TARP), especially when they may really need it.

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A delay in the Stress Test Results

The Stress Test started with criticism from economists and analysts saying the variables in the stress test were weak and not necessarily reflecting “STRESS” but rather the current situation. Now (even with the criticized method) the banks have previewed the results and debating with the examiners as to their findings.

That certainly tells me that things are NOT as good as they would appear. If several people are criticizing the method as to it being weak and banks are not even able to jump that hurdle and have to debate, one can imagine how many more or how dire the results would be if they actually stressed the variables.

So as banks bicker with the examiners, the Federal Reserve (minus a backbone) is going to postpone the results – after they let the banks have their say (and possibly change or alter the results – if pressured enough).

Several banks (suspected to be B of A, Citi, Sun Trust, Fifth Third) – which were in the bottom half of the results, face a double edge sword. They certainly don’t want to be at the bottom of the list – which may reflect poorly on banks (and could be a cause for concern that they may see withdrawals) – on the other side of that sword, they still need much needed funds to stay ahead of their leveraged risk positions.

Let the games begin…. I think the banks have had more than their fair share in this rally (regardless if you believed they were oversold or not) – now is not the time to be getting long, if you missed the massive rally. Of course I am still waiting for the shoe shine boy to give me a stock tip as to which bank stock to buy (which WILL be the top).

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

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MasterCard – better than expected or risk going forward?

All the analyst knew that MasterCard would be facing a slow down, as consumer credit is cut and default ramp. The question was how bad was it going to be, estimates had been from 15-30% drop in profits. MasterCard, however surprised the consensus with only an 18% drop in profits (2.81 a share). Partly that was due to the increase in cost cutting rather than the analyst being wrong about revenue. It wasn’t much of a surprise – since the analyst were on target with revenue, default rates, and credit limits – but thanks to the CEO Selander – getting to grips with costs to increase margins – the company did better than expected.

The problem now – what to expect going forward. The utilization of Debit Cards vs. Credit Cards has helped offset a drop in credit card use, but may not make up for the net decline or increase delinquency. Expectations are for limited to flat growth – but that is also predicated on if and when credit will begin to trickle down to consumers again. But the seriously disappointing news – once we peer into the numbers – was the charge-off rates which surged to 8.5% in the quarter (doubling its previous increase). Optimistic speculation from the companies says that the charge-off rates increase will contract to 2.5% next quarter – but many analyst are questioning that observation as the consumer spending numbers, jobless claims, and credit availability tell a different story.

To see the real impact, we only had to look at B of A (the largest U.S. lender by assets) – which wrote off 1.7 billion in the first-quarter from credit card losses. That’s a whopper by anyone’s standard.

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Bond Risk – government intervention punishes up premiums

The World Bank group is paying up (30 bps higher) on their most recent 3-year notes – the widest spread for a dollar-denominated bond offering. Traditionally, according to the interview conducted by Bloomberg, these special offerings were designed to bring stability to the credit markets – but it is having the opposite affect and seriously depreciating the World Bank offering due to government policies of sales of taxpayer-backed debt (from the banking sector).

It was bested summed up by a Goldman Sachs banker; “Governments started announcing guarantees for their banks, and then the whole world changed.” It is now having a trickle down affect as other offerings to developing nations are also seeing a rise in risk premiums.

The problem is there is just too many offerings chasing too few dollars – and all those offerings are backed by nothing more than mounting debt. The spreads in commercial paper is expanding, but what is surprising is so is government (and dollar-denominated). A few weeks ago an economist made the interesting point – if you are going to buy debt from the government at 1 to 3%, why not just buy corporate debt guaranteed by the government for 6 to 8%. Good point!

One firm has been rolling out of government paper and moving into government backed corporate paper on that principal alone. However, I think with the collapse of Chrysler (while not a bank) – the debt holders got the shaft and we could see that risk begin to creep into the banking sector – as these stress test results begin to come to light.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ahSZlk5fNTAE&refer=home
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Futures Pre-Market

We are seeing a slight rise in futures in the pre-market, but not enough to get any serious spread action into play. Expect a flat to mix opening.

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Support / Resistances

A pause after the rally…?

INDU 8000 / 8250 (Now doubt we have made a good rally – but there isn’t any more clarity – we could start to see drifting action.)

NDX 1350 / 1400 (The 1400 level is watched carefully and a few over weights have pushed this up – but earnings season is coming to a close and more follow through may not be as strong.)

SPX 850 / 875 (Closer to the top part of the range – is 900 in the cards or we going to see 850?)

RUT 450 / 500 (We saw some end of the day weakness – but it is sector driven – does the broad base have enough to keep the run?)

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Gold 850 – 900 (Still range bound for now)

Silver 12+

Oil 50 +/- (That 50 level is sure a massive pivot point, this morning above – but who knows tomorrow.)

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Conclusion

The Obama 100 days excitement and confidence speech has come and gone. Yesterday we saw the collapse of one of the oldest U.S. companies and it may not even be able to get into bed with Fiat – which means a break up and sell off. The banks are arguing with the skeptical Stress Test – which means that things could be worse than expected. This realities – even with very strong consumer confidence – the market may see a serious pause at these levels after the run up. We are at the end of earning seasons – so to get any more surprises (up or down) may not be in the cards and we now fall back on government data, stress test, GM, and the bank problems.
Maybe this quarter will be the summer doldrums – either way I think we have had a good run and it will be hard to maintain that momentum. Take in long deltas, lock in gains, look at hedging positions and stay nimble.

If the shoe-shine boy (or coffee shop kid) starts giving you stock tips – you’ll know that is the top!