5/5/09 (Truth? GMAC to fail? LIBOR falls!)

Traders,

A good move up – with help from the banking sector (prior to the stress test results). The irony is that we continue to hear from Bernanke and Geithner that the banks are well capitalized and then we hear rumors in the Stress Test results indicate that more than half of them will need more money. So which is it? It certainly has been the talk of the financial news.

On one hand the recent earnings look great, but once we looked at the results in detailed we saw everything from moving assets into holding companies, new accounting standards, and the added benefit on not reporting an entire month because some of these firms have moved from an investment firm to a bank (thus changing the earnings cycle).

Then, as I said, we hear testimony and responses from the Treasury and Federal Reserve that they are well capitalized. Certainly the banks may have been significantly undervalued and have thus made a terrific rally – but to this date we really don’t KNOW anything. Are they well capitalized? Do they need more money? Did all the changes to the accounting standards and shifting items off-balance sheet reflect the TRUE nature of their positions? Why would the Treasury and Fed say they are well capitalized if they need more money? What are the results of the stress test? Is the stress test good enough? As you can see there is questions than clarity as to the situation. And now we wait…

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GMAC – a failed bank?

GMAC, GM’s initial auto lender arm that moved into home lending had completely collapsed. It was bailed out with $6 billion from the government, turned into a bank, and was given access to the Federal Reserve Discount window – in which it borrowed more money – all at the government (and tax payer) expense.

Critics said that it should not be bailed out and many continue with that conviction. Well GMAC reported a first quarter loss of $675 million – as a SURGE in loan defaults eclipse an increase in new mortgages. And their future continues to look bleak with the massive drop in auto-sales and now faces even a larger risk if GM were to file for bankruptcy. However, have no fear – an official of the Obama administration said GMAC would receive more “financial support necessary”.

Rumors are – GMAC is one of the 19 banks that will NEED more money, go figure. I am wondering how much money does the government continue to give to these companies? I think I know the answer, until the file bankruptcy.

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LIBOR Falls below 1%

There is a silver lining in the credit markets – the Libor (London InterBank Offer Rate) has fallen below 1% - the first time since 2003. It would seem that confidence between banks is returning – however the problem is that while banks are lending to each other (maybe a sign that U.S. banks are supported at all costs by the Treasury and Fed), the money is STILL NOT getting to the consumer.

While it has come down below 1% it is still in the upper range of the Fed’s target rate by 74 (bps), while the avg. was 22 (bps). So it remains relatively high as compared to its traditional spread prior to the credit crisis. There is also some criticism that the amount being loan via Libor is significantly low and not ALL banks are participating. Good news it is contracting and not at the 300+ bps that it had been, regardless of how much is being lent.

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Futures Pre-market

The futures are down and below fair value. There is concern beginning to surface about the stress test which is putting pressure on the market in the morning. If spreads remain – expect the market to open down.

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Support / Resistance

POW – again to the upside – where too now?

INDU 8000 / 8500 (We made another huge pop – there was a large amount of short-covering that continued throughout the day as well – which help push stocks higher. Do we touch 8500 or head back to 8000?)

NDX 1350 (1400) 1450 (I think the 1400 line is going to be a pivot point.)

SPX 850 / 900 (We are just above 900 and it looks like we could drop just below it this morning. Is this support or resistance?)

RUT 450 / 500 (Again – a 4% rally drove it above 500 – are we to close above it?)
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Gold 900! (OK – we are above 900 again – do we fall back into the 850-900 range or continue higher?)

Silver 12+ (We are over 13 now!)

OIL 50+ (We are almost at 55)

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Conclusion

One person said yesterday was a short capitulation day – I don’t know if I buy that or not – but short-interest did collapse significantly in several issues (mainly in banking). The futures are down a little and I think we all await as to the Stress Test results (which have been bickered over between the banks and examiners). Which side caved in? I am sure the Fed, Treasury, and examiners caved to the pressure of the banks. Rumors are for 10 banks that will need more capital, but regardless of any rumors – some banks WILL need more money and the criticism will begin to ramp as to how accurate the stress test was.

Of course perception will rule the day – regardless of fundamentals.