5/6/09 (Banks need MORE! Jobless rate slows!)

Traders,

Yesterday was pretty flat (open to close), but intra-day we are seeing some volatility – which seems more like traders taking a position at the opening and then covering at the close. However, there intra-day positions are not driving enough liquidity to continue and thus we are seeing some covering at the close.

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Bank of America needs $34 billion?

A front page story in the NYT indicates that Bank of America needs about $34 billion in new capital – as leaks of the stress test and rumors continue to surface. The question is – where do they get the money?

Government or Private sector. But there are problems, if they convert the government stake into common equity and thus allowing private money to be first in line on debt (with interest) - the government will have a massive (if not controlling) stake in the company.

We already saw the Administration fire the CEO of GM – how would they steer a bank? That question is in the mind of any private investor. If they don’t go after private money or are not able to raise enough and have to go back and dip in the government well again – it will be a very hard sell to Congress. The TARP was NOT popular with the citizens in this country and a second round will face House members on both sides of the aisle with trepidation.

Of course this is all from “sources” in the know – and we additionally know that the banks seriously pushed back on the initial results and I would wager that Treasury, Fed, and the examiners will tone it down. It certainly seems that banks continue to get “their” way.

Initially Bank of America and other banks took a hit in the pre-market as the news was announced.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEuHUJ4E3qDE&refer=home
http://www.nytimes.com/2009/05/06/business/06stress.html?_r=1&hp
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ADP jobless report – indicates slowing…

The ADP Employer Services released their jobless claims and said the nation lost 491,000 jobs last month, lower than analyst expectations. Futures have rallied strongly after the news – even the banking sector that was down got a good pre-market boost and are looking at a positive opening.
But let’s remember, while layoffs are easing (a very good sign) it is a finite amount – it does NOT mean jobs are be created, it just means fewer people are getting fired. Good sign as to a slowing, but not a sign of recovery.
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Earnings – a last few…

Disney – beat estimates and reported 43 cents a share. Disney had cut costs and had lay-offs in all sectors. They also raised park fees as well as push more low-end products lines to consumers that had less to spend.

Pulte Homes and Centrex – (two homebuilders that plan to combine) – reports quarterly losses that exceed analyst estimates – as more write downs continue and the housing market may show it is nearing a bottom, it is not showing a sign of recovery.

Electronic Arts – one of the largest computer game makers beat estimates after cutting expenses. A report on G4 had shown that console sales may have slowed, game title sales have increased – as a cheap alternative form of entertainment.

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Futures Pre-market

We got a little volatility this morning – first the market was down – looking significantly lower. News that banks may need significantly more than expected put pressure on the market. Then the ADP jobless numbers show a slowing in the lay-offs and dropped to 491,000 – still very significant, but still down from before. Futures spiked initially, but are starting to come off a little from their peak.
Expect a mix opening – as Arb traders may have gotten caught out. Spreads show a mix, flat, to up opening.

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Support / Resistance

INDU 8000 / 8500 (We had a great rally above the 8000 point – which seemed to be a testing area. We got some covering which helped fueled the move up. – range bound?)

NDX 1400 / 1450 (We are right in the middle – was looking lower, then higher, now flat. The news is mixed.)

SPX 850 / 900 (We closed right around 900 and was starting to look weak this morning in the futures – but the ADP numbers gave it a spike, looks like a slightly better to flat opening.)

RUT 500! (Do we close above or below. It is a great number to hit in such a short time – but could be considered a pivot point.)

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Gold 900! (Just got above it only to slip below it. We can’t seem to get out of that 850-900 range.)

Silver 12+

Oil 50+ (We are at 55 – it seems like we are getting a rally - maybe?)

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Conclusion

Bank Stress Test leaks are showing it may not be that good and banks need more money and may have problem finding it. Market starts to go down, but the ADP numbers reporting that job losses were only 491,000 last month – showing a sign of a slowdown – seems to spur optimism. I listen to Bloomberg this morning and one analyst said it is a clear sign of a recovery – the host corrected him that it is showing a sign of SLOWING, but NOT a recovery. That is an important point – we should be happy that job losses are slowing - BUT we should understand two things, first jobs are a finite quantity – they can only lay off so many people, thus it is inevitable that job losses will slow. A slowing also does NOT mean we are recovering – it means we are getting close to a bottom. For the economy to see a recovery we need to see job creation, not just job losses slowing. Job numbers are hard to define and to make sense out of it and we must take them in stride.

It is good news, meaning we could see a bottom soon. My concern is that while we might see a bottom in the economic conditions this year – I really want to see a sign of recovery. I don’t think we can get the economic growth that we have traditionally expected and maybe this nation from Government and Corporations to consumers will start to value earned income and saving, rather than just available credit lines. Certainly that means that consumer spending would seem to be curtailed for some time – as excessive credit may not be as easily available.

The market seems to remain optimistic and right now the ADP numbers (while still large losses) are better than expected, it has certainly trumped the Bank Stress Test news that they need 10s of billions more.