Monday, July 27, 2009

7/13/09 (Goldman Buy? CIT stumbles.)


We had a fairly mixed week as we flirted with support levels. False starts higher or lower – only to see an intraday change that reversed course. Earnings kicked off with Alcoa – which was mixed, great growth in China and slow growth domestically gave them good long-term stability news and short-term domestic concerns, which may seem to be the case going forward with other companies. Earning season will be about those that have an international presence and on the right side of the trade (import vs. export) combined with dollar strength. I would expect to see lower revenues this earning season and lower guidance, but on the good side I expect to see better margins as companies are better prepared and thus some should beat expectations (which had been significantly lower) – which could buoy stocks and/or sectors.

Goldman – a buy recommendation?

Meredith Whitney (a well respected analyst) raised Goldman to a “BUY” before the earnings announcement – which sent the stock higher in the pre-market (up over 6 points currently). Goldman is expected to report larger than expected profits tomorrow when it reports earnings. It should also set the stage for the other investment firms (sorry I mean to say banks). It does look a little toppy up at 150 – it’s previous high in May and has been in a 140 to 150 range since. Expect some volatility tomorrow and a possible breakout of 150 or 140, the buy rating this morning is sending it back to that 150 range pretty quickly.

CIT facing a stumbling block

The next possible big failure is on the horizon and concern is escalating. Thousands of businesses rely on CIT financing – from operating capital, payrolls, to export/import financing – they have their hand in many financial programs. However, CIT (like other banks) have suffered significantly during the credit crisis (as it too is over leveraged). Unfortunately, unlike the others, CIT has not be able to convince government agencies (including the FDIC) to back their debt and according to Bloomberg a failure at CIT could create problems for 760 manufacturing clients and over 300,000 retailers.
CIT has been meeting with federal regulators, but so far it has not resolved anything. Fitch (credit agency) has indicated that CIT may default in several months (April) as their credit line comes due. A default would create ripple effects across the manufacturing and retail sector, the problem is that the thousands of commercial customers do not have an alternative. Credit is already hard to get from other institutions, additionally CIT offers a variety of financial products for commercial lenders that is just not available elsewhere.
This is an important story to follow, but I suspect a bailout will most likely be in the works. Sock broke down below $2 last week and looking lower in the pre-market (1.30).

Futures Pre-market

The futures are getting a good pop, following Europe and the Goldman upgrade. Expect a higher opening.

Support / Resistance

We have been bouncing on support – keep an eye to see if we can rally off.

INDU 8000 / 8250 – 8500 (A strong rally and getting above 8250 is in the cards – but it will be the volatility of earnings that will determine that.)

NDX 1400 / 1425 – 1450 (Futures are showing a 1425 opening and a close above 1425 would be a positive sign that we might of put in a short-term support.)

SPX 880 (We kept locking in on that number day after day it seemed last week. Futures are pointing to a higher opening and making sure we stay above it is important.)

RUT 475 / 500 (We are looking at a mid 480 opening off the lows. A move above 500 could bring back some optimism.)


It looked like we were seeing some run to treasury bonds as equities started to look week last week, the bonds were rallying and yields were coming off and we say the 10-year get down to almost 3.25% this morning. But after the Goldman news and new found optimism with earnings – we are starting to see the yield begin to rally as money knee jerks back out into equity (futures – in the pre-market). Of course Bernanke would like to see rates down, but that is going to be hard unless we can get some serious interest and it looks like about another 1.5 trillion needs to be issued this year. Jimmy Rogers is concern with dollar risk and believe a crisis could mount as early as year end. Keep an eye on commodity prices, treasury auctions, interest rates – which all will be a tell tale sign.

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