Sorry about missing yesterday – (out of the office in the morning) – go figure, I am out of the office and the market goes into hyper rally. INTC sure boosted the optimism and while revenue’s are looking flat for the most part the margins were improved. The question going forward is that you can improve margins only so much before revenue needs to catch up. There was some serious short-covering going on as well as short-interest had built up to the largest amount since February, getting caught out help great the rally. We did reach some of those resistance levels as well, which could mean some resistance after the run. Lastly implied volatility (as per measured by the VIX) didn’t fall, but actually went up (25.89) – indicating there is still downside concern.
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JPM – profits rise
JPM follows Goldman on larger than expected profits, while not at the level of Goldman (which broke records), it was higher than expected. Like Goldman, JPM is on the fast track repaying the TARP – because they don’t want to be handcuffed to government rules on hiring and compensation (as well as other TARP coupled rules).
However, not all that is shiny is gold, the credit card division lost money ($675 million) and expected to continue to lose money. Additionally the mortgage side of the business (including commercial) is also showing an increase in delinquency. Like Goldman the money was made on the trading, investment, under-writing side of the business – while the loan side continues to suffer.
CEO Dimon had indicated that they believe the consumer will continue to have difficulties and the consumer credit risk side of the business will continue to suffer.
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CIT – bankruptcy as early as Friday?
The CIT story is getting worse and it doesn’t look like the government will be stepping in to save (or help) them – thus a bankruptcy is in the cards as soon as this Friday. What does that mean? On CNBC, CEO White, of Summer Classics a mid-size business, who is close to the CIT problem, indicates that it could create a systemic risk across the small to mid-size business arena. The problem is that all these businesses rely on CIT to handle all kinds of credit lines and with over 300,000 companies tied into CIT there is no way they can quickly move over to a new lending institution. There additionally are questions about the move – do the other lending institutions have the systems in place for the various financial credit facilities (export/import, restocking, pay-roll, etc.), additionally if they can handle that kind of lending – the question is will they. We must remember that companies that use CIT (rely on them) receive credit after transactions – which is the revenue used to run the business.
This could be a larger problem that could create a domino effect. While I don’t think Mr. White articulated the problem well – is point is clear: http://www.cnbc.com/id/15840232?video=1184609429&play=1
http://www.bloomberg.com/apps/news?pid=20601087&sid=ai0YdvcSDT3o
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Futures Pre-market
We are seeing slippage after the huge run yesterday, which isn’t to surprising – we could have a slight retracement. Expect a lower opening.
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Support / Resistance
This week got us back up to those resistance levels and just like support that we had recently been at – the question is do we break out or retreat?
INDU 8500 / 8750 (We blew through 8500 yesterday, but could see a revisit to 8500. Futures are looking a little weak at this point – I think it will really be earning’s perception.)
NDX 1450 / 1500 (We gapped up and ran back to 1500 – an area previously visited in early June. We are seeing the futures pull off in the morning. 1500 is resistance test area.)
SPX 900 / 950 (The SPX didn’t get back up to the 950 area and is showing a little weakness in the futures.)
RUT 500 / 535 (Seems like we are mid-range below the previous high and 500 support, similar to the SPX)
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Money Flow
Seem like money poured out of treasuries and into everything else.
Commodities, Gold, Silver, etc – all rallied.
Currencies rallied against the dollar.
Bond yields went up as investors excited.
Yesterday seemed more about money flow than sector driven.
I would reason the following:
Equities rallied, which was helped fueled by shorts – sending it up fast and hard.
Commodities rallied, which was fueled by a drop in the dollar against foreign currencies.
Bond prices fell (yields went up) as investors exited for either equity euphoria or fundamental commodity bets on weaker dollar.
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Conclusion
The investment banks are showing strong gains in this economy, interestingly enough it is their trading desks that are the profit centers, while the credit and loan sectors continue to lose money. It does seem at odds, but as long as their trading desks can continue to generate those kind of profits to off-set the consumer and commercial loan losses then they stand to do well. The problem is that we can’t measure economic recovery by the earnings results of the likes of Goldman and JPM. Clearly – the consumer side continues to lose them money (credit cards losses, commercial/residential mortgage delinquencies on the rise, commercial loan losses) – that side of the business is the REAL economy. The current trend could be investment banks make billions on trading and transaction business (more than making up the losses), but the economy continues to falter.
The CIT story seems to be a problem, the government doesn’t seem to care to help them (which I can’t figure out – since they helped all these other failed banks and companies, including GMAC, GM, etc.) Not that I am for bailing out everyone and anyone – but CIT is the leading lender to 100s of thousands of small to mid-size companies, which a failure by them could send a shockwave across the small to mid-size business community. I guess the small and mid-size businesses didn’t donate to the Democrat party, like the UAW or Goldman Sachs.
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