Last week saw a huge move to the upside in the indices, interesting enough what help precipitate the move was a huge amount of force short-covering. Short interest had reached levels as high as they were in February before the market sold off to their mid-March lows according to Bloomberg. It was the Wednesday gap up that fueled the covering right into Friday. While the two broader indices (RUT and SPX) gave up steam on Friday and closed lower, the INDU and NDX had a few issues that pushed them higher.
Expiration was not the typical pin-to-strike expectation as the weekly move blew through several strikes – making Friday more volatile. Talking with one market maker – he said he was glad to close out those short OTM call options earlier in the week.
CIT a stay in execution…
CIT was on the fast track to bankruptcy – even the Federal Government, FDIC, and other regulators were giving them a pass. The problem (which is still prevalent) is the 100s of thousands of companies that rely on CIT. There is news this morning on Bloomberg that bond holders may come to the rescue as early as this morning with $3 billion short-term financing. If that doesn’t come to pass – by Friday they will be bankrupt.
There was some concern this morning on Bloomberg and CNBC that even with the $3 billion it might not eliminate the bankruptcy, but just push it out a few months (I guess on hope that the economy will turn around and these companies can pay back the debt). However, sometimes it is NOT the rate of return that bondholders have their eye on. CIT is the “go to” bank and financial institution for 100s of thousands of businesses (including Eddie Bauer, Dunkin Donutes, etc.) these companies need and rely on the CIT relationship. Bondholders might be looking at this as a back-door opportunity for equity or pre-purchase in case of a bankruptcy. CIT has a viable business and this might be a time to get it on the cheap. There is a wildcard, the government – who could step in last minute and screw the bondholders (like it did on GM and Chrysler). Sure they don’t show interest in it today – but with enough companies complaining to their Congressman about future job losses, they could be the wild card.
For now CIT is on life support – or so it seems.
Bernanke plays second fiddle
With all eyes on earnings and the recent sharp rally last week – not a peep about Bernanke’s semiannual economic report to Congress tomorrow. If we take our eyes off the earnings train for just a second – what we really need to hear from Bernanke is several items.
1. Does he have an “EFFECTIVE” plan to buy in all the resent cash he created (trillions) – to avoid inflation?
2. Congress has been talking about a second stimulus, but Bernanke has been warning Congress about spending and they need to curtail it – will he BEND and pony up some more printed money if Congress decides to push forth another stimulus?
3. Citi and Bank of America had mentioned SERIOUS concerns about 2010 and possibly into 2011 and more loan liabilities (delinquency) CEO Ken Lewis expects losses to mount and the banks have been hording capital to pay down future losses. 5 more banks have been shut down by the FDIC taking the total this year over 50. Other regional banks continue to suffer draw downs. True Goldman and JPM have large trading desks that can soak up the loan losses, but the majority of banks don’t have that option. Questions: What is the current Discount Window liability? Is it increasing? Will the Fed make additional credit available to these banks? Does Bernanke believe that Citi, B of A, and others will require more loans?
4. CIT is not getting any help from the government, if they go into bankruptcy, will the FED step in and support their services to aid the 100s of thousands of small-mid size companies that rely on CIT? Does he believe that CIT’s failure could cause a domino effect of companies that are unable to get credit?
5. Unemployment? It looks like we will hit 10%, if we include “disgruntle workers” and part-time we are closer to 18% http://www.shadowstats.com/alternate_data - many say that jobs are a lagging indicator – but in some respects it is a leading indicator.
6. Recession and Recovery, certainly we are getting closer to the bottom in the recession – but the important question is the recovery and when he believes he will see signs of a recovery and not just a recession bottom.
Bernanke is also NOT part of the clique and rumors abound that Summers has his eye on Bernanke’s job. Bernanke has been outspoken (as much as he can be) about the Congressional spending and also the mounting debt the Fed is taking on by purchasing Treasuries, but at the same time he has to do it with a smile, sell some confidence, and give people faith. Since it is faith that backs the dollar. I have a sneaking suspicion that Bernanke will not last out Obama’s term.
I know you maybe be more interested in earnings – but take a listen to Bernanke’s report and if any reasonable answers are giving, that assumes that Congress can ask reasonable questions.
We are getting a rise in futures in the pre-market, following Friday’s gain. Europe and Asia were also up (Tokyo was closed due to Holiday). Spread is in and expect a slightly higher opening.
Support / Resistance
INDU 8750 (We that is the resistance number, we closed just shy of that on Friday and futures look to be poking their head above it at the opening. Watch the close to see if we close strong and above it.)
NDX 1500??? (We are above it and it sure looks like a break-out (even if it was just a 3-day move up) – watch the close today. It look like we were getting a little bit of a break-out in June as we flirted with the 1500-1510 area only to retrace. There are a few volatile issues – APPLE was the big driver – but that is also getting a little long in the tooth.)
SPX 950 (We closed lower on Friday (slightly) but it did lose some ground. Futures are pointing to a higher opening – but we are still 10 points shy of 950. Watch the close – we could visit it intraday – the question is do we close above it?)
RUT 535 (RUT closed down over .5% after the big rally – the broader base market – while higher is showing that it is sectors and issues that are giving this rally the break-out legs and not the market as a whole. The futures are pointing higher – but the RUT needs to show some strength to confirm the narrower based indices.)
I heard over the weekend on Bloomberg an analyst calling this the last minute rally before the “going back to school blues”. He said that retail numbers and expected revenue could be down more than 50% and with current estimates on summer holiday vacation revenue looking significantly lower – he expects a sell-off to hit late 3rd quarter to 4th quarter. The revisit of the consumer concern (regardless of the market) will come back to be measured in the GDP (2/3rds based on consumers) and that could be a wake-up call.
The bright spot? China and emerging markets – Hilary Clinton is visiting India which is expanding and could generate big revenues for U.S. firms. China is also seeing their stimulus hit the bottom line. Maybe it will be emerging markets, China, Brazil, and others that pull us up this time. The problem is interesting – while U.S. firms may generate huge profits from expanding sales overseas, these U.S. firms also do most of their manufacturing, production, and services over-seas. How does that translate to jobs in this country? That is a tricky question. We could see a huge divide between international firms and domestic firms. We could start seeing portfolios and funds divided into this category (if there are not already) – but it is something to look at.