Monday, July 27, 2009

7/9/09 (Private/Public Investment, Jobless Claims)


Alcoa’s earnings beat estimates, while still suffering losses – those losses were less than expected. The positive news on the horizon is the China stimulus and growth. China has been stockpiling commodities that is both utilized material in their expansion and a holding inflation hedge. Alcoa (largest aluminum producer) is seeing increased demand overseas. China reported a massive increase in auto sales as their stimulus is going right to the bottom line as the consumers and nation has little if any debt. Alcoa is seeing some gains in the pre-market. Much needed news for long equity holders as we are at key support levels.

Government Private/Public investment partnership…

The new Government Private/Public investment program that was design to buy off the toxic assets from banks (mortgage back securities) got underway yesterday, but without PIMCO (Pacific Investment Management Co) – the world’s largest bond manager. PIMCO removed it’s application at the last minute citing uncertainties about the design and structure.
Concerns are now circulating why the largest participator of the purposed program made a last minute withdrawal. One analyst stated on Bloomberg that the complexity of the program make the risk and returns less clear. Certainly after the TARP and rule changes for those that participated in TARP, along with the GM and Chrysler Bankruptcy/Bailout where bond holders were seriously short-changed as the government man-handled the operation from start-to-finish that challenged bankruptcy laws – would certainly create concern for any private entity moving into another co-operation with the government on debt programs.
If the government can change the rules last minute – who’s to say it won’t happen again. Certainly if Bill Gross (PIMCO) can see clarity in the program – that means there are probably more questions and possible more risk than initially meets the eye. On the other hand, PIMCO might of seen what they had the opportunity to buy in this program and it could just be that it is so toxic that it is worthless at any price. At his point it remains unclear, but certainly doesn’t spell confidence in the program or the government’s ability to manage the program.

Initial Jobless Claims fall

The initial jobless claims fall to the lowest level since January, below forecasts. Initial weekly claims fell by 52,000 to 565,000. While 565,000 is certainly very high, the contraction from the 600,000s is a sign that lay-offs are easing. Of course there is some volatility in these numbers as from week-to-week the automotive sector is dumping jobs in blocks which creates volatility to the weekly numbers. It is probably better to measure a month-over-month instead of weekly – which can inject market volatility as well.

Futures Pre-open

Alcoa and China growth with lower weekly jobless claims is sending futures higher in the pre-market. Expect a higher opening.

Support / Resistance

After a significant sell off after the last few days we are seeing a brief bit of good news that might hold these indices at support in the short-term, but that is not to say they will hold – be prepared in case they don’t.

INDU 8000 / 8250 (8250 is a important support area that we remain below and hover above the 8000 level as we intra-day try to make a visit. The news this morning is injecting a positive futures rally that could translate into a pop – but at 8250 we could see resistance.)

NDX 1400 (We dipped below it throughout the day yesterday – we could get back to 1450 – but expect some difficulty up there.)

SPX 880 / 900 (We closed almost right at that level – futures are pointing higher – but getting back to 900 is needed to see any hope of getting off this support area – watch that 880 level.)

RUT 475 / 500 (Above the 475 level but the broader market was down almost 1% on the day as the narrower indices rallied to finish positive. It doesn’t spell strength yet.)

VIX 30? (I don’t normally include the VIX – but the action was interesting as it over-extended intra-day and then pulled back hard into the close. It could be a short-term topping area as we could see it get below 30 in the near term. However, longer-term I think we can see the VIX revisit the 40 level this year.)


Talk is kicking up about the need of a second stimulus, VP Biden blundered yesterday saying that the recession was far worse than they initially thought, of course Obama quickly corrected and said that they would not of done anything differently and that there is still money working through the system. The reality is that we (main street) knew it is (was) worse and the government was either living in fantasyland or didn’t want to face the stark reality. Now the question is do we get another stimulus? There is the need to get credit and spending flowing as well as jobs, but also more national debt which means more taxes. Politicians are caught between a rock and a hard place, as all the bailouts, TARP, and spending has not seen any results and the fear of more taxes is creating skepticism from the voters as Congress approval ratings continue to fall. Additionally another big spending program could create a larger exodus of the foreign central banks that we rely on to buy our debt. This story as it unfolds doesn’t have a good ending, either more stimulus (which means more taxes, more national debt, weaker dollar, and more pressure for China and Russia to move to a foreign currency) or not another stimulus (which means a more difficult time for consumers, lower job growth, and a weaker economy).

Keep an eye on this as it unfolds.

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