1/29/09 ( EFCA? GDP - 3.8%! AMZN rallies! )

Traders,

The market gave up the gains from Wednesday (a rally based on optimistic euphoria – that the government was going to save the day) – reality came back that it was about printing more money and not necessarily going to create job creation – but rather band-aid the problem (for now). We are we going from here…

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EFCA ???

This nation is built on Democracy – we are a Republic. We elect individuals to represent us! However, to have a Democracy we must feel safe from intimidation – a freedom to make a choice without repercussions. In order to do that we vote via SECRET ballet. We elected Obama, our Congress, etc – all with Secret ballet. In fact when you ask people – many times they don’t want to tell you WHO they voted for, because they don’t want to suffer any social repercussions. Jimmy Carter travels around the world – and preaches that Democracy can only be insured if the people are free and safe to vote by secret ballet (devoid of threats).

So what is EFCA (Employee Free Choice Act) – is anything BUT free. Not allowing employees to vote by secret ballet – coupled with the threat of the government to enter a business and dictate pay, insurance, etc. This is not about UNIONS – if employees want to vote FOR or AGAINST a union they should be free to do so – but they should be able to do it in Secret !

I can put it any better than Bernie Marcus this morning on CNBC, watch it: http://www.cnbc.com/id/15840232?video=1017738004

Different views (you decide):
http://www.heritage.org/Research/labor/wm1768.cfm
http://www.aflcio.org/joinaunion/voiceatwork/efca/ (how the Union sees it) – of course they are FOR IT!

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GDP – not that bad?

The futures got a solid jolt to the upside as soon as the GDP reported that the U.S. economy shrank 3.8% in the 4th quarter – while the most since 1982 – it was less than forecast (median forecast was for 5.5%). That got the futures to rally for sure – maybe it’s not that bad. But it looks like it is going to continue – at least for the 1st quarter of 2009. It was the first back-to-back contractions since 1991 (-.5% in the 3rd quarter, -3.8% in the 4th quarter) and we look to three-peat in the 1st quarter as well – possibly into the 2nd and 3rd.

However – many are pointing to 2008’s net GDP growth of 1.3% - and saying that we are not that bad off. Sure when you add in a massive stimulus check that was issued earlier in the year that created a massive shopping spree and the crack in the dollar that temporarily reduced the expansion of the trade deficit. These folks tend to ignore AIG, Freddie, Fannie, Bear, Lehman, etc…. I have even heard one call it an isolated incident – yeah isolated to the entire banking and lending sector (that affects every man, woman and child). Now it’s round two of Stimulus packages ($850 billion) – couple that with the $1 trillion dollar “Bad Bank” to buy assets, the second $350 billion in the Tarp, and already the massive debt of the Fed – well we should be fine – (please note that was sarcasm).

But when we look at the unadjusted GDP – it shrank 4.1% (the most since 1958) – please remember these are government numbers and the model frequently changes over the year (read my essay - for more details on government data: http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html

Clearly companies are still laying off people – job growth is negative and consumer spending (credit) is shrinking fast. I expect contraction in 1st quarter – but we could be sucked into believing that the economy is expanding by the 2nd or 3rd quarter (just like mid-last year) – once that stimulus check makes its way through the system. I call it “fake” – because we are spending borrowed money from the government – any premium it adds to the GDP is FAKE in my book – and it may look good today – but what happens when that stimulus runs out (just like the one last year) – bang – the harder we fall.

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AMZN – cheaper, faster, better !

While the brick-n-mortar suffer – Amazon looked to do well (as best it could) in the contracting consumer spending. Yeah – even I participated in Amazon’s holiday sales. A friend said to me – Amazon is the way that MEN like to shop for holiday gifts. Point, Click, Select Gift Wrap, Write Note, Address, Pay = DONE. None of that wandering around the mall and finding a parking space and the horror of picking out and wrapping gifts. Ask my Dad – he likes plastic or paper bags as gift wrapping (just kidding).

That being said – the world’s largest online retailer numbers topped estimates – which has sent the stock in the pre-market up 15%. It even out-paced Ebay (surprise). Net income rose 8.7% (52 cents a share). It looks like Amazon also stole business from many of the Mall Type Stores = racking in its biggest holiday season ever.

There is a recession story here as well. Amazon, unlike it’s store-front competitors – does not have to pay for retail space, cashiers, store front marketing, etc. That cuts down on the over-head. Additionally – state taxes – what state taxes? Cheap shipping costs and gift wrapping services also add into the ease. Thus saving money for the consumer and in this day and age – it is about saving money.

Could Amazon (like Wal-mart) be a recession stock? It would seem they have some edge over their competitors. Sales will surely contract in the non-holiday season as consumers have less to spend – but they are taking a serious look at buying power – Amazon gives them buying power.

Side note: Looking to save money on computers (and electronics) – great shipping, great reviews. I order most of my stuff from Newegg. Check it out www.newegg.com – too bad they are not public, but I would guess (with their growth) they would be a takeover target by someone that wanted to get into the AMZN business.

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Futures Pre-market

The futures were off – waiting for the GDP news – the shocker was it came in fairly higher than expected and along with Amazon news – it “seems” the market/economy isn’t that bad. Please note that it’s government data and one company – so this could be nothing more than a knee-jerk reaction. We look to have a flat to slightly higher opening.

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Support / Resistance

We started coming back off those resistance areas (bands).

INDU 8000 / 8250 (It looked like 8250 couldn’t hold and it now is a resistance again. As I said the other day – if you don’t know treat it as a pivot point – get flat with deltas. If you did – you didn’t get hurt.)

NDX 1100-1150 / 1200-1250 (We are at the bottom of the resistance band – 1200 looks like the support for the upper band. AMZN will help boost the index higher.)

SPX 800 (850) 900 (That 850 has some serious staying power – and is a pivot point)

RUT 400 (450) 500 (Just like the SPX)

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Conclusion

We can debate all day (and neither of us would be right) if we focus on moral justification (what we THINK or Believe should be right). I tend to avoid those debates. However – socialism comes about when we SEE things that we would all agree is NOT right and we wish to change them (Help the poor, Welfare, Social Security, etc.) – people confuse a cold heart with those that believe in Constitutional Freedoms.

The Declaration is this nation’s document to justify our decision to declare independence. The Declaration was addressed to ALL MEN of this earth (that is why it is such an important document) – it begins “We hold these TRUTHS to be self-evident” – these are traditional natural laws – which holds that there is a higher law of right and wrong. These moral truth’s are: “all Men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.” (note: it is Pursuit, not Entitled). We are BORN with those rights – we do NOT get them from the Government. Our government was created to SECURE those rights – and only use their powers in just ways to secure them. The Constitution was drafted upon the principals of the Declaration.

The Constitution starts, “We the People…” – All power comes from the PEOPLE, not the government. Remember this is a Republic we ELECT them to represent the PEOPLE, not to RULE the People. Lately – our government is testing Article I, section 8 (General Welfare Clause) as an excuse for taxes, bailouts, and taking from some to give to others. The purpose of that section is permitting the spending only for enumerated ends and RESTRICTS such spending on the general welfare – NOT the welfare of PARTICULAR parties.

These are (for me anyway) concerning times.

I suggest (if you haven’t) take the time to read and know the two documents that have given us the Freedoms which we cherish today.

1/29/08 (Taleb wears Jack Boots! Supply & Demand)

Traders,

The market had a good rally up – but not really to those resistance levels for the most part. The rally was based on (as it makes me almost sick to say it) the government spending MORE money (between voting through the $800+ billion stimulus combined with the NEW BAD BANK – which the FDIC will run). The new “Bad Bank” will be adding and estimated $1 trillion worth of crap and toxic paper to the books. Don’t forget the second round of $350 billion in the TARP fund. So in the first two weeks of office – the new administration has spent over $2 trillion in bailout money. Of course they are selling this as it will create jobs – but in reality how does giving people money create jobs?

Let’s step back – because we have recent history to see how it actually worked. First let’s looks at last year’s stimulus checks – it sure didn’t create jobs. What did people spend their stimulus checks on? Flat-screen TVs, computer games, etc. In fact one survey showed the biggest percentage rise was in pornography. One thing people didn’t spend it on was paying down their mortgages, or catching up on credit, or even SAVE. Now let’s look at the combo FED/TARP spending spree – they gave over a trillion dollars to banks and companies – some of the companies (even after getting access to the FED money) failed (AIG, Lehman, Freddie, Fannie – to name a few). The ones that didn’t sure didn’t start hiring people or loaning money – they used it to write-down more debt and/or horde it. If you really want to get sick – all you had to do was look at how Thain spent his money over at Merrill Lynch ($1 million dollar office / $250k driver’s salary, etc.) So – I think we SHOULD of learned our lesson by just tossing 100s of billion to companies and the people.

We are a consuming nation – give someone some free money and they will spend. Of course some would argue with me that is what they SHOULD be doing to keep the economy going – and I would YELL back – are you F’n kidding me. Giving people money to keep this deficit spending party going is just INSANE. STOP and listen to what you are saying. We NEED to pay down our debt, stop deficit spending, and start living within our means! Will companies see short falls in revenues as people LEARN to pay down their debt and save? Sure – but we must realize that if we stay on this deficit spending road and “HOPE” the government bails us out – not only will we be dumping trillions on the back of our kids (and grandkids) to pay for it (via – eventually massive taxes) – but we are seriously putting the dollar in jeopardy.

I was pondering last night on my drive home – what does THIS nation have to offer anyone (in terms of assets)? NOTHING – we have some coal, but for the most part we have already consumed the majority of our natural resources. Our soft commodities don’t even cover our current consumption. This nation NEEDS the other nations of the world to keep going – we food, energy, hard commodities are shipped into this country to consume. So how do we PAY for it? With paper – paper that is not backed by anything other than the good faith of our government. One day a foreign nation (or many) is going to seriously look at that paper dollar and say – what can I do with THAT? What is it really worth? We are sending all our resources to the United States for them to consume and we are getting a piece of paper with some old guys picture on it and I really can’t do anything with it – other than “HOPING” the next guy down the line will think it is valuable. At the end of the day – this nation doesn’t have anything of materialistic value to trade (of any massive quantity). Coal maybe – but what else? It’s just food for thought – but it gets you thinking as to why China (and some other nations) are buying massive quantities of GOLD or hording other resources. After you ponder what I just said – reread the first two paragraphs (about printing money) and I think you’ll may come to the same concerning conclusion. Inflation is a very real possibility, Hyper-inflation maybe improbable – but certainly not impossible.

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FORD – show me the money?

FORD burned through $5.5 BILLION in the 4th quarter – the worst performance in its 105 year history. Guess what – they are going back to the well for more money – while it did say it didn’t NEED federal aid like GM – that is ONLY predicated on the fact that they have some credit lines to tap. The credit line will give them access to $10 billion for next quarter as their reserves quickly deplete. The question is how much longer can they last before they have to go back to the well or the government.

Regardless of market reaction – even if it goes up – owning a car company is not the sharpest idea you could have.

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Taleb – for nationalization?

In an article in Bloomberg, respect author (maybe not any more), Nicholas Taleb said, “Bank nationalizations are absolutely necessary to avoid taxpayer having to bear the burden of their risk taking.” – WHAT? Now I have read his books (no doubt he is a very smart guy) – I do have issues with many of his observations in his books (which I mention in my reviews) – however it would seem (IMHO) is that he is not thinking about this FULL-CIRCLE! Additionally – don’t we have FDIC and a Banking oversight committee, as well as a Federal Reserve?

You could rephrase his statement by saying, “The government has failed in their ability to insure banks at the FDIC level, the Banking oversight committee has failed to properly regulate the banks, and the Federal Reserve is bailing them out. Since our government has done such a bang-up job managing and regulating the system with taxpayer money – we might as well just nationalize them!” – he states you can’t trust the banks, so he wants us to trust the government. Is he kidding with that? I don’t deny the banks have screwed up – but tossing your hands in the air is stupidity.

While I enjoyed both his books (criticism aside) and he is a sharp guy – his most recent statement leaves me to believe he should stick to trading and bail on his economic hypothesis.
But – what should we expect in there times – even wise man will spout utter sh#t. Maybe he is looking for a place in the new administration – or a dinner invite over to Pelosi’s house?

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Futures Pre-market

Durable goods orders fell for the 5th consecutive month, combined with the vote pass on the $800 billion check – futures are seeing some down side in the pre-market. The euphoric optimistic rally based on the government riding to the rescue is now being meet with harsh reality – who is going to PAY? The spread is in and expect ARB traders to purchase futures and short the cash going into the opening – which will create pressure on the market at the opening.

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Support / Resistance

Got close and now we are seeing the pressure at resistance.

INDU 8000 (8250) 8500 (The question - --- is 8250 a pivot level or the new support. I certainly wouldn’t get long at 8250 – but rather flat.)

NDX 1100-1150 / 1200-1250 (The band in the support and resistance area is a little wide – I would say the outside levels are around 1100 – 1250. 1200 could be pivotal for sure. 1250 is still resistance for now.)

SPX 800 (850) 900 (Above 850, but we could revisit that today.)

RUT 400 (450) 500 (Not up to 500, but above the 450 level – to we come off and revisit the 450 area – sure we could.)

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Conclusion

As I was driving home I was really trying to think about value and wealth – not based on fiat currency but what people (nations) HAVE. Land could be one – but if the land produces NOTHING then the value is dwelling. Raw materials (including soft commodities) are what keep societies going. Our nation is very close to being tapped out in that respect. Sadly (and please don’t think that I agree with what I am about to say) – occupying assets is a reality that all governments (nations) at some point deem necessary – for without resources the society is threaten. In the old world – countries would concur other countries for the needed resources. In modern times that war is played with currencies and trade.

At the end of the day – everything is based on supply and demand. With the suppliers ALWAYS in control – whether we like it or not. The War on drugs has proven completely useless. We spend our resources and human lives to stop the suppliers – but as long as there is a demand the suppliers will continue to supply and continue to make money. As we continue to spend money to stop supply. The same is true with oil – as long as we demand it the suppliers will supply and make the money. Supply side economics is the winning side, the demand side is the losing side. You want to know what separates the rich from the poor – simple – supply and demand. Nothing more or less. Supply/Demand knows no moral right or wrong – it just IS!
The problem is this nation is a consuming nation – that means we are (for the most part) on the demand side – not the supply side. Our advantage – power, military, and the dollar (which for now – is the world reserve currency) – that is a very fragile situation. This countries might is largely built on perception of the value of the dollar.

We face a difficult road ahead.

Did I mention this year - better to hedge your positions?

1/28/09 (Stimulus Coming! Wells Fargo Losses!)

Traders,

It was a relatively mild day with a higher bias heading towards those resistance points. The main focus in the economy, the market, and in D.C. is the big stimulus package. It is coming, it is big, and it will definitely inject tons of money into the system. The Fed has pretty much used up all the tools in their tool box (interest rates set to ZERO) – and now they are directly purchasing securities (and printing more money) injecting it into the system (in addition to the TARP).

Now the FDIC may create and run a bank of debt (or as Bloomberg calls it “Bad Bank”) to buy toxic assets. The FDIC would seem a logical choice, however as you may have read – I already have concerns with Sheila Bair (FDIC Chairman) and the current FDIC which they ran at razor thin deposits vs. coverage – believing (before and now) that they carrying such little capital vs. coverage is O.K. – the irony that they would NEVER allow a bank that they insure with such very low balance sheets, should not escape you. Additionally – their brilliance at risk management and foresight have sent THEM (along with a string of others – including Freddie and Fannie – both government regulated) – to the Treasuries door for just a little more money (billions).

The problem is that our government doesn’t KNOW how to run business because they believe they have an endless supply of money (therefore the MARGIN FORMULA is not ever part of any discussion – I don’t even think Frank, Dodd, Bair, Pelosi, Reid, etc. know what the word, Margin, means). Simply SWEEPING debt and losses (from the banks – auto loans, business loans, home loans, student loans) into a “Bad Bank” doesn’t mean it goes away. The only thing it does is GIVE the perception that the economy is doing better, once they sweep the debt under the rug – they’ll forget about it.

President Clinton played that game with Social Security (taking it off the balance sheets and moving it into a trust) – on paper it reduce the national debt and deficit – because it was no longer counted in the official budget – it was now a trust. It certainly SEEMED that everything was better and they (and we) just forgot about the DEBT that Social Security was and is. The problem – the dollar WILL break if we load it too much with debt and deficit. More bailout money is like pushing on a string – if the debt is NOT paid down. We are CREATING the next big financial CRISIS – it WILL be the dollar.

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Wells Fargo – lemmings chasing losses!

Wells Fargo (no the second biggest U.S. home lender) reported its first quarterly loss since 2001 – after acquiring debt ridden WHACKovia ($2.5 billion / 79 cents per share). At one time Wells Fargo seem brilliant they had avoided the big home collapse, managed their risk, tackled the default rates on their credit cards. But something happened and they drank the kool-aid and jumped into the water with their acquisition of Wachovia. Now they are no different from the rest – with close to $13 billion in overdue mortgages with more to follow, coupled with a rise in credit card defaults.

Wells was also in line and received $25 billion in bailout and also raised $12 billion in stock offering. They now have a little cushion to carry the debt and getting ready for more write downs for next quarter (as the cycle continues). Many expect a cut in dividend as well.
However, the “worst is behind us” talk is already starting up and the lemmings are flocking to Wells Fargo in the pre-market already driving it up $3 dollars. Who knows – but many people don’t know the difference between value and price. If I was long I would flatten or hedge my position up here at $20 – look at it as a gift and nothing more.

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Futures Pre-Market

The futures are getting a good early morning run – on the back of the big stimulus that is coming. The spread is fairly wide, so expect the Arb traders to short futures and buy the cash into the opening – creating some upside pressure in the market.

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Support / Resistance

Getting close to resistance?

INDU 8000 / 8250 – 8500 (We will probably be above the 8250 line this morning as the futures are predicting it. Continue to lean long, but roll up hedges at 8250 – sure 8500 is in the cards, maybe not today – but we could easily see it. The question will be at the close – above or below 8250. A strong close above it means that 8250 turns into a pivot and we could head to 8500)

NDX 1100-1150 / 1200 (We are going to punch through the 1200 line this morning – 1250 is the next level up. Watch the close if we come back off and just close at or slightly above 1200 don’t read too much into the rally – if we close on the high we could get a continued run to the 1250 marker.)

SPX 800 (850) 900 (850 was the pivot point and we are seeing a good injection in volatility this morning with a solid run up. 900 is resistance and if the hyper extension happens today – we could see it. Watch the close and 850.)

RUT 400 (450) 500 (Watch the legs in this index and how we close in relation to 450. It has remained strong recently - closer to 450 at the close means we may not get the follow through in the narrower indices if they over shoot.)

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Conclusion

It’s all about perception and the government riding the rescue to keep the spending party going – the stimulus package is coming, just like last year it will give a solid bump to the market. We could see a 2 quarter rally – but when the money runs out we will fall just that much further (until stimulus part 2 happens). Stimulus can only carry you so far – people are losing jobs and no amount of stimulus will change that. Those that are working are getting paid less. At some point stimulus turns into government welfare. We are nationalizing not just businesses, but entire industries (bond insurance, mortgages, auto-loans, etc.) – the government is sucking down insane amounts of debt – but the government has NO collateral – the dollar is based on one thing – FAITH. There is not GOLD, SILVER, or anything backing it – just lots of paper, ink, and the hope people continue to find value in it.

I believe we could see a fairly stable if not bullish market going into the summer – but come late 3rd quarter or 4th quarter when the money runs out from this stimulus – we could be in for a serious SHOCKER – when the government goes back to the printing presses. You can only go to the well so many times.

1/27/09 (AXP Rally? Dow Chem Hurt? Butterfly Effect!)

Traders,

Yesterday seem like the market had gotten back to normal as volatility came in – not the massive swings we have become accustomed too – but don’t hold your breath we are deep in the middle of it.

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American Express – beating estimates?

These are the days when a company can report a 72% drop in earnings and make it sound rosy. American Express saw a huge drop in profits, however it beat the most pessimistic forecasts – I guess that is good right? The stock initial saw some positive after market moves – but who really knows what that means.



But if things are so rosy, how come they are tapping that TARP money ($3.39 billion)? And raising money ($6.2 billion) by selling certificates of deposit? And cutting 7,000 jobs. No – things are NOT good – consumer defaults at American Express are ramping fast.


While true, the company missed estimates by one penny, don’t forget they had massively lowered their forecast (several times) – to such a low number the bar was not that high to jump over – yet they still missed. It is going to be a very bumpy ride going forward – if consumers can’t pay back their debt – expect more defaults, the road ahead for consumer credit is not a bright one or is it. If the new stimulus package injects enough money (no one is going to say that this administration and Congress will UNDER-fund bailing out the American People)…

Which leads me to my next point….

We could see a good early kick in the pants and a ramp in consumer spending (even some paying their minimums) – thus many will get long American Express and the like. But I am of the camp that believes a stimulus doesn’t create jobs it just a band-aid that extends the party a few more months (did we already quickly forget last year’s stimulus package – a pop in the market/economy and when it ran out we went right back down). My issue is that a BIG stimulus will get a BIG rally and a bigger fall – which leads me to my next point (which the brightest minds in the room will disagree with me) – HYPER INFLATION. Formula: Bigger the stimulus (more money printed, more debt) = Bigger short-term rally (on perception and short-term data that reflects that we MAY be out of a recession) = SURPRISE! Hyper Inflation (The knee’s of the dollar buckle under the weight of hyper debt and printing) BANG we come back down hard!

Obama is a smart guy – if he could just look out to the future instead of the present, when it comes to stimulus planning – I would hope he could see the problem. The issue is do we want to suffer pain NOW or latter. Most people prefer to push off bad news and pain tell later. (Humans and society is always an optimistic procrastinator – we go to the doctors/dentist when it is too late, we sell our stocks at the bottom for losses, we ignore the mounting debt on our credit cards and wait until the collector calls us, we pay our bills at the last possible minute.) – I would argue that our Congress / Administration is doing the same thing (they KNOW that the stimulus will have dire affect on the dollar – they are just choosing to ignore it and will deal with it when it comes, but by then (I am afraid) we will be out of ammunition)

Coming back full-circle, for now we could see a rally in American Express and other credit, if coupled with a sizeable stimulus package that could give banks/lenders a break and get the consumers back to doing what they do best – consume!

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Dow Chemical pulls plug on merger!

It seemed only yesterday that Dow Chemical was on track to pick up some companies, they have an international presence, some impressive contracts, and a currency trading room that always seemed (via inside rumors) to be ahead of the curve. Then – they pull the plug on the Rohm & Haas merger ($15 billion) – that was expected to be done yesterday. The concerning part was the reason (which is still foggy) “uncertainties” in funding as a result of the global financial crisis – they also cited a Kuwait deal ($9 billion) that was canceled as the reason. However Rohm has responded that the K-Dow deal cancelation does not provide Dow with adequate reason for halting the merger. Now remember – they have a monster trading floor (in Midland Michigan) – or so I have been told. I am wondering if they took a hit on their currency desk (yeah I know it is a chemical company) – however if you have seen the action in the


Euro/Pound/Dollar/Yen in the last year – they look like Dot.com stocks of old trading in hyper-volatile swings. I wouldn’t be surprised if they took a solid WHACK on their currency desk that handcuffed the merger – unless they get help.

Rohm & Haas has filed suit already – keep an eye on this.

Interesting article on about Dow Chemical and it's trading floor (how they manage risk and trade for profit): http://www.thefreelibrary.com/The+how+of+Dow:+managing+currency+risk-a021276643


Question: Did they get hit in the recent currency volatilty?
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Futures Pre-Market

The futures are up and flirting with fair-value. There is some volatility in the market this morning – Dow Chem news is not good and American Express is spinning gold. Expect a flat to slightly mixed opening.

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Support / Resistance

Well we are still above supports.

INDU 8000 / 8250 – 8500 (I tightened up the resistance range because volatility is coming in and we haven’t gotten above it in over a week. Not that I would get short at 8250, but I would flatten deltas.)

NDX 1100-1150 / 1200 (I really think that 1200 is in the cards and maybe sooner than we think. Flatten there and lean short if you have the gamma to do so.)

SPX 800 (850) 900 (I think the 850 could be a pivot point, but you also could treat it as a slight resistance – but with long gamma.)

RUT 400 (450) 500 (The RUT has been holding very well and now at 450 we are AT the pivot point which will probably be a better indicator to the narrow based indices that are being driven by over-weight individual stocks.)

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Conclusion

I can’t emphasize enough my concerned about the high probability of coming hyper-inflation. I know the smartest guys in the room and economist are talking about dis-inflation or deflation. They have valid points – but I think they are trying to figure out what is going on last year and what is happening now. Nothing wrong with that and I would not argue with their conclusions, but I am a trader (and have been for 20 years) – as an option market maker – option IMPLIED volatility could care less about STATISTICAL volatility – we price on forecast, not now or the past. Thus – we try to determine the possibilities of the future. Just like earnings – they don’t mean anything to us traders, other than it is a day of volatility – the earnings number is irrelevant because it is telling us what they DID, not what they are GOING TO DO. Sure – we may be seeing dis-inflation / deflation today – but what about 6 months or 1 year from now. The administration and Congress’s actions will have massive repercussions in the years, if not decades to follow.

Just like a butterfly flapping his wing, with a stroke of the president's pen today – we could see hyper-inflation down the road.

1/26/09 (Pfizer Takeover, McDonald's getting FAT)

Traders –

Volatility has been coming in since the inauguration – first it was a jolt down, then up, and the ping pong continues with less drastic moves. Obama has come out of the gate with Executive Orders and action – something the American (and world community) wants to see (regardless of political beliefs) – we certainly didn’t want him to be a bump on the log.

The big “sausage” is the new $800 billion plus stimulus. Obama wants it to be bi-partisan and he has meet and will meet this week with Republicans (even if he doesn’t need their vote). The Republicans are standing ground and do NOT want a blank check written on the backs of our children and grandchildren who will be picking up the bill – along with current businesses (which will curtail growth). The week will play out and this is the first big test for Obama and reaching across the aisle (which is already upsetting Pelosi and others – since they have it in the can already – “why bother going back to the Republicans when we can pass this now!”) – Obama sees value in bringing parties together – sure he has won and also controls both houses. It will be an interesting week in politics.

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Pfizer acquisition of survival or vulture?

In this economy we will see two types of mergers – survival mergers (like BofA and Merrill) and vulture mergers (taking over a struggling company with debt) – the question is which one is Pfizer? It’s hard to tell – they are seeing some of their product lines hit the life cycle (meaning they’ll lose exclusivity on the patent – facing generic competition as early as 2011) and as well as law suits. Pfizer has also missed earnings – however it has been pointed out that prior to the economic slowdown Pfizer has been positioning itself for acquisitions – (in the drug trade a successful drug is a one-trick pony – sure it brings in large revenue, but at some point the life cycle ends and you BETTER have something in the pipe line). Pfizer has been living off the world’s most successful drug – Lipitor (after the acquisition of Warner-Lambert for $115 billion and the developer of Lipitor). Pfizer has also had some smack-downs as well – Bextra was pulled and Celebrex lost half its sales after the Vioxx scare (a similar drug).

The questions that are always asked internally in the Drug World (or I suppose they must be asked) are: What do we have in the pipe-line? What is projected revenue? How much does it cost for the next NEW drug in R&D? What does our competition have and would it be cheaper to acquire? = The formula will always be: (footprint of drug sales, how many people will need or want it, Possible Revenue x life cycle, before competition) – (R&D, Marketing, Legal) = margins (or profits). If you can replace the (R&D, Marketing, Legal) with (Acquisition) and the acquisition has faster time to market (with pre-approved drugs by the FDA with a new and long life cycle), that might be the better option.

These are also lean economic times. Pfizer did see a slow down, but still beat analyst forecasts. This acquisition also means they had to go out and borrow money. They are also looking to trim some fat, layoffs (19,000), 5 plants closed, and a dividend cut to ride out the hard time and to keep margins in the black.

Pfizer futures, well it will probably be fine – it will face some bumps with the acquisition of Wyeth (that has a couple of legal issues), as well as integration. The dividend cut also makes it less attractive as a static return performer, but what companies pay dividends anymore?

For traders – the deal will make for some short-term Arb opportunities: (cash-n-stock transaction): I haven’t looked at the current spreads or the exact formula, but it will be in there and probably worth the play. Get in before the spread closes down too much = don’t forget to add in the cash. Note: Our new platform Obsidian separates out the new/old option classes with cash deals. Additionally the new Spread Maker allows for stock arbitrage (just released last week) = call Lawrence if you have any questions about it. http://www.silexx.com/

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McDonald’s – Big Mac Attack

No surprise here, economic slowdown means more people scale down to cheap, fast, crap food. Expect cheap crap food to expand and do better in leaner times. It is the law of trickling down. The top of the pyramid is thin and the bottom is fat. Those at the top (the few) that could afford to go to Ruth Chris Steak house ($100 plus) once a week have scaled down to Outback Steak House ($50),

those (more than few) that went to Outback Steak House ($50) once a week have scaled down to Applebee’s ($25),

the many that went to Applebee’s ($25) are scaling down to McDonalds ($10),

and the masses at the bottom that already go to McDonald’s ($10) – well they are already at the bottom.

The point is the bottom of the food chain is swelling. More people are scaling back and that means the top gets thinner and the bottom gets fatter.

In the options / volatility world you could say McDonald’s has fat tails!

McDonald’s is a recession stock, just like Wal-mart. People need to eat and sleep, regardless of the economic situation. It’s no surprise that more people will go to the cheaper food, it’s sad because the food is barely eatable and means more fat, sick, high cholesterol, and a less healthy nation (faster). I guess that is good news for Pfizer, maybe the own McDonald’s stock.
It would be interesting if someone had done a study on the health of a nation (based on eating habits) in recession times – I would guess that people would get less healthy because eating habits change for the worse.

Too bad people forgot how to cook, which is still cheaper than going to McDonald’s. But we live in an instant society. Maybe with people out of work they can start learning how to cook again. My hopes are not that high.

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Futures Pre-Market

The futures are seeing a pop in the pre-market and getting close to (and some cases above) fair value. The spreads are pretty narrow, but we might see a slight pop in the market.

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Support / Resistance

We are flirting with supports in hear. The nation (and world) has absorbed the Obama hand over well – with a slight jolt of volatility. Now it is back to perception with the big ticket item (the massive stimulus package).

INDU 8000 / 8500 (We closed above the support – watch it closely)

NDX 1100-1150 / 1200 (We are just above the 1150 mid-level support and below the 1200 resistance)

SPX 800 / 850 – 900 (850 use to be a pivot point, is it now resistance?)

RUT 400 (450) 500 (The RUT has continued to be the driver for the last year – it held well above support as the narrower indices fell to their supports – does the market continue to look at the broad base to set the stage?)

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Conclusions

Perception is back on the table, the volatile event of the inauguration is over and we have had a weekend to really absorb it. The stimulus package is next, does the nation (and world) by that it will be the life saver we need? Who knows – Obama needs to sell it – regardless if it works or not. Of course I am not a believer of taking this nation into massive debt, because I believe it will cause a hidden bubble of hyper-inflation in the dollar that when it bursts, there is nothing the government will be able to do. Should we suffer now (without massive bailouts) and get our nation in order, or do we just extend the credit line some more?

1/23/09 (How to spend Tarp Money, Global Slowdown?)

Traders,

Well we stayed up above the supports for the most part – even with the pull back and this morning it certainly looks like we are going to test them again today – the question will be about the close. Now doubt more bad news is coming out and it’s making it harder to determine the fundamental bottom of this market (and economy). Stay ahead of the curve – keep your hedges tight.

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How to spend your TARP money.

You may of heard that John Thain (CEO of Merrill) is now out of a job, but no worries – he is now starting a new late-night infomercial course “How to spend your Tarp money!” - I almost puked when I read the story the other day that Thain (who had come on board at Merrill to SAVE it during the crisis) spent over $1 million on his office as the company was hemorrhaging money and on top of that paid his driver $250k.

I was never a big Thain fan – he was lauded as a savor - he was the CEO of the NYSE, and CFO at Goldman. However – if you look at the trail of golden parachutes this guy has tailing him – the only thing he seems to be an expert in is milking the cow dry. What pisses me off on a personal note is that I have been a client of Merrill for some time and I really “HOPED” that he would come in a clean house – that obviously never happened. Between $300 million in Goldman stock and supposedly as much as $120 million as a 1 year (f’up) CEO of Merrill – he is getting fired – like he cares.

I don’t mean to make you sick over the weekend – so only read this if you have the stomach for it:

http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-87000-rug/

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Global slump seems worse

How do we measure economic growth is a very good question – and it really depends on what side of the coin your country sits. Your country falls into basically two buckets – a consumer or producer.

Now globalization is a good thing, but it also means we are married to each other. Our nation is a consuming nation, with 2/3rds of the GDP relies on us consuming. When China was opened in the 70s to produce cheaper goods for us to consume – it elevated all Americans with the ability to buy MORE junk. If wealth was measured by materialistic garbage this country is very wealthy. This nation now doubt judged socially by not only the consumption of goods – but the position of goods (bigger was better).

The problem was growth (in consumer spending) was eventually going to hit a ceiling – predicated on earned income. The explosion of the credit boom so we could buy more crap (even if we didn’t have the money) insured that our consumption could continue and thus GDP growth would not be stifled. Of course people complained about jobs being shipped overseas, but they didn’t complain that they could buy cheap junk at Wal-mart and Target (the birth of the cheap retail stores exploded in this country). It was a double edge sword – keep jobs here – but products more expensive. We the people – drove jobs overseas in our obsession to purchase cheaper junk.

The other countries for the most part are the producers – some countries sell their natural resources and commodities – while others are manufactures. Europe had also moved (for the most part) into a consumption venue – rather than the producers. In a nut shell – the world was producing junk for the US and the WEST to consume. When our credit lines ran out, our consumption slowed, which meant the producers also saw harder times (fewer people to buy the junk means they make less junk).

The other day I mentioned China – they are in at the tipping point – in the next few years they can internally (domestically) be a consumer/producer. All those millions of people want (or feel the need) to start consuming – and they are. Cell phones, computers, cars, movies, TVs, and more junk. They have the possibility to survive as an isolationist. They are however still connected to the U.S. and while agriculture (soft) commodities is not a problem – they do need massive imports of hard commodities to keep growth alive. China will no doubt slow and see difficult times – but they are also way more self sustaining than many nations (even with their massive population).
The big question for us is not that we will get out of this (we will) – the questions are:

1. How long does it take?
2. How do we get there?

The answer to the first question I think is fairly easy. It’s when all the leverage is unwound and we use actual mark-to-market, rather than mark-to-myth. There is still much fluff or juice in the marks. The second question is more difficult and more risky a proposition:

The new administration plans on spending trillions of dollars and New Deal Policies (or as Obama calls them “Shovel Ready”). I have read about FDR and sure he was a great president and most of the biographies about him are not very critical and most tend to avoid the math. The math reality of the New Deal – if we look at the numbers along – are very alarming. Taxes were eventually raised from the high teens to over 70%. New excise taxes (sales tax) on certain products, and unemployment ramped to almost 20% (all after 6 years of New Deal programs – problems got worse, not better.)

Competition was frowned upon and a special minimum no-skilled labor wage was imposed so high that most companies laid people off because they could not pay the high minimum labor prices – the poor got poorer under New Deal policies. The problem, like with almost anything, is that it looks great on paper – but when executed it could have drastically the opposite effect. Communism sounds great on paper – but we only have to look at how that faired under the Soviet Union – the people had enough after awhile (sure it wasn’t pure Marxist communism – some would argue – but it was an collectivism).

Total Unemployement during the Great Depression:

I would argue that WWII – as dreadful as this may sound – saved this nation economically and also saved us from heading further down the Nationalism / Socialism road. The problem – most of the FDR biographies don’t mention math or numbers – and WWII was an unavoidable out come. History is written by the victors. I will not deny that FDR was a great president – in some regards. But the New Deal failed to meet (based on math) anything it was really set out to do – so much so that after 6 years of New Deal policies FDR started changing course. One thing New Deal policies forget – just because you build it doesn’t mean they’ll come.

Dams, roads, buildings are all great – and true they can measure capacity = but capacity doesn’t equal revenue or profits. There is more to economic success than just building some roads and buildings (that is the cost, the question that New Deal policies don’t answer is how do we pay for it and how does it make money?)


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Futures Pre – Market

We are getting WHACKED – not good – things are looking to open on the lows and ARB traders will be buying futures to sell that cash. Expect downside pressure on the opening.

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Support / Resistance

Today is a serious test day on those supports – watch the close!

INDU 8000 / 8500 (We need to close above 8000 to see signs of strength – the close will determine it. A solid close below it means that Monday could get ugly)

NDX 1100-1150 / 1200 (We are above the weaker support of 1150 – close below it (slightly) is not a serious problem – but if we fall to the 1100 area and don’t hold – get out your parachutes.)

SPX 800 / 850 (While 850 seemed like a pivot point, I think it is becoming a resistance level. 800 needs to hold, just like the 8000 in the INDU – otherwise it’s ugly time for Bulls)

RUT 400 (450) 500 (The RUT has been holding up well – this is the only positive sign across the board. Watch the close)

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Conclusion

We have a tough road ahead and Obama has some serious decision making as well. I hope he does not forget that value of the dollar and the risk of inflation! He may be able to band-aid this by pouring tons of money into the system to find a mark-to-market bottom, however if he doesn’t watch the dollar, debt, deficit, very closely = inflation could be a bigger problem than the housing/credit crisis.

1/22/09 (“Sell the Rhetoric, Buy the Executive Orders!” )

Traders,

I was thinking about what my friend said yesterday, “Buy the Rumor, Sell the News” – I think I have a new one, “Sell the Rhetoric, Buy the Executive Orders!” – As you know the market sold off pretty hard on inauguration day – I was “hoping” that Obama could sell the confidence the market needed and was disappointed. However, the next day he came out ripping fast balls (and for not being a Democrat) - I was no doubt impressed with the Executive order ( Limiting Lobbying and Gifts, lowering wages, etc.) and also putting money where his mouth is by halting the Terror Trials. The market seemed to like action and not talk. These are difficult times and one thing Obama has shown so far (that I applaud) is that he is not willing to walk lock-step with his fellow Democrats and not afraid to ruffle some feathers.

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China’s growth slows….but?

Now if I told you that ANY country’s economy grew last year by 6.8% - you would be shell shocked. Well China’s did, but it slowed the most in 7 years. The good news is that it’s still growing by a significant amount. China’s chief concern is exports – which is the biggest portion of their GDP (the exact opposite of ours – which is consumer spending). Hopefully you can see the important relationship between China and the U.S. (they make money from selling us junk, they lend our government money so we can buy more junk) – really – China is on the winning side on both those trades. You could say – we are in debt to China (in more than one way).

However – being on the winning side of a trade – doesn’t mean it will always be a winning trade (you are only as good as your last trade). China’s reliance on us to borrow money to buy their junk is now their undoing. The U.S. is tapping out on collateral to borrow more money (consumers have tapped out their home equity and credit lines – now they are losing jobs) – China COULD lend more money – but that WOULD be a losing trade since the consumers (and government) can post no more collateral to secure such funding – hence China’s announcement in 2007 that they would start reducing their US back assets (they saw the writing on the wall – the US was going into massive debt and probably would have a hard time paying back that debt).

2008 showed the reality of such massive leveraged debt and the housing crisis was just the beginning of unwinding that massive debt. Now China sees the government printing MORE money, we have taken interest rates to zero, and have allowed companies to post junk as collateral. That certainly doesn’t attract investors (China being one of the largest) – but that also poses a large problem for China, if the US has run out of credit to spend, how will consumers buy more China junk? = Hence the slowing growth.

Food for thought – a question I have not heard asked or answered – has China made enough headway that domestic consumption can pick up the slack of foreign consumption? Certainly not enough to fully off-set it – but could it be enough that while China’s growth may contract it also may stabilize. Remember – millions of rural Chinese have moved into booming metropolises where service, tech, and manufacturing jobs boomed to service the rest of the world.

These new employees need phones, computers, cars, food, etc. A funny example of domestic growth in China is the online game market, for example the game World of Warcraft when released in China in a single month had more Chinese subscribers than the US in one year. That obviously means there are millions with computers already and also millions of consumers looking for content and products. If China is able to move over to domestic consumption to ease the burden – it means we may not see China to hardly hit by a recession or slow down.

This ALSO means that foreign companies have a new consumer that didn’t exist 10 years ago – the CHINESE. It is quite possible in the next 10 years that China surpasses the US as a consumer nation. We have already seen several US companies make headway into China – McDonald’s and CAT to name a few. Could China be our economic salvation as we begin to tap the Chinese consumer to sell OUR junk to? Could there be a role reversal? The one thing for sure – the Chinese consumer has awakened and even with slow growth (because of exports) the domestic side is still growing at accelerated rates.

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Cell phones everywhere!

I was at the mall a few weeks ago and began to ask myself a question….. Have cell phones just become a commodity? There are so many makes and models – there are now 8 i-phone clones and more versions of the blackberry to count. Prices are coming down (to almost free) with a contract. And worldwide consumers are still gobbling them up – even in this slowing economy.
Now you probably know I am a huge believer in competition (because it brings better products to the market and lowers prices) – we saw that with Flat Screen TVs and DVDs (the more people who make them, the more choices, the more bells and whistles to get you to buy, the cheaper the prices). You can now buy a DVD player for $50 (that even upscale to 1080p – almost as good as Blue-Ray). The same is happening with Cell Phones. All that is GREAT for the consumer – but what does it do to companies?

Well NOKIA is seeing a slump – and it is a one-two punch. Apple introduced the i-Phone which meant a ramping up in spending for all competitors to bring out their own version of i-phone (day late and dollar short) – it also means if they want to break the i-Phone market they need to come in at a lower price with more bells and whistles (the bet is risky because the upfront cost could sink the ship if they don’t get penetration) add to that the slowing economy and consumers with less money to spend and OUCH!

Nokia cut their dividend and I don’t expect cell phone makers to do well in the coming year – between pricing competition and slowing economies – the cell phone has reached the tipping point of becoming a commodity!

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Futures Pre-Market

The futures are seeing a serious whack in the pre-market – maybe the over extension of the Obama takes Action rally of yesterday – but Housing starts just knocked the wind out of the sails (down 16% lowest on record). The spreads are in and if they remain expect pressure on the market at the opening.

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Support / Resistance

I guess that was inauguration supports because we rallied hard of them – could we retest them?

INDU 8000 / 8500 (We are right in the middle now – a pivot point – certainly)

NDX 1100-1150 / 1200 (We are just above the weaker support of 1150 and didn’t make it to 1200 – 1150 test could be in the cards.)

SPX 800 (850) 900 (We are back to that 850 pivot or is that resistance?)

RUT 400 (450) 500 (The RUT never hit that 400 bottom that SPX and INDU hit – it is now back to the pivot point – which way to we move?)

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Conclusion

The market seems to be testing the new president – it likes action and hates words (it would seem – but we only have two days to compare it to). While I am not a believer of more bailout and FDR New Deal programs – Obama came out with a executive order that did please us few Constitution fans.

The housing start numbers this morning confirmed things are getting worse (down 16% worse on record) – and Obama has a serious uphill fight. Credit is drying up and he is going to need to put the country seriously in debt to juice the market. That is his plan – and maybe his only option (I think there are others – but who am I?) – however my concern is while it might band-aid the problem we are putting serious stress on the dollar. Maybe we should start cheerleading “Go China, Go!”

1/21/09 (Sell the News! Pimco & GM! FDR comeback?)

Traders,

I guess I was wrong about yesterday, as a friend emailed me “Buy the rumor, sell the news!” – how true that is. My concern is that Obama didn’t “Sell It!” – he may of sold it to the million people standing in the cold – but they certainly were not trading. What do I mean by “Sell it”? Well – the plan is simple – print money and start bailing out this country (regardless if you are for that policy or not), the problem is WHERE does that money come from? Well – actually it is created out of thin air – the country has two choices, A. finance it (by selling MORE treasuries or selling off assets) or B. Go further in debt. We would most likely love to sell more treasuries (especially to nations like China and others – whom we rely on for the credit lines). Since this nation utilizes a fiat currency (or faith backed) – Obama needs to SELL the confidence and optimism – not just to the voters – but to the market and the rest of the world (so they feel secured in purchasing U.S. debt). Suffice to say – the news of the increase in economic slowdown trumped Obama’s inauguration, which is a little alarming (as to the economy).
What was very puzzling was the dollar trade yesterday as it strengthen significantly against the basket – which is a paradox to be sure. A good friend emailed me a article that clearly delineates that we are seeing not presumed deflation but rather dis-inflation. I agree – but also believe that it is creating a hidden bubble of inflation. Certainly prices may come off against the dollar – but we are flooding the system with more dollars. The only magic trick being performed is the new dollar printed is quickly being absorbed into losses (of which the government is taking on.) What we ARE seeing is a huge shift of debt and liability from people and companies to the U.S. government (FED, FDIC, TARP, and Nationalized companies – AIG, Freddie, Fannie, etc.) – so what does that mean? I would argue that we may see a shift of presumed risk from corporate bonds to government bonds. OK – for some of you that may sound very perplexing – even crazy – for me to say there is more risk in government bonds than corporate. And it is – if it wasn’t for the big shift in liabilities. Think about this – a company is able to dump it’s toxic paper on the government and borrow money (therefore reducing its risk) – the company bond paper has less risk of default, since the risk has been moved OFF the books to the government. The government’s appetite for toxic paper and increase risk could be viewed in terms of the Treasury bonds – since owning those bonds you are in technically holding government debt. Of course the government will NOT default on paying off the Treasury bonds (I am not saying that) – what I am saying is that when it comes time to pay the government maybe in such a whole (debt and deficit spending) with revenue contracting (via taxes) – that they may have to PRINT more money to pay off existing treasury paper and that spells INFLATION. I would say corporate bonds (with a government back-stop) that interest is greater than pre-1990 CPI calculations would be the bonds I would opt for.

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PIMCO bets on Government backstopping GM

PIMCO (world’s largest bond fund) and it’s boss Bill Gross (the Bond King) – resigned from the committee to negotiate GM and GMAC debt for shares. Of course Gross spun it, ““We’re just not good committee members. We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.” – would say (after hearing Gross for years in interviews and in the paper) that if there was a good deal to be made he would still be there. What we DO know – Bill being on the committee got to see the play book and balance sheets. Leaving means he will have less insight and information – which clearly tells me that he is not interested in converting GM/GMAC debt at ANY level – he is betting on bailout by the government and nationalization.
Pimco pulled out of the GMAC deal to swap their debt for as little as 60 cents on the dollar. Pimco bet correctly that GMAC would get bailed out ANYWAY – because the government wouldn’t allow it to collapse – instead of 60 cents – the value increased to 80.5 cents on the dollar. Pimco is one of the largest holders of GM’s debt – stepping down from this committee has ruffled lots of feathers. You could say he is a hold out and so far he is making coin on the deal. Betting on the government backstopping GM is probably a sure thing (especially with the current administration and Congress) – the big risk is does that government nationalize the firm and wipe the debt holders out? Probably not – but while it may not be probably it is certainly possible.

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Futures Pre-market

We are seeing a bounce from yesterday’s smack down. The ARB trader’s will sell the futures to buy the basket as long as the spread is in – expect a gap up opening.

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Support / Resistance

We certainly headed down to those low support levels – are they support – that is the big question. Obama didn’t sell the confidence in the market as it expects the recession to get worse and more government debt.

INDU 8000 / 8500 (We closed right below 8000, but the futures are looking like a 8050 opening – watch the close. This is a big support area – if we fail it could get ugly quick.)

NDX 1100-1150 / 1200 (We are right in that support resistance band – we didn’t get down to the 1100 level, but we did break 1150. The futures are pointing to a 1150ish opening – do we close above it or does THAT become the new resistance?)

SPX 800 / 850 (850 was the pivot point, which I would now call resistance. We are right AT 800 – the market is showing a higher opening. Do we close and stay above it. Just like the INDU 800 is a big number. A rally off this is needed – if we break – things could get ugly fast.)

RUT 400 (450) 500 (We are below that 450 mark (pivot point) and still well above 400 – if this broad measure is any sign of support, I would say it is a good one. As the RUT didn’t get back to the same lows that the INDU or SPX did. Watch the close. A solid close above 450 would be welcomed.)

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Conclusion

I had read that yesterday’s market was the worse inauguration day move in history. I am certainly not blaming Obama for it – but rather the reality of the economic storm we are in. I was hoping, since he did so well in selling “Hope” and “Change” in the election that the world would hear his rally cry and that would bring more optimism, boy was I wrong. As my good friend correctly pointed out – “Buy the Rumor, Sell the News!” – he was right. We may yet – see the market rally off these supports – but the market wants ACTION NOW – it is down with rhetoric. Obama’s plans are vague at best – and it may be months before we begin to see an outline of what he plans. Now doubt he has inherited a mess – and I don’t envy his job. He is good at selling Faith and he needs to couple that with a solid economic policy that doesn’t further erode confidence in the economy. New Deal policies are a scary thought – as it means massive government debt – and we all know how well that worked out for FDR (unemployment sky-rocketed from 12% to over 19% and taxes went up from the high teens to well over 70%). Let’s not hope for history repeating itself – the disturbing thing is Obama and Co. seem to be heading down that path – as NPR reported he just picked up a FDR biography and started reading it – YIKES!

1/20/09 (Inauguration Rally or Sell OFF?)

Traders,

Last Friday showed some volatile action yet the market closed up – maybe on anticipation of the inauguration. The market moves on perception – and the optimism and hope have been a driving force – not only for the markets but for the economy as a whole. As I turned on the TV this morning the 10s of thousands that are coming from all over the US to see this historical occasion is rather impressive. We wait to hear, with baited breath, the words of the new president. No doubt it will be a mix of the sour reality of the economy coupled with inspiring words of hope and optimism. That being said – the question IS, will the market buy into it and we see a rally or not. The inauguration will certainly be the test to see if our new president can create positive perception of a changing future or not – if you believe that the market is swayed by perception.
I would say the market this morning is already at war – the futures are down in the premarket as more bad news hammers down upon it. Can Obama bring hope to turn what looks to be a negative opening – into a positive one?

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Oil and commodities backing off again

The oil market (and it’s off-shoots) are moving around like a Dot.Com stock of the late 90s. The volatility on any giving day is pretty terrific – the latest being a slowdown in consumer spending (more reports of recession and slowdowns coming in from all parts of the world) is re-enforcing the perception that the NEED for oil is waning. Oil futures are off and below $35 a barrel. Exxon Mobil is getting hit pretty solidly in the pre-market. Aluminum is falling off as well – which is putting pressure on Alcoa.
We are seeing tremendous volatility at these low areas – at some point, just like equities – we will certainly base. The action is similar to equities after the take a blow of bad news and premiums jump – as people seem to always panic at the bottom. I am certainly not saying get “naked” long commodities down here – but we must not forget we are human beings and part of a society – that means while the economy slows and we are certainly in a recession – it doesn’t mean the world comes to a grinding halt. Just look outside – people still drive, buy and eat food, build, etc. They may do it more slowly – but it certainly hasn’t stopped.
Secondly – much of the pressure in the commodity sector is the recent bottoming and strength in the dollar – which in my book is very perplexing. Sure the global markets are seeing a slowdown as well – but they also are not on the multi-trillion dollar bailout train. Last week – in Bloomberg – an economist put is best, “Obama is damned if he does and damned if he doesn’t!” – referring to the bailout. The economist explained that by not bailing out banks, companies, and mortgages we could see a longer deeper depression – but to do so means that we will double the national debt (if not more) and send the budget deficit so far down that it becomes questionable if it can even recover in the next 50 years. That being said – what is amazing is that while we have been on the bailout train – the dollar remains strong.
It is a most interesting situation. We can draw a couple conclusions – one is perception of safety. If all nations feel that he US is the safe harbor – they MAY flock to US treasuries (even at flat to negative interest) to protect principal (thus lending our government the money needed to pay for the bailout without creating inflation). That implies that Obama really needs to sell the Hope – because the USD is a fiat currency and we need to sell the world that there is NO RISK in investing in the USD. That is certainly contrary to the math (from companies, banks, US citizens, and even the government) in massive debt. The biggest player in town (NOW) is China. With a population, manufacturing, etc – do they BELIEVE in the dollar or do they move to a more isolationist approach. Stories abound about their hording and purchasing of gold. If the world saw China making a large purchase and ramping up US dollar backed assets that could bring HOPE. However – the Congress has set a fairly strong and anti-China agenda – does Obama follow suit?
I think commodities will be a dollar game going forward.
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Fiat to take 35% stake in Chrysler?

It looks like one of the big three has found a partner in Fiat. Could this mean we see someone come into Ford or GM as a partner? Also how does this effect government intervention and bailout money?

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Futures Pre-market

The futures have been trading in negative territory all morning – as world markets saw negative pressure from the continual slow down. We should see Arb traders purchasing futures into the opening and short the cash basket – BUT being a big inauguration day – we should or could see a big boost to the upside. Maybe?

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Support / Resistance

Today could see a big move to the upside.

INDU 8200 / 8500 (We are just above support areas –sure the futures look negative but if Obama can SELL IT – we could drive higher)

NDX 1100 – 1150 / 1200 (We are RIGHT AT the previous resistance area – a break out means that 1250 could be in the cards.)

SPX 800 (850) 900 (Again 850 a pivot point – while futures look negative – we could see a turnaround.)

RUT 400 (450) 500 (Same as the SPX – can Obama push this market up on Hope?)

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Conclusion

If any day is a measurement of HOPE and Optimism in the market – it is today. Either, in face of all the negative news and economic problems, Obama can “sell” the optimism (which if any indication of the 10s of thousands of people standing in the cold to see the address is a sign) – we could see a rally. If the market instead sells off – it doesn’t reflect a positive note. Why is market reaction today a big issue? Because the entire world is going to be gauging their perception on Obama’s ability to inspire the people and bring Hope and Optimism. Banks, investors, etc. around the world will USE (rightly or wrongly) the market reaction as a gauge of perception and FAITH in the system. Please remember that our currency is a FIAT currency (based on FAITH) – that is important to remember – because Obama is planning on printing trillions of dollars to help bailout this nation (rightly or wrongly) – and he NEEDS foreign nations and investors to BUY treasuries to fund such an endeavor in order to avoid hyper-inflation. Today’s equity markets, the dollar, and treasuries will be a measuring gauge as to Obama’s ability to “sell” the faith to the World. I am pretty optimistic he can do it – at least we ALL need to hope he can.

1/16/09 (Banks struggle, TARP round two, MLK)

Traders,

Interesting action yesterday – the market sold off pretty hard and then rebounded and closed up at the end of the day. Investors seem to be taking the bad news very well – maybe they are just Punch Drunk – like Rocky. Also we are all waiting with excitement for the Obama inauguration. Even a friend of mine (who is a die-hard Republican and really dislikes Obama) – went as far as to say – he appreciates that he brings Hope and Optimism to the table because in times like these that is all we may have. If HE is saying that – then the theory that we may get a sizeable rally off the inauguration (in my mind) is a pretty decent possibility.

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Banks still struggle….

Yesterday was JPMorgan and today it’s Citi and Bank of America. Remember the lesson I spoke of yesterday (raise money to write more down) – well these companies are not only going back to the well, but are seriously looking at ways to even stay afloat. Citi, whose biggest problem is that they are in too many markets is talking about a break-up of services after a $8 billion dollar write-down. Bank of American is going DEEP with a $138 billion bailout – expect more write downs. I guess the Countrywide and Merrill purchase had more strings attached.
A very good and wise friend of mine pointed out yesterday (about the WRITE DOWN lesson) – is that while assets maybe illiquid – there is a possibility that mark-to-market value maybe higher than anticipated if the underlying asset can show a revenue stream. Example that he gave – a house which might not sell at the perceived market value, may still be generating revenue via rent – which could cover a decent portion of the nut. So true he is and I certainly didn’t want my Lesson to make assumptions that the illiquid assets are worth ZERO – rather that they are worth significantly less than what the banks assume via their mark-to-myth. Thanks JP.

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Round Two….what to do with the banks.

Paulson used the Tarp money to make investments into the bank equity line – was it the right thing to do? It’s hard to tell – there is a large assumption (under Paulson’s method) that the banks will use it to stabilize balance sheets. The advantage to his method is certainly to the bank – as they can hold bad assets, write them down, and hope they can make money in the future. The problem – it keeps those illiquid assets on the book.
If you been following the bailout debate – round two looks to take a different approach and instead of giving the banks money in exchange for equity, they are going to BUY the assets themselves. There is good and bad with this method as well.
The good – it certainly takes those assets off the books of the banks – giving them more room to breathe. It also (if the government does it RIGHT) allows for a more transparent method to create a mark-to-market value. That is if the government creates a transparent market to post and trade price discovery of these products (something that has been talked about with a couple of exchanges). These assets COULD (that is a big IF) actually make money down the road. I seriously doubt it – as they will probably have to assume future losses before a bottom is found.
The bad – the government now holds these positions and at what price they assume them from the bank means the government could be taking future write-downs instead of the banks. Additionally (as JP pointed out) some may be good value and showing returns – while others may be fully junk! Additionally – the government will not participate in any appreciation in equity as the banks could rally off the lows as they are freed up of the toxic waste. Leaving the government holding the garbage.
Regardless – both approaches have their good and bad – the question is really which is going to get us to move forward? Personally – I think either way will work, why you ask? Because in either method the toxic assets WILL reach their REAL mark-to-market value (be that ZERO or some value slightly above it) – the question is WHO is going to mark them to their actual value first. So far the banks have been mark-to-mything them down each quarter – their problem is that they may NOT want to unload those toxic positions anymore because they could be closer to their actual value pretty soon – meaning that if they find a bottom they could eventually start to see profits again – so why give that up.
The debate is raging in Washington – as the controlling Democrat party is not happy with Paulson’s method and look to shift to purchasing the assets outright. It’s not about right or wrong – it’s about getting everyone to the same page to find the REAL value of these assets.
The bigger question – which is continual avoided – is how much MORE money is the government going to print and how much more debt can the government assume. The hidden stress on the dollar is building and that is something I am VERY concerned about . What might seem like the right thing to do today (bailout companies and people) may put the bigger economic backbone (national debt and the dollar) further into the whole.
It is interesting that the new stimulus package $700 billion – will in such a short-time will dwarf both the Katrina and Iraq war debt. This is not to pass the buck – but to show between War, National Disaster, and Economic Bailout – how much MORE can we load up the national credit card before foreign countries say – “Sorry, we are reducing your spending limit!”

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Treasuries vs. equities

Only a few short weeks ago we saw the lemmings chase the treasury yield curve to a negative number (which has never been done before) – people ACTUALLY paid the government to loan the government money. Talk about idiocy – but fear and greed make investors do stupid things. Now the flood of money is coming back out of the treasuries and surging back into equities – maybe we WILL see that Obama rally (abet short) before they rush back into treasuries. It’s like everyone is flip-flopping between fear and greed, will bottom picking ever end? Probably not. Keep an eye on the yield curve – getting in front of the lemmings maybe the winning trade. Remember retail investors are always the last one on the train and as the old J.P. Morgan story goes “When the shoe shine boy is giving you a stock tip – there is no one left to buy!” Sell Sell Sell. I’ll let you figure out the rest.

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Futures pre-market

Futures are getting a rally – in spite of the bank news. The spreads are in – so expect the Arb traders to short futures and buy the basket – thus sending a good jolt up in the market at the opening.

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Support / Resistance

INDU 8200 / 8500 (We went below 8200 most of the day – but rallied back above it. Remember it’s about the close!)

NDX 1100-1150 / 1200 (We again are between the 1150 – 1200 range. 1150 short-term support – which again we closed above it.)

SPX 800 (850) 900 (That 850 is the pivot point – did we sing hard and then rally or what. Watch the close and the 850 line)

RUT 400 (450) 500 (Again that 450 pivot / support saw some action yesterday.)

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Conclusion

Today is expiration so expect some action into the close. It will be interesting to see if we get any pin – risk, watch after hours trading with your do/do not exercise notices. It’s also a long weekend so we may see the decay priced in early.

Whether you are an Obama fan or not – this weekend MLK day – is a very special occasion. MLK would be 80 this year (I think) and it is a very emotional day for this country. I am a big fan of the Constitution – our founding fathers clearly understood what freedom was and regardless of their times – many knew that ALL MAN ARE CREATED EQUAL. It has taken this nation a long time to figure that out – we judge men by their actions and words – not their beliefs, color of their skin, or sexual orientation. It is a great move forward in this country (regardless of your political leanings). While I am certainly not a Democrat (nor Republican) and I don’t like many of the plans laid forth by the new administration – I am still very proud to be an American and to show the rest of the world – that in these times that a black man (of mixed race) with a Muslim name can hold the highest office in this country. This is a big achievement in a country with our history.
While this is a historical mile stone and we finish patting ourselves on the back for this occasion – we will be back to focusing on what we SHOULD do. I certainly will not be giving Obama any free passes (because of his achievements – which are very admirable) – just like I don’t give a pass to Ben, Hank, or Congress. We have serious work to do – so this weekend let us wave the flag as all Americans should be proud – but then we should quickly get back to friendly debate of what is the right course of action.

Have a great weekend.

1/15/09 (Write Down Lesson, Apple, ECB cuts)

Traders,

The question we were asking – is it support or not – well I think yesterday we realized that the reality of the news can sometimes bring down the hope and optimistic perception. The market just couldn’t hold up – after the retail numbers (down double what was expected) along with the mounting jobless claims had just sucked any optimism right out of the market.
Be that as it may – I still have “faith” that Obama’s inauguration will rise to the occasion and people will rush back in on the “Hope & Change” train that could spur a decent rally yet. Of course that is just another optimistic call. We as a people, nation, government, and president face a difficult road a head – we certainly do NOT know or should even pretend to know the correct course of action – we can only “Hope” that the leaders steer us in the right direction. One thing you can bet on with Obama (regardless if you agree with his policies or not) – unlike Bush – he can SELL the “Hope & Change” better than anyone – and that is a big step in bringing a positive mind set forward. Let’s hope that we don’t bring too much socialistic change that will suck the “life” out of this country and the road to prosperity (or serfdom).

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More Write Downs?

Sure…why not. Let me explain the write down game in the most simplistic measure so we are all on the same page. I am not trying to justify or get into any complex methods of accounting – but just to give us the “1000 foot view” so we understand why we can and will continue to see them.

1. The balance sheets of these companies are based on “Mark to Market” values of assets. Now “Mark-to-Market” works GREAT with listed and liquid securities – that have daily price discovery. Example – stock, options, futures – can all use Mark-to-Market accounting because you can SEE the price of each of these products as it trades throughout the day, in fact you can TRADE that product throughout the day. Investors use “mark-to-market” accounting to see their unrealized gains and losses in their stock portfolios. However, what happens when you want to “mark-to-market” something that does NOT have price discovery. Such as a house, a collectible item, or anything that is not traded on a daily basis? In the case of a home you hire an appraiser that looks at similar homes in the neighborhood and does some research and he/she comes up with an appraisal. Since your house is not traded every day there really is NO price discovery. You could say the appraiser is creating a theoretical value based on that moment in time – a “mark-to-market” value. It is important to remember that the value is not MARKET value but perceived market value. There is NO guarantee that you can sell your home for that price – it could sell for higher or lower. The appraisal value is really in the hands of the appraiser and how good are they at assessing the market value. Two appraisers will come up with two different prices. There is NO REAL MARKET value for the home – ONLY appraised value. That is important to remember as we move forward.
Well – many of these banks and brokerage firms hold illiquid assets (like the house example) and they are using a theoretical value from their own appraisal department. Since these assets don’t trade every day – they have to come up with a best guess as to their value if they DID sell them (not too much unlike the appraiser). This is one of the reasons that Buffet calls this “Mark-to-Myth” – since there is NO MARKET the MARK value is really the best guess and as liquidity dries up there is additional unseen volatility in the price (just like a home – if no homes have sold in 6 months in your area – maybe there are really no buyers at those levels – regardless of the appraised value). A good appraiser is one with experience, foresight, and knowledge of the area – the same is true for these financial appraisers. Thus – a big part of the balance sheet at these banks is based off a MARKED appraisal value, rather than an actual market value.

2. Banks have to maintain a certain level of capital to loan value, as well as reserves. Believe it or not – banks are very heavily regulated – between the Fed and FDIC, as well as the banking committees. This means they have to have so much capital vs. those positions they have. These banks held massive illiquid positions that were valued on Mark-to-Market, but since there was no real market for them, they used a theoretical value to mark these massive illiquid positions to. Part of the values were based on credit ratings, volatility, revenue, insurance, etc. It was a complex mess of theoretical numbers – but NONE of it contained ACTUAL market value – because there is no daily liquid market to price them to. The bank assumed, we assumed, the banking committee assumed, the Fed assumed, Congress assumed – everyone ASSUMED that these values were FAIR and ACCURATE – little did they know.


When the bottom fell out of the credit/housing market – and these banks held massive illiquid positions – based on access mark-to-market (remember these are theoretical values) – they started seeing losses. There was no one that wanted to buy them, since every bank was holding them. When they DID go out to the market to find a REAL price, not a theoretical price, the value of the assets were pennies on the dollar. That IS the REAL market. However they were in a pickle – if they actually used REAL market value of these assets (where they could actually sell them) – they would be out of business. They certainly would run out of capital and they banks would be upside down.
Quick – what to do? Well they couldn’t sell them and they couldn’t use REAL market values – so they needed a game plan and here it was and is. Going forward I will refer to Mark-to-Market value against actual market prices and Buffet’s “mark-to-myth” value as assumed theoretical value of the assets.

1. Lower the mark-to-myth value enough so that the bank can stay in business. WRITE DOWN
2. Raise more money for the next quarter to bring up the balance sheets against the debt.
3. Lower the mark-to-myth value enough so that the bank can stay in business. WRITE DOWN
4. Raise more money by selling stock to bring up the balance sheets against the debt.
5. Lower the mark-to-myth value enough so that the bank can stay in business. WRITE DOWN
6. Raise more money via TARP or mergers to bring up the balance sheets against the debt.
7. Lower the mark-to-myth value enough so that the bank can stay in business. WRITE DOWN

I think you get the picture. It really is that simple. Eventually (hopefully) they will actually get to the mark-to-MARKET value, rather than the theoretical value.

Now – I actually had someone argue with me that this is not the case at all. That the mark-to-market values were accurate. But it would stand to reason that if that were true – A. they would not continue to write down more losses and/or B. They would/should of sold them. You would think that after the 2nd quarter of massive losses they would just dump that paper, only and idiot would hold on to a losing position for 7-8 quarters. Additionally – while it did take some time – just looking through their balance sheets and quarterly report states the case. And lastly – if you are in the market you understand the difference between theoretical value and actual market values and what illiquidity means. Feel free to disagree with me – but I think if you take the simple 1000 foot view, look at the math, quarterly reports, capital raising, write downs per quarter versus balance sheet versus money they raised = the math is fairly clear.

So on with the story – and sorry for the boring lesson –

JP Morgan profit drops 76% on $2.9 billion of Write Downs – feel free to read more into that if you’d like, but I think I explained it above.

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Apple and Jobs

Steve Jobs has stepped away and very unfortunately the internet rumors were true – he is possibly going in for surgery. Let’s just hope he will be better soon. The question is how much is Apple’s stock price Jobs vs. Apple. Not to be morbid – but Job’s possible surgery is costing Apple about $4 in the pre-market of about 5%. I wrote a more detailed story about this several Market Previews ago – which can be reviewed at http://marketpreview.blogspot.com/2009/01/1609-us-post-apple-jobs-green-back.html

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ECB cuts!

ECB seems to be following Bernanke in the race to the bottom, but they forgot that Bernanke won – he reached Zero first. Europe is a different animal – because each country still issues bonds, have different GDPs, interest rates, etc. – but they do share a common currency. There are definitely some bond plays going on – but the key Euro rate is now at 2% (still higher than the USD). The policy has seemed to shift from currency protection (inflation) to bailing out, but we are seeing it in stages with Germany recently injecting 70 billion in bailout money. I think the ECB and the European Union is a hard and more complex animal to understand – because while they do share a currency – they still are independent countries.

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Futures Pre-market

The futures are seeing some volatility – Producer Prices Fall 1.9% but Initial Jobless claims rise more than forecast – the push-pull in the news and perception is really giving the futures a good jerk around in the morning. So far the spreads are in – so Arb traders will be buying the futures to sell the stocks at the opening – expect some pressure at the opening, but it COULD turn around quickly.

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Support / Resistance

Well it didn’t look good yesterday and we could certainly see more pressure to the down side – but Obama is about to make history and a historic speech that could bring optimistic euphoria back into the market. Who knows – but expect some more volatility.

INDU 8200 / 8500 (We are at another support area – do we rally or continue to sell off?)

NDX 1100 – 1150 / 1200 (We are at a first level of support 1150, but 1100 is a more solid support area – where are we to go?)

SPX 800 (850) 900 (850 could be support or just a massive pivot point to send us to 900 or 800 - ???)

RUT 400 (450) 500 (Again 450 is support or a pivot point - ????)

I think we could see some support at these numbers – if people feel and believe the bad data is “priced in” – but it is really about perception at this point.

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Conclusion

Let’s hope that Job’s recovers soon – he is an American Icon. Also – let’s HOPE that Obama can spark some more optimism. Notice I used “hope” twice already – I really hate using Hope to make any value or judgment calls – as I tend to be more of a realist – rather than an optimist or pessimist. The market is getting seeing some knock down by more bad news – the storm looks to get worse – the question we all are asking is the new captain going to lead us through the storm?

Does hope spring eternal? I think so – but hope can’t avoid math either.