Market Preview

News Letter Update!

2009-10-28T12:37:00.001-04:00

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7/27/09 (Dollar Slips - but a New Hope?)

2009-07-27T09:18:00.001-04:00

Traders,

We continued the push higher into Friday last week, but we did see a couple of stocks miss – the two big ones were Microsoft and Amazon. When you have a breakout (to the upside or downside) and there is no resistance or support – eventually the acceleration of the move slows and begins to consolidate to find that new support or resistance level. That consolidation period is a combination of the big fish being done, some profit taking, and a pause looking for the next undervalued sector or product.
The big movers and shakers have for the most part reported earnings – and they have been better than expected. Forward guidance has been a little mix – questions about the holiday sales and growth is still a big concern.

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Dollar slipping – but a New Hope?

With all the excitement from the 2 week massive rally in equities, the dollar has all but been ignored. The dollar has been slipping against foreign currencies and also commodities (Oil and Copper have been rallying).
The general view is becoming apparent, as I had earlier stated – we will see two types of countries emerging from the recession – those with debt and those without debt (when I speak of debt – I refer to government, consumer, and corporate – I am also not implying that a nation has NO debt, but relatively little compared to the debt burden nations). The question is can those growth nations (without massive debt) carry the nations with debt? India and China vs. U.S and the West
It is important question and it will translate into the market based on sectors and international companies. Companies like Coke, Apple, CAT have positioned themselves for growth in those nations (China, India). Apple is working on making a huge push of the iPhone into China, Coke is trying to acquire the largest juice manufacture in China, CAT’s biggest sales are in China. China has a trade surplus, little debt, almost no consumer debt, and the money is going to the bottom line.
While this is great news for many companies that have made that leap into China (and India) – there are companies that either do not have that exposure or are late to the party. One friend that I spoke to made an interesting observation – we could have some strong sector driven market growth (in equities) and at the same time remain in a rather dismal domestic economic landscape – as the consumer continues to suffer.
So what is the New Hope? In the late 90s we had the dot.com boom (and bust) that created a whole new wealth in this nation (for many it was temporary), that was quickly followed by the housing market boom (and bust) and that too created a whole new temporary wealth. There is a possibility that the next bug is the appetite for China and India growth. Even the word BRIC (Brazil, Russia, India, and China) has become a familiar term and the term is becoming synonymous with debt FREE growth. Investors are already latching on as ETFs and mutilifunds are popping up. However there is one small problem with this possible economic booster, actually there are a couple. First, unlike the Dot.com and Housing boom – consumer credit availability is gone. Most investors used margin that was leveraged off of debt (that is gone). Second, the dollar continues to slip and we didn’t face the massive inflation risk we face today – thus any gains in the Dot.com and housing boom translated to REAL buying power – which may not now be the case.
I still think there is huge advantages in either direct investing or finding companies with strong balance sheets and international exposure. But hedging that dollar / inflation risk is a new and much needed addition to any equity play.

Interest rates on treasuries continue to climb as the government auctions more money and the Fed continues to take down billions – in order to avoid an auction failure. Bernanke is doing what he can to keep rates down – but they continue to move higher.

Watch the dollar – look for international exposure – and hedge buying power.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a9y.Uzbu0hVM
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Futures Pre-market

The futures are off in the pre-market, flat to lower and below fair value. Expect a slightly lower opening.

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Support / Resistance

INDU 9000 (9000 is support, but where is resistance – after the breakout the upside is going to be about a consolidation area. – but not a support area to get long, but rather flat.)

NDX 1600 (We are right up there at 1600 – is it resistance or are we seeing a consolidation area?)

SPX 950 (950 was resistance – we broke out – will we revisit 950 – it could be a support area – but a place to get flat rather than long.)

RUT 550 (The RUT finally moved higher and got above that 540 area. Watch the 540 to 550 area.)

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Conclusion

The earnings season has created surprises, the rally has moved into 3 weeks, we have seen some mixed economic data and a couple of big companies report rather concerning numbers. However – the market perception remains optimistic and has pushed it higher. We have yet to see a consolidation area – which could create either a new support or possible resistance – we are just in lofty areas at this point and while some companies have made moves on fundamentals, others have been pulled up by the overall optimism.
My concern about rallying too fast and too high – is that the economic data, lower revenue numbers, commodity prices heading higher, keep me skeptical if we can continue to see a general market rally into the 3rd quarter. Maybe it is time to take some profit off the table, hedge those long deltas, and start looking at some value plays rather than just momentum.

7/24/09 (Microsoft and Amazon MISS !)

2009-07-27T09:17:00.000-04:00

Traders,

Breakout!!! The SPX and RUT finally snapped up and was sucked up into the 2 week long rally to break above their resistance – it was a euphoric and rapid move to the upside. It seemed that we could continue on to 10,000 or even 11,000 in the Dow Jones – even Crammer (Mad Money) is said this is a rally you can believe in (that’s if you give anything he has to say any weight).
But there was mixed economic signals yesterday, jobless claims (taking a back seat to the big rally) we up 30,000 and while existing home sales were up – we had additionally been reminded that foreclosures continue to mount. No worries – the market ignored it and headed higher.
Then after the close – the futures began to flush pretty hard. Microsoft missed earnings and sales were down, the stock was hit. Then Amazon got hit on their earnings, AXP and others starting following suit. The futures began selling off and the put volatility (skew) started increasing rapidly.
Certainly the resistance has now become support, but was the aftermarket session the indication that the short-term rally is over?

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Microsoft – reported a profit decline

Microsoft the world’s leading software company reported a 29% drop in profit and a sharp delinquency in customer credit payments. If customers can’t make a payment for their software – which is showed a 29% drop - how are they making payments on their computers or other items? Apple is unique in that the majority of their iPhone sales are via a cellular carrier that makes up a significant amount of the revenue, rather than direct sales. But you must begin to wonder about that consumer spending power.
Microsoft was not optimistic with their forward guidance coming out of the first quarter – they had been conservative (like others) lowering expectations – but they didn’t even make that hurdle. When we step back and look at the earnings and compare the two important factors; year-over-year and revenue = the earnings on the whole across the board look pretty crappy. Repeated again on Bloomberg this morning (and we keep hearing it) the earnings surprises have been from cost cutting measures – NOT because they had increase revenue. Sure there are some rock stars out there – but if Microsoft is having problems collecting payments, seeing a slump in computer sales, and couldn’t even beat (let alone meet) their relative conservative guidance – I think it is a clear sign (that while the market is up) the economy has a long way to go to recover.
Microsoft down in the pre-market.

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Amazon – Brick and mortar online

While I mentioned yesterday that I had a love affair with eBay, Amazon is a different story for me. Sure I use them and like their services – but really they are just a brick and mortar store online. The warehouses, shipping, returns, sales, credit card payments, etc. They have a lot of items to manage and WAY thinner margins to work with than an eBay.
Great idea, while executed, and a brilliant use of the internet – however they are subject to the same problems that every retailer has (inventory, short-term financing to stock inventory, shipping prices, credit payments, sales, returns, etc.) Of course they don’t have to have a store front or a sales staff.
But just like Microsoft – Amazon (the world’s largest online retailer) saw a decline in 2nd quarter profits and a slump in sales (even after discounts).
This doesn’t bode well for “back to school” sales and if that doesn’t pop – I think “holiday sales” could also fall flat. So far the picture for the 3rd and 4th quarter is not looking too hot – if we measure it by consumer purchases using Amazon as a bell weather.
Amazon is down in the pre-market.

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U.K. reports the economy shrunk twice as much as expected

The U.K. our closest ally and economic mirror in many ways reported that the economy shrunk twice as much as forecast (.8%) in the second quarter. The slump is lead by the same conditions in this country, job losses, credit availability, payment delinquencies. Sure the market has rallied abroad as it has here – but the economic outlook continues to remain weak.
The pound is off about .5% to the dollar this morning, but for now the U.K. report is most likely similar to our own.

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Futures Pre-market

The futures after market fell sharply on Microsoft and Amazon’s poor earnings – fair value is considerable higher from here and the futures continue to look lower in the pre-market. Expect a gap down in the market this morning.

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Support / Resistance

Just when we saw the SPX and RUT finally breakout above those resistance levels, Microsoft had to ruin the party and pull it back down. Sure we are still above those resistance levels – even after the lower opening this morning – but as one investor on Bloomberg said this morning, “When I saw the Dow Jones hit 9000, I knew I should take some profits.”

INDU 9000! (We not only touched it we ripped through it yesterday, however futures are pointing to a opening below the 9000 level. The question is can we get back there today or was that the short-term top?)

NDX 1600! (Just like the INDU the NDX ripped to 1600 and then sold off over 20 points in the aftermarket.)

SPX 950! (We broke through and went to 975 – futures are looking lower but above 950. Watch the close.)

RUT 540! (Again we got through it – but it looks like we are opening right at 540 this morning.)

It is the weekend and we may see some additional profit taking. Watch those numbers at the close – if we close below them or above them. If we get a rally into the close – that means we could see more strength next week. If we close on some lows and below those numbers it could mean that the short-term rally has lost some steam and a visit to slightly lower levels is in the cards.

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Conclusion

No doubt, most traders I have heard from – had all expected (for those technical guys) that the head and shoulders from a couple of weeks ago, coupled with the talk that the stimulus was not working and second one was in the cards looked like we might drop. Then as we started getting back up to that 20MA (or shoulder top) – we had a gap and a run during expiration week that was between 5 to 8%. Coming into the week the short open interest was getting up to February record levels (before the sell off into March lows), and that gap up on Wednesday triggered some serious short covering which has continued to help fuel the rally. Short-covering is not good for investors (regardless of your bullish or bearish stance) because it injects some volatility and knee jerk movement – catching some out and I have seen long holders see it top out only to watch it retrace. Just like a rubber band – it can snap. Yesterday’s pop in OTM put volatility was the first indication of the panic the started to surface at the close in 15 minutes of aftermarket futures options trading. Watch out for hyper-moves (in both directions).
The 1,000 foot view continues to show a huge gulf of separation between the economic reality on the ground and the market euphoria of heading higher. It was only two weeks ago that the media was talking about the failed economic stimulus and a second was needed, foreclosures and delinquencies were up, jobless claims continue to increase, and the green shoots were turning into weeds. (Notice how the “Green shoot” talk faded as nothing was coming up daisies?)
Then going into expiration week and earnings season we have a pop (gap) fueled by short covering that continues for 2 weeks. Everyone forgot about the economy, talked about earnings surprises, and pointed to them and said “There! There is the proof and good news!” – only a few asked, but everyone lowered expectations to super sucky levels – anyone should have been able to beat those expectations. They the talking heads start reviewing – wait it’s cost cutting, banks still have huge loan losses and mark-to-mark losses (sure Goldman traded for record profits – but their code is stolen and there is some skeptical business practices being suggested). Now two bell weathers, Microsoft and Amazon go further to indicate that sales have slumped and consumer delinquency is on the rise.
At the end of the day we can’t forget about the most import part of our economy, it is WE – we the PEOPLE. Our economy WILL recover – when the housing prices hit bottom, foreclosures stop, consumers deleverage, job losses stop and new jobs are created. But until that happens anything else is just “green shoot” optimism and a failure to look at the reality.
As they say in WAR (and McNamara admitted he got it wrong – sitting behind a desk and looking at numbers) – unless you are on the ground you really don’t have a clue as to what is going on.

7/23/09 (eBay great business, Ford survives!)

2009-07-27T09:15:00.000-04:00

Traders,

A mixed day after a long consecutive rally, the INDU and SPX gave up ground – yet the NDX finished higher (due to Apple’s stellar performance). An interesting statistic I heard this morning on Bloomberg is that this has been the longest consecutive rally in the NASDAQ in 12 years (yesterday was day 11).

Another interesting point made this morning on CNBC was that while earnings have been beating estimates, they have significantly fell short on a year-over-year gain and only a very few (so far) have shown an increase in revenue. Certainly (as they pointed out) that earnings forecast for 2009 have been lowered significantly that it would be hard NOT to beat, but the revenue short-fall story is a longer term issue. Making up for a couple of quarters from cost cutting and lay-offs to keep that margin gap wide and in the black is important, but how many quarters coupled with a drop in revenue can one continue to see growth. Interesting questions.

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eBay – I just love this company….

There was really only one company out of the entire Dot.com era that I fell in love with, it was eBay. Not only as a user, but more importantly from a business model. Just think – they don’t have inventory, they don’t ship anything, they have no sales people, they are simply a facilitating service. It was brilliant – simply bringing the world’s garage sale to the internet with the additional attraction of an auction. It was simple and yet eloquent. I could not see any downside to the business model (except technology – but they have that in the bag). Latter on they acquired PayPal – talk about a synergistic purchase.

Now the recession and global slowdown is in full swing and guess what – people need money – so why not sell you stuff on eBay? I would think eBay has a two-sided recession equation – those that need money selling their stuff and those needing something but looking for a bargain.
I could never figure out why it sold off into the 20s, oh yeah – I forgot – the market is about PERCEPTION, certainly NOT reality. While few companies actually reflect reality (Apple for instance) – many are just not sexy enough. eBay’s only fault is that they are not sexy – it’s just an online garage sale, that’s too bad – because it is a company with a solid business model and I can’t think of another company on the entire planet that has the ease of margin controls (No R&D, No manufacturing, No Sales, No Shipping, No products, No commodity exposure, etc.)
Of course eBay tops estimates and rather than go through all the silly numbers – note this – it is a solid company and the stock is up in the pre-market. I think they are a recession stock for sure.

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Ford - the lone survivor

I have always been a Ford fan, not that I own one – but hey I am from Michigan and I also love the great story of the GT-40 going to Le Mans and kicking Ferrari’s butt (I have met Dan Gurney and have a picture of him and his GT-40 that he won in – great American story). Ask yourself, what kind of engine are you going to drop in that Cobra 427 (yeah – a Ford Roush Crate for sure). But beyond that – they suffered and made bad decisions and had their beef with the UAW. Unlike the rest of the U.S. automotive industry they got serious and quick – cost cutting, getting their game on, and looking to get out from under this recession.

They have a very long road ahead and are STILL losing billions of dollars, the outlook on sales doesn’t look that bright either. Now they have competition with GM (Government Motors) and Obama’s subsidy programs and incentives to buy government cars. That being said I think they will eventually rise as the others continue to suffer.

Is it a buy at this price? Ouch – I really don’t know. The stock is up in the pre-market, but future revenue for some time is looking bleak. If it was a buy it is a serious long-long-long term hold. The business model still needs lots of work and they could face problems down the road. It was nice to hear that they didn’t do as bad as people thought, but I don’t think I will be buying any stock in the near future.
Ford is up in the pre-market.

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CIT – just might not make it….

CIT has been a secondary story in the news and if you are not following the financial news you might not even know about it. It is not a household name, but in the business world it is crucial to 100s of thousands of small to mid-size companies. The company was facing bankruptcy (and still is), the government is not giving them a hand-out or bail-out (for whatever reason – not a sexy company, didn’t donate to the right party, none of their board members have connections, who knows) – certainly if it was Goldman, JPM, Citi, or B of A they would get a hand out, not that I am in favor of that – but find it interesting that if one was really concerned about small to mid-size businesses in this country that one would help out in some capacity.

Microsoft pulled out of CIT (as a credit facilitator to their client business) and other bond holders have been looking to raise $3 billion fast to keep it from collapsing, but that may not be enough. It looks like bankruptcy is in the cards – most likely Chapter 11 – the problem is what kind of fall out will that have with businesses? I have read several stories (Bloomberg, Economist, etc.) mostly interviews with CEO’s of these mid-size companies and many just might not make it – since they rely on everything from client credit facilities to short-term non-equity loans to facilitate inventory, payroll, import/export, to many special financing needs of a small business. Other’s like Wells Fargo who is picking up some of the business is not familiar or has the capabilities to facilitate all these companies loan structures. CIT seems to be a one of a kind bank that has been servicing this sector for decades.
Only 3 options.

1. Other banks pick-up the slack and facilitate these special loans (which doesn’t seem to be happening or very slowly)
2. CIT gets some kind of bailout (which doesn’t seem likely)
3. CIT files for chapter 11 or 12 – many small-to-mid size companies struggle or close shop – which seems like what is happening.

It is an interesting story to watch and could have rather large repercussions with 100s of thousands of small companies.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abUEn.AbivJo

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Futures Pre-market

The futures are up small – mostly right around fair value. Earnings looking good for the most part – but guidance and revenue is shaky at best. For now expect a flat to slightly higher opening.

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Support / Resistance

The breakout seems to be struggling a little.

INDU 8500 / 9000 (Are first pull back after the mighty run – a couple more earnings of Dow Jones’ components and then it will be over – buy the rumor and sell the news? It looks like it is giving up a little bit. That doesn’t mean we can’t go higher for the rest of the year, but a retracement is likely – don’t be surprise to get back to 8500 in the near term.)

NDX 1500 / 1575? (I thought we would of seen a little hold out at 1550, but Apple single handedly drove the index up. eBay is looking strong in the morning – which is helping futures up a little – but it is certainly no Apple or overweight at that level. Keep an eye on the 1550 level.)

SPX 950 (Sure we are still slightly above it – but two days of struggle at that level is not confirmation of the broader breakout – yet. Watch the close.)

RUT 500 / 540 (We were up a couple of points – but the steam seems to have run out for now – we need a good boost in the broader market – which doesn’t seem to be happening – yet.)

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Gold is back above 950 (As the dollar weakens and if it continues to weaken we could see a sharp pop to 1000 )

Silver is back close to 14 after it’s slight pull back.

Oil is back up above 60, in fact back up above 65.

Dollar continues to slip.

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Conclusion

I listen to Bernanke yesterday take a beat down in the questioning, he certainly doesn’t want Congress to take a look at his books or poke around too much. From a 500 billion balance sheet to over 2 trillion in months and suggestions by Bloomberg that off-balance sheets could show another 9 trillion. Additionally – special lending facilities at the Discount Window have made now failed loans to many companies (AIG, Lehman, Bear Stearns, CIT, etc.) that will never be paid back. Bernanke’s time is coming and I think in January that Mr. Summers will be filling his shoes. Summers is a very close advisor of Obama’s and has (in my mind) be stroking him for that position. That is not something that would necessarily be good for this nation – Executive Branch, Congress, Senate, and the FED all in one party hands – with all the special interest groups in line. There is more here than meets the eye – maybe it is best we really don’t know about the trillions of dollars of printed money. Bernanke said he has some tools to reel in all that printed money, I don’t think he has a tool big enough. Are we getting to a tipping point?

Earnings look good, if one only measures from estimates and doesn’t bother to look at revenue or year-over-year. Sure there are some excellent stories out there (Apple, eBay, Coke, CAT, etc.) but these are few that have a top-to-bottom story that supports the numbers. Goldman is living off trading as they (as well as other banks) continue to lose on the loan side and mark-to-mark billions more in losses. I think 3rd and 4th quarter will show that the 2nd quarter was about cost cutting to hit those black margin numbers and meet (or beat) estimates, can they continue to cut in the 3rd or 4th and will consumers spending pick up to take up the slack – those are the key questions.

7/22/09 (Apple rallies, Morgan Stanley misses!)

2009-07-27T09:14:00.000-04:00

Traders,

The market made another spurt to the upside into the close to close positive across the board, except the RUT which again closed down. The rush into the close was helped by speculation that Apple’s earnings would beat and they did sending the stock higher in the aftermarket. However, we continue to see some over weights driving the market higher and good gapping moves – which until yesterday was pulling up the broader market. The SPX closed just above that resistance of 950, but is looking lower in the pre-market (futures lower) – but the RUT continues to lose traction. This morning Morgan Stanley made announcement to “Sell into the rally!” - stating that while the economy may be recovering we are not out of the woods yet. An Economist article also looked into the Goldman earnings vs. the rest of the banking sector and they concluded that the Goldman record breaking earnings are driven by trading, which even in the boom years wasn’t that big of a profit center, was it a one trick pony. The bigger concern was that without the trading revenue the big stain on Goldman’s leger is the $1.4 billion mark-to-market losses, which doesn’t bode well for other banks.
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14034883

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Apple – the love affair

Apple as measured strictly as a retailer is awesome – the amount of product they move vs. retail square footage is incredible. Looking at them from a technology company, they are not creating anything new – but bringing existing technology together to create innovative technology. Their design, marketing, and innovation is legendary.

Even in a struggling company Apple blew out (as expected) earnings. Sure they are conservative in their forecast – which gives them room to surprise. However, they too are having to adjust to economic conditions – they have cut prices, which has helped moved inventory (iPhone 3g was cut to $99 as the new iPhone 3gs came out – same with the Mac) – this helped accelerate sales and even with a tighter margin, if they can move more products to make up for the cost cutting that means more revenue. They sold 2.6 million Macs (well above the 2.4 million expected).
So things are looking good – but Apple did indicate a struggle domestically as price cutting can only move so many products. It is the domestic side of the business that doesn’t reflect a forecast of the continued expected growth the Apple is use to. But there is a SERIOUS bright spot, Apple has been working to sell the iPhone in China - there are some issues that need to be worked through. However, if Apple can have the kind of success in China we could expect to see Apple continue higher. The China Apple invasion looks to happen in 2010 – which might not help the 3rd and 4th quarter.

Several firms have upgraded Apple to “buy” and raised their price targets – however we may see a slight pull back in the 3rd and 4th quarter if domestic sales continue to slog, until the China pipeline comes on line. Expect a little volatility in here, the news is out, Apple is up in the pre-market. Apple could retrace down to the 145 level before heading higher, while stock is up in the pre-market we could see some profit taking.

Over-all, I am a believer in Apple and if they invade China that could be their “Ace in the hole” as domestic revenue continues to struggle. China will be a formula of margins – sure they can move lots of inventory, but it is finding the sweet spot in price to move the product to generate the best margins. I am sure the bean counters are figuring that out now. For now, Apple’s current formula is cut prices enough to ramp sales to keep margins moving higher – but with anything else that is a fine balancing act.

Bullish Apple long-term, but expect near-term volatility. A lot is riding on expanding into China.

Apple up $5 in the pre-market.

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Morgan Stanley Reports a loss (worse than expected)

While Goldman was a rock star, JP Morgan did ok, the rest of the banking sector is really not looking that great. It really comes down to the story we have been hearing over the last year – the debt ratio and mark-to-mark losses. Even Goldman had a whopper of $1.4 billion (but traded massively to make up for that) – unfortunately other banks are not heavy into trading or didn’t do nearly as well as Goldman.

Interesting that all the firms are selling their own stocks after the rally to raise money, Morgan sold enough shares to raise $6.9 billion (that helped to pay back the government TARP loan and dividends) as well as taking control of Citigroups’s Smith Barney brokerage unit.

Morgan also came out with a call to “sell into the rally” – maybe after reviewing their own balance sheet and seeing other banks balance sheets they realize the banking sector is not out of the woods yet.

Wells also came out with earnings – better than expected but with debt exposure and write-offs.

Both stocks are down in the pre-market.

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Futures Pre-market

After seeing one of the largest weekly rallies (over 7 straight days) and after the most anticipated earnings (Apple) the market seems to be giving up a little in the pre-market. Morgan Stanley recommending to “sell into the rally as cyclical growth risks have diminished but not disappeared” is sending the futures lower. Europe was also lower. The spread is in and Apple is doing a good job keeping the narrower based indices from falling too much. Expect a lower opening.

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Support / Resistance

Break-out are retracement? While the INDU and NDX seem to have broken-out, the SPX and RUT still struggle.

INDU 8500 / 9000 (We are just shy of 9000 is that the turning point? Futures are down about 50 points this morning – but that could change.)

NDX 1500 / 1550 (We closed just above the 1550 mark and futures are pointing to a lower opening. Apple is up 5 points which is about 10 points in the NDX, so take Apple out of the NDX and the futures would be down even further. Apple could keep the index from falling too much and even bring it back to even. But can one company hold up the entire index?)

SPX 950 (We closed just above it as we rallied into the close, but futures a lower opening. 950 seems to be a resistance level, can we head higher or is that the near-term high?)

RUT 500 / 540 (The RUT closed lower on the day and while it has made a decent run from the lows – it is not seeing the breakout that we are seeing with the narrow based indices. The broader market is just not heading higher like Apple!)

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Conclusion

We have made a rapid move up (between 7 to 10% depending on the index) in just over a week – a couple of indices have appeared to break out (INDU and NDX), but the broader indices (while getting back to resistance levels) are struggling. Is this a short-term top, Morgan Stanley seems to think so. The earnings reports are mixed, CAT, Apple, Coke, and a few others have a great story to tell – while banks and retailers continue to struggle. The stronger companies are not relying on domestic sales alone – but are looking to make significant inroads into the emerging markets. Apple also came out with another round of great earnings (no big surprise I guess) – but has rallied into earnings rather strongly. It looks like we are getting into a near-term top, unless the broader market can move higher and break out – supporting the overweight’s.

The economic outlook – as far as jobs, debt, and financing has not turned around. Job losses continue, banks continue to write down losses, and credit is not available. CIT story is typical of the economic wows and is looking like the short-term loan may not be enough to save it.

3rd and 4th quarter – as far as domestic retailers is probably not going to be great. Granted that expectations are low. Yahoo reported earnings – but their story was like others in the Advertising sector- the first cost cutting is marketing dollars and Yahoo, Google, and others are suffering. That clearly tells me that companies are not fat with cash and are focusing on beating estimates via cost cutting methods as the revenues being reported continue to come in lower (for the most part). How much more can companies cut costs to meet projections?

Be skeptical about the 3rd and 4th quarter, look for companies with overseas sales (international), hedge those long deltas when stocks gap up, and keep a watchful eye on those companies that have rallied significantly without the earnings to back them up.

It will probably be more sector driven going into the 3rd quarter – rather than broad market rallies.

7/21/09 (CAT the Dow Jones rock star!)

2009-07-27T09:12:00.001-04:00

Traders,

Pushing higher on good news, optimism, and short covering. It is certainly a mixed rally and that means there are some good bullish plays, some that need to be hedged, and some to avoid. What really makes this rally a mixed message is that oil and commodities are rallying strong and foreign currencies are climbing strongly against the dollar (as it becomes weaker). We are also seeing interest rates move higher as money flows out of bonds sending them lower. So where is the smart play? In equities it is a case-by-case sector or issue – that’s for sure. Reading the fine print hasn’t been more important. Just because you beat estimates is not always a sign of positive growth, one must remember that companies in 2009 had significantly lowered their guidance to very conservative levels, so beating an estimate was no big hurdle. On the other hand several companies have VERY good story to tell in this economic down turn. One thing is for sure – there is a huge difference between the market and economic conditions – which continues to widen.

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CAT – the Dow Jones rock star.

I had mentioned in the past on several occasions that CAT has been a recession survivor. It has a awesome international presence, which made up for a lack of domestic sales. It is interesting to note that they had called the recession months before it happened and have been fairly accurate with their corporate forecasts. If there was one Dow component to be long CAT would be it. They are a big player in China’s massive infrastructure rebuild as well as many emerging markets – that will most certainly pick up the slack for any domestic short falls.

Well – their earnings were a big surprise and reported profits that exceeded estimates. The CEO (Jim Owens) is a straight shooter and made some interesting observations. His company is seeing strong demands abroad and especially in China where the stimulus is going right to the bottom line (building 1,000s of miles of roads, building, sea ports, damns, etc.), however on the domestic front it has slowed and it seems to remain slow. He notices that while world credit markets have eased, they are seeing problems on the domestic front as payment delinquencies have increased. He expects that 3rd and 4th quarter to be mixed and thus while they have raised the full-year forecast to $1.15 to $2.25 (a VERY wide estimate) – it accounts for the HUGE uncertainty in the 3rd and 4th quarter.

He has taken command of his company as he had pushed the U.S. government for favorable tax and trade policies that help boost sales and he also cut more than 24,000 jobs. Realizing that international sales is the strong option he needed to make sure that they could see strong profits without government entanglements.

The company has a great story and domestically it will most likely stay in this country. Building their equipment is a lot more demanding than the typical auto assembly lines. Most equipment is hand built and most employees are truly engineers or mechanics. Relocating a company like that is not even in the cards – so the company will continue to push the government for favorable tax, trade, and domestic issues.

All in all – CAT is a great American story and a recession survivalist. The wide forecast (1.15 to 2.25) for the year (remember that is only the next two quarters) means that even the CEO (and company) is still very unsure about the domestic front and IF we will see a bottom to this domestic recession. However, abroad – sales and business is going very well. Domestic revenue was down and doesn’t look to improve. The one other variable is the possibility of a dividend cut, which will most likely be determined by the earnings in the 3rd quarter and if the 2.25 is still a realistic view of the full-year returns.

As I mentioned before – it is time to start putting companies into two categories (strong international and domestic only). CAT falls in the Strong International – and should see profits as the emerging markets recover, while the West continues to suffer.

CAT up strong in the pre-market up $4 - sending the INDU futures up hard.

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COKE – another great story

COKE is it! Coke has been kicking Pepsi’s ass in the international market, mainly in China. Coke has realized that not everyone loves their core fizzy bubbly drink and has quickly moved into none carbonated products including water. Earlier Coke made a huge move in China to acquire their largest juice producer – but China blocked that (it is still up in the air and could happen). However, Coke is expanding their own line there and has made significant ground, leaving Pepsi to figure it out.

Coke had a fairly good story, but revenue was down and lower than expected – even though they did beat estimates. The question is Coke still a value play at these levels? I think it might be a little difficult to see a big rally from these levels – it has made a great run and unlike CAT didn’t see any big retracements coming out of the hole in March.
Coke is slightly down in the pre-market, still a great story with growth internationally.

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Other earnings…

Merck’s earnings decline, but the good news is that revenue increased. That is an important driver that most companies are falling flat on. While earnings did decline the profits fell less than expected and as they set to buy rival Schering-Plough the pipeline is probably going to be good going forward. There is domestic concern with drug makers play a key role in healthcare reform and that could inject some volatility in the futures. Merck is up in the pre-market

Regional banks – if you are watching these earnings as they come out daily it is sickening. They continue to hemorrhage money, continue to see losses, continue to have increasing delinquencies, and FDIC continues to close more regional’s. The regional banking sector looks ugly.

Airlines – they did look to do well as fuel prices fell, but as the prices begin to climb again and people have less to spend for travel things don’t look so bright. Could web based communications like “Go-to-Meeting” really be an airline competitor? Maybe if companies continue to trim costs. As Warren Buffet learned the hard way – airlines are a sector to stay away from – margins are rail thin and that is if it can get into the black.

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Futures Pre-market

The INDU futures are getting a surge from CAT and up about 50, the rest are flat to slightly up and closer to fair value. No overweight drivers in the other issues. Expect a stronger to mix opening.

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Support / Resistance

Break-out is here, but mixed for sure. Keep an eye for quick sector retracements and over weights being a driver.

INDU 8750 (We are getting a good rally in the INDU and CAT is charging it ahead in the pre-market. Expect it to be higher today. – 8750 is support.)

NDX 1500 / 1550 (A few stocks have been the huge driver in this index – AAPL being one of them. Some are getting a little long in the tooth and if we strip out the over-weights in this index it is in the 1510-1515 range. Watch those over-weights they continue to drive it, but if any of them turn around they could pull this back down to or through the 1500 range fast.)

SPX 950 (Unlike the INDU or NDX – both are narrower based and have some key drivers, the SPX has just gotten to its resistance and has not broken through yet. That leaves me skeptical about the INDU and NDX as a couple of key components drive them up. Unless SPX can get the significant break-through, I wonder how strong the NDX and INDU really are. Keep an eye on the SPX strength – let it be the confirmer.)

RUT 540 (Like the SPX the RUT has not confirmed a break-out yet. Unless we can see the broader indices make the same break-out that the NDX and INDU have – this might just be a breakout of a few over-weight rock stars that have left the broader market behind and we could get a contraction in the spread.)

The spread contraction is coming, either the broader market rallies (RUT and SPX) to meet the breakout of the narrower based indices, or the narrower based indices (INDU and NDX) come off a little to meet the broader market indices. Right now the story seems to be a few rock stars.

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Conclusion

Earnings surprise, sure – there is some good stories in there. CAT being the rock star of the day, but they remain very skeptical of the domestic economic situation and are concerned about their increase in delinquencies – hence the very wide range of guidance for the year. Regional banks look bad and don’t look to improve any time soon. Drug makers have some good news lately, some mergers, and some better revenue, but are facing some volatility as to the healthcare plan and what role will they play.

The reoccurring story is lower revenue and profits really made by increasing margins, which has meant more layoffs and cost cutting. Fat companies are thinning down to keep profits inline, but revenue shrinks and you can only cut so much. The 3rd and 4th quarter doesn’t seem to be looking great on the domestic front if any companies are relying on domestic sales. That is why it is time to make sure you have some international exposure companies in your portfolio.

Expectations for “Back to School” sales are looking negative and holiday sales following close behind with the job losses this country has suffered is not looking better. It will be companies like CAT and COKE that we will rely on to keep the market up.

Meanwhile, gold, silver, oil, and other commodities rally and the dollar falls. Interest rates are going up as bond’s fall and that also spells more difficulty for mortgages and lenders as rates go up and also means that Bernanke is going to have to buy MORE treasuries if we see too much of a pop in rates it could mean the Bernanke has lost control and we could see a bigger exodus of foreign treasury holders. He should be addressing those questions today. Listen up.

7/20/09 (CIT a stay in execution, Bernanke shadow!)

2009-07-27T09:10:00.000-04:00

Traders,

Last week saw a huge move to the upside in the indices, interesting enough what help precipitate the move was a huge amount of force short-covering. Short interest had reached levels as high as they were in February before the market sold off to their mid-March lows according to Bloomberg. It was the Wednesday gap up that fueled the covering right into Friday. While the two broader indices (RUT and SPX) gave up steam on Friday and closed lower, the INDU and NDX had a few issues that pushed them higher.
Expiration was not the typical pin-to-strike expectation as the weekly move blew through several strikes – making Friday more volatile. Talking with one market maker – he said he was glad to close out those short OTM call options earlier in the week.

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CIT a stay in execution…

CIT was on the fast track to bankruptcy – even the Federal Government, FDIC, and other regulators were giving them a pass. The problem (which is still prevalent) is the 100s of thousands of companies that rely on CIT. There is news this morning on Bloomberg that bond holders may come to the rescue as early as this morning with $3 billion short-term financing. If that doesn’t come to pass – by Friday they will be bankrupt.
There was some concern this morning on Bloomberg and CNBC that even with the $3 billion it might not eliminate the bankruptcy, but just push it out a few months (I guess on hope that the economy will turn around and these companies can pay back the debt). However, sometimes it is NOT the rate of return that bondholders have their eye on. CIT is the “go to” bank and financial institution for 100s of thousands of businesses (including Eddie Bauer, Dunkin Donutes, etc.) these companies need and rely on the CIT relationship. Bondholders might be looking at this as a back-door opportunity for equity or pre-purchase in case of a bankruptcy. CIT has a viable business and this might be a time to get it on the cheap. There is a wildcard, the government – who could step in last minute and screw the bondholders (like it did on GM and Chrysler). Sure they don’t show interest in it today – but with enough companies complaining to their Congressman about future job losses, they could be the wild card.
For now CIT is on life support – or so it seems.

Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=a6wi06W2VqUs

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Bernanke plays second fiddle

With all eyes on earnings and the recent sharp rally last week – not a peep about Bernanke’s semiannual economic report to Congress tomorrow. If we take our eyes off the earnings train for just a second – what we really need to hear from Bernanke is several items.

1. Does he have an “EFFECTIVE” plan to buy in all the resent cash he created (trillions) – to avoid inflation?

2. Congress has been talking about a second stimulus, but Bernanke has been warning Congress about spending and they need to curtail it – will he BEND and pony up some more printed money if Congress decides to push forth another stimulus?

3. Citi and Bank of America had mentioned SERIOUS concerns about 2010 and possibly into 2011 and more loan liabilities (delinquency) CEO Ken Lewis expects losses to mount and the banks have been hording capital to pay down future losses. 5 more banks have been shut down by the FDIC taking the total this year over 50. Other regional banks continue to suffer draw downs. True Goldman and JPM have large trading desks that can soak up the loan losses, but the majority of banks don’t have that option. Questions: What is the current Discount Window liability? Is it increasing? Will the Fed make additional credit available to these banks? Does Bernanke believe that Citi, B of A, and others will require more loans?

4. CIT is not getting any help from the government, if they go into bankruptcy, will the FED step in and support their services to aid the 100s of thousands of small-mid size companies that rely on CIT? Does he believe that CIT’s failure could cause a domino effect of companies that are unable to get credit?

5. Unemployment? It looks like we will hit 10%, if we include “disgruntle workers” and part-time we are closer to 18% http://www.shadowstats.com/alternate_data - many say that jobs are a lagging indicator – but in some respects it is a leading indicator.

6. Recession and Recovery, certainly we are getting closer to the bottom in the recession – but the important question is the recovery and when he believes he will see signs of a recovery and not just a recession bottom.

Bernanke is also NOT part of the clique and rumors abound that Summers has his eye on Bernanke’s job. Bernanke has been outspoken (as much as he can be) about the Congressional spending and also the mounting debt the Fed is taking on by purchasing Treasuries, but at the same time he has to do it with a smile, sell some confidence, and give people faith. Since it is faith that backs the dollar. I have a sneaking suspicion that Bernanke will not last out Obama’s term.

I know you maybe be more interested in earnings – but take a listen to Bernanke’s report and if any reasonable answers are giving, that assumes that Congress can ask reasonable questions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.3INX2TI_Ec

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Futures Pre-open

We are getting a rise in futures in the pre-market, following Friday’s gain. Europe and Asia were also up (Tokyo was closed due to Holiday). Spread is in and expect a slightly higher opening.

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Support / Resistance

INDU 8750 (We that is the resistance number, we closed just shy of that on Friday and futures look to be poking their head above it at the opening. Watch the close to see if we close strong and above it.)

NDX 1500??? (We are above it and it sure looks like a break-out (even if it was just a 3-day move up) – watch the close today. It look like we were getting a little bit of a break-out in June as we flirted with the 1500-1510 area only to retrace. There are a few volatile issues – APPLE was the big driver – but that is also getting a little long in the tooth.)

SPX 950 (We closed lower on Friday (slightly) but it did lose some ground. Futures are pointing to a higher opening – but we are still 10 points shy of 950. Watch the close – we could visit it intraday – the question is do we close above it?)

RUT 535 (RUT closed down over .5% after the big rally – the broader base market – while higher is showing that it is sectors and issues that are giving this rally the break-out legs and not the market as a whole. The futures are pointing higher – but the RUT needs to show some strength to confirm the narrower based indices.)

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Conclusion

I heard over the weekend on Bloomberg an analyst calling this the last minute rally before the “going back to school blues”. He said that retail numbers and expected revenue could be down more than 50% and with current estimates on summer holiday vacation revenue looking significantly lower – he expects a sell-off to hit late 3rd quarter to 4th quarter. The revisit of the consumer concern (regardless of the market) will come back to be measured in the GDP (2/3rds based on consumers) and that could be a wake-up call.
The bright spot? China and emerging markets – Hilary Clinton is visiting India which is expanding and could generate big revenues for U.S. firms. China is also seeing their stimulus hit the bottom line. Maybe it will be emerging markets, China, Brazil, and others that pull us up this time. The problem is interesting – while U.S. firms may generate huge profits from expanding sales overseas, these U.S. firms also do most of their manufacturing, production, and services over-seas. How does that translate to jobs in this country? That is a tricky question. We could see a huge divide between international firms and domestic firms. We could start seeing portfolios and funds divided into this category (if there are not already) – but it is something to look at.

7/17/09 (Bank of America and Citi earnings!?)

2009-07-27T09:09:00.000-04:00

Traders,

Yesterday seemed flat and then late in the day Nouriel Roubini restated that he believed that the recession would end this year, ever since the economist had correctly called the “Credit Crisis” – he has become one of the most influential economists. He had mentioned a few months back that he had become more careful with his words because he didn’t want to influence the market, too late. We are the start of earnings season and some of the banks have top estimates (of course that was JPM and Goldman) – however Bank of America came out this morning and while it looks slightly better – they still have some problems. Google’s earnings after the close showed a drop in ad revenue. While Roubini is probably right that we will be putting in the bottom this year, he has also stated the longer term problem is the recovery.
The bombing in Jakarta has not caused too much jitters in the financial markets – but it a cause of concern as that region has been relatively stable for the last few years. Asian markets didn’t see too much volatility. My thoughts go out to the victims.
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Bank of America and Citigroup Earnings

While Goldman and JPM looked great – mainly from the trading desk (their loan side still has problems), Citigroup and Bank of America do not have the horsepower on the trading desk to make up a big enough difference. Bank of America is setting aside more money for losses and the CEO (Ken Lewis) predicted a weak economy will persist into 2010. Net income fell 5.5%. Bank of America is also in a scuffle with regulators over the Merrill Lynch acquisition (finger pointing game continues). Additionally their acquisition of Countrywide has put serious stress on the balance sheet.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avCMWypEbXUM

Citigroup has similar problems, but instead of acquiring a brokerage firm (like Bank of America) they sold their control of Smith Barney helping bringing in much needed cash. Additionally their consumer and commercial loan losses continue to mount. Without the massive trading desk that can make-up losses on the loan side – it’s going to be tight. Profit generated from unloading their control of Smith Barney is a onetime pop, but the company still needs to manage the debt on the balance sheet and reduce cost.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTod7XEgk.QM

Bank of America (BAC) is down slightly in the pre-market.
Citigroup ( C ) is flat to slightly up.

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Housing Starts

There is still mixed messages in the housing market and it is hard to determine if we have bottomed or not. Foreclosures continue to increase, mortgage rates are increasing putting pressure on lending, and delinquencies (more than 90 days late) are increasing in the residential and commercial markets. However, the Housing Starts reported this morning reports a positive sign as it increased 3.6% and brought the annual rate up to 582,00 (the highest level since last November). Certainly it is still low compared to what it had been over the last several years, but it is a sign that some construction is breaking ground. But in reality is it really the EXISTING home sales that really drive the market and that remains negative.

Still the data is mixed and it will probably remain too hard to tell if the housing market has bottom or not.

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Futures Pre-market

The futures are down in the pre-market. But are seeing some volatility. The spread is small – with fair value a few points above. Expect a weak opening.

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Support / Resistance

Possible Break-out?

INDU 8500 / 8750 (It has been a fast rally week from the support to resistance in a short time – over 7%. 8750 is a key area to watch, a break out could mean the first visit to 9000 this year.)

NDX 1450 / 1500 (The 1500 area was resistance and we saw a jump going into the close that looks like a break out. If we can remain above the 1500 line a move towards 1600 is in the cards. If we close at 1500 or below, the late session break-out could of just been a head fake.)

SPX 880 / 950 (Unlike the NDX the SPX is still short of that 950 area – if the NDX stays above 1500 and SPX breaks 950 we could be looking at a breakout.)

RUT 500 / 535 (Like the SPX the RUT has still short of the breakout area. Keep an eye to see if we can get one.)

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Gold 900 / 950 (It seems like gold is just holding between 900 and 950 – it would seem like it is waiting to see how the dollar pans out.)

Silver 12 / 14 (Similar - but more volatile than gold – Silver seems to be in the range as well.)

OIL 60 + (Oil saw a big move down, but is now rallying back.)

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Conclusion

We have had a solid rally back to resistance, the earnings seem to be great on the surface (beating estimates) – but the story seems to be the same, consumer and commercial loan losses continue to mount. Goldman and JPM were saved from their trade desks, but BofA, GE, and C are suffering from debt. The CIT story could be a large blow for small to medium size businesses and clearly shows that there is still serious problems with credit.
The housing market also seems to be finding some solid ground, but the foreclosure and delinquency rate still increases. It may see a bottom this year.

Nourirl Roubini (Dr. Doom) has not wavered from his view that it would be the end of this year that would possibly be the bottom of the recession, but he does also continue to convey concern about the recovery going forward.

At the end of the day it is the consumer the drives the wheel of the economy and that is what we really need to see change – jobs, income, credit availability before we can see the revenue increase on the business side. We are still in the mode of watching companies beat estimates on lower revenues because they have cut costs – but that can only last so long. Revenues have to eventually pick up – when we see that happen – the recovery will be in play.

7/16/09 (JPM Profits rise, CIT bankrupt?)

2009-07-27T09:08:00.000-04:00

Traders,

Sorry about missing yesterday – (out of the office in the morning) – go figure, I am out of the office and the market goes into hyper rally. INTC sure boosted the optimism and while revenue’s are looking flat for the most part the margins were improved. The question going forward is that you can improve margins only so much before revenue needs to catch up. There was some serious short-covering going on as well as short-interest had built up to the largest amount since February, getting caught out help great the rally. We did reach some of those resistance levels as well, which could mean some resistance after the run. Lastly implied volatility (as per measured by the VIX) didn’t fall, but actually went up (25.89) – indicating there is still downside concern.

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JPM – profits rise

JPM follows Goldman on larger than expected profits, while not at the level of Goldman (which broke records), it was higher than expected. Like Goldman, JPM is on the fast track repaying the TARP – because they don’t want to be handcuffed to government rules on hiring and compensation (as well as other TARP coupled rules).
However, not all that is shiny is gold, the credit card division lost money ($675 million) and expected to continue to lose money. Additionally the mortgage side of the business (including commercial) is also showing an increase in delinquency. Like Goldman the money was made on the trading, investment, under-writing side of the business – while the loan side continues to suffer.
CEO Dimon had indicated that they believe the consumer will continue to have difficulties and the consumer credit risk side of the business will continue to suffer.

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CIT – bankruptcy as early as Friday?

The CIT story is getting worse and it doesn’t look like the government will be stepping in to save (or help) them – thus a bankruptcy is in the cards as soon as this Friday. What does that mean? On CNBC, CEO White, of Summer Classics a mid-size business, who is close to the CIT problem, indicates that it could create a systemic risk across the small to mid-size business arena. The problem is that all these businesses rely on CIT to handle all kinds of credit lines and with over 300,000 companies tied into CIT there is no way they can quickly move over to a new lending institution. There additionally are questions about the move – do the other lending institutions have the systems in place for the various financial credit facilities (export/import, restocking, pay-roll, etc.), additionally if they can handle that kind of lending – the question is will they. We must remember that companies that use CIT (rely on them) receive credit after transactions – which is the revenue used to run the business.
This could be a larger problem that could create a domino effect. While I don’t think Mr. White articulated the problem well – is point is clear: http://www.cnbc.com/id/15840232?video=1184609429&play=1

http://www.bloomberg.com/apps/news?pid=20601087&sid=ai0YdvcSDT3o

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Futures Pre-market

We are seeing slippage after the huge run yesterday, which isn’t to surprising – we could have a slight retracement. Expect a lower opening.

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Support / Resistance

This week got us back up to those resistance levels and just like support that we had recently been at – the question is do we break out or retreat?

INDU 8500 / 8750 (We blew through 8500 yesterday, but could see a revisit to 8500. Futures are looking a little weak at this point – I think it will really be earning’s perception.)

NDX 1450 / 1500 (We gapped up and ran back to 1500 – an area previously visited in early June. We are seeing the futures pull off in the morning. 1500 is resistance test area.)

SPX 900 / 950 (The SPX didn’t get back up to the 950 area and is showing a little weakness in the futures.)

RUT 500 / 535 (Seems like we are mid-range below the previous high and 500 support, similar to the SPX)

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Money Flow

Seem like money poured out of treasuries and into everything else.

Commodities, Gold, Silver, etc – all rallied.
Currencies rallied against the dollar.
Bond yields went up as investors excited.

Yesterday seemed more about money flow than sector driven.

I would reason the following:
Equities rallied, which was helped fueled by shorts – sending it up fast and hard.
Commodities rallied, which was fueled by a drop in the dollar against foreign currencies.
Bond prices fell (yields went up) as investors exited for either equity euphoria or fundamental commodity bets on weaker dollar.

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Conclusion

The investment banks are showing strong gains in this economy, interestingly enough it is their trading desks that are the profit centers, while the credit and loan sectors continue to lose money. It does seem at odds, but as long as their trading desks can continue to generate those kind of profits to off-set the consumer and commercial loan losses then they stand to do well. The problem is that we can’t measure economic recovery by the earnings results of the likes of Goldman and JPM. Clearly – the consumer side continues to lose them money (credit cards losses, commercial/residential mortgage delinquencies on the rise, commercial loan losses) – that side of the business is the REAL economy. The current trend could be investment banks make billions on trading and transaction business (more than making up the losses), but the economy continues to falter.
The CIT story seems to be a problem, the government doesn’t seem to care to help them (which I can’t figure out – since they helped all these other failed banks and companies, including GMAC, GM, etc.) Not that I am for bailing out everyone and anyone – but CIT is the leading lender to 100s of thousands of small to mid-size companies, which a failure by them could send a shockwave across the small to mid-size business community. I guess the small and mid-size businesses didn’t donate to the Democrat party, like the UAW or Goldman Sachs.

7/14/09 (Goldman Trades for Profit, CIT concerns!)

2009-07-27T09:07:00.000-04:00

Traders,

A rocket move off the support level, lead by the upgrade on Goldman going into earnings this morning. The CIT news (as serious as it is) was overshadowed by new found optimism. Goldman stock took off after Meredith Whitney gave it a “Buy” rating yesterday, it had been in a tight 135 to 150 range and ran from 140 to 150 yesterday after her recommendation.
Earnings is in full swing and while revenues maybe down sharply, cost cutting may have helped margins. That will be the key, but the guidance (if the companies even give it now days) will probably be lower revenue warnings. Between JNJ and Goldman earnings we should see some volatility today.

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JNJ profits decline

Johnson & Johnson saw profits decline 3.6%, in part from increase in generic drug competition. JNJ also took advantage of the weak economic conditions facing competitors and bought Cougar Biotechnology as well as taking a large stake in Élan Corp – which expands their future pipeline. However, that means in the short-term capital outlay (whether it is cash or stock). The investment/acquisition decisions is to help reduce the decline in their existing pipeline (primarily Topamx and Risperdal) which are facing strong generic competition.
Net income dropped to 3.21 billion (down from 3.33 billion). While a decline in profits, they still beat estimates by 3 cents - $1.15 per share (vs. expected 1.12 per share). Sale have declined from 15.2 billion from 16.5 billion – but management efforts help keep margins wider than expected, helping them beat estimates.
Stock is up .75 cents in the pre-market, but volume is light and that could change.

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Goldman beats !

Whitney made a “buy” recommendation yesterday, sending the stock up almost 10 points. But the stock is near its recent high range at 150, which could be a resistance point. Earnings come out in the pre-market and expectations were for another massive profit, ironically after they have been the recipients of many benefits (including the TARP, record borrowing from the Discount Window, backdoor payments via AIG bailout, reporting advantage when they changed their standings to become a bank, and that doesn’t include the $5 billion dollar investment from Buffet), and while I have a clearing relationship with Goldman it does leave a little bit of a bad taste in your mouth that the company is reporting record profits in this economy (with huge government borrowing).
Goldman has recently been in an awkward situation as their “trading program” had been stolen and there was statements made that those in possession of such a program “could” manipulate the market. I asked myself isn’t that a self admital that your software CAN “manipulate “ the market? Goldman has more people working in their programming and technology department, than any other department in their firm (according to Bloomberg this morning) – additionally a look at the revenue shows that the trading desk is the largest profit center. There has also been some skeptical stories (emails) that have circled that concludes that their “trading program” may have front-running algorithms, but that is not proven (but wouldn’t be surprising – based on the kind of profits they are reporting).
Goldman beat estimates with record earnings over $4 per share, but the stock is seeing some pressure on some rather large volume in the pre-market and is currently down about $1 dollar (but with volatility) this of course could change in a second. Of course 150 was a resistance level and reports have indicated an increase in insider selling. However, the pre-market is not necessarily indicative of how the market will react after the opening when the retail world joins the fray. However it is seeing negative pressure.
Expect some pressure around the 150 area, but if it can break through with any strength we could see it rip to the upside. 150 will be the pivot point.

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CIT concern has reached Congress

Talk is starting about a bailout of CIT as 100s of thousands of companies rely on their financial arm. Most of their debt is rated junk, FDIC will not back their debt, and they haven’t been made the “team” like other banks. Right now they are on the edge and something quickly needs to be decided – or we could see some negative pressure on small to mid-size businesses throughout the country. Keep an eye on this as it could have economic fallout if something is not done.

More news at Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ak7fEvfw4y7E

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Futures Pre-market

Futures had seen a good pop going into the JNJ and Goldman earnings, but are now coming off their highs – still up on the day. If they can hold here expect a slightly higher market, but they seem to be weakening.

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Support / Resistance

INDU 8000 (8250) 8500 (Sure it is a wide range, but it is also earnings season. I wouldn’t get long or short at the 8250 range as it could be a serious pivot point, we busted through it yesterday and could stay above it, but visiting that level intra-day is a real possibility.)

NDX 1400 (1450) 1500 (We are right in the middle – nice pop off the lows – but can we continue up to 1500?)

SPX 900! (As I mentioned 900 was key – we got there, just there – but we need to stay above it now. Visiting 900 doesn’t mean a turn around, closing above it on strength will help confirm. I still have a feeling that 880 will be revisited.)

RUT 500 (We didn’t get to 500, but made a good run, watch the close.)

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Conclusion

Inflation concerns continue to mount and while eyes are on PPI and CPI as more government data is released, the other factor is watching those treasury auctions and interest rates. It seemed that we were seeing some strength return to bonds until yesterday’s equity move as money rushed out of bonds and back into equities. The 10 year was close to 3.25, but then quickly popped and is looking above 3.40 this morning (for now). Second stimulus talk is making the rounds in Congress, CIT is starting to get Congressional and media coverage (a serious concern), and we are still not seeing recovery traction yet.
Jimmy Rogers the other day on Bloomberg was becoming more concern with the dollar as rates go up and Bernanke can’t seem to stop it, the Fed is buying more and more treasuries, there is over another $1 trillion in treasuries to be sold. He stated unless something can be done quickly it is quite possible to see a serious currency crisis by year end. Interestingly and ironic that we see states fail, California is tapped out and giving out IOUs and can’t get a loan (or credit) to save themselves, other states are following suit. While we seem to be concerned about the states, no one seems to be concerned about the Federal government. The only difference between the states and Federal government, is that the Fed can PRINT money and the states can’t. The question is can we inflate (print) our way out of this without the loss in faith in our currency. We are riding on faith at this point. Let’s hope that Obama, Geithner, and Bernanke can continue to sell it.

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

2009-07-27T09:06:00.000-04:00

Traders,

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

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Goldman – a buy recommendation?

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

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CIT facing a stumbling block

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

http://www.bloomberg.com/apps/news?pid=20601087&sid=antG4OSxVsHQ

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Futures Pre-market

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

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Support / Resistance

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

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

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

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

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

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Conclusion

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

7/10/09 (Government Motors, Recession Fades?)

2009-07-27T09:05:00.000-04:00

Traders,

Weak legs yesterday, after Alcoa and other (seemingly) good news and a good opening rally in the market it fell flat to close unchanged on the day. It seems that we are sitting in this bottom support range and that this 3 month rally has lost some of its seam. One would think that GM coming out of bankruptcy today would create a little optimism that maybe some of the bottom has been realized (especially in the auto sector). All that maybe true and a bottom has been put in, but it is now all talk about the recovery and how fast will it happen.

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GM – now Government Motors

GM comes out of bankruptcy today – in probably one of the fastest (and amazing) bankruptcies in the history of the world. Of course the government had cut deals with all the creditors, UAW, and paid out billions into GM before bankruptcy. Then it was ram-rodded through the court system – as the government wanted it FAST and without issue. I am personally surprised how fast it happened, but what are we left with?
The U.S. government (tax payer) – now owns 60% (over $50 billion in debt) in GM. There is talk about an IPO next year so the government (or tax payer) can get their money back, but I am VERY skeptical that an IPO of GM next year would even yield 25% of the $50 billion. The sad reality is that our investment in GM is going to be a net loss to the tax payer. Sure the government could hold onto the company for the next several years (hoping) that it would increase in value enough to get a return. But now we are just betting on GM’s future success.

They are not going to be profitable on day one and analyst have said it will take about a year before it returns to profitably (if it can that quickly) – that means more money will probably be “loaned” to the new GM to keep it going. All eyes should be on its burn rate – which will determine how successful they will be in the short run.

The other big problem, other than trucks – they really don’t have any new products or alternative fuel vehicles that will be coming to the market soon. Can they create competitive cars? They lost some of their better selling brands (via sales during bankruptcy).

Only time will tell – but at least the big headache of bankruptcy is over. Let’s hope they can pay back the government.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axrI8lkzH5ag

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Forecast – recession fades?

Economist survey expect a increase in consumer spending starting in 2010. Certainly the job losses are contracting (but still high), if the percentage contraction continues we should be in the 200 to 300 thousand by year end, while that does increase the net on unemployment to the high 9s or 10s – it also indicates that it should be topping out. The auto sector seems to have found a bottom – as far as contracting – with the bankruptcies – there is expected to be some more layoffs at GM (about 4,500) but that should be the last large cut. The housing market seems to be starting to stabilize, we will most likely seem home values to continue to contract – but more slowly and while foreclosures continue they (like the unemployment numbers) will begin to contract. While I agree that all these do show a coming end to a recession (no doubt it has to end), the recovery becomes the big question.
The economic survey indicates that consumer spending is expected to expand in 2010 as stabilization is reached. But the recovery will not be robust, but rather lackluster. New job creation will be few going forward as companies look to run leaner companies. It really comes down to access to credit – if companies can’t borrow – they can’t hire and that seems to be the choke point. It is the chicken and the egg problem, when does the company grow? Do they borrow and expand to create capacity to meet future demand? OR Do they wait until demand increases until they decided to expand? Certainly the access to debt will be a vital variable to the equation. If they don’t have access to the credit they need, they might not have the ability to grow until revenues help load the coffers.
It is now about measuring the recovery and not the recession.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_Xb00lMEnNM

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Futures Pre-market

The futures are looking a little weak in the pre-market, not necessarily news driven – but following Europe’s decline. Expect a lower opening.

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Support / Resistance

The market stopped it’s recent slide, but is hasn’t bounced off the bottom yet. Futures are looking slightly lower – but it will be the close going into the weekend that will create the perception that the short-term bottom is in or not.

INDU 8000 – 8250 range (This seems more like a wide support area than anything else. Unless we can get above 8250 with a little strength – this area remains rather weak with bottom support at 8000.)

NDX 1400 / 1450 (We have had a few monster moves with some issues in this index that has created some volatility and driven it down. Are the bottoms in on those big issues. Watch that 1400 area.)

SPX 880 / 900 (Again a couple of days in a row at the 880 area as if it is a support being put in. Watch the close – 880 or above to confirm.)

RUT 475 / 500 (The RUT seems weak and has room down to 470 without really breaking, but it didn’t show even the weak strength of the other indices yesterday. Watch that 475 area. A close at 480 or higher is better.)

==========================
Gold 900 (We have seen gold and silver come off in this rally – some would say profit taking. 900 is a supporting area and 850 is an accumulation area.

Silver 12 (Like gold, silver has come off. 12 is a support area and an area to accumulate.)

Oil 60 (Oil has come off fairly hard and broke down through 60 and their seems to be some big volume being put in. 60 range would seem a support – keep an eye on the close.)

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Conclusion

The market has come off a little from its recent high and the rally legs have seem to weaken. It is almost as if we are in a pause area – waiting for some “Green Shoots” to flower, to be able to point at something and say SEE! But so far the signs are rather vague and recoveries are being pushed out into 2010 as 2009 seems to be about finding a bottom. As the “green shoot” talk fades the talk of another big stimulus is starting to make the rounds. Obama must continue to push the optimism and hope as the pitchman, while Congress, Fed, and Treasury need to get on the ball and focus on legislation that doesn’t create more debt and spurs economic recovery. Ideology seems to be clouding judgment as dollar risk, inflation risk, and economic risk is pushed to the back burner. Unfortunately the foreign central banks we rely on are less concerned about ideology and more concerned with dollar and inflation risk. We need to make sure any policies we pass carefully consider the economic impact, because while we might be saving some trees we could economic collapse our fiat currency system. Balance is key at this crucial time and I am afraid leaders like Pelosi and Frank are not concerned with debt, let’s hope the Senate has better foresight.

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

2009-07-27T09:04:00.000-04:00

Traders,

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.
http://www.bloomberg.com/apps/news?pid=20601087&sid=av1HKZmRd5Jw

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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.

http://www.bloomberg.com/apps/news?pid=20601087&sid=as5gharxTDc0

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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.

http://www.bloomberg.com/apps/news?pid=20601087&sid=atE0.wFoga3M

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Futures Pre-open

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

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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.)

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Conclusion

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.

7/8/09 (Strong Dollar? Earning Season Begins!)

2009-07-27T09:03:00.000-04:00

Traders,

The market did sing along with Europe which had seen a rebound, but renewed concern about “Green Shoots” as well as possible earnings are going to look like – with Alcoa kicking off the season tonight. The talk of a possible second stimulus this year has also cause some currency concerns. Europe again held after the rally yesterday and isn’t losing ground, but Asia did – our markets sit paused to make a move with futures being flat in the pre-market.

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Strong or Weak Dollar?

China it is said desires a strong dollar (ironically) because their exports are priced in dollars, they hold over $1 trillion in U.S. reserves, and many commodity imports are priced in dollars (which can thus drive the price down.) China was fairly upset with the U.S. (and Fed) as the policies are geared toward inflation and a weak dollar (to try and kick start the economy). Inflation comes in many forms and the U.S. is running on all cylinders in that direction. As we know (and as I have repeated often) China has been saber rattling about a new reserve currency as a wake-up call that U.S. policies are hurting China.
This morning on CNBC, Jim Rickards, explains this in excellent detail – about the Dollar, Treasury Bonds, and China’s role. This is a short and excellent explanation of what has transpired and the current situation:

http://www.cnbc.com/id/15840232?video=1175132958&play=1

Yuan Deposes Dollar on China Borders (interesting follow-up story):

http://www.bloomberg.com/apps/news?pid=20601109&sid=aqA9QhRSNeqM
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Earning Season begins

This has been significant concern about earnings season as it kicks off today. The combination of a massive rally – which is creating higher P/E ratios in this market, the weak dollar, credit issues, and commodity volatility is definitely going to inject some volatility and possible down side concerns.

Alcoa kicks it off today after the close and there is an expectation for Alcoa to report a loss based on lower aluminum prices that have not rebounded. The company has done some serious restructuring to operate in a leaner capacity and now we will find out shortly if cost cutting helped increased margins on possibly low to flat revenue.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adbB.XXs9Xxw

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Futures Pre-market

The futures are flat but above fair value. After a few days of selling off – traders are paused as earning seasons approaches and cautious.

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Support / Resistance

INDU 8000 / 8500 (The 8250 line was crossed and there was no rebound into the close. 8000 is the next support area and unless we can get some push up above the 8250 area to close above it – then 8000 is a pretty real area.)

NDX 1400! (The NDX slide faster and harder than the other indices – of course with more volatility. It is just above 1400 and the question on the trader’s mind is does 1400 have legs to stand on. Futures pointing to higher opening.)

SPX 880 / 900 (880 was an area that several traders were talking about as a zone of support we are right at it. Futures looking for a flat to slightly higher opening. Watch 880 into the close, below that there is not much to hang your hat on.)

RUT 475 / 500 (The RUT has been more thick and not nearly as volatile it can move down to the 475 is the rest of the indices drop. 450 is the way below market. Futures are looking at a slightly higher opening.)

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Conclusion

The media and consumers have been living off of hope and optimism – the talk of “Green Shoots” – the rally in the market - all as a gauge that a recovery is in place. However the stock market doesn’t care or even know about the economy. And the stock market is not necessarily the best gauge of economic recovery – since it is based on perception of value.
At the end of the day it is the data and the data, while pointing to a slow down, is certainly not pointing to a recovery. Right now it seems that everyone is holding their breath to see how earnings pan out. Good earnings could spur more “green shoot” talk and give the market back the legs it needs to continue higher. If they look bad or forward guidance looks bad a revisit to the lows is certainly not out of the question.
Stay frosty and hedged those long equity positions.

7/7/09 (Great Fed Debate, Europe Rebounds!)

2009-07-07T09:05:00.000-04:00

Traders,

Sorry about not being around Monday, the Dentist morning visit (routine) kept me at bay. Thursday before the holiday weekend so extreme pressure going into the holiday and it looked like Monday was going to follow through, but going into the close we saw a significant rebound. We are at some support levels and need to pay close attention to see if they hold or if we continue to slide.

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The Great Fed debate creates dollar volatility

The debate about how and if the Fed can reverse course on their “Quantitative Easing” strategy has been heating up. This is not just China and Russia concerned, but it is ramping between investment banks. Goldman Sach’s doesn’t seem to be concerned and believe the Fed has time to deploy proper exit strategies to avoid inflation risk, which Morgan Stanley remains concern that the Fed may keep easing credit too long that it would encumber a proper exit strategy that would avoid inflation. It is not who is right or who is wrong that we will be able to discern from this debate, but rather that the debate is even happening.
Certainly these are unprecedented times and loose comparisons are being made to the Great Depression (if comparisons are even appropriate) – that being said no one seems to know what is in store and the more debate means the greater the unknown. All that equates to more volatility. We are seeing that already in the currency market – the dollar was weakening as foreign central banks pointed fingers about the U.S. increased national debt have investors running for safe havens outside the dollar. Renewed optimism and hope have them rushing back in and out of other currencies. Everyone is trying to make a bet as to where the safe heaven is and which side they want to be on.
This means that hedging all positions against adverse market moves (either up or down) is prudent, additionally diversifying holding out of dollar backed risk would also help secure buying power if inflation does come. I am certainly in the camp that inflation is coming – the question is when and how much. For me it is certain.
Interesting article at Bloomberg spells out the concern: http://www.bloomberg.com/apps/news?pid=20601087&sid=aXE_NxcOLRXc
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Europe stock rebound – does it follow through to the U.S.

After the sell off on Thursday (globally) and a mixed to negative market yesterday, Europe saw a rebound as manufacturing orders seem to pick up. Obama is meeting with Russia and no doubt there has been tensions with the ex-Eastern Bloc community. Russia (like China) have been quick to voice their reserve currency concerns, have moved to purchase IMF debt, additionally they have relations with nations (trade mostly) that is in direct conflict with U.S. allies. Of course there is the old debate over nukes – but the real issues on the table in economics.
Europe is in mixed shape compared to the United States. Some nations have stronger manufacturing and services and less debt, while others are struggling. Sharing a common currency does help the weaker ones, but it drags on the stronger nations. Europe has also been making end roads into Russia and China – as corporations look to penetrate those markets from both a consumer and manufacturing standpoint. They are also less critical to voice their differences – as the U.S. has a history of voicing their political and economic concerns. Which has created stressful relationships – most recently accusing China of currency manipulation.
The question is not looking at a global recovery, but which nations recover and which nations struggle. China (and the BRIC) for the most part have the ability to recover quicker because of their low debt, while the U.S. struggles with increased debt. Europe is on the fence and what ties them together is the Euro. Germany has made great roads to be the leader of the European community from being a financial center, manufacturing, durable goods, and trade.
So – as we see a rebound in Europe, does that carry through to the U.S. equity markets? It will be interesting – certainly there are companies that do prosper internationally, but I think that may not be enough to carry the nation as a whole.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVh1u69q0qgc

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Future Pre-market

The futures are looking a flat to mix a little volatility has entered the pre-market. The ARB traders are side-line because there is little if any spreads. Expect a mix opening unless something changes.

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Support / Resistance

Getting close to those support levels.

INDU 8250 / 8500 (We are 75 points above it after a rally going into the close. Do we retest and hold or rally out of here?)

NDX 1400-1425 / 1475-1500 (The short-term support is that 1425 line, sure we could slip to 1400 if we head lower. But keeping above the 1425 area is sign of rebound.)

SPX 900! (Sure we closed slightly below it and a visit to the 880 area is not out of the question. Closing above 900 is critical to see a rebound.)

RUT 500! (Similar to the SPX the RUT needs to close above the 500 level, it was just below it yesterday. Watch the close.)

==============================

Gold 900+ (Gold has gotten quite and is sitting around the 930 to 950 area – it seems to be waiting.)

Silver 13+ (We saw it fall of from the 14s but it like gold seems to be in a staging area.)

It would seem the metals are seeing slight volatility as the inflation debate rages.

OIL 60+ (Oil slipped from the 70 level to the mid 60s. This is a serious mix bag of dollar (inflation), inventory levels, and assumption that the U.S. consumer can afford higher gas prices or will drive less. Expect volatility)

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Conclusion

There is talk about another stimulus check http://www.bloomberg.com/apps/news?pid=20601087&sid=aStWHJXsvePA , a debate rages even among firms about inflation risk, Obama is meeting with Russia and economic concerns about a new reserve currency is certainly on the agenda. These “Green Shoots” are not bearing fruit and it looks like a recovery may be further off. Talk is also surfacing that we might NOT have seen a bottom yet.
Certainly volatility is revisiting the market and the VIX is again flirting with 30.

Get your hedge on.

7/2/09 (ECB rates! Job losses! J&J expands)

2009-07-07T09:04:00.000-04:00

Traders,

The market saw a solid rally following Europe, even in the face of the ADP report which came in worst than expected. The market however didn’t have legs going into the close and saw some selling pressure. We may see some intra-day volatility – but it is also a long weekend and the summer (lower volume). Certainly the jobless rate is going to go up, the question coming into this morning was by how much. Obama was on the marketing parade with his town hall meeting selling his Health Care plan, but it was frustrating listening to the rhetoric – it is only time before the people can LISTEN to positive optimism “Change” - before they start getting frustrated because they are NOT SEEING positive “Change”. The problem is spending and debt.

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ECB leaves rates unchanged

We didn’t expect any change in the rates, but we are keen to find out about their bond auctions and lending. The ECB last week lent a record $600 billion to banks for 12 months, hoping that will trickle through to companies and consumers, if the U.S. is any gauge – the banks are clogged and the money is not flowing through. The big concerned by the ECB, is similar to ours, that the loan growth is slowing (even after they pour money into the banks). Both Europe and the U.S. government’s well intentions to help the consumer is really not seeing any traction. That is the serious problem, how much Drano do you pour into the sink to unclog the drain – there is a point at which the Drano becomes part of the problem as it begins to overflow in the sink (as it is still clogged). That is pretty much what we are seeing, we can continue to pour money into the system – but it is not coming out the other end to companies or consumers.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.5DiJzpa1p0
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Job Losses – Good, Bad, Ugly?

The Good, unemployment rose to 9.5% from 9.4% (less than expected, at 9.6%)!
The Bad, we lost 467,000 jobs in June (worst than expected at 100,000 more than forecast)!
The Ugly, there is no signs in growth rate and revisions of job losses are pushed out even further (especially in the wake of GM and Chrysler).

http://www.bloomberg.com/apps/news?pid=20601087&sid=az1UHIDg.Ta4

There was some good news as to a slowing down, we were seeing losses in the 600,000 per month and it is now in the mid 400,000s per month. So it is slowing, but that is a given since there is a finite amount of jobs. However, what we NEED to focus on for forecasting growth is are there any NEW jobs being created – those signs are still uncertain.

Additionally, there is a huge drop off in the unemployment (suspected to be 1 to 2 million) from those that fall off unemployment benefits (now called “discouraged worker”).

The futures were down coming into the numbers, saw a shocked drop of 10-20 points, ripped back up and rallied 10-20 points, then came back off, and now at the pre-announcement numbers. That all happened in 5 minutes – which clearly shows how low volume, speculation, and knee jerks can inject serious intra-day volatility swings.

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J&J expands

One thing you see in a recession are the strong gobbling up the weak. We have seen some major takeovers in the Drug sector over the last 6 months, now we are seeing companies pick over the bones for possible assets. J&J is paying $1 billion to take a stake in Elan and help fund the development of medicines against Alzheimer’s disease. Elan shot up like a rock in the foreign markets (J&J is seeing a little weakness for having to coin up the money). However, long-term these are the times to keep your eyes on those companies with deep pockets that can reach out and expand when others need help. J&J remains a solid company – I think they are the only company still paying a dividend (that was sarcasm), but I think you get my point.

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Futures Pre-market

The futures were low coming into the Job announcement expecting more job losses. The numbers in the ADP came out worse than expected and thus traders were getting in front of the Labor numbers expecting the same. They were right – futures are now down across the board – expect a lower opening.

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Support / Resistance

We saw a good move up yesterday and we look to give it all up today.

INDU 8250 (8500) 8750 (Can you say 8500 pivot point? That is the number we hit yesterday and it looks like we are heading right back down.)

NDX 1400 (1450) 1500 (We are above that 1450 line and I do give the NDX a wider than normal berth just because of its volatility.)

SPX 900 (925) 950 (Again right in the middle.)

RUT 500! (We are at 517, but futures are looking at a 505 opening. 500 is in the cards – it needs to hold going into the weekend. Watch the close.)

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Conclusion

Job numbers did have some positive signs that we are getting closer to the bottom, but don’t mistake or spin positive signs of getting to a bottom as POSITIVE SIGNS of a recovery. We may just be getting to a bottom and could remain there for some time. That means we need to be diligent in managing our positions and expect future volatility as well as sporadic growth. Once we hit bottom for a while – I expect we move to more sector driven markets as well as a NEW type of portfolio creation – which will be those companies with international growth vs. overweighed domestic reliance. Companies will have to make sure they are well positioned to take advantage of growth abroad as the local economy might be stagnant. Companies like CAT and GE – while they have problems domestically have seen huge growth and potential aboard. More companies will look to position themselves internationally to off-set slow domestic growth. As investors we need to start separating those companies, even within sectors to take advantage of those that have diversified prospects.

It’s fourth of July weekend. Let’s take the time to REMEMBER what this nation stands for and what it doesn’t. We are at a huge fork in the road – which will really define this nation going forward and it seems to get farther and farther away of what our founding fathers intended.

7/1/09 (Green Shoots? ADP! New Reserve Currency?)

2009-07-07T09:03:00.000-04:00

Traders,

We thought that things were getting better, we had seen consumer confidence was going up and a bottom and “Green shoots” were forming, then we get nailed with more home foreclosure risk and Consumer Confidence falls. The market fell after the news, but we did come off the lows going into the close. The market is now in a range between the support and resistance level as more questions need to be resolved.
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Green Shoots?

Just after it seemed that things were getting better (we had a couple of good months of growing consumer confidence and the housing starts were up), it would seem that the Green Shoots were sprouting. However, I remained skeptical because the U.S. consumer story was not reflecting a positive note (regardless of confidence), jobless rates were still climbing, no new jobs on the horizon, earned income down, and no access to credit. That means that while a stimulus check (or two or three) and a feeling of optimism will not carry the consumer into the End Zone.

Yesterday’s two news stories revisited that issue:

1. Delinquencies Double on the LEAST-RISKY loans: http://www.bloomberg.com/apps/news?pid=20601087&sid=aDkTqrdlECCo
This clearly indicates that the housing mortgage problems is not over yet and equity values continue to decline. AIG also stated that they had increased risk on half of their CDS’s (credit default swaps) just shy of $100 billion on mortgage related securities.

2. Consumer Confidence slips back down to 49.3: http://www.bloomberg.com/apps/news?pid=20601110&sid=aL2GQmLUajv4
I was never totally a believer as to the Consumer Confidence as the sole indicator of market recovery. Sure a poll tracks consumers are confident and that might reflect that their appetite for risk might increase or their fear declining. And I would even go as far as it could help buoy equity values, but it does NOT translate to economic recovery. Earned income, jobs, and credit move the economy – not confidence (which is a measure of perception at best)

So what has become of these Green Shoots? I am still very skeptical until I see the bottom line change, not just confidence or stock prices (which have been living on a momentum rally and optimistic perception on Green Shoots). So far the math is not reflecting the perception – as far as the economic data is concerned.

How do we translate this into trading strategies? Simple, VIX is getting cheap and fear has left the market predicated on perceived Green Shoots! That means if you don’t own some downside protection, it is CHEAP and you better through some on to hedge out those long equity positions. The data is certainly not supporting the perception.

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ADP Payrolls

ADP reported that companies cut more jobs than forecasted in the month of June of a 473,00 drop (economist predicted 395,000), followed by a revised reduction in May of 485,000. Estimates are that job losses will mount with the bankruptcies of General Motors and Chrysler, additionally we saw today the first bankruptcy of the smaller auto-parts suppliers and more are to follow.

Now all eyes are on the Labor Department report, which is coming out early tomorrow (because of the holiday). Expectations are for 363,000 losses.

Talking heads and those spinning the “green shoot” talk are still saying “Employment usually trails overall economic activity.” Let’s keep telling our self that – because seeing more layoffs and no growth doesn’t bode well for the recovery.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKrjCwnY23L4

Tomorrows Labor number can inject some volatility tomorrow.

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The move to a New Reserve currency begins.

China, Russia, and others have demanded a new reserve currency, controlled by the IMF (International Monetary Fund). They have even offered to purchase IMF debt as an alternative to purchasing U.S. treasuries. The BRIC nations (Brazil, Russia, India, and China) recently meet to discuss this issue and have had several meeting with the IMF. It was only a matter of time before we saw the IMF make the bold move to issue large bond debt to accommodate this demand.

The IMF board looks to approve the authorization of as much as $150 billion of bonds for the first time. The spin of course is that THEY are seeking new sources of funds, but behind closed doors we know the BRIC has been pushing for this. Today they meet and vote on interest rate, maturity and other factors. The BRIC have already pledged to purchase the majority of the debt.

So how does this affect the U.S.? Not good, the deficit is $3.5 trillion and we have seen the Fed monetize (print money) at an alarming rate to purchase Treasury bonds. The IMF new debt product is seen as competition and if this new IMF debt is successful we could lose a vast amount of our credit supply from China and others. Than would seriously put the dollar and U.S. debt under stress. This is certainly not something that we need as we are trying to get out of a economic recession. We could see bonds continue to remain weak and rates go up, something our government cannot afford and means that the FED will have to print even more than it had initially intended.

Keep an eye on the dollar – this could be the catalyst event.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aICtTde_qKVA

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Futures Pre-market

The futures are getting off the mat and are showing a positive gain, following Europe. The ADP report did send a downward jolt when released be it seems to have quickly recovered. Expect a higher opening as the spread is in.

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Support / Resistance

INDU 8250 (8500) 8750 (We fell below that pivot point of 8500 and it looks like we could get back to it at the opening. Tomorrow could prove some serious volatility if we get a surprise in the Labor data. A move to 8250 or 8750 is in the cards – but couple that with the holiday weekend could also mean a wait and see.)

NDX 1400 / 1500 (A wider more volatile band than the narrow based indices. Expect a few of the heavy weights to continue to drive the index.)

SPX 900 / 950 (We did slip, but not below that 900 level, a small pop this morning could get us up to 920 or 925.)

RUT 500! (We came off a little, but still above the 500 level – futures point to a 510 opening.)

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Conclusion

The push of the massive energy bill, with that 300 page amendment dropped in at 3am the morning of the vote, makes me ill. Let’s hope the Senate doesn’t take such action. Healthcare is now on the table and could get a similar push. Why are these large pieces of legislation so concerning to the market and why would I care – simple – it has really nothing to do with saving the environment or healthcare (I am all for those things) – what companies, foreign central bank, and investment firms are watching are the following: Taxes, Tariffs, Fair-trade issues, and most importantly how much will it cost. Ironically several Obama supporters including Buffet are now speaking out against several issues that have been drafted into the legislation. Paul Allen of Microsoft has gone as far as to say that some tax proposals would be such a determent to the corporate earnings that they have seriously considered to relocate the company outside of the U.S. And a story I shared – showed a massive drop in revenue for a state when taxes were raised significantly on the top 10% - who decided to exit the state in droves.
The issues are no doubt important and need to be addressed, but it seems that costs are NOT an issue even worth discussing and that could sink this nation further into debt and push of a recovery even further. Ironically it is obvious as to the deficit and the debt problem (the increasing printing of money and spending) that foreign nations are concerned and have moved to alternative forums of investments (not dollars) and have called for a new reserve currency. But it seems that Congress, Senate, Administration, Media, and the Sheeple of this nation have not woken up to that fact.
We are seriously facing that fork in the road and while government moves slowly and we might not see anything happen quickly, it is the policies today that will outline the future of this nation and the future recovery.

Take heed.

6/30/09 (AIG more losses, Dollar weakens?)

2009-06-30T11:20:00.000-04:00

Traders,

The VIX has been dropping below 30 and is now close to 25, even intra-day statistical volatility is starting to contract. Volume is also down (maybe “Sell in May and Go Away” has returned). Congress in on break (again) and we have a holiday (short week) ahead. While it is unlikely we will see any volatility going into the holiday – don’t count it out either. Fear is leaving the market, consumer confidence is up, and risk appetite is expanding. I am still waiting for the kid at the coffee shop to give me a stock tip, then I know the last of the buyers are in. I hope we see a mild summer and low volatility to give the economy time for the green shoots to turn into flowering plants, but I think as volatility contracts and the fear subsides that coming into the end of the 3rd quarter and beginning of 4th quarter we are going to be injected with volatility once again. Luxury spending is going to be down and unless we can see the consumer gain in jobs, earned income, and access to credit it is going to be a weak holiday season this year and thus we could see volatility return. For now – enjoy the summer, but remain vigilant.

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AIG – the never ending losses.

The bailed out ($182 billion of U.S taxpayer money) insurer said that valuations on its CDS (credit default swaps) may create even MORE losses. The “HOPE” was for a recovery and that credit would materialize, but that is not happening. Right now we are still trying to find a bottom and while the stock market did rally, the economy has yet to. That has created a sharp increase of risk in almost the $200 billion in CDS that AIG sold. About half of the $200 billion is tied to corporate loans and the other half tied to mortgage back securities. The problem is a one-two punch – credit risk in corporations have not eased, but increased and foreclosures continue to mount.
It looks like the U.S. taxpayer may have to pony up some MORE money for this nationalized insurance company. Will banks receive more AIG money via this backdoor bailout company?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3c4Dhbj8JYM
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Dollar continues to weaken

Ironically as optimism as to a global recovery expands the weaker the dollar gets, as the appetite for risk expands – money is being put to work. The commodity sector is expanding, especially as China is converting its paper holdings (U.S. dollars) into tangible assets (hard commodities). It is no longer a supply and demand equation, but a conversion of paper to intrinsic value. That has spurred a investment run out of dollar holdings into everything but dollars. Typically you would think this would buoy an economy as investors rush to in, but we are seeing a diametrical relationship between the economy and the equity/commodities market. The markets are rallying (across the board) but the economy is continuing to weaken. Governments (not just the U.S.) are flushing the system with printed money to bail out their respective economies and those countries are falling into two camps. Countries that ARE seeing economic growth (and not just market growth) and countries that are not.
This morning on CNBC an analyst (forgot his name) made an interesting observation, he said that we mislabel the American people as consumers. He said they are consumers second and producers first. A consumer cannot consume until he produces something and creates earned income. This nation over the last couple of decades has relabeled the producer to a consumer because of the massive growth of credit availability which lead to massive luxury spending. He is right, as I have been making that observation by saying that we need to see jobs increase and earned income increase before we can see consumers begin to consumer, I was making his case for him. We need to see Americans become producers to HAVE earned income, at which point they CAN consume.
But what happens at the end of this optimism global recovery? I had previously said that countries fall into two camps; Debt and Non-Debt nations. Debt nations like our own is not seeing a growth in infrastructure or jobs, but rather the trillions we are spending is covering leveraged losses. The Non-debt nations, like China are actually expanding – build massive roads, cities, railways, seaports, etc. They are buying commodities as fast as they can, not just to build, but to stockpile for future building. Sometime in the near future we will SEE the difference resolve itself, as this nation continues to struggle and measure green shoots and wonders when we will get back to even 3% growth, the dollar will continue to weaken and inflation will increase (not just because of more dollars) because the Non-debt nations will be the “Haves” and this nation will be the “Have nots”.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ap1UOGAQkews

Another story as to the hidden ramping of coming inflation. While we might not see it now, it is no doubt building.

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Futures Pre-market

The futures are pretty flat and volatility is contracting. Wait and see period.

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Support / Resistance

Are we ranged bound for the summer?

INDU 8250 (8500) 8750 (We are back up to that mid-resistance level that we broke down from last week. It could be considered the pivot point in the range)

NDX 1400 (1450) 1500 (Again – another range?)

SPX 900 / 950 (another range?)

RUT 500 / 540 (range?)

It could be range bound if volume is unable to drive the truck through support or resistance, but for now with a holiday upon us and light summer volume we might not see the drive either way to break out. VIX continues to drop and the skew is coming out as well.

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Conclusion

Consumer Confidence is reflecting confidence, but that does not translate into jobs, credit or spending. It does translate into a decline in fear and an increase in risk appetite. Remember the market is heavily perception driven and certainly not fundamentals. For if it were fundamentals, we certainly would not of seen the rally (nor sell off) to the extremes. Maybe it is a pause as we wait to see if those green shoots really have any roots, for now they are still just green shoots and lots of optimism.
Is this a quite period before the final quarter storm, will we see inflation this year or will it be pushed off until after a possible failure of consumer growth in the 4th quarter, will we see the BRIC nations take a more decisive action towards an alternative world reserve currency or debt product, will these nationalized companies return to the private sector, will government continue to take a deeper role in the private sector, will the dollar strengthen before it continues to fall? These and many other questions will (and should be) contemplated over this slow summer period. And while we take an active role to balance our portfolio we need to continue to consider longer term investments and hedges that take these possible risks into consideration.

6/29/09 (Firms selling shares, GE in government sights?)

2009-06-30T11:19:00.000-04:00

Traders,

Last week saw a gap down, testing at some short-term support areas, and a rally to close the gap for a net week that was pretty much unchanged. The market seems to have absorbed the perception that the recession is coming to a close, but the uncertainty of growth is creating concern. Wilbur Ross (on CNBC this morning) was asked – Is the recession over? There has never been 3 consecutive months of consumer confidence heading higher in a recession. He responded, if we look at it as a whole (rather than growth) the overall number is not great. But what does consumer confidence really mean, housing market is still falling, car sales are off, and the job data still reflects negatively. He is right, what does it matter what the consumer confidence is if they are not spending money and housing prices continue to fall. Ross concluded with something I have been hammering on, the CONSUMER. It is ALL ABOUT THE CONSUMER. If the consumer is not rebounding, then the economy cannot rebound. It will be the consumer that determines when we see a recovery, not a poll of questions asking them if they are confident.

CNBC Video, Ross on the Economy: http://www.cnbc.com/id/15840232?video=1166978967&play=1

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Financial firms selling their own share?

We had seen some banks selling shares back when things were looking bleak to raise much needed capital, the perception lately is the banks are on firmer ground. But if that is the case why are they selling their own shares? Maybe they think this is a great opportunity after their stocks had rallied significantly or maybe they need capital. The big problem, which I don’t think has been addressed in this credit crisis, is the reduction of leverage at the financial institutions. While consumers are forced to deleverage, the banks had been bailed out by the government, had accounting rules changed to their advantage to maintain leverage positions, and have raised capital privately and publicly. Sure we are seeing a demand for new regulations and regulatory bodies – but the fundamental reason of leverage has not been addressed. There is additional questions about the banks profit and returns for the 1st quarter as well – since they changed from investment firms to banks and the addition of the account rules. Some have said that returns should be treated with a skeptical eye and now with JP Morgan selling their own shares is bringing some more criticism to the table. Sure the big three (Goldman, Morgan Stanley, and JP Morgan) repaid the TARP money, but their remains some issues – mainly leverage and accounting – that one should be wary about. Not that there is anything to be concerned about fundamentally – the concern is that it is so convoluted and complex to make heads or tails out of – from Fed Discount window access, accounting standards, leverage, back-door AIG payments, etc. Instead of becoming more clear, it has become more foggy.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYlWNEyLQzPk

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GE in government sights!

GE is now in the sights of the U.S. government. As legislation is being drafted to take more action over banks and financial firms, GE is could fall into the trap. The problem with GE is GE Capital, which also took bailout money. Analyst mentioned that GE was able to weather the storm better than most because of their international manufacturing business, which helped off-set losses in the financial division. But the government may want to breakup companies like GE that have a rather large financial operation as part of their conglomerate. All eyes are on Congress as to how this new legislation will pan out.
Just a few weeks ago everyone thought Cap-n-Trade and the energy bill would not pass the House, to everyone’s surprise it did pass and now we wait for the Senate. Cap-n-Trade could be the litmus test for more redefining and radical legislation. GE’s CEO Immelt sent a memo out too all employee’s saying that GE Capital is here to stay. GE will be putting forth a massive lobbying effort to halt legislation would could create a break-up.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13900176

http://www.bloomberg.com/apps/news?pid=20601087&sid=aWPfkE8OtwvM

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Futures Pre-market

The futures are slightly up and in-line with fair value. Expect a slightly higher to mix opening.

________________________________________________________
Support / Resistance

INDU 8250 / 8500 (We pulled off a little from 8500, but still up near there. Will we get back over it?)

NDX 1400 / 1500 (There is some narrower support/resistance in the 1425 to 1475 range – but this index has more volatility than the others.)

SPX 900 / 925 (We are still below the 20-day moving average, but did get back up off that 900 support area.)

RUT 500 (Like the SPX we tested 500 – keep an eye on 500 in the RUT and 900 in the SPX – they are key areas.)

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Conclusion

Cap-n-Trade with a massive amount of amendments (earmarks and pork) passed the house. Additionally some trade/tariff/protectionism had been added as well, creating even more concern. Buffet, a big Obama supporter, even said this amounts to a tax and is more of a hindrance and step back, then a step forward. It “seems” good – new energy and green planet legislation, but is it really? The Energy Czar was on CNBC and Ross (the guest host) asked pointed questions, like why doesn’t the energy bill have more on using rail (that costs ¼ of trucking)? The Energy Czar was not that impressive, she avoided almost every question and was on the marketing/spin parade constantly repeating, this will create millions of green jobs and make the U.S. the leader in green energy. I also thought Obama was going to come down on all this earmarks and pork issues, this bill has ballooned to over 1300 pages. CNBC joked with here that it looked like “War and Peace” and asked if she read ALL of it. She of course skirted that question and said that she (and her staff) have been following it closely, when asked again about reading it – she went back into marketing mode. This energy bill could also be the sign of more legislation make its way through that could move to a more nationalistic, higher taxes, and protectionism. Now all eyes are on the Senate.

CNBC VIDEO with Energy Czar: http://www.cnbc.com/id/15840232?video=1166982716&play=1

6/26/09 (Consumer Spending Rises?, China Rising)

2009-06-30T11:18:00.000-04:00

Traders,

After a shaky start and concerned about the jobless claims the market began to rally and did so in quick fashion to fill the gap down from Monday. Bernanke came under flak and there seems to be more questions than answers resolved, it really comes down to - did Bernanke do what he thought was right vs. doing so within the scope of the law. Some argue that time was pressing and something needed to be done quickly, while others argue that it still needs to conform to regulation. While it might not seem like a big deal, the larger concern that looms is that the Fed’s role, power, and oversight is expected to be greatly enhanced and additionally it looks like Summers (who had Obama’s ear) is eyeing for Bernanke’s seat. There is certainly some agendas that are playing into the cards and in my opinion this is not the time to play politics as the economic recovery should take priority.

_________________________________________________
Consumer Spending rises?

The Commerce Department said that consumer spending rose .3%, followed by no change in April, which came in line with economic forecasts. Some economist reflect that the increase was significantly impacted by the stimulus checks and are concerned about future growth. Chris Rupkey (chief financial economist for Bank of Tokyo) stated that while the recession is ending the purchases are likely to be modest until job losses ease and companies start hiring. He is right that is the key – a government injecting of capital “stimulus” will no doubt reduce consumer debt and increase purchases, but that is a onetime injection (unless we see more of them). The consumer needs to eventually stand on his own earnings and equity, not off of government stimulus. While consumer spending rose (as expected) the other side of the coin showed wages and salaries however dropped .1% in May, reflecting the effects of the job losses.
As I continue to mention it is the consumer that drives the economy and until jobs are created, job losses stop, consumer spending is based on EARNED income and not stimulus, and wages grow moderately vs. inflation. Until we see those stars align the future recovery is going to struggle.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aETQTTCxeUhw
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China renewing their call for a reserve currency

China’s central bank is gain making a strong request (or demand) for a new global currency to replace the dollar and suggested the International Monetary Fund should manage more of the members’ foreign-exchange services. “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” People’s Bank of China.
China has the world’s largest currency reserve of more than 1.95 TRILLION dollars and has taken the first steps to begin a large diversification project, including (along with Russia and Brazil) purchasing IMF debt rather than U.S. treasuries.

The truth, which maybe we Americans are too arrogant to realize, is that we NEED China to continue to purchase our government debt (U.S. Treasuries) to keep our spending alive. The counter argument is they NEED us more to sell their wares. True, but the U.S. (while a large consumer) is not the only consumer of Chinese products. Additionally the dependent on U.S. consumers purchasing Chinese products vs. the growth of their domestic and other foreign purchases was on the decline before the recession and after the recession we saw a huge slow down (almost a halt) as U.S. consumers quickly became tapped out (no money and no credit). China suffered, as their GDP shrank from double digits to single digits – but is still a massive growth rate. They saw they could survive and grow without the massive reliance being the focal point of trade, now it is time to cut the cord and they know that.

The reality is this is not going to happen overnight and their probably be huge struggle to move in this direction, however – we are seeing the BRIC (Brazil, Russia, India, China) moving on their own. It is quite possible they move in this direction without the blessing of the rest of the world. They hold all the cards, they could create their own new world currency with the IMF and then demand payment in that currency for any of their goods. That would FORCE the rest of the world to either move in that direction or face the currency exchange risk and possible massive inflation.

I think the cards are in the BRICs hand, they are the big stack at the table and they can pretty much call the shots.

Keep an eye on this story…. It is sending some volatility into the dollar as it continues to slip against foreign currencies. Expect MORE volatility not less.

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Futures Pre-market

The futures are off in the pre-market a little, we did close the Monday gap and close to those resistance levels so it might be hard to get some follow through to the upside.

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Support / Resistance

We are almost back to those resistance levels – we might see some resistance here.

INDU 8250 / 8500 (Right below the 8500 mark – we might struggle to get through that and see the market come off a little.)

NDX 1425 / 1475-1500 (The NDX is more volatile than most other indices – between 1475 and 1500 it is a resistance zone – we are right at the edge of that zone.)

SPX 900 / 950 (We are right in the middle and are looking to give up a little at the opening.)

RUT 500 (Made a good move up yesterday to get above 500, but we may revisit it this morning. Watch the close.)

====================================
Gold 950 (We did have a pullback, but not down to 900 – now we are moving up as the dollar is questioned again by the Chinese.)

Silver 14+ (We are bouncing back up with gold)

Oil 70? (We fell off and now are back up – the dollar is playing a role in this.)

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Conclusion

Bernanke is getting grilled by Congress, Summer is rumored for the job, more power to the Fed is being considered, Congress STILL hasn’t been able to get a report (audit) on the Fed (suspected to have more than 9 trillion in debt), but the Fed continues to print money to buy treasuries and mortgage debt securities. This is absurd and while the rest of the world sees it, has commented on it, is concerned enough to call for a reserve currency – our Congress, Administration, and Media act as if “Green Shoots” are springing up everywhere. Are we really that blind to the circus that is going on.
I read an excellent essay on political policy as a measurement of GDP/Debt ratio and how we CAN recover or NOT. If you are interested in the essay, send me and email and I will forward it to you.

Stay Frosty – while the VIX is below 30, I think we could have a serious pop again in the future (sometime this year.)

6/25/09 (Jobless Rises, Short Interest Rises, Bond Auctions!)

2009-06-25T09:11:00.002-04:00

Traders,

Yesterday seemed like we would of rallied and retraced some of Monday’s sell off, but the second half of the day saw weakness return and while the NDX and SPX remained higher, the INDU gave up ground. Just like at the resistance level the previous week, the market is trying to figure out our future. The Oracle news coupled with the Durable Goods order jumping initially gave the market some hope.
So we maybe at a push-pull area in these support levels as we were at the resistance levels. Really, it will be the perception, hope, and optimism that will get this market off the mat again and return back to its upward momentum. Bernanke’s testimony, bond auctions, and weekly government data will continue to inject short-term jolts up and down into the market place.

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Initial Jobless claims rise!

After what seemed to be “green shoots” in the jobs market as the jobless claims seem to be diminishing and actually seeing the month-over-month and those that remain on unemployment drop or flatten, today’s initial jobless claims sent a jolt into the market as it rose by 15,000 to 627,000 in the week ending June 20th and the number of people that remain on unemployment gained by 29,000 to 6.74 million. Economist average was 600,000 and that it would decline not rise.
On analyst mentioned this morning that some of that is additional fallout from the auto sector and not necessary reflective of the national average and this could be just a one week anomaly. We can only “hope.”

The news did snap the futures gain in the pre-market and showing a lower opening by a few points.

_________________________________________
Short Interest Rises for the first time since March

We heard last week about more companies selling their own shares to raise money, insiders selling their shares, and now short interest in the S&P 500 has risen the first time since March rally. The general sentiment from a measurement of short-interest is expecting some retracement. Short Interest in the S&P 500 rose to 9.8 billion shares as of June 15th (a gain of 1% from a week earlier). A sector that is seeing a rise in short-interest is Health Care – as the fight begins to heat up in Washington and everyone is wondering how the new National Health Care will be delivered. One item that I hear over and over is that margins for Health Care facilitators is going to be squeezed regardless of the outcome. Now investors are making that bet and taking more Bearish positions in that sector.
There is also a general concern after the market made a huge rally from March’s lows. It was certainly momentum rather than fundamental, but the “green shoot” talk is injecting hope that fundamentals will return to keep the momentum along.

__________________________________________
Treasury Auctions

I have never seen more traders and professionals who do NOT trade Treasury Bonds pay close attention to the auctions. The pay close attention to how much the Federal Reserve is buying and the price/rate. The market is watching as it is trying to determine future inflation risk and also credit risk. The secondary market is becoming very thin and thus the primary auction is getting all the attention. The auctions amounts are huge (with a total of 3.5 trillion needed to be sold), but in this global economy and concerned optimism is seeing the amount of bidders is thin and we watch in hope that their depth is big enough to take down 100s of billions. The 5 year and 10 year have sold off (yield rising) and sitting in the 2.70 and 3.70 areas respectively.

___________________________________________
Futures Pre-market

The futures are off after the initial jobless claims unexpectedly were up, erasing gains in the futures. Expect a drop in the opening.

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Support / Resistance

We saw some of the indices get up and above those key levels, do they hold?

INDU 8250 / 8500 (The INDU had rallied and then sold off into the close to finish at the 8300 area – futures are pointing to a 8250 opening.)

NDX 1425 / 1450 (We were above the 1450 area for most of the session to close just slightly below it.)

SPX 900 (We closed above 900, but are looking down at the opening at 895, watch the close.)

RUT 500 (We made a good run, but not enough – we closed just below at 495 and now looking at a 490 opening.)

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Conclusion

We are certainly in a limbo area and I think that hidden volatility is ramping, sure the VIX is below 30, but the statistical volatility could see a jump, but that doesn’t mean down, we could just as easily see a big rally. The signs are pointing to some market pressure (see rise in short-interest) – but perception and momentum has ruled the day for the last few months, all eyes will now be on Bernanke and the Fed bringing confidence back to the markets.

We might not be seeing inflation yet, but no doubt the variables that can increase it are building. Additionally the light volume is also creating some concern and injecting some intraday volatility.

Stay Frosty.

6/24/09 (Durable Goods Rise! Oracle Rally!)

2009-06-25T09:09:00.000-04:00

Traders,

After the big slippage on Monday, Tuesday saw another pause. The market is sure moving in fits and starts – between “green shoots” and the negative outlook of a very slow recovery. There was an interesting article in the Economist (an outside editorial) about the “double dip” recession in the 1930s. It seemed in 1933 that the government stimulus was working, unemployment had drop from the 20s into the low teens. They saw “green shoots”, but in a couple of years the Federal Reserve had switched from an easing to a contracting fiscal policy. The guest editorial (Christina Romer) goes on to explain that the government should continue the stimulus ( “print money”) until we reach full employment, so we don’t have a double dip recession. I am not totally buying that argument, simply because we can (if we have not already) crossed a point of no return. She (as many others) seem to overlook a huge difference between the 1930’s New Deal policies and those of today – we are now a GLOBAL economy using a FIAT currency. That means that protectionism, which worked exceedingly well in the 1930s as well as the building of infrastructure. We had our OWN energy, manufacturing, commodities, etc. We didn’t rely on imports and we were an EXPORT nation. That simple realization in my mind is why a return to New Deal policies can be our downfall. Additionally – the New Deal spending went right to the bottom line (roads, dams, bridges, buildings, etc.) – so far the nation has spent trillions of dollars on NOTHING (just paying off other companies losses). The money the government is spending is NOT going to any bottom line or building anything. It is just going to shore up GM, Chrysler, AIG, Freddie, Fannie, Banks. And it has saved nothing, we have poured money into a system and it didn’t keep these companies from shedding thousands of jobs, it didn’t keep them from going bankrupt, it did little other than restore confidence. We just spent trillions on a giant marketing “Confidence and Hope” campaign with nothing to show for it. At the end of the day we still rely on foreign nation for food, energy, and goods – that is a core component that our government has not calculated into their plans. http://www.economist.com/businessfinance/displaystory.cfm?story_id=13856176

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Durable Goods

We got a injection of good news – Durable Goods orders unexpectedly jumped in May – showing a signs of the recession easing. Again – another story of “green shoots”. It is certainly good news, but a 1.8% gain is paltry (really showing a stabilization) in the overall scheme of things. The excitement is that it is positive, as economist expected a drop of .9%. I am not trying to knock the news – but I think it shows that we are very close to a bottom, but it doesn’t change the longer term forecast of very slow growth.
GE’s Vice Chairman, John Rice, said “I am not particularly of the green shoots group yet, I have not seen it in our order patterns yet.” That is an interesting view, GE being a large conglomerate with global and domestic market share. Another economist on Bloomberg this morning pointed to the volatility in the numbers – that might not reflect a true reflection of growth or contraction. He pointed out that the bankruptcies of Chrysler and GM is injecting volatility into the numbers additionally some of the order for larger goods, such as aircrafts can push orders back-n-forth between months. Concluding that looking at a larger average, rather than a month-to-month, will smooth out the volatility and give better resolution as to whether we are growing or contracting. http://www.bloomberg.com/apps/news?pid=20601087&sid=apkAeuPJBaJw
The market unlike any time in recent history is really hanging on every number that comes out and then responds in a knee jerk reaction. Again, it’s good news (on a month over month basis) – looking at revisions and closer at the numbers reviles some volatile concerns.
Futures had a decent spike to the upside after the news came out.

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ORACLE driving higher

Oracle, like Microsoft, has a dominate market share in their sector of the market. Their acquisitions (which seems year after year) of competitors or companies that can expand market share or introduce new vertical markets has expanded the company into the forefront. Their reoccurring contractual obligations (licensing of software) is a brilliant business model, as it creates long-term commitments by clients to continue to update their user licenses. Managing data is crucial for every single business in the world and Oracle has put themselves in that sweet spot. They reported a fourth quarter profit that exceeded analyst expectations and the stock is now up $1 in the pre-market.

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Futures Pre-market

The futures are driving higher after Oracle news and Durable Goods showing the recession is coming to a close. The spread is in, expect a gap up at the opening.

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Support / Resistance

Is this a short-term support and buying opportunity?

INDU 8250 / 8500 (We were pretty flat yesterday – we a good sell off that rebounded into the close. The news today could drive us back up.)

NDX 1425 / 1450 (We are right at that 1425 number – which is short-term support.)

SPX 900 (We closed just below it, but up on the day. Watch the close to see if we close above it.)

RUT 500 (We are still looking below it in the pre-market, but closing above it would build confidence.)

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Conclusion

This week we are seeing a huge amount of treasuries being sold (over $100 billion) as we chip away at that $3 trillion deficit. All eyes will be on the Fed and how much they will take down – which could create concern and more volatility in the market. We saw the dollar drop yesterday against foreign currency and there is a story about the Swiss Franc being weak this morning http://www.bloomberg.com/apps/news?pid=20601110&sid=aY93d1pbmed8 , however we are already seeing more pressure on the dollar this morning – watch those auctions.
The Durable Goods number has the “Green Shoot” talk covering the financial airways this morning, the question is how much will that impact the market. The opening is looking higher on that news – but I think we could see some volatility depending on how those treasury auctions pan out.

6/23/09 (FedEx Rally? Commodity Stocks!)

2009-06-25T09:08:00.000-04:00

Traders,

We certainly didn’t hold those support levels or see a rally going into the close. If we look at the S&P PE ratio it had been rather high, in spite of the economic circumstances. Combine that with news about companies selling shares to raise money and a huge increase of insider selling – the tipping point might have been reached or has it? There are those that think this is a little pressure release just like we had at the end of April, where the indices pulled off a little before ramping up again. However, it would be wise to remain cautious none the less.

The big question that is starting to make the financial news talk shows, can Bernanke stop the printing train? The Fed Governors have all said in recent weeks (including Bernanke himself) that they are working or have a plan to reverse course “take of the trade”, however the “strong dollar” talk garnered laughs in China when Geithner made his speech and so far the Fed is monetizing (printing money to buy) more of the Treasury debt. The simple fact is that the Administration has 3.5 TRILLION dollars to finance and there is just not enough U.S. savings or World savings to buy that much treasuries and the ONLY outlet is for the Fed to print more money to buy more treasuries. It would stand to reason that Bernanke, no matter how much he wants to, can’t raise interest rates. What is he going to do, charge Obama (and the American tax payer) more money for more debt? Of course not. Additionally, the ripple effect from raising interest rates would stifle consumers from mortgage rates to credit spending that would cause a massive contraction in GDP, which is certainly what this country cannot afford if it expects to make it out of the recession. Additionally, Obama’s whole plan of spending $3.5 Trillion is based on a GDP forecast of expansion that starts as early as the end of this year (a little optimistic I think). So as Bernanke speaks this week – expect the following, another warning about the government spending too much (but they will not listen), “strong dollar” talk (but he will continue to monetize the debt), and the economy remains fragile. I am not saying that Bernanke is doing a bad job, but he has his hands tied. Additionally, Summers has Obama’s ear and rumors are that he is gunning for Bernanke’s job (note all the new policies are for an expansion of the Fed – most of those ideas are NOT coming from Bernanke – I wonder who?). Time will tell – but my bet is Bernanke is on his way out, they will continue to keep rates low to monetize the massive government spending, and we will continue with the “Strong Dollar” marketing campaign in “Hope” that foreign central banks are buying it.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUBTI6OxeEVA

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Fed Ex rally?

Fed Ex which has been having a dismal time with several gut busting blows – from higher fuel prices to a huge drop in shipments has also translated to volatile stock price. It came down from the 100 level last year all the way to the March low of 33, but with the whole market rallying (regardless of fundamentals) it got back to above 60 before slipping again (maybe people started looking at the actual business) – it just lost momentum.

This morning JP Morgan raised it to an “overweight” from “neutral” – based on “its strong operating leverage should drive performance for the stock when there is improvement in the economy”. I read that as BUY the stock if you think the economy is improving. Note they said “WHEN” there is improvement. Just like the weatherman on TV there is always a chance of sunshine.

I think Fed Ex’s recent rally was part of the momentum rather than fundamentally based. Sure it probably wasn’t a 30 dollar stock when it reached bottom in the March sell off, but it certainly wasn’t a 60 stock either. The Fed Ex business model swings in the wind of economic boom or bust and thus I would expect more volatility as well as momentum trading rather than fundamental valuation.

Stock is up $1.50 on JP Morgan’s recommendation in the pre-market.

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Commodity stocks got hit ….but…

The whole market took a hit yesterday, but just like a broad based rally, a broad base sell off reflects momentum rather than fundamental. If we are to believe that there is any measure of inflation risk in the near term – commodity prices based on the dollar will rise. While certainly supply and demand play a key roll the other component is fiat currency value. Meaning that it is quite possible for supply and demand to remain flat, but commodity prices to rise because the dollar becomes weak (another form of inflation).

CNBC had an interesting interview with shipping (ocean tanker) company CEO’s this morning, a very interesting industry that we really don’t hear much about. But a distinct point was made that 90% of the goods in the U.S. are shipped. They are (along with the trucks and trains) the rivers of products that drive the economy. The three CEO’s that were interviewed were all bullish on China, simply because shipping is going one way – Commodities INTO China. They remarked that China’s stimulus is going to the bottom line, they are building new roads, bridges, dams, buildings, housing, power plants, etc. They are going through their NEW DEAL right now. The amazing thing about China is that unlike OUR New Deal - theirs is funded by a massive trade surplus (U.S. Dollars). They don’t have to tax their people MORE nor are they seeing a negative GDP (while they have come down from double digit GDP growth, they are still at 6 to 7% and that is MASSIVE). Unlike the U.S. where are stimulus is paying for bailouts of Banks, Auto Companies, and Mortgages (we are paying down losses) – theirs is actually creating jobs and expansion.

The CEO’s pointed out that China is stock piling commodities – copper, iron ore, cement and every hard known commodity – rather than hording U.S. dollars they are spending them (converting the paper to hard assets ). You could say it is a massive inflation hedge.

That translates to Alcoa, Rio Tinto, and other mining and commodity companies into solid fundamentals going forward. The question remains how do the commodity companies hedge dollar and inflation risk? By asking to be paid in non-dollar currencies? Additionally that means that commodities, based on supply and demand – could also rise.

I think a long term bull market in commodities and commodity based companies is at hand based on these factors.

1. Demand: China (as well as other non-debt strapped countries growth) and demand for commodities.
2. Dollar Risk: When inflation comes that will also increase commodity prices.

Of course we have to watch out for the over shoot momentum trade like seeing oil go from $40 to $140, but that can be dealt with proper hedges.
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Futures Pre-market

We are seeing the futures up a few points in the pre-market after yesterday’s sell off – but will we see a bounce?

INDU 8250 / 8500 (We broke 8500 and are in a hanging area above 8250.)

NDX 1400 / 1450 (We could still see a pull back to 1400 which would be a significant test. Futures are pointing to a slightly higher opening.)

SPX 900 (We broke 900 yesterday – but we could get back above it. Watch 875 and 900!)

RUT 500 (We also broke the 500 level – so keep an eye on the broader market.)

======================
Oil still over 65 and seeing slight move higher this morning.

Gold in the 920s

Silver 13.80

VIX 30+

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Conclusion

The volatility pop and skew to the downside puts shows there is some concern rising that the recovery is going to be farther off and a double dip recession could be in the cards. Global recovery talk should be separated into debt nations vs. non debt nations. We are printing money (creating more debt) to take existing losses off the table and on to the tax payer, while other nations with a surplus are building. China is expanding fast and will become the economic super power before long, we just had too big of a debt mountain to climb and there is no way to win the trade war (they have already won that.)

The reality of this nation will seem to take a similar course as Japan and stagflation is becoming a more looming reality. Now we need the Fed, Congress, and the Administration to get on top of the dollar, debt, and inflation issue. Unfortunately that will not happen until we stop spending.

Once momentum leaves the market it will certainly be sector driven and I think commodity and internationally positioned companies (especially those with growth in China) will be the leaders.

6/22/09 (Volatility in the Currency Markets!)

2009-06-25T09:07:00.000-04:00

Traders,

Expiration was mixed – like the previous week we flirted with resistance and last week we have flirted with support. We are seeing an big increase in companies selling their stocks to raise money and Bloomberg reported we are also seeing one of the largest insiders selling reports in some time http://www.bloomberg.com/apps/news?pid=20601087&sid=aflROe0Pe0QM . It is as if people are become impatient to see whether these green shoots will turn into flowers. As I mentioned, you can only talk up the green shoot talk for so long before results needs to be obtained. Obama has been instrumental in bringing confidence and optimism back to the market, but as NPR reported this morning he is the Chief Marketing Officer. He is selling a brand and has done a very good job of it from the campaign and right on through the economic stimulus and crisis. But as every Pitchman (including Billy Mays) will tell you, you can sell the product, but the product has to work.
The concern about inflation and seeing a recovery is beginning to trump the “finding the bottom” and “green shoot” talk. We need to see some results or a bottom soon. The perception will determine whether this support area holds or not.

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Volatility in the currency market.

We have seen huge swings in the currency markets and all of it surrounds the talk about the stability of the dollar. From China’s request for a new currency to Russia buying IMF debt, rather than U.S. – The volatility has been significant and seeing a few cent move in a day, rather than the traditional fraction of cent is sending jitters across the market. Central banks are scrambling to figure out a solution to maintain some principal stability and at the same time dealing with their U.S. dollar reserve holdings. One such problem is the very low yield on the U.S. dollar, which is not making up the offset in the U.S. dollar’s weakness. Several foreign central banks are also handcuffed into long-dated bonds – making it even more difficult to tap capital without penalties and larger dollar risk volatility exposure.
But there is a massive split between analyst forecasts. Some say that the dollar will strengthen and a flight to safety (regardless of interest return being flat to negative) will buoy the dollar. That has been the traditional line that most economist had believed in and there is still a serious camp in “Safe Haven” theory. However, the big split in views of those that believe the dollar is facing serious inflation risk and global weakness have several valid facts to back up their theory, from China and Russia moving money into non U.S. dollar backed securities and asking for a new reserve, commodity prices and volatility, and most importantly the massive amount of debt the U.S. is piling on (not to mention the off-balance sheet accounting at the Fed which is believed to be 9 trillion).
No doubt the dollar is at a critical juncture and massive fork in the road. We have moved beyond the math determination in dollar viability and into a new realm of faith. Sure there are those that will point to the math, but I bring up faith as a key component. Our currency, being a FIAT currency (it is backed by nothing other than the “good FAITH” of the U.S. government), means that everyone has to “BELIEVE” that it is worth something. If a country like China stops believing in it and moves out of the dollar and refuses to take dollars in trade (not saying that it will happen) – we could see a fast drop and possible collapse of the dollar. (Like Iceland last year). This is a very low probability, but a probability none the less.
At some point foreign central banks (in fact everyone) has to have “FAITH” in our government and its ability to reduce the deficit and pay down debt. Obviously printing money will not solve that problem and that is why foreign nations are crying FOUL and want the U.S. to get a solid grasp of its financials.
This is a very delicate time and as these two camps, one of FAITH “Safe Haven” and the other that is losing faith become more at odds – we should expect bigger swings in the currency markets and that means more volatility. And more volatility means that regardless which side is right – some might leave the party to avoid volatility. If enough of those smaller emerging markets look for quite places to avoid the swings that too means a loss of strength and faith in the dollar.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLaIb.6J8xFc

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Apple and Jobs

Would Apple be where it is today without Steve Jobs, I would say not. He started the company with the “Woz” in a garage, built it up, and then was ousted from his own company. As the typical suits took over Apple lost momentum and started to fall. When Jobs came back, he brought back his vision and drive. iMac, iPhone, iTunes, iPod, and a whole new view and technology. He is certainly an American pioneer that has beat to his own drum and brought Apple back from the dust.
But he has been facing serious ailments, from cancer (which he beat) to recently being ill which lead to a rumor that he had a liver transplant. Apple in his absence continued to rally higher and up-sells of the iPhone, but since he has left it has really been living off its past product line’s next generations. The questions are numerous, is he coming back, is he ok, will he be the CEO, how long, and most importantly when he does eventually step down – who will be that inventive driving force that will roll out the new line of technologies?
If the past is any indication of the future, if a blue stuffy suit is to take over (like it had), we can expect to see Apple trade back down into the teens and nothing new on the horizon for decades. We can only hope that Apple has learned from its past and that another Jobs Jr. is in the wings being shown the way by one of world’s greatest technology wizards. May Steve Jobs have many long and prosperous days ahead.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRYCnEpXRww0

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Futures Pre-market

Europe was down and it seems that it is also dragging down the futures in the pre-market. We are still at those support levels, but there seems to be some selling pressure. Expect a negative opening.

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Support / Resistance

We have been flirting at these levels and it seems that we might be visiting again this morning – do we hold or break?

INDU 8500 / 8750 (Futures are showing an opening just below the support.)

NDX 1450 / 1500 (Looks like we might opening right at 1450.)

SPX 900 / 950 (A 905 opening, do we hold?)

RUT 500 / 540 (At 505 based on the futures in the pre-market).

===========================
Gold 900 (Gold has come off after making its run – expect to see volatility with the currencies.)

Silver 14 (We saw a pull back from the 15 level and are looking just below 14.)

Oil 65+ (We were up in the low 70s, but this morning’s action is showing Oil breaking 70 and trading in the 67-68 range.)

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Conclusion

People are very tired of hearing “green shoots”, it is almost mind numbing. It was catchy when someone first said it a couple of months ago, but I suspect that it is the most used word to describe the economic condition on any major network. Buzz words used properly, like “green shoots”, create hope and optimism. Marketing people KNOW what works and what doesn’t. The word “green shoots” implies hope and growth, it represents Spring and new life or new beginning. It is synonymous with Obama and his administration, out with the old and in with the new. However, it was Summer Solstice – the equinox has passed and it is summer. The flowers should be out, but they are not. Just like any farmer, the greet shoot talk is great after the snow has melted and the plants are breaking up through the soil, but they need to harvest those rewards. Once Summer is upon us, those plants better not be green shoots any longer, otherwise by fall there will be nothing to harvest. Investors want to see results, the economy wants to see results, and seeing companies and insiders selling their stocks is telling me that they think those green shoots might not be sprouting into flowers by fall.

Watch the dollar!

6/19/09 (Millionaries Missing? Global recovery? IPhone Craze!)

2009-06-19T09:08:00.002-04:00

Traders,

A basing area? We got down to those supports and have been basing as if waiting for some vital information that will steer the market up or down. Obama’s financial reform fell slightly flat and Geithner wasn’t convincing either way in his testimony. It’s a big task and still too many questions. The recent government data – from unemployment, inflation, and housing starts continue to tell the same story – we are not at a bottom yet, but there looks to be green shoots. But even though the numbers are not looking worst and are slowing in decline – the fact is they are still declining. It was like the housing starts – they looked great, but then you turn the page and foreclosures were up again. Investors (and the market) optimism of green shoots needs to pay off soon and those green shoots need to turn into flowers soon. We can only have “not that bad news” for so long and continue to hope that it will get better.

The talk now is the “double dip” recession, that talk is gaining a little ground because on the low end of the curve (the consumer) is not improving. No new jobs, jobless claims continue, no credit availability, equity lines in their home have decline, inflation (gas and food) are up, and mortgages rates have increased 100bps in a month. Unless we can see actual improvement at the consumer end of the curve – optimism, hope, and confidence doesn’t pay the bills. Well that’s the meat of the argument for the double dip. The math for the double dip is simple – look at revenues at companies (they are continuing to show lower numbers and guide lower). Smart companies will plan for lower revenue and look at cutting costs to juice the margins to remain profitable. But you can only cut so far. The big talk now is taxes, which are a big cost to any company.

If taxes are raised on the wealthy and companies to make up for the government spending and debt, we will hear more people like Paul Allen who has threaten to move Microsoft overseas. In some cases were are already seeing it. This is a great article on how raising taxes on the rich may not pay off and in fact in this case raising taxes actually yield LOWER revenue for the state. http://online.wsj.com/article/SB124329282377252471.html (Millionaires go missing!)

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Global economic recovery…

News out of Europe have a few leaders talking about “green shoots” and seeing in some of the data some numbers improving. Unfortunately not the consumer – which is what everyone is forgetting about. However, an interesting point is an increase in manufacturing – which is great news. But let’s look at it in break down the details. First, when the recession hit manufacturing slowed down as inventories became backlogged. In order to clear inventories, which takes time, means flushing them out at huge discounts. We saw, what seemed, as a deflation environment. For a short time it was – goods were sold at step discount just to move them and clear out massive backlogs. As the inventories diminished the wheels of manufacturing started turning again. Now doubt that it has increased, but should we get excited that it is increasing even though the measure is very small. I say yes and no. Yes – because it means that they are pushing out product again. No – because the increase is very small and while measurable it shows that goods are moving at a snail’s pace. It is a good first sign – but we need to see it pick up.

Second, where IS the manufacturing picking up? That is another interesting question. Reports show a pickup in the BRIC nations and other manufacturing nations. The U.S. is really not showing anything to get excited about on the domestic front, but the international companies are seeing their foreign sites picking up. The question is where are the goods and services being deployed.

China had seen a slow down as well, but they also don’t have the national or consumer debt like this country. Their stimulus went to the bottom line as only a small percentage of consumers in that nation have access to credit and thus little debt. They are seeing a quick bounce – the question is how much of their domestic manufacturing is serving them domestically vs. foreign trade. The trade balance is widening, but we are also seeing them both decline.

I think it is not wise to look at a global recovery, but rather on a nation by nation recovery. Investors are also going to be taking a closer look at investing overseas as new ETFs, funds, and other products are giving them better access to foreign investments. That means competition in products – more products with a finite amount of dollars means diversification. It also means higher volatility as we see money chase the yield. We see that traditionally in the bonds vs. stocks as money pulls out of safe heavens into equities and back in again. As more foreign products are available we could see funds chase products overseas.

China is in a incredible ability to recover – little to no consumer debt, little national debt, positive trade balance (trade surplus), manufacturing, growth, and commodities. Compare that to the U.S., massive consumer debt, massive national debt, negative trade balance, shrinking manufacturing, and a reliance on foreign commodities. Jimmy Rogers is right – it will be only a matter of time before we see more investors chase better opportunities off-shore.

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Apple – Jobs who?

Steve Jobs has been out because of an illness, but that hasn’t stopped Apple from rocketing higher (up 50% from its lows). People are waiting in line again this morning, not for a new product – but for an updated Iphone. It looks the same, works, the same, is really the same – except it has a few new features. The power of Apple is amazing – marketing, design, etc. It certainly has it’s crazy fan boys that will wait in line and those in line probably already have Iphone 1, Iphone 3g, and now they are buying the new Iphone. It’s like a drug. Smart investors are riding the momentum of Apple’s ability to resell the same product 3 times in a row with just new features. The price difference is incredible – people are paying over $200 more for a couple of new features. So expect a pop in the stock today.

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Futures Pre-market

We are seeing a good pop in the futures – part from the Iphone hype (which we are seeing the NDX) and part from the positive spin out of Europe about Global economic growth. Expect a higher opening.

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Support / Resistance

INDU 8500 / 8750 (It looks like 8500 held as support are we to head back to 8750?)

NDX 1450 / 1500 (Again a hold at the 1450 level – looking about 15 points higher at the opening.)

SPX 900 / 950 (SPX also held.)

RUT 500 / 540 (Another hold.)

Watch the close – it is expiration this week. Volume also has been light after we got to the support.

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Conclusion

Currency markets and commodities have been quite this week, along with the market after it reached support areas. Today is “triple witching” as futures and options expire collectively. We may not see a big rally or sell off as hedging into expiration could create some pin risk on issues. Watch the action into the close and if this rally off support has any legs.

Watch you expiration risk and stock after the close. Get those exercise / do not exercise notices out – we might see some aftermarket money on the table.

6/18/09 (Horse Trading Begins...)

2009-06-18T09:06:00.000-04:00

Traders,

Seems like a holding pattern around the support area as the indices closed mixed. Obama introduced his new financial reform plan, including a new regulatory arm as well as increasing powers of the Federal Reserve. There are also some rumblings that Summers’ has his eye on Bernanke’s seat, much of that has come from the idea of giving the Federal Reserve more sweeping powers. Some say that Summers’ has Obama’s ear and that some of the suggestions about the expanding role of the Federal Reserve is not coming from Bernanke, but rather Summers’. Those crazy political games – who knows – but there will be some shake up.

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We wait for debate….

It is almost like the market is paused waiting to hear the back-to-back testimony of Geitner at the Senate banking committee and then latter in the afternoon at the House financial committee. We heard Obama’s plan and have a general idea – but there is many questions, but it seems to be a big reform. We certainly need reform – the question what is the right reform. We a new possible regulatory agency (or several), including a possible merger of one or two, add in flipping powers from one agency to another and finally bringing the Treasury and Fed into the mix – it is going to be a massive land grab for power. Who gets what power and what authority? Who reports to who? Who is going to run the new agencies? It is going to get messy and crazy.
It felt like Obama dropped the green flag yesterday, today is about getting information and figuring out who is on what side, and then the massive horse trading begins. Certainly election of 2010 is going to play into this as politicians need to be on the winning ticket and they need to figure out which side the winning ticket is.

Obama remains hugely popular, but ironically Congress’s popularity continues to fall. They are both the same party and one would think they would be more harmonious. Even among the democrats there is some blue dog vs. bigger government types are fighting it out.

Jack Welch today on CNBC said that everyone needs to take a breath. The new Congress and Administration has been in office not even 6 months and they have a trillion plus controversial Healthcare proposal on the table, Cap and Trade energy plan, and now a massive sweeping reform of the entire financial industry. If they don’t focus on one – everything could unravel. Top that off we are certainly not seeing a recovery any time soon and still have a very fragile market. Maybe taking a breath and tackling one at a time would be best.

Regardless – the debates begin today – tune into Geithner this morning and afternoon. It may give us an idea of who and what is in the mix in this horse trading extravaganza. I know the market will be listening and we could get some intraday knee jerks up or down based on the tone and if any clearer picture of this plan emerges.

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Initial Jobless Claims…

Initial weekly claims rose by 3,000 to 608,000 in-line with forecast. The net collecting unemployment insurance fell 148,000 to 6.69 million (the most since November). Economist on Bloomberg radio pointed out that it is hard to say how much of the 148,000 fell off because time ran out vs. how many actually found new jobs. He surmised that it was the “disgruntled” category, only because we continue to see the weekly claims continue to rise – indicating that people are continuing to be laid off.
The futures did get a little pop off the net number falling, but I think the market remains paused at the support and wait to hear more about this financial reform today.

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Futures Pre-market

The futures had been down all morning, but did get a little pop on the jobless numbers – small and it looks like we will see a flat to slightly mixed opening.

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Support / Resistance

The market was mixed yesterday and RIGHT at those support numbers. Today we may get some confidence or see it erode as Geithner testifies – expect a little volatility.

INDU 8500 / 8750 (We closed just below – the support, but I am still counting it at 8500)

NDX 1450 / 1500 (I think 1450 is more of a pivot point, rather than support – but call it short-term support for today.)

SPX 900 / 950 (10 points above the 900 support and futures look flat at the opening.)

RUT 500 / 540 (We are just above 500 at 507 – futures are showing a slightly lower opening, but still above 500.)

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Conclusion

I believe that Obama is well intention and sees many things that are broken and need fixing. He is right and both Republicans, Democrats, and Independents agree. The question is not if they are broken, but how to correctly fix it. The GOP has offered their own Healthcare plan, but Obama refuses to even look at it. The GOP just introduced their Financial Plan – but the Democrats criticize it without reviewing it. The Democrats are no different than the Republicans when they were in office. Obama might SAY he is willing to listen, but the reality (as we are witnessing it) is that he has an agenda and big plans and is pushing them forward. The problem is not Obama, as any president will have their ideas and plans, the problem is that one party controls Congress, Senate, and the Executive branch. That means they don’t have to listen, the Republicans might as well not even bother showing up, because any ideas or proposals will not even be considered. We saw the same thing in Bush’s first term – he never reached across the aisle, because he didn’t need to. Now Obama doesn’t need to either.

That should be alarming to anyone, regardless of party. We need some balance, regardless if you agree or disagree with one party or another. It is the purpose of why we have 3 branches and that power is divided. While this is not a political newsletter, it is now politics that are playing a crucial role in the markets. We need to pay attention what is happening in Wall Street – because it is becoming more involved with Wall Street.

6/17/09 (CPI - no inflation, Fed Confused?)

2009-06-18T09:05:00.000-04:00

Traders,

Mix signals in the data yesterday between inflation and housing starts – causing concern, not that we are coming to a bottom – but the ability for the nation to rebound quickly or get back on track as the more optimistic forecasts predict. Certainly we are seeing some selling pressure and the question on everyone’s lips is this a buying opportunity or has momentum lost steam. Certainly we have had a fantastic run, one to market down in the history books. The problem and ironically (as per the previous times we have seen a similar rally) is that the fundamentals look rather weak. It’s as if the market rallied without revenue’s in mind and now all of a sudden paused and said, oh yeah the consumers were not on board.

____________________________________
CPI – no inflation?

The CPI (consumer price index), crept up less than expected. While some may point to it and say “See – we need not worry about inflation.” It is not the past (which is what CPI reports), nor the present, but rather the future that one must prepare for. A small creep up or no creep up – doesn’t mean that it will not happen. You may also know that I wrote a essay on the CPI and government data – so I give the data a more critical, if not skeptical eye. No doubt that commodity prices are rallying – look at oil, or just go to the gas station. Same is true with food.

But it is the dollar and U.S. treasuries that cause the biggest concern – it is the faith in the currency that can strike at the very heart of inflation. That is the most important gauge of all – we earn dollars and we spend dollars – all true. But this nation is not self reliant. We consume the world’s resources – not just our own and thus we must convert our money to buy those resources.

Bloomberg: CPI Report http://www.bloomberg.com/apps/news?pid=20601087&sid=a7monBTRDAdQ

My Essay: http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html

Shadow Statistics: http://www.shadowstats.com/

_______________________________________
Fed confused?

What is the Fed to do? They have are printing money to buy treasuries (debt), trying to keep rates low via “quantitative easing”, made speeches about being “strong dollar” people, and have pretty much used every tool in their tool box. The problem is that bonds continue to slide and the rates go up. The trickledown effect has seen the 30 year mortgage rates rocket 100 bps in a few weeks. The Fed’s off balance sheet liabilities are guestimated by Bloomberg to exceed $8 trillion and Bernanke had just warned Congress to stop spending and get this deficit under control (he can’t continue to print money).

The problem is not finding a bottom – we all pretty much agree (bulls, bears, Democrats, and Republicans) – that a bottom will be at hand soon (that is the simple math – there are only so many jobs and so many people – so you can only fire a finite amount of people). The data has shown that it is slowing down and a bottom is coming. But that is not the problem – the problem is WHEN DO WE GROW and HOW FAST?

But the Fed has a bigger problem – how do they reign in all the money they injected? When they figure that out the second two questions is How Much and How Fast? It’s a bigger problem than the Fed can handle alone, because the Fed has lent our government (treasury) billions of dollars – so there is a little concern about how fast the government can pay back the Fed.

If we look at this very simply, the Fed is the Bank and the Treasury is a business that has just taken a massive loan. The Bank is now concern, because it gave them this loan predicated on their ability to pay it back. But the company is spending MORE money than it has and needs to borrow even MORE money. See the company is basing their futures on two things – current revenue (from the tax payer) to help pay off the loan and future growth expectations (GDP growth) that is rather optimistic. Now the bank is saying you got to STOP spending and need to start thinking (seriously) about how to pay back what you have already borrowed.

Now the bank is concerned, not just about the company it lent money too, but they too have creditors they rely on (foreign central banks) – who are saying – you are over extended and you are continuing to loan money to a company that is losing revenue and their growth expectations are not realistic. If you don’t stop we will pull our credit!

Of course my simple view is not the whole picture – there is some serious incestuous relationships between the Fed and Treasury, the foreign central banks have their own problems but also don’t want to be married to this ongoing problem either – but I think you get the picture.

So – it’s back to repeating their FOMC mantra, “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” – meaning – they are going to continue to print money as the government continues to spend.

I guess it is really in the hands of China and their brethren – rather than are Fed. I guess Bernanke and Geithner need to do another road show to China and they must keep Obama from making any negative remarks towards China (like “China’s currency manipulation”).

What else is there to do.

http://www.bloomberg.com/apps/news?pid=20601087&sid=arWqPRMOr14A

_____________________________________________
Futures Pre-market

The futures got off the mat a little with what seemed like inflation at bay – but gave that up quickly. Market looks flat to mix opening.

______________________________________________
Support / Resistance

As we fought for a week at Resistance we are very quickly back to short-term support.

INDU 8500 / 8750 (Is 8500 a buying area – today will be the day to see.)

NDX 1400 (1450) 1500 (I think 1450 is more of a pivot point – we could see action either way – it’s market perception today.)

SPX 900 / 950 (Just off the 900 level, is it a support buying opportunity ?)

RUT 500 / 540-550 (We are right there – a crack below 500 is not a good sign – watch the close.)

_______________________________________________
Conclusion

There is some political volatility in the air and when mixed with economic concerns – spells big concerns. Iran’s vote and instability, North Korea weapons testing (and China’s relationship with them), Healthcare reform looking to top 1 trillion, new regulations and new government agencies to enforce new regulations. I would say we are not going to see the summer doldrums we usually expect to see – something is going to heat up and if we recover from something quickly and favorably that will be positive for the market, if we waver and things get messy that will be negative.

VIX shot about 30 – that’s a clue to get your hedge on if you don’t have it on.

6/16/09 (The BRIC Party!)

2009-06-18T09:04:00.000-04:00

Traders,

Yesterday we did not get that rebound up to those resistance levels and the trading day saw pressure throughout the session. It seems to no longer be about the recession slowing down, but more about the recovery. The concern is how fast the recovery will be, traditionally after a recession we see a 4 to 6% growth rate as credit and consumer spending picks up, drives an increase in revenue, that drives an increase in hiring, and at the end of the day profits for the company (and shareholders). But that is not what we are seeing and it really seems to boil down to the consumer level – when will they start spending - a lot of that has to do with credit and their propensity to spend when (and if) credit is available. There no doubt is some shell shock and while savings and paying down debt is a good thing, savings doesn’t grow an economy – which is what we need to see growth so the nation (our government) can start paying down their debt.

No doubt that the Fed and Treasury are concern and I have faith that they’ll have a plan to reel in the debt, but that plan is predicated on consumers, their spending, and jobs. So while the plan might be the best plan, we now need to wait to see if the consumer can get off the mat. The longer we wait for the recover – the more concern people will become.

____________________________________
Housing (The good with the bad)

Some good news is that the housing starts and permits expanded in May by 17% to an annual rate of 532,000, up from 454,000 the prior month. Permits also rose to an annual pace of 485,000. But on the other hand builders continue to face a challenge from excess inventory and foreclosures and delinquencies are still rising. Additionally mortgage rates have been surging and is now up to 5.57 – matching the increasing rates in the treasury market.

The builders, while breaking new ground face lower revenue and higher margins (commodity prices). As they try to get off the mat – it is the competition in existing inventory and now higher rates that could make this a one-two month anomaly. One analyst on Bloomberg suggested the second quarter saw a rise in consumer confidence and possibly an early jump into picking a bottom in housing, but with the increase in rates and the excess inventory, those investors may not see the returns for some time. One real estate investor mentioned it was a hedge against inflation.

The good news about the starts being up – did send a small spike up into the futures in the pre-market

________________________________________
BRIC looking into each other

The BRIC (Brazil, Russia, India, and China) had voiced their concerns, stepped into the IMF for bonds, and now are talking about buying each other’s debt to diversify out of the dollar. The question remains: 1. Do they continue to purchase dollars at the same amount, 2. How do they get out of U.S. bonds – let them expire or sell them. Those two questions will have a big impact on the interest rate, inflation curve, and dollar strength/weakness.

It is a story we much remain focused on: http://www.bloomberg.com/apps/news?pid=20601110&sid=a3VqQW.OiRqY

_________________________________________
Futures Pre-Market

We saw a small pop, up from flat, on the housing starts – but their remains questions. If the spread remains expect a positive opening.

__________________________________________
Support / Resistance

Last week was the fight at resistance and Monday the sellers won and we had a pull back. Is it a buying opportunity and a rally back, or a place to pause? Note all the indices are pretty much on that 20 day moving average.

INDU 8500 / 8750 (The opening doesn’t seem to be indicating either way – watch the close.)

NDX 1425 / 1500 (We almost filled the gap.)

SPX 900 / 950 (Right in the middle)

RUT 500 / 540 (Just off the bottom.)

__________________________________________
Conclusion

How long are we going to hear about “Green Shoots” – that can’t be “Green Shoots” forever – they need to grow into something – flowers or weeds? I wonder what the “green shoot” talk timeline is – when people become sick of hearing “Green Shoots” and want to know WHAT those plants are that are growing. It is rather silly – but there must be a psychological time line were we can only hear the talk so much before we need to see something. It’s like the “Strong dollar” talk – you hear it over and over, but then you just see the dollar continue to lose ground over time.

Perception and psychology is very important, no doubt. Obama has done a fantastic job selling hope and optimism, but that does need to turn into results. And all that recovery talk is not showing any results and not that it should. A recovery takes months if not years – we should expect to see it in weeks, but the market moves in a knee jerk fashion and expects results NOW. We live in an instantaneous society – and that creates short-term knee jerk reactions (both positive and negative). We are perception reactionary nation, rather than analytical.

Stay frosty.

6/15/09 (Russia's Gambit)

2009-06-15T12:19:00.000-04:00

Traders,

Last week was rather flat, but did see intra-day volatility. A push and pull around those resistance levels, one morning up only to fall off the next down only to rally back. It seem that the dollar strength, bonds, and national debt has become more focused talking points. More and more economists are coming to the table about the pending fork in the road, try to inflate our way out or default. Concern about the dollar began to blossom when S&P downgraded the UK debt as it reached 100% of GDP. While the U.S. assured us (and Geithner assured China) – the question still remained. A rating agency in Brazil put U.S. debt on warning and a possible credit downgrade, and other foreign rating agencies (none as prominent as Moody’s, Fitch, or S&P) and none that are U.S. based have echoed that concern, but how far are we to trust our own credit rating agencies? Didn’t they give AAA credit to GM, AIG, Freddie, Fannie, as well as 100s of billions in mortgage backed security products?

The dollar story will remain on the forefront as we recover, only to land us in another economic concern – inflation. There are two debates with National Healthcare, first is the political one – (privatization, nationalism, socialism, etc.) both sides have their merits and faults – but there is another debate equally, if not more important. Can we afford it? The truth is we can’t (even if we wanted to). National debt (including programs) is in the trillions, the deficit is in the trillions, bailouts and loans in the trillions, so much debt that the Fed is printing money just to buy government debt (bonds) and now even Bernanke has warned Congress to stop spending. Other nations are also concerned about the National Healthcare plan, not the policy but the funding of it. Giethner promised foreign central banks that the administration would be lowering the deficit to 3%, but the new healthcare plan adds by NPR’s figures (rather low from what others have indicated) over 1.5 trillion in additional spending.

There is nothing wrong with debt, if you can afford it, and nations have had debt throughout history. But as we approach rather quickly 100% of GDP (and looking to exceed it) we come to a tipping point. The straw that will break the back is when the nation needs to borrow money just to cover the interest rate. We all know how interest only loans worked out for those mortgages, our government is on a fast track of interest only debt – but worst – they will have to borrow MORE just to make the interest payments. That’s analogous to paying your interest only mortgage with credit cards.

____________________________________________
Russia’s Gambit

http://www.bloomberg.com/apps/news?pid=20601087&sid=awOCMo25zbYY

Russian officials had made some comments last week that put more negative pressure on the dollar, the openly purchased billions in IMF debt, rather than U.S. treasuries. Unofficial talk coming out of Russia was that they might sell out of their U.S. dollar backed debt and move elsewhere. The BRIC (Brazil, Russia, India, and China) started to follow suit, Brazil and China have taken the plunge as well. Concerns last week that Bernanke would not be able to control rates and would have to print more money to buy treasuries to make up for the short-fall of foreign central banks became a serious concern.

Russia however made official comments after last week’s move into the IMF debt and said “It’s too early to speak of an alternative” to the U.S. as a reserve currency. They are probably right, but on the other hand their previous comments had driven the bonds down (costing Russia and other debt holders 100s of millions if not billions). After the comment the bonds began to rally again. But is this just a political speech to buoy the dollar, enough so that Russia can get back on the selling train? It’s true that there is not enough liquidity in any other single asset to take the place of the dollar as a world reserve currency. However, we may see a move to a more diversified basket, which will still create weakness to the dollar.

For now the BRIC is holding all the cards and the U.S. is sending envoys to ease their concerns about our debt and spending habits. The U.S. needs them to buy MORE debt, not sell what they have. Talk is cheap and all eyes (from afar) are watching the net debt mount and now pressuring concerns about this trillion dollar plus health care bill. Could a passage of the Healthcare bill spark a selloff of U.S. treasuries by foreign central banks as they grow concern about our mounting debt and deficit? I don’t know but if CNBC Europe and Bloomberg Asia interviews with foreign analyst and economist seem to think that it sure doesn’t ADD confidence to the U.S.’s ability to pay down the debt and reduce their deficit.

___________________________________________
Futures Pre-market

The futures are down following Asia and Europe as the recession might be ending but growth seems to be long in coming. The spreads are end – expect negative pressure on the market at the opening.

_____________________________________________
Support / Resistance

We all know the numbers by now – we should crack below them today – but like all last week – it’s about the close.

INDU 8750

NDX 1500

SPX 950

RUT 540-550

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Conclusion

The G-8 finance ministers are drawing up contingency plans for rolling back the budget deficits and banks bailouts as the economy shows signs of “green shoots” to help ease concerns of economist how have indicated that if we stay the course inflation will be worst that anticipated. While it is premature to do anything today or even in the near-term – having policies in place is finally showing some foresight as to try to avoid inflation while at the same time making sure we don’t slip back into a credit crisis.

One of the big issues, while people are pointing to “green shoots”, is that the consumer (that real driver of the economy) is not seeing ANY “green shoots”. And the banking data looking good – primarily because they are not lending. This is the see-saw as to any decision by the financial ministers of the top nations. Bank data is looking better, TARP repayments, LIBOR easing, but the consumer data (other than confidence) is showing no new jobs, lower consumer spending, and no credit availability. There are always “green shoots” if you look for them, the problem is they may not be growing where you NEED them to grow. We can only ignore the consumer for so long – it is the consumer that needs to recover before the economy can.

6/12/09 (Dollar Cheerleading!)

2009-06-12T09:14:00.000-04:00

Traders,

Another push-pull at the resistance levels – the retail sales number and the weekly claims looked good on the surface, but didn’t show signs of a recover – but that the recession is slowing. A bottom has yet to be found. While the bond auctions had not done very well, the smaller 30 year auction actually did better than the 10 year that preceded it. While 11 billion is a lot – it was paltry compared to the other auctions. So while it did well – skeptics remain cautious.

________________________________________
Dollar Cheerleading!!!

The big story right now is the dollar and U.S. debt.

1. We saw Geithner travel to China on a road show to ease concerns and get the Chinese to buy more.

2. We had the BRIC (Brazil, Russia, India, and China) – with Russia taking the lead – purchase IMF bonds and mention they will reducing dollar holdings.

3. Nouriel Roubini said the dollar will eventually diminish as a world reserve currency.

4. The Fed is buying (printing money) billions of Treasuries to make up for the short-fall and to keep interest rates low – but failing.

5. Bonds are getting hit and yields are rallying.

6. Dollar is slipping in value against foreign currencies

7. Commodities are rallying

I had never in the past seen equity and option traders pay so much attention to the bond auctions and watching the dollar. This is going to be the big story. As I mentioned the dollar bubble is inflating and it will either POP or deflate. A pop is not a good thing.

Keep an eye on the currency exchange rates, bond yields, auctions, and foreign central bank action.

We are seeing China and others moving into shorter-term maturity rather than buying 5, 10 or 30 year. This allows them to get out earlier and not fully committed.

Yesterday I forwarded an interesting story (which I have yet seen covered in the U.S media) – so far I don’t know if they are counterfeit or real. But even if they are counterfeit at $500 million denomination who are they going to sell them to and if they are real – they are only issued to foreign central banks.

http://www.asianews.it/index.php?l=en&art=15456&size=A

It is interesting that the Finance Minister of Japan came out the next day and said, “We have complete trust in the fact that the U.S. views its strong-dollar policy as fundamental.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=apWVhFYArRhg

It would be interesting to find out something more about this story.

______________________________________________
Futures Pre-market

The futures are down and the spread is in. Expect some negative pressure on the market at the opening if the spreads remain.

___________________________________________
Support / Resistance

Each time we try to break out we come right back down. It has been a weak of push and pull at this level. Can’t go higher, but can’t go lower. Who wins?
There is nothing more to say – other than watch the close and these are the numbers.

INDU 8750

NDX 1500

SPX 950

RUT 540

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Conclusion

A follow-up to the dollar story is the Healthcare plan which according to an NPR report could cost over 1.5 TRILLION, the question is how are we going to pay? Whether you are for it or against it – the reality is that it is MORE national debt (a lot more). If foreign nations are already concerned, calling for a reserve currency, and we rely on them to extend us credit – what do you think there view is of this nation spending another trillion? Time to get out?

While the Healthcare program might sound good, it could be the international straw that breaks the dollar back.

6/11/09 (Retail Sales, Jobless, Yeilds Higher?)

2009-06-11T10:45:00.000-04:00

Traders,

The market had looked to open up rather high, following Asia and Europe - but sold off throughout the day. Then, almost like clockwork, the market rallied into the close, but still down on the day and below those resistance levels - which continue to be tested. The action in the market was interesting and the beige book didn't reflect a recovery, but rather (as we know) the contraction in the economy is slowing down, good news - but not a bottom yet.

I had an interesting conversation yesterday - he indicated that we are seeing some lighter volume and larger trading momentum activity, rather that sector driven investment type paper. The traditional institutional contingency orders are few and far between, and the activity seems to toss short-term deltas into the market. His concern is that momentum markets (up or down) need to (eventually) have some fundamental foundation for them to be justified in the long-term. I mentioned that the banks "seem" to be fundamentally sound (regardless if we criticize the accounting and Fed borrowing) - since by the "NEW" measure it is getting better. True enough he said, but the market is rally as revenue is contracting - that can only last so long. If revenue is contracting that is negative growth no matter how you slice it. I think that it could create more efficient business models to keep margins hire - but he is right - as a measure of consumer consumption it is showing contraction.

At the end of the conversation - it is one thing - regardless of unemployment, we need to see revenue stabilize and start to grow (broadly) before a recovery is measureable. Unemployment is a gauge we can determine by reason if we expect to see revenue contract or expand, for now we haven't seen a bottom yet (but I think it will happen this year - or I hope).

CEO of Blackrock was on CNBC this morning and he made a similar comment, we are NOT going to see the growth that we are accustom to going forward and that also means "fundamentally" slower growth. He also thinks, while 1000 SPX target for 2009 is still their target, we have come up too much too fast and a revisit to 800 is in the cards in the short-term. He expects a choppy move to 1000 and slow growth in 2010 and 2011. He included that inflation is a very big worry for them going forward.

_____________________________________________________
Yields Rising…

The auctions of government treasuries is not seeing the kind of buying that is needed to absorb the debt the government is generating, we are continuing to see bonds fall, sending the yields higher. The 10-year is approaching 4%, a level we had not seen since last October. The problem is there is a lot more debt to be sold and the market has been barely able to absorb it, as the Fed is printing money to buy the balance and make up for the short fall.

The U.S. will auction $11 billion in the 30-year paper today and the traders are keeping an eye on the buying and the yield.

Yesterday, Russia announced that it is diminishing it’s positions in U.S. and now Brazil is taking a similar position. A story to keep our eyes on.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_8g_DLCl4vs

Now even Nouriel Roubini (Economics professor that predicted the economic crisis) – says that dollar’s favor of a reserve currency will deteriorate. While it will not happen overnight, the momentum (and faith) is moving in that direction. Geithner tried to reassure the Chinese, but the reality of the debt, deficit, and printing of 100s of billions is a clear sign that it will take more than a pep talk from Geithner to bring back confidence.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRMZbES7DNFc

_____________________________________
Retail Sales and Weekly Jobless

Retail sales up rising .5% (excluding autos) – better than expected (.2%), but a mixed number when we look at it in more detail. Growth in food and beverage, but down in department stores. While number may look on the surface better than expected, the analyst are saying that once looking into the numbers – it seems the necessity purchases remain strong, but extracurricular purchases are suffering. Good news they ARE spending, but in a very frugal manner. Auto sales may also look better, but those sales are skeptical because GM and Chrysler are selling at steep discounts to empty inventory and generate cash in a bankruptcy.

Weekly jobless claims down 24,000 – showing that it is slowing, but still not enough.
However, those that remain on unemployment hit a new record of 6.8 million. While we might be slowing in layoffs, the net number rising of those on unemployment clearly shows that we are not seeing any growth yet.

______________________________________
Futures Pre-market

The futures are starting to come off after the retail and job numbers – it had initially jolted up, but then came down after the numbers were being reviewed. Expect a flat to negative opening.

______________________________________
Support / Resistance

Seemed like we were going to break out yesterday morning, but selling pressure pushed us back down below those resistance levels. A good fight at these levels – pretty even.

INDU 8750 (Way up, way down, back to unchanged. I call the fight a draw!)

NDX 1500 (Again – same play up, down, back to unchanged.)

SPX 950 (Same here)

RUT 540-550 (This was a little weaker than the narrow based indices)

Keep an eye on this fight – these are key for a break out or a sell off. It could go either way – momentum or fundamental. Momentum has seemed to slow.

_____________________________________
Conclusion

The data today looks like we are getting to a bottom, but the growth doesn’t seem to be coming any time soon. We did see bonds begin to rally after the numbers, right after they had touched 4% - a safe haven play? Not enough action yet to make that call.

To conclude – here is a very interesting story:
What are two dudes doing with $134 billion in bonds in a brief case?

http://www.japantoday.com/category/crime/view/2-japanese-carrying-134-bil-worth-of-us-bonds-detained-in-italy

6/10/09 (Will the Dollar Break?)

2009-06-10T09:00:00.000-04:00

Traders,

Yesterday was a mixed market across the board, we saw the dollar start to weaken, commodities rally, and the a mix session in the bond market. The market tested those resistances and we have been in a momentum rally (rather than a fundamental) for the most part. There had been some expectations that Bernanke (and the FED) would raise rates - but that debate cuts both ways, policy and politically he will not raise rates, but fundamentally he may have to. Who is to say - but if that were the case it would be damaging to the consumer recovery as the very little credit available will become more expensive, which would put a clamp on home sales.

____________________________________________
Policy News

Summertime is usually a low in stock and sector news, with market news driven by policy or world events.

The Supreme Court passed on taking a go at the Chrysler decision and it looks like the sale will go through – giving some concern to the corporate bond market.

The administration is looking to expand the SEC powers to include executive pay oversight, which will certainly get push back and create some concerns in the banking industry.

US Debt and Dollar risk continues to be a concern, Russia announces it will switch out of U.S. Treasuries and into IMF DEBT (others may follow).

The Stimulus is seeing its way into the market, but consumers are still strapped for spending power.

Trade deficit widens – as exports drop - reducing hopes of a recovery soon.

Certainly we will get some good and bad news and it the market will take it in stride.

____________________________________________
Dollar and U.S. Debt

The story that just will not die. For the last several months we hear concern about deflation, I had said that was a very short sighted view and while it may “seem” like deflation it was really a by-product of the credit crunch than actual deflation (in my book) – my concern was coming inflation and mounting U.S. debt. But as I mentioned earlier the concern seems to be a two way street. Certainly we are seeing inflation – you can’t deny that – just look at commodity prices or go to the gas pump or pay attention the next time you are buying food. Prices are going up.

As Bernanke took interest rates to zero, the only reason people bought U.S. treasuries was their concern about RISK, they certainly were NOT making any money with close to ZERO rates. But now, after the market has made a significant rally, people are coming out of there caves and seem to have an appetite for risk – (selling their U.S. treasuries and buying stocks and equities). That is one primary force in the market (that is driving up the equity momentum rally and down U.S treasuries), but there is another force.

While retail and investors are selling treasuries because they are looking for better returns elsewhere, the foreign players (and considerably bigger) are reducing their longer-term U.S. treasuries for a different reason – FEAR of the mounting U.S. debt and deficit, coupled with the massive printing of money. While we have seen many foreign players continue to purchase U.S. treasuries, they have significantly changed their game plan. What had traditionally been a mixed basket between 30 day, 2 year, 5 year, 10 year, - we are now see them move more and more into the short-term paper and significantly less in the 5 and 10 year (forget 30 year). The answer is simple – the shorter time frame, the quicker they expire, the quicker they are out. This gives them time to figure out where to go to next. We have heard their concerns and calling for a NEW reserve currency, but so far they have continued to buy (and hold) U.S. treasuries – until now. Russia announced it may be the first to cut the cord and switch out of U.S. treasuries into IMF Debt. While Russia is not the biggest player – it could be the domino that creates a wave of others to follow.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahoIPyEdpHUI

What does this mean – well it means that we could see Treasuries fall dramatically (they are already going down), that means yields will go up fast. This has many very negative consequences.

1. It can create a very weak dollar as others rush to get out of U.S. dollar holdings
.
2. It will significantly hurt the U.S. deficit and debt – as Obama needs to finance MORE of the deficit and sell 100s of billions more in treasuries – with no buyers the yields go up that means the U.S. government paying VERY high interest payments – which could be a back breaker.

3. Consumer credit will become very expensive – forget those low mortgage rates (banks have to borrow money and it will be expensive).

4. Bankrupt Fed? The Fed is rumored to have over 9 trillion in off balance sheet risk (Bloomberg law suit), they have doubled their reported balance sheet, and are buying more and more treasuries (with printed money) because the government’s spending is so massive there is not enough investors in the world to finance it. If nations stop buying (or worst start selling) their holdings – that means the amount the Fed has to print to make up for the short fall is passing the tipping point.

If Russia moves in this direction and others follow – would could get ugly fast.

We are beyond the math models of inflation, deflation, stagflation. This can no longer be measured in any velocity of money or M1, M2, M3, etc. We have moved into the realm of FAITH. If nations lose faith in the U.S. dollar no amount of printing, policies, speeches, or even math can make up any difference. A move to a new reserve currency tells the U.S. that the world has lost faith in the U.S.’s ability to manage debt and their printing has gotten out of control.

While I might sound like an alarmist – I am not alone, wiser and more knowledgeable men than I have voiced similar concerns (Buffet, Rogers, Faber, Gross, and many others). We can only “HOPE” that Congress and the administration can get in front of this. When Bernanke the other day WARNS Congress they must stop spending – shouldn’t that be warning enough. The FED is printing billions daily to keep up – it just has to stop.

What is the breaking point? How much more money do you have to print to finance the U.S. Debt (treasuries) before it becomes a joke (or worthless)? Nations, Bernanke, and others are saying we are very close to that tipping point.

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Futures Pre-market

We are getting a pop in the futures pre-market which just seems to be a following of the Europe and Asian markets – rather than any fundamental information.

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Support / Resistance

We are right there and the futures look to break through those resistance points – watch the close for confirmation.

INDU 8750 (We are right there – with the INDU pretty much unchanged – the futures are pointing to a higher opening. But will that hold into the close?)

NDX 1500 (Again – closed almost right on the money – future pointing higher.)

SPX 940-950 (Right in the resistance wheel house.)

RUT 540-550 (Just below – but close)

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Conclusion

The big question for the economy and future stability is twofold, IF Russia makes this move out of the dollar and IF others follow. I think this should be the primary economic story of the day – not just the brief headline that I saw on Bloomberg. Of course the media reports after it happens, maybe we should look at this as a warning shot. So far it has just been saber rattling requesting a new reserve currency and their increase in short-term vs. long-term. However, a move out and if others follow could send yields spiking fast and hard when we least expect it.

I don’t know how the administration is going to smooth the relationships with our largest creditors. Obama and Geithner had initially shot themselves in the foot when they had said that China had “manipulated” their currency. Now they are retracting that and Geithner went on a road show to China to ease their concerns. You can’t piss off our biggest creditor when the economy looks this bad, we NEED China more than they need us. We NEED them to buy more treasuries! Bernanke is at a breaking point, he can’t keep printing money to make up the difference which is increasing.
Everyone is running out of the dollar (U.S. treasuries) – small and big investors as their appetite for risk increases and they don’t want to miss the boat on the equity rally and the foreign nations that think the U.S. debt and spending is out of control. As everyone rushes out, how are we to fund (borrow) to cover our deficit, pay down the debt, or just pay off the interest on our debt.

I got sick this morning when I heard on NPR about the new Health Care plan that is expected to cost $1.5 TRILLION – yeah how are we going to pay for that?

6/9/09 (Bankruptcy & Supreme Court, Tarp Payback!)

2009-06-09T09:06:00.003-04:00

Traders,

Yesterday the market was under pressure more of the day, as analyst and economist pointed that while the bottom is near - we could have problems with credit and consumer spending and thus seeing slower growth in the GDP (or recovery).

Apple caused some buzz and excitement on a couple of fronts, dropping the price of the Iphone to $99, new generation introduced, GoTo GPS, and Steve Jobs returning to Apple (even though he wasn’t there). Then Paul Krugman (Nobel prize economist and NYT columnist) made the statement that in hindsight we may look back to the summer as the bottom of the recession. This news sent a euphoric spike to the market into the close. It shows that we can certainly take one sentence out of context and turn it into a "Green Shoot" - for good or for bad, our media loves to latch onto out of context sentences and spin them. He didn't say the recession ended, but media spun it as if he had.

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Supreme Court vs. Administration

The government's involvement in the bankruptcy's of the auto companies has caused confusion and questions. The big question that has reached the supreme court seems to be one of ideology vs. contact law. The Administration stance is that we are putting the Automotive companies and the 1,000 of jobs first and the secured bond holders (those that lent money to auto companies) said that they (by law) are first. The lower courts ruled in favor of the government, but pension funds that have been sent to the back of the line said STOP. They had invested for their state pension funds under the correct assumption that they are first in line.

Now it is in the Supreme Court's hand and they have HALTED the sale of Chrysler to Fiat until they review this further. This could also create serious problems for GM, which is in a similar situation (yet different).

While this may not affect action in any issues today - if could create the following problems going forward.

1. Psychological - if ruled against the government it might create negative market segment indicating the government will have a harder time trying to bailout companies (banks, airlines, automotive).

2. Bond interest rates - if the government wins it could create higher rates on corporate bonds for companies that are traditionally in need of government aid (banks, airlines, automotive) - making it harder for companies to raise money and certainly more expensive that will affect the bottom line.

It is both an interesting story to follow - on a legal and political basis, but also important to follow because it could create some volatility in the corporate bond market and the verdict could create some market volatility. What is best for the country and what is the law – it will be debated.

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Tarp Repayment

After months of questions and request the Treasury is going to grant 9 banks to be allowed to pay back the Tarp. The debate was that if the Treasury had let only a handful pay, it would make the others look worse. I think we all know by now which banks are having problems and which are not. Goldman, JP Morgan, US Bank and a few others are suspected as the ones that will be granted to pay back the money. The announcement should be made today - and we could see some intra-sector volatility as those that can repay could go up (showing confidence) and we could see ones that didn't make the cut come under pressure. For now it expect some volatility in the banking sector - up and/or down.

On analyst on Bloomberg made an interesting observation, stating that while the banks have raised money (by selling shares) - they have also benefited from new accounting rules and one important factor that we have not included is their huge borrowing at the Discount Window of the Fed. While paying back the Treasury (TARP) is a good sign, they are still borrowing from the Fed - and thus would be borrowing from the Fed to pay back the Treasury. I guess nothing is wrong with that - since that is what Treasury is doing selling bonds (borrowing from the Fed). Interesting observation....

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Futures Pre-market

Flat to slightly positive – expect a flat to mix opening. No Arb as of this morning.

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Support / Resistance

We were down most of the day – until the close. Still close to those resistance levels. The bad news about the rally at the close was the very light volume. That means it is going to need a little more volume to push up harder.

INDU 8750 (We came off over 100 points yesterday only to rally into the close back to the 8750 area.)

NDX 1500 (We came off – but are close.)

SPX 950 (We are only 10 points below.)

RUT 540-550 (We are significantly lower than the other indices, % wise yesterday showing weaker broader market).

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Conclusion

The debate we are hearing from Congress and the Administration is rooted in “What is best for this nation!” – I fully agree that our elected officials should be operating from that position (ALWAYS) – but when that trumps the Constitution we begin to ask the question is it really best for the nation, or for a particular group. No doubt that our auto companies have been a manufacturing staple of this country, 100,000s of jobs, a beacon of our industrial might, etc. The government should do all it can to help the company – within reason (not only of the law and constitution, but also the tax payer). The 100s of billions are one thing that has created turmoil in the deficit and debt of this nation – but that is an argument for Congress and economist, but the bankruptcy and government involvement is highly questionable (from a legal and constitutional sense).

A bankruptcy by the government and for the government. Not only were they involved both financially and political before the bankruptcy’s they are also benefiting as the largest stake holder after the bankruptcy. They are putting their interest first – before those of the people. The Supreme court has halted the sale of Chrysler and will review if the government has stepped over the constitutional line. It is a landmark case and will certainly result in an interesting outcome and that outcome will clearly define our corporate future. Empathy and sympathy vs. blind justice. Who wins?

6/8/09 (Deflation, Inflation, now Stagflation?)

2009-06-09T09:06:00.001-04:00

Traders –

Friday was interesting – a spike up in the futures with the jobs number and then it sold off. I think once people absorbed the news about NET unemployment going higher 9.4% and also seeing the huge revisions over the last year – that while the number short-term may shows that the it is not as bad as it is, it is still bad. The “less bad news” is not always good news. What is interesting is when I heard people on Bloomberg or CNBC talking “bullishly” about the -375,000 jobless claims vs. the 500,000+ jobless claims, need we forget that during the previous recessions that jobless claims never got over 350,000? So we are still at massive all time highs – but I guess the good news is it is not 500,000 or 600,000.

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Deflation, Inflation, now Stagflation

The early talk was about deflation, which to me never held too much water – it might SEEM like it but that was just a surface review. Inflation was the hidden trump card that was going to surface. Last week even Bernanke warned Congress and the Administration to stop spending so much money (they Fed is drowning in printed money and is buying treasuries at an alarming pace).
http://www.bloomberg.com/apps/news?pid=20601087&sid=axq3ToKyUXnE

But there is an interesting problem arising – as the Fed is printing tons of money, commodity prices head higher, the man on the street (consumer) as well as many companies are not SEEING any of that new printed money. It is possible that we might not see inflation or deflation, but possibly something else (and it could be worse than either).
Imagine a world where commodities and goods go up in price, the fiat money printed is losing buying power, and even though the money is becoming less valuable (via massive printing and government debt) – you STILL can’t get your hands on any. This seems like a more likely scenario - as we must measure the cost of goods independently from the consumer access to money (credit or earned income).
http://www.bloomberg.com/apps/news?pid=20601087&sid=atsXGDwfFA_E

It’s a deflation/inflation mix bag and some are calling it stagflation. Whatever you want to label it – it means that those without credit or earned income are going to face higher prices (poor get poorer) and those with money will be losing buying power and good prices increase and dollar weakens.

The call for a new reserve currency is making the rounds again this morning, this time from Europe. Has China and Europe come to terms with something we are not willing to face? Are they losing faith in the U.S. dollar? On the surface you wouldn’t think so, as the Treasury spins bond sales figures to indicate that we are seeing record buying by China and others. There is SOME truth to that, but once we look AT the numbers we see something unusual – as they DO continue to buy treasuries – they are NOT buying long-term treasuries, but rather Short-term. So What, they are still buying – some might say. The reality – short-term is more liquid and expires sooner. Clearly they don’t want to make long-term commitments to the dollar.

How long before a new reserve currency? Probably 2 – 5 years, they question remains – can we hold out that long and what do we (investors) do? Make sure to put on some inflation plays with some percentage of your portfolio, be it gold, silver, foreign currencies, commodities or any mix bag. Equities will not help in a inflationary environment. Remember – “Stagflation” talk does NOT mean prices will not go up – they will.

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Futures Pre-market

Futures are getting hit this morning, following Europe’s sell off. The spread is in – but expect negative pressure on the market at the opening for now.

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Support / Resistance

INDU 8750 (We closed back up to that resistance point after seeing some intraday volatility.)

NDX 1500 (Up, Down, Up, Down – a fight up here that is seeing some volatility.)

SPX 950 (Again another resistance fight.)

RUT 530 (500 in the cards?)

It seems that the bulls don’t want to give an inch – regardless of news. One person made the comment that institutions are buying this market with all that government bailout money (TARP) , that’s pretty ironic.

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Conclusion

We are seeing some negative pressure in the futures this morning – some of the stories last week that were overshadowed by the Job’s numbers are getting some more attention this morning, Bernanke’s testimony and debt, banks ability to pay back tarp funding, Citigroup executive shakeup and funding, etc. Add all that to the talk of Stagflation as the new buzzword and we are back to that head scratching phase as we ask ourselves are we at the bottom, is the worst over, is this the recovery?

It’s been a wild ride and my concern is that Inflation or Stagflation or whatever you want to call it will be on us when we least expect it. It’s like the housing bubble, we all KNEW that the housing market was going to pop, which just FAILED to listen to our gut. People act as if it was a shock, were there really people in denial? Then it happened, and it happened fast and we acted like it was a surprise. Now we are hearing warnings from Rogers, Faber, Ross, Buffet, China, Europe, a host of economist about the concern about the dollar and inflation (or whatever you want to call it) – yet we ignore it. Are we doomed to repeat ourselves? It would seem so. When will it come? Who knows, but it is not IF it will come it is WHEN and How Bad. We are warned, but will we listen? Even Bernanke is warning Congress and the Administration to stop spending, but they don’t listen and are now talking about the new national healthcare plan as paying for it is taking a backburner, because they can ALWAYS just print MORE money.

6/5/09 (Unemployment - half full or half empty?)

2009-06-05T10:24:00.000-04:00

Traders,

The 10-year yield continues to head higher and the 4% rate is in the cards. Money is certainly coming out and the fairly sharp move to the upside has also been spurred by the weak dollar. A dispersion of investments from commodities, equities, and foreign currencies. But the talk this morning is about the unemployment numbers – which could reverse that depending on the number. That number may not just affect equity markets – but could create some volatility in the currencies and bonds.

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Unemployment numbers & the hidden story

On CNBC this morning the big shocker (or hidden story) was how much have the revisions added to the total unemployment numbers. There are a total of 6.7 million people unemployed, but the revisions have added over 1 million to that number (over 15%). On CNBC they mentioned that is what creates the skeptical eye to the number being reported, what ARE the revisions going forward. If the revisions continue upward the more skeptical investors become to the unemployment numbers as they are released.

The good, yet confusing news: The numbers are out and the futures are spiking. The payrolls fell by 345,000 (the smallest decrease in over 6 months). The consensus was 520,000 – so it seems a shocker on the front end (as many said it could NOT be below 400,000 – the lowest forecast was for 450,000) – so everyone seems to be shocked by the numbers. What created such a huge drop, while the ADP and others did not indicate such a massive slowdown. Also the revision in April was down to 504,000 (a good sign and reverse of the previous increase that had added over 1 million to the unemployment numbers). Is this a one month aberration? The massive wave of unemployment from the GM and Chrysler bankruptcies will probably increase this number again in the coming months according to Bloomberg.

The bad news, it seems that there is not any NEW jobs as those remain on unemployment increased more than expected sending the unemployment rate to 9.4%, higher than forecast of 9.2% average. Which seems to be ignored.

There is actually two stories here: 1. The jobless rate is slowing down (“green shoots”), 2. The NET unemployment came in HIGHER than expected – showing no signs of recovery (“weeds”). The jobless rate is clearly showing that we are getting to a bottom, but the net unemployment rate is showing that no jobs are being created. It’s a glass half full vs. a glass half empty. They both are correct – short-term view is the market is finding a bottom, the long-term view is that a recovery is farther off. Both are right – it would seem the short-term play is get long, the long-term play is to hedged. It’s more of a traders market, than a investor market and long-term investors should be looking to lock in gains and roll up hedges. Looking at these knee jerk up moves as short-term opportunity.

David Rosenberg (Bloomberg) said the numbers could be spun into “green shoot” talk as they look at the headline data, but looking at the numbers there is some concerns. One interesting point is that ACTUAL wages are down – but what sends them up is government sponsored programs which are included (including food stamps and other government funding – which is on the rise) – so it may “seem” the bottom line is better – but the actual earned income has dropped. Additionally – those that fall off unemployment (no longer counted) added together with the job growth rate (new hires) shows a very negative recovery. He did say the good news is that layoffs are slowing down – but there is some seasonable adjustment (and the auto industry may ramp back up those numbers). However – what is concerning is the huge revision swings and looking at a total revisions that have added over 1 million to the unemployment numbers is concerning. Additionally – there is also the measure of birth and deaths of businesses – interesting statistic, indicating that there is some serious birth/death noise in these numbers.

The market (futures) knee jerked up – on a huge print – but seems to be coming off a little from those highs – as investors look beyond just the headline number. Bonds getting hit hard – sending up long-term yields. And the currency markets are seeing some volatility.

The bad news – unemployment rate has been raised above 10% for 2009, the market doesn’t seem to care.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aWbpOrWSssE8

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Apple – Jobs is back

After Jobs had left for medical reasons – the good news is that it seems that he is healthy enough to return. There is also news about some new generation iPhones – all which brings back some optimism and euphoria back to Apple. Not that it needs any help after its recent rally. Good to hear that he is better.
http://www.cnbc.com/id/15840232?video=1142874322&play=1
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Wal-mart annual party!

As I have been mentioning Wal-mart is the recession stock play that for anyone with a retail play should seriously consider. It has done very well against the broad market and their retail numbers have been surprising vs. competitors. I think Wal-mart is still a long-term safe play as I remain skeptical about a long-term recovery and many will still need places to shop like Wal-mart. They have a good story in this economic landscape.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a11ePJbLBGN4
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Oil and its future

Initially when the job numbers came out - oil SPIKED above 70 for the first time, but it is coming back off hard. JP Morgan and Goldman are forecasting oil prices as high as 80 to 90 dollars this year. JP Morgan has also been making some interesting economic plays. Certainly the dollar is playing a big role in the prices and if the dollar remains weak – I think JP Morgan or Goldman could be right.

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Futures Pre-market

The futures made a huge jump on the headline number of job losses slowing, but the net unemployment (getting less attention) went above expectation to 9.4%. Futures initial gap up has come off from the pop – but still up. Definitely a momentum trade – expect a higher opening.

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Support / Resistance

Resistance are broken based on the futures – we got some serious volatility after the job numbers in oil, futures, commodities, and bonds.

INDU 8750? (Futures are pointing to a higher opening.)

NDX 1500? (Again a pop above the 1500 line in the futures – do we close above it.)

SPX 950? (Above 950 – do we close above it?)

RUT 540 (Almost there.)

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Conclusion

There is definitely two camps – those that are focusing on short-term finding the bottom and those concerned about the longer-term recovery. If we were to judge the economy by the market conditions it would seem that everything is doing fantastic, but on the economic front when looking at commodities, bonds, and the man on the street it is a different story. I heard an interesting comment on Bloomberg radio the other day – a economist said that if we are to look at the difference of the economic conditions vs. the market, it is a simple reflection of the rich getting richer and the poor getting poorer. He went on to say if you ask the man on the street – things are bad, they have no credit, loss of jobs, underwater on the equity of their home, having problems finding jobs, and inflation (gas prices and food prices). If you ask the Wall Street analyst things are “green shoots” and looking better and they will just point at the stock market. The problem he went on to say is that Wall Street forgets that they need the man on the street, because it is the man on the street that eventually DRIVES the economy by spending money – he needs a job, he needs credit lines, he needs to be able to spend. I think it was a simple, yet astute, observation – there is certainly a disconnect between the market reaction and what is going on with the man on the street. But it is hard to see that if you are an analyst that never gets out of your Manhattan office.

Another story that is not getting much attention is that Sheila Bair is going after Citigroup and wants to “shake up” the executives – implying firing the CEO (Pandit). I guess that the government sees bigger problems at Citi than we are aware of.

6/4/09 (ECB & London Rates Unchanged, Initial Jobless)

2009-06-04T09:14:00.001-04:00

Traders,

Yesterday saw some negative pressure for the first time in a few days. A pause possibly after the two day upward momentum and questions remain – a buying opportunity or a place to reconsider long positions? We also saw commodities, silver, gold, and foreign currencies come off some. Bernanke’s testimony was of caution, caution that the U.S. is spending too much too fast. While Geithner was assuring China that our dollars are strong and bonds safe, on the other side of the Pacific, Bernanke was warning our Congress and President that while it might be safe now – if spending is not curtailed we face looming difficulties (ironically he still has many more dollars to print to continue to fund treasuries – something he is probably not too happy about.)

These concerns were echoed by the German Chancellor, Angela Merkel – before today’s ECB rate decision. She leveled concerns that the U.S. spending (bailouts, loans, and printing of money) and that the Federal Reserve must return to fiscal responsibility and not political accommodation.
The market was under pressure, but going into the close call it intra-day short covering or opportunity buying we saw a decent rally in the last 30 mins.

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ECB & London kept rates unchanged

While the ECB and London kept rates unchanged they additionally did not indicate they would expand the debt funding, maybe they listened to Angela Merkel. Analyst have pointed to a combination of the recent weak dollar, stepping long-term yield curves, and the recent rise in Gold as a concern that inflation is around the corner or could be very quickly. While the yields did rally very quickly, it is still only in the 3.5% range – but what they point out is how FAST it did rally. Reflecting that in the future it could be upon us before we know it.
It would seem that London and the ECB are not only listening to the likes of Merkel, but have also seen the signs in the market that while fiscal stimulus is necessary – there unwinding of that stimulus can take time and if that stimulus is massive (as in the case of the U.S.) it can be a daunting task to get inflation under control.

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Initial jobless claims…

As expected they fell by 4,000 to 621,000 in the last week of May, from a revised 625,000 the previous week. Additionally those that remain on unemployment fell slightly to 6.735 million from 6.750 million. Some attribute that it doesn’t necessary reflect that those on unemployment have found jobs, but have just fallen off unemployment (“disgruntled”) and are no longer counted.

The good news is that it is falling and is showing that we are coming to a bottom, however finding a bottom is not “green shoots” of growth – but only that the unemployment has hit bottom. Getting off the mat, the growth or “green shoots”, is the question – not that it will not happen, but rather how fast it will happen. But “less bad news” is spun into good news.

The administration is basing their deficit and forecast on a “V” shape recovery, but most economist forecast show either a “W” shape recovery or a very slow recovery. That means (as the earlier story reflects) that deficit spending must be curtailed.

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Futures Pre-market

The futures were up and started coming off as Asia was down and Europe mixed, the ECB and London rates unchanged sent the futures briefly into the negative territory. The initial jobless claims sent a upside very small knee jerk – but they continue to be mixed (above, below, or at fair value). Expect a mix opening as it seems that Arb traders are sidelined.

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Support / Resistance

The markets came off their highs yesterday but rallied into the close (still negative on the day) – do we make another push to the upside? Could, but the legs are getting a little weak if the futures action is to be given any weight.

INDU 8500 / 8750 (We are currently down from that resistance and had looked weak all day yesterday. The initial jobless claims was inline – but nothing surprising. With no big news today – it could be mixed.)

NDX 1430 / 1500 (The gap down is at 1430 – we had a rally to close almost unchanged on the day after being down 15 points during most of the session. Opening looks flat.)

SPX 900 / 940 (We have had a volatile gap week – which could mean that we get a little retracement .)

RUT 500 / 525 – 550 (We didn’t get to 550 but did top 525. 500 is where we ran from – so volatility could be in the cards from the short fast move.)

======================================
Gold 950+ (We have moved solidly up from the 900 level over the last couple of weeks and yesterday we saw a pull back, but still above the 950 level.)

Silver 15+ (Silver was up above 16 for the first time since August last year. The 17.50 area could see some resistance.)

Oil 65+ (We did see a pull back, but the it is rallying again. JP Morgan forecasts oil prices at 80 by year end.)

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Conclusion

Unemployment numbers come out tomorrow and are expected to reach the 9% level, which is currently on track to reach higher levels than the Administration anticipates based on its deficit and GDP growth and equally importantly the “Stress Test” measurements. While we are seeing a slowdown in the RISE of unemployment, it is still a RISE. That needs to end before we can see the GDP to grow, certainly we are not going to be able to rely on trade to make up the difference and the real wheel is consumer spending (making up 3/4s of the GDP). That means people need jobs, money, and credit to SPEND.

I saw Peter Schiff’s review of Geithner’s trip to China – which upon reflection did seem rather comical (in a sad way). Geithner giving the Chinese economic advice, was analogous of a “F” student giving an “A” student advice on how to study and pass a class. Chinese is not only financing the U.S., but also sit on the massively POSITIVE side of the Trade Balance (they have all our money – as it is shipped over to them). We pay them to lend us more money. What was even more ironic is that Giethner’s advice was about the government spending MORE money to build infrastructure, social security, and health care so that the consumers could SPEND their money (rather than save). Maybe Giethner forgot that China is a Communist nation and that means they all ready do those things – but he is suggesting they do more (spend more). While, Bernanke is warning at the same time we are spending too much and printing money to finance the government spending. Looking at it from that perspective it just seems silly.

The big number tomorrow will be unemployment (while a lagging indicator) everyone will be watching – spun into “less bad news” or “economic reality” will be all based on perception and less on the actual math. The market will move on perception and how we read and absorb the data – however the economy will move independently of market reaction.

There could be some volatility tomorrow.

6/3/09 (Geithner China, ADP Report, Commodity Plays..)

2009-06-04T09:12:00.001-04:00

Traders,

Yesterday’s trading action seemed more like a pause – there is certainly some confusing issues for investors trying to ascertain the big picture. First is the disconnect between the short-term vs. long-term rates. I feel the long-term rate increase is twofold – a combination of investors pulling their money from bonds and dumping it into equities, but a bigger problem seems to be that the large foreign investments we expect have moved to short-term paper because of their concern about inflation. No doubt the sharp increase in rates brings two problems to the table, first the concern about coming inflation and second it increases upward pressure on mortgage rates (not good if we want the housing market to recover). The other disconnect seems to be the huge commodity rally and equity rally – coupled with a weakening dollar. Higher oil and commodity prices hurt the bottom line of the economy – and will inject higher costs into goods (inflation). The weak dollar also creates concerns on two fronts, first it too creates price inflation and second it creates trepidation by large foreign investors of our treasuries as they loose on the conversion rate.
Something will give and it seems that everyone is coming out of their cave and jumping into one of several camps, there is the bullish equity crowd, the bullish commodity crowd, and the anti-dollar inflation crowd. One thing they all agree on is getting out of treasuries all at once (or so it seems) and with the foreign money not taking up the slack that means that the FED has to print more paper to buy more treasuries. And the crazy cycle continues. If we get a big enough ramp in the 10 year yields we could see a huge pull back in equities as the safe haven investor crowd rushes back into that door.

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Jobless (ADP Report)

It seems that we are not seeing that bottom yet. ADP reported a higher than expected 532,000 losses in May and worst they revised up April’s number to 545,000. This doesn’t even include the 40+ thousand job losses from GM’s bankruptcy that trickles down to dealerships and part markers (some estimates that the bankruptcy and it’s foot print of jobs could be as high as 100,000 job losses in the next quarter.)

At some point the numbers will decrease, there is a finite amount of works and a finite amount of jobs. It is just getting to the bottom that is painful. The big problem is not the job loss in my view, it is when will we see the job growth and that seems to be pushed out farther and farther. We will find a bottom soon, but when will we see growth again. Companies are puckered up and are not about to expand their job growth until they can see consumer spending rise. It is kind of a circle – people will not spend unless they have a job, companies will not higher unless they can see people spend. Chicken and the egg problem.

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Commodity Plays….

I was recently introduced to Stephen Leeb, I have only read some of his papers (not his books) – while slightly more extreme than Jimmy Rogers, Pickens, and others – he has a point. Resources are finite and consumption continues to grow, that is certainly a formula that we can all simply understand. Whether we like Supply/Demand economics, regardless of our ideology, that is how the world works. Food, energy, goods, etc are all driven by demand and supply.

The concern that people like Leeb and others have is twofold and it makes sense. First is the increase demand, regardless of consumer spending habits the world population is growing and we need food, shelter, and goods. The second is credit and a fiat currency. China’s demand is growing (sure the growth has slowed, but it is still at 5+%) for the largest population in the world – that is a ton of rice, gas, coal, etc. India is growing, Russia, Brazil, and others.

Commodity plays are also considered inflation hedge plays – because many goods can be sold in different currency as well. That gets me to this interesting story in Bloomberg, JP Morgan is not just investing in commodities, they are hiring supertankers to store those commodities. They just hired a supertanker to store heating oil off Malta. Why? Because they KNOW (we all KNOW) that demand is there – people NEED heating oil. The second part of the question is HOW MUCH heating oil and if the dollar continues to weaken – prices will go up even if demand remains a constant. Additionally – they don’t have to sell it to the U.S. there are many countries. http://www.bloomberg.com/apps/news?pid=20601087&sid=auE79A8VeBis

The point is that we are seeing more global type commodity plays, the world is taking notice of China, India and others are growing economies. The world is questioning the dollar (China and others have asked to drop it as a reserve currency) – that means smart money is going into NEED commodities, hedged against the dollar, with the ability to deliver goods into any currency and any market.

For us investors there are many ETF’s out there to make some commodity plays – from Oil, natural gas, gold, silver, copper, etc. Take the time to look into these, many are very liquid and trade options. They also offer a unique inflation hedge.

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Futures Pre-market

That ADP number was not looking good and have sent futures lower at the opening. Expect a lower opening.

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Support / Resistance

Sugar Rally? Over bought? Most of the professional traders I know (bullish, bearish, and neutral) say take some equity profits off the table or at the very least roll up those hedges.

INDU 8500 / 8750 (We had a pop intra-day, but it pulled off. Do we revisit 8500?)

NDX 1400 / 1475 (We are a little over stretched compared to the SPX and RUT – we look to open below the 1470 level based on the futures. A revisit to 1450?)

SPX 900 / 925 / 950 (Like the other indices we stretched the neck the last couple of days – a cool off is probably in the cards.)

RUT 500? (Do we revisit 500?)

The question is not about the pull back, which is probably going to happen. The question IS it another buying opportunity as every pull back in the last couple months have been?

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Conclusion

The futures are pulling the market down a little going into the opening, the ADP numbers didn’t look good, and thus we might have a pull back into the close. The question that everyone is asking – will this be just another buying opportunity? So far every pull back has reflected just that. It is interesting if we watch the 10 year yield track the rally of the market, it feels like you can actually SEE the money coming out of long-term treasuries and into the equity market. However, if we see that rally in the 10-year yield slow or start to contract we could also see a decent pull back in the equity market. It might be a good short-term gauge to see if any pull back is a buying opportunity or not.

Stay frosty!

6/2/09 (China & Geithner, Banks sell stock, Sugar Rally?)

2009-06-02T09:19:00.000-04:00

Traders,

We had an extended massive rally again, which seemed to follow around the world after China released its economic data that reflected a quicker recovery than expected, that helped lift Asian markets, then Europe markets, and trickled into the U.S. The Chinese news was good on many fronts, including exports (which was better than expected – reflecting that products are starting to move). China’s biggest story was on its domestic front – from infrastructure to consumer spending. They are certainly seeing a slow down, but their slow down is the equivalent of a booming year in the States. China wants to play a bigger role in the world economic forum, as they have been taking a back seat and treated as a 3rd world manufacturing nation of cheap goods. But the rise of China is becoming apparent to all.
Obama when he was campaigning had made harsh remarks about China – including that they manipulated their currency. However, his tune has radically changed and the Treasury Sect. Geithner paid a visit to calm the storm (a 3 prong sales pitch that included: U.S. dollars and bonds are safe and not losing their credit rating, the Fed. and Treasury have a “Strong dollar” policy, and the U.S. will focus on reducing their deficit.) – They question now is did China buy the sales pitch. To fly the Treasury Sec. to China for a road show – reflects the important of having China on board to continue to buy our debt, which they have reflected huge concerns. China listened, but they don’t want just talk – they want to SEE those results. Unfortunately everything that Geithner preached, has yet to unfold, the dollar is weaker (not “strong”), the U.S. credit rating is questionable and one foreign rating agency has announced they will be downgrading it, and the U.S. national deficit is at all time highs by at least 3x as much.
I think China will give us time to “prove” ourselves – but they can ONLY wait so long.

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GM filed bankruptcy….

This morning there is news about a possible sale of Hummer, but the bigger questions are how long with the bankruptcy take, what kind of GM will emerge, can they be profitable, and what role if any will the government take.

There is still way to much uncertainty at this point.

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Banks sells shares to raise money…

The banks are not out of the woods yet and JP Morgan, American Express and others are selling shares to raise billions more money. Geithner was asked this morning about banks being able to repay the TARP – his answer is not clear – If they meet the burden. It wasn’t yes or no. So far they have NOT been allowed too.
Yesterday’s rally was driven by every sector but the banks which seem to have lost steam.

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Futures Pre-market

The futures are giving up a little after the big run yesterday . Expect a lower opening.

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Support / Resistance

If there is any proof of the massive rally, I would say that it was the S&P hitting that 200 day moving average. Not that I am a technical guy, but for a rebound this quick after a yearlong fall to hit a 200 day moving average is a good measure of how fast and how far we have return. The question on everyone’s lips has it been too much too fast?

INDU 8500 / 8750 (A breakout over 8500 rocketed it to 8750 – we seem to see a little pull back, but is it another “buy the dip” and a road to 9000? Note that GM and Citi were removed. The INDU unlike any other index can always go higher because of the human intervention to replace “better” stocks. While other indices are based on capital or other math formulas.)

NDX 1475? (There was a snap down back in October from 1475 – the market has rallied hard and we a just closed that gap. Is 1500 in the cards?)

SPX 950! (We hit that Jan peak yesterday at touched the 200 day moving average. A sign to buy or sell – the talk is mixed on the street.)

RUT 520! (Just like the SPX the RUT hit that Jan peak.)

This has been a big rally and certainly in the face of economic instability. The economy has a long road to play catch up. The question asked on CNBC this morning – is this a Sugar Rally? Some traders seem to think so.

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Conclusion

The rally has been great for the moral of this nation and bringing back investor and consumer confidence. The question remains has it been too fast and too much. Economically speaking it certainly has been, as one would argue that we also oversold. The market moves on perception and does over react (to the upside and downside). The problem is that the Bulls have no fundamentals to hang their hat on – they can’t really point to anything that reflects economic recovery or that we are even at a bottom yet. Sure there are some “perceived” green shoots – but those are questionable at best. The data reflects a different story – jobless rates continue to rise, banks continue to need money, inflation concerns are driving gold, silver, oil, and other commodities higher, the long-end of the yield curve is ramping, and the consumer (while confident) doesn’t have jobs, credit, or money to spend as contraction continues.
So will the economy find a bottom and recover quick enough to meet market expectations, or does the market come off to meet economic reality. The professional traders I have talked to are getting loft concerns, even my very bullish friend who correctly called the bottom. He too is now saying it’s time to take a little off the table, because the economy is not making the kind of turn around that the market seems to anticipate. Sounds like there is a little sugar in this rally.

6/1/09 (Government Motors, China Growing!)

2009-06-02T09:18:00.000-04:00

Traders,

The global recovery cross road is at hand. Certainly we are seeing a winding down of some companies and banks “seem” to be back on track. However there are some conflictive data both domestically and globally that is not inherently represented in the market. Friday did see a rally up to those resistance levels and the futures this morning, despite the GM’s bankruptcy looks even higher. The conflict is seeing the bond yields rally, dollar weaker, and commodity rally.
However, it is important to realize the market is always hyper sensitive relative to the economy – and thus it over-reacts to the downside, which we recently saw, and to the up side. Driven by perception, the math which is sometimes ignored needs time to catch up. Look how long GM lasted on fumes (a couple of years).

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GM (Government Motors)

This morning is the final chapter of the U.S.’s largest iconic company. For the last few years it has been losing vast sums of money, not because revenue had been down. Quite the opposite – in recent years 2004,2005,2006 they had sold more cars than ever and revenue was huge. The problem is the liabilities, debt, costs, and interest. The concept of margins, the core of the business model, had completely failed. Some economist, analyst, and business professors had pointed to the eventual GM failure for years, but were ignored. Mainly because no one could believe it – they didn’t WANT to look at the math.
So what does this mean. I am sure you will be hearing lots about it – since every news agency is talking about it all weekend and day. But let’s look at the break-down. In a normal Ch. 11 bankruptcy – a company sells off any assets, get’s the creditors off their back, and restructures – if it is able to. However, in GM’s case they have an added benefit, the U.S. Government. The Government is going to put in ANOTHER $30 billion (after a previous several injections of $20 billion plus). If it wasn’t for this latest round of government (tax payer) money, GM would fail after bankruptcy and they still could. Why would the government put another $30 billion in, because if they didn’t the first $20 billion is all but lost.
The fall out is going to be pretty massive, about another 20 to 25,000 layoffs, 11 to 12 factories closed, 1000s of dealerships close, part-markers fold or demised capacity. It certainly is going to be widely felt in this nation. It is also going to take months for it to be resolved, as assets need to be sold and the 100s of small fires need to be put out.
The financial fallout is unclear, however the big concern is debt financing by companies. The government has stepped in and changed the rules and those bond holders (pensions, investors, banks, etc.) are all out billions of dollars and collectively get about 10% of the new company, as the UAW and Government set the rules and get the largest piece of the pie. A video this morning (Bloomberg) showed a family that had put their nest egg in GM bonds, because they wanted low risk and guaranteed income with a AAA rated bond. Now they wonder why the government isn’t looking out for them. But the government responds this is a unusual case (GM and Chrysler) and that they would never step in unless necessary. However, economist point out that any company that may have to tap government loans in the past and future are now going to face higher rates and more difficulty raising debt. Who wants to loan money to a company that is supposedly first in line in a bankruptcy, if the government can just step in and change the rules
As per the market reaction – this was expected for days (if not weeks) – which seems to be priced into the market this morning. Of course it could be the market really hasn’t absorbed the reality. There is still much uncertainty how long it will take to get through, what will emerge, and the future.

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China Growing

China released data that they are showing significant signs of recovery, which has lead the world markets to rally. For me there was no doubt that China, even with its GROWTH slowing down is going to continue to expand. China has some serious concerns and that is the U.S. on several fronts. They have publicly asked for a new world reserve currency, concerned about the U.S. national deficit, and the credit security of the U.S. China has already lost about 3-4% this year in the U.S. dollar backed assets, and while they remain the biggest holder of bonds they have moved to purchasing short-term paper as the future is unclear. GM’s bankruptcy and the government tossing another $30 billion at the company is continued concern, because that $30 billion needs to be financed – and that means selling more treasuries and hopefully China will buy more. The treasuries have failed to raise the money needed and the Fed is printing money to fund the treasuries, another concern that China has mentioned.
So what to do? Send Geithner on a China road show! He is currently in China and I saw part of his speech which focuses on 3 topics. U.S. has a “strong dollar” policy, U.S. credit is AAA and is safe, and U.S. will reduce its deficit significantly to reduce the need to raise more capital. Of course all of this flies in the face or reality. Dollar is weak, AAA rating has been questioned and downgraded by foreign credit agencies, and the deficit has expanded to over 1.5 trillion.
It clearly seems that we need China more than China needs us. Why, because they are our Bank of Credit. We need them to buy more debt to keep the debt cycle going. We can also look into China domestically which has down very well despite the global slowdown. Unlike the U.S. and Europe the majority of Chinese do not have access to credit, they spend/save what they earn. It is only recently that credit cards and credit has been made available and that is only a small portion of the population. That means the Chinese stimulus to the people went right to the bottom line – they could SPEND the money, rather than pay down debt. Additionally – their infrastructure has grown massively, roads, airports, buildings, etc. Chinese citizens are purchasing goods they never purchased before (cell phones, TVs, cars, games, etc.) China’s advantage is that they have the world’s largest population that is just coming into their own as consumers and China can look internally (even isolationist and protectionist) and continue to expand. Unfortunately in this country it is the opposite, we borrow from other nations and we buy other nations goods. We are a consumer nation and with GM gone are last hold of manufacturing is gone as well.
So how does this affect us? Well, I think we need to pay attention to China’s position publicly and their actual holdings. You don’t send the Treasury Secretary of the U.S. giving speeches about bond security, debt reduction, and credit ratings – if this nation is NOT concerned about the need of continual finance and getting China on board to buy more of our debt. The big question is for all their economic saber rattling can Geithner sell the goods? It’s hard for him to give that speech on the same day that GM filed bankruptcy and the government is printing more money ($30 billion) to bail them out. China might listen to Geithner, but what they are seeing tells a different story. Good luck.

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Consumer Spending and unemployment

Commerce department reported the second straight month that consumer spending is contracting. Whether they have the money or as some speculate they are saving because of the concern of rising unemployment is less clear. While the drop of -.1% was less than expected the concerns that the slowdown continues persist. The savings rate which rose by 5.7% is rather skewed with government payments linked to bailouts and stimulus.
Consumers may “Feel” better about the economy (as the consumer confidence shows), but their spending habits and savings tell a different story. Maybe a sobriety of the current situation is construed as feeling better, rather than coming to terms with reality. Regardless consumers are not spending.
Economist continue to raise their unemployment expectations and while the rise in the stock market may mask the economic slowdown, the confidence remains strong, for now.

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Futures Pre-market

The futures are making a big gap up – as the world markets rally after China released data that showed a recovery and commodities began to rally. GM on the other hand seems to have little if any factor. Future spreads are rather large, so expect to see futures come off a little into the opening as the spreads contract. Expect the market to open higher.

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Support / Resistance

Indices are at their resistances! May previous highs!

INDU 8600! (We will certainly open above it!)

NDX 1450! (We are right at this big resistance area!)

SPX 930! (We are right at this resistance level.)

RUT 515! (Again right at the resistance)

The indices are at those levels at the opening. The question is do they go higher, remain there, or come off. Between the China Growth, GM bankruptcy, and commodity story it is a mix bag.

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Gold 950+ (We could be at 1,000 soon)

Silver 15+ (16 looks like it could be in the cards today)

Oil 65+ (I would not be surprised if we see 70)

Dollar continues to fall the Pound broke through 1.60 and the Euro is above 1.40. Dollar is also falling against the YEN.

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Conclusion

We are certainly facing some unusual times as the market moves higher in the face of consumer contraction and GM bankruptcy. China continues to be concerned about the U.S. dollar and economics – Geithner is sent to ease those concerns and sell them on buying more debt. Inflation is a concern from overseas, but domestically we are only talking about deflation. That seems like a total disconnect to me.
The market seems to ignore the GM news (which was expected) and has embraced the China growth story and commodity rally story. Even though China’s growth may be to our determent economically speaking.
VIX is back below 30, yet intra-day volatility shows a different picture. Hidden volatility is ramping and we could be in for a knee jerk move up or down. Expect anything, but don’t try to make sense of it.

5/29/09 (Bulls vs. Bears, GDP shrinks!, Dell!)

2009-05-29T10:56:00.004-04:00

Traders,

Yesterday saw interesting action, down, up , down, up, - certainly some intraday volatility. Bloomberg released news that insiders said that GM’s bankruptcy WILL be filed on Monday which created some volatility intra-day. It would seem that the bull vs. bear fight continues and we are at another crucial resistance point in the market. Interesting enough I have friends on both sides.

The bull argument is that the worst is behind us, Obama’s plan is starting to see green shoots, and the government data is showing slowing signs of a recession. Many stocks have been oversold or are under value. The core ingredients is optimism and faith in the government and the Fed controlling rates. They don’t believe that inflation is a threat and if it were to rise the Fed would be able to contain it.

The bear argument is that it is true that government data is showing signs that it is slowing down, but it certainly has not found a bottom or signs of a recovery. They argue that the PE ratio of the S&P has skyrocketed and while true that stocks may have BEEN (past tensed) undervalued that the recent rocketing rally has put them into an overvalued state. They also point to the yield curve on the 10 year expanding, inflation threat is looming, and accounting changes in the banking sector reflects paper profits ONLY.

There is truth in both views and I think that is why there is the push pull that we are seeing. However, the bull argument is going to need a little more meat pretty soon. We can be optimistic about the recession slowing down, but eventually we are going to need some good news (not just less bad news). A bottom and signs of a recovery. The bull’s argument certainly has some legs – but with the yield curve steeping and the dollar getting weak – coupled with GM’s bankruptcy – well that could diminish the optimism a little.

And the saber rattling in North Korea is a little unnerving as they tested another missile and have ended their “truce” with South Korea. Let’s hope it is only saber rattling.

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Economy Contracts more than expected….

Commerce Department showed that the U.S. economy contracted 5.7% in the first quarter and revised the last quarter of 2008 to a contraction of 6.3%.

The big problem seems to be consumer spending which rose significantly less than expected at 1.5% vs. 2%. The second quarter doesn’t seem to look any better. The housing starts have fallen, unemployment while slowing still increased, and credit lines are diminishing – and it looks like contraction will continue. Another way of coming up with a forecast is that the majority of earnings reports show reduced revenue expectations for the next couple of quarters. Certainly consumer spending has contracted and it doesn’t look like it will expand any time soon. Some companies have done well in managing the decrease in revenue and costs to keep margins in the black, however on the economic scale it is certainly not a sign of a recovery in 2009 (unless something changes).

The concerning news is the bond yields and the weakening dollar and the news of contraction has investors looking elsewhere for safety or returns. Dollar based commodities are also making a run and I believe that the dollar has a bigger impact to the rise than demand. Inflation hedges are also on the rise, Gold breaking 975 and Silver above 15.

There has been some controversy as to WHAT is the mandate of the FED as we initially thought they would defend the interest rate, but they have not. That is sending concern to those investors in risk-free assets and the trust that the Fed will defend it is waning. The Fed’s plan to keep rates low and help the mortgage market is actually slipping fast. 30 year fix rates made a big pop from the 4.7% to 5.3% as it would seem that rates are continuing to climb. Questions of the Fed and their “Quantitative Easing” Policy abound. Certainly the demand for long-term paper has significantly diminished.

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Dell earnings…

Dell saw a significant slump in revenue and profits, but did beat analyst estimates. The question really came down to the future expectations, rather than beating their already low guidance. The forecast is looking very slow for the next two quarters and they are guiding their revenue numbers down. They have focused (like other companies) on cost cutting to keep margins wide, but as revenue contracts and computers turn more into a commodity (as prices collapse) headway is going to be hard in the U.S. – good news – Dell has redoubled their efforts into the Asian markets and expects to be the PC leader.

The stock saw some after market volatility trading as low as 10.80 and as high as 11.80 – however it has settled in at the 11.50 range and looks to open slight higher.

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Futures Pre-market

We saw the futures on a good gain in the pre-market, but the GDP contraction news (worst than expected) as consumer spending continues to contract saw them pull back hard. It looks like a flat to slightly higher opening.

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Support / Resistance

INDU 8250 / 8500 (We had a volatile week from 8250 to 8500 – we are looking a little higher – but the GDP news is showing some pressure.)

NDX 1350 / 1425-1450 (The overweighs seem to be the driver in here recently – primarily AAPL which has made a good run.)

SPX 881 / 930 (The 900 level seems to be a good pivot point we look a little above at the opening.)

RUT 475 / 500-515 (The RUT didn’t make a big move to the upside like the rest of the indices yesterday. In fact it looked to close lower on the day until the end of the session.)

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Gold 975+ (We broke that 950 range and as talk of inflation and weaker dollar starts hitting the airway we are seeing a run for gold)

Silver 15+ (Didn’t buy enough at 10 to 12, but at 15 it still seems cheap in relation to gold.)

OIL 65+ (Oil broke over 60 and then 65 - up 80% from its lows. I think the dollar is playing a bigger role in this.)

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Conclusion

The push-me-pull-you of the bull and bears in the market, both with valid views are now having to face the math eventually and the GDP numbers this morning didn’t reflect a recovery anytime soon. I think we could see some volatility on Monday when GM files for bankruptcy – there is that 11th hour government massive bailout, extend the deadline, loan, etc. that could happen (for the good of the country and UAW). It’s a long shot, but certainly not out of the cards and if that were to happen it could inject another general market euphoric rally.

5/28/09 (Reality, Government Data, Bond market)

2009-05-28T09:20:00.003-04:00

Traders,

We had a pull-back across the board after the one day Consumer Confidence rally. Volatility (VIX) has been in a tighter range around the 30 level, but the skew in the OTM puts is getting higher – reflecting that there is some down side concern.

I did receive several emails about the hyperinflation talk by Faber and the 79% of Debt vs. GDP and the possible downgrade of U.S. credit. Most of the emails were in the vein of we will not see inflation, FED will manage it, I am overly skeptical, or overly pessimistic. I think those all would be fair arguments if we fail to see what this economy is going through. Need I remind that AIG, Freddie, Fannie, Lehman, and Bear are gone (or taken over by the government), Chrysler is gone, GM is about to file bankruptcy, Countrywide and Merrill were taken over last minute before failing, the FED’s balance sheet while unknown is expected to have on/off balance sheet liabilities that exceed 5 trillion and the government has also spent a couple of trillion. This is only to serve as a reminder of the recent economic events and while I agree that we will find a bottom sooner rather than latter, that doesn’t or should not elevate concerns of the value of our currency or the national debt.

Wouldn’t it be wiser to hedge against such risk than to argue that those like Rogers, Faber, Schiff and others are wrong (who we must agree have been right so far). Having a 5 year son, I am seriously concerned about his future. I certainly don’t want inflation or as Faber suggested hyper-inflation to reach our shores. Nor do I want the dollar to fail or the credit rating of this nation to be downgraded. It would be foolish for anyone to wish that. On the other hand to ignore those possibilities is equally foolish. Hope and optimism is important. We hope that we don’t get sick, but we still buy health insurance. We hope we don’t get in a car accident, but we still buy auto insurance. We should hope that inflation (or hyper inflation) doesn’t reach our shore, so shouldn’t we hedge against that possibility.

The problem with looking at economic data that reflects negative impacts to the economy and pointing those out – you are quickly labeled a pessimist. How about a realist that HOPES that it doesn’t happen and looks to hedge against those risks?

Please don’t view everything with Eyes Wide Shut. Optimism and Hope have their place and are important, but more is needed to secure our future.

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Government Data

Durable goods orders rose 1.9%, which initially seemed better than forecast, but the revision for last month was a shocking revision lower of -2.1%. If we don’t combine the numbers the April numbers look great, but the revision in March look bad. If we combine them they come in line with expectations.

Jobless claims were down 13,000 to 620,000. While showing signs that the layoffs are slowing, we are not seeing new job creation to take those that lost their jobs to get back into the job market. We continue at record levels over 6.8 million remain on unemployment. The big question on the horizon is GM’s pending bankruptcy and the domino affect (from closing of the plants, dealers, and supply makers) is expected to drive unemployment higher.

We must view the numbers from to vantage points. First is the contraction and the recession worsening, slowing, or hit bottom. I would say it is slowing (a good sign). On the other hand we have to look at it from a recovery perspective, but that can only happen after we hit bottom. We are certainly not seeing any recovery yet.

The jobless claims down is a good sign, but the millions that remain on unemployment is showing that a recovery has not yet happened. Additionally the revision lower in the Durable Goods Orders from last month is not a good sign even with this month’s increase – it is too conflictive (either they didn’t get an accurate reading or failed in math) – it is not very good resolution and hard to make any reasonable conclusion as to what they really are (because April could be revised down or up next month as well).

http://www.bloomberg.com/apps/news?pid=20601087&sid=acxRhu6PF8V8&refer=home
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Government Bonds

The talk on Bloomberg and CNBC is the concern with the long-term government paper yields on the rise. The Fed has been purchasing more and more of the treasuries (for two reasons – first there is not enough money to buy the treasuries being sold and second to keep rates in check). However, the 10 year yield has popped in the last couple weeks from 3% to 3.68%.

Why and what does this mean.

The why: I think China has articulated their position that gives clear resolution as to why we are seeing the spread between the 2-year and 10-year expand, it is simple. They are concerned about the dollar and inflation. They have made a request for an international reserve currency instead of the dollar, they have publicly made concerns about the bailouts and printing of money in the United States, and they are concerned about the future as it seems to be more uncertain. They have not stopped purchasing U.S. debt, but they have changed their positions into short-term paper and have significantly reduced all their long-term maturities. China is not the only one – several other sovereign funds and large firms are taking a similar position. If future inflation is an unknown (while many agree that it is coming – they don’t know by how much), then why lock in capital on long-term paper at very low rates. Ironically that means the Fed has to print more money to make up for the slack of foreign buyers (thus creating more debt) – a silly circle.

What does that mean: It means that long-term paper yield rates are going up and that trickles down to companies and consumers. We are seeing mortgage rates go up – in fact they made a significant jump recently. That means that housing prices have to come down to off-set higher rates. As per companies and small businesses – it becomes more expensive to borrow money – when they need it the most. Additional consumer credit lines will see higher rates.

For the government’s economic plan to work it needs low rates, very low rates. Obama’s deficit is based on low rates and Bernanke’s policy is to keep them low. However, the bond market and the money we are talking about may be too big.

Keep an eye on these rates as it could mean larger concern for the economic recovery. As well as creating some problems for companies that are relying on debt financing.

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Futures Pre-market

The futures are pretty flat in the pre-market. Expect a mixed opening.
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Support / Resistance

We were at support, then resistance, and now back in the middle – where next?

INDU 8250 / 8500
NDX 1350 / 1425-1450
SPX 881 / 925
RUT 470 / 515

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Conclusion

It seems that we are in a unknown period and everyone is holding their breath with GM and how that unfolds. The economic data still shows a recession, but that it is slowing down. Previously less bad news was good news, but now investors need to see some actual good news (not just less bad news).

Remain skeptical and hedge against risk now, not when you have too.

5/27/09 (Shoeshine boy? GM's nail in the coffin!)

2009-05-27T11:56:00.004-04:00

Traders,

Wow, what a ride. A friend of mine said that he received a call from the Consumer Confidence board to participate in the poll. He said they had some qualifier questions before he could take the poll:

First did he have a job? YES
Second did he ever work in the real estate or the mortgage business? NO
Lastly does he live in Detroit, work or has family members that work in the auto sector, or a member of the UAW? NO!

Great he qualified for the poll. Ok that was a joke – but I found it rather shocking that the poll of 5,000 people should show such optimism. We started to think back to that JP Morgan story and the shoeshine boy – was this a similar sign?

When I read the headline on Bloomberg, the two following headlines read “New Normal of 2% GDP growth and Unemployment greater than 8%” and “Home Prices in 20 U.S. Cities Fall more than Forecast”. He said – do you think they were selective of who they polled or is optimistic euphoria trumping economic reality? I said – faith is strong in this nation. It’s not that I am pessimistic, it just that reality and perception continues to show a widening disconnect. GM is about to file bankruptcy, credit card default is on the rise, jobless claims are expected to surpass 9%, and revenue is down. After looking at the PE ratio of the SP 500 – it is rather toppy.

So I come full circle, is this a sign like that JP Morgan and the shoeshine boy? Who is left to be optimistic (or buy) when the shoeshine boy is at the bottom rung. I think I need to swing by the coffee shop and ask the barista what his view of the economic conditions are – if he is very bullish, maybe it is time to get short.

Additionally there was some massive intraday short-covering on the number in the futures market. Which trickled over into the baskets. The volume spike and the arb widening looked as if someone got caught out – you don’t see those kind of prints unless something else was going on.

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GM – First nail in the coffin!

Of course GM failed to get 90% of the bond holders to swap out their debt for a 10% stake in the new company (as the government gets 50% and the UAW gets 40% and billions). Of course if you were a bond holder you would not take that deal – especially if you have the position hedged with credit-default swaps. It is a little irritating that the Obama had called these bond holders “speculators” and inferred to them as the bad guys. These bond holders include pension funds, mutual funds, banks, individual investors, and others. They had LENT GM money and expected to get it paid back. Why should they get only 10% when the government (who came late to the show) and the UAW get the other 90% plus billions?

So this was the first nail in the coffin on the way to bankruptcy. The executives had already sold almost 100% of their holdings earlier (around $2 dollars) – they KNEW that the bond holders would NEVER agree to such a ridiculous offer.

It is almost 100% certain that GM will file bankruptcy on Monday – what will save them? Certainly not bond holders or anyone else, but there IS a wild card, the Government. The administration has extended the deadlines for GM time and time again. They have given them billions, more billions, and more billions (just recently). The Government COULD say for the good of the country (and UAW) that they will give them ANOTHER deadline and MORE money. That is the wild card – if we take the government out of the deck – bankruptcy is 100% certain. That is probably the only reason the stock is trading above $1 – it’s that unknown government wild card.

Stay away – there could be psychological fall out on Monday when (IF) they file.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqtJh9SdO52s&refer=home
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Futures pre-market

We are seeing a little volatility in the morning in the futures – waiting for some home sale data. Expect a mix opening.
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Support / Resistance

Yesterday we were testing short-term supports and then the consumer confidence number drove the market higher to those resistances.

INDU 8250 / 8500 (We were just at 8250 and now up at 8500 – do we break through?)

NDX 1350 / 1425-1450 (Again a pop back to those resistance levels)

SPX 881 / 925 (Again a similar action.)

RUT 475 / 500 (Another pop to resistance)

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Gold 950 – we up there do we hold.

Silver 14+ - has been making a bigger run than gold.

OIL 60+ - seems more of a dollar factor than anything else.

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Conclusion

Action yesterday was as if the sellers stepped away and some big prints were unusual that help spur some short covering. Too much too fast? Could be – the rest of the world did not have that kind of reaction and the news (other than the consumer confidence) was not positive. So to put all this on just the consumer confidence in the face of all the other news yesterday was strange at best.
I remain skeptical – watch those resistance levels.

5/26/09 (North Korea, GM's last days, False Profits?)

2009-05-26T11:33:00.003-04:00

Traders,

No doubt an eventful weekend with North Korea. Even after the Obama Administration had previously mentioned that it would be open to talks with ALL nations – North Korea decides to test a nuclear weapon (supposedly from some reports 10 to 20x larger than the one they had set off a few years ago). Of course the rest of the world (and the U.S. of course) denounced the test – but guess what – North Korea didn’t care an went ahead the following day and tested two missiles.

What can we make of this? We have little facts (other than the test) so we can only surmise with reason of the North Korean posture. They are not doing it for attention (unlike the Bush administration the Obama administration said it was open to talks and was already working on the 6-party talk with North Korea). So it would stand to reason that they actually WANT to have nuclear weapons and must feel the WEST and their allies are a threat to North Korea. They have been shut-down, sanctioned, scolded, etc before. Certainly sanctions stop food and other products from getting into North Korea, but seems to only hurt the commoners – since the “party” seems to be getting all the food and products they want. So sanctions just hurt the people, not the elite, and certainly has done nothing to change their mind.

So what next and how do we respond? China has mentioned that “tough talk and sanctions” don’t really work. And some have said that China wants to keep the military card ON THE TABLE.

This is a market preview – not a political analysis – so the question we must ask ourselves is how does this affect the economic conditions and market?

The first thing we saw was the dollar gain some strength against the Asian currencies – mainly the South Korean. The dollar had been weak – but the order flow seems to reflect a short-term run to safety out of Asia. The initial dollar move is putting some pressure on dollar denominated commodity prices (Gold, Oil, etc.) out of the gate – but not that much. Additionally – we are seeing some flight to quality plays out of equities and into bonds – which seems to be wanting to avoid volatility.

Asia and Europe had been under-pressure, dollar is up, commodities seeing negative pressure, and futures are seeing some negative pressures as well.

It’s the West’s move now. It seems it might take more than just some tough talk – we wait.

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GM’s final week.

This is a week of daily news for GM.

Today: Debt exchange deadline. Debt and Bond holders seem to already reject the deal – but we find out today.

Wednesday: OPEL – how much did it sell for and who bought it?

Thursday: Auto-part supplies getting paid billions – who and how much need to be determined before any bankruptcy.

Monday: Deadline = bankruptcy filing date.

However, the government is still on the “Aid Train” – giving GM ANOTHER $4 billion in Federal loans to work through this process. Three deadlines and 4 payments latter – the government (tax payer money) has given GM over $19 billion. For what – them to file bankruptcy?

But that’s not all – reports now show they need over another $7 billion next Monday after the bankruptcy – to help them while in bankruptcy. Even GM admitted in their report to the government earlier in the year that they may need as much as $30 billion when all is said and done. However = analyst said that for any restructuring it is going to cost almost double that.

The government is doing everything it can to keep GM from sinking – but it doesn’t seem to matter. The business plan is a failure and until they realize that we will keep tossing money into the hole.

It is going to get messy very fast. No doubt it is complex and I don’t think ANYONE has ANY IDEA of the outcome or cost – other than it is going to cost tax payers 10s of billions, money that we will never recover (especially if they file bankruptcy). And if you believe that we will recover the money - you need to stop drinking the Kook aid.

Do NOT buy GM stock – this is something to watch from the sidelines.
While it may not have a big mathematical impact to the market – it could have a tremendous psychological effect. Certainly there is no “Green Shoots” growing in Detroit.

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JPM getting excited over false prophets….

Profits are profits, you can’t change the math, but you can change the accounting rules! You got to love it when you can just change the rules and move losses over into the win column. Are we really that stupid to get excited over that. If I was at JPM I sure would not be blowing my horn about accounting rule changes to make me look better.

It seems that the new rule allows JPM to change the failed bad loans it purchase from Washington Mutual into income. This new so-called “accredtable yield” is the difference between the “value” of the loans on the banks balance sheet and the cash flow they expect to produce. Guess what – the expected cash flow didn’t change and the loan risk didn’t change. It is just a “value” assumption.

At the end of the day the company spent X dollars buying bad loans. The loans expect to generate Y dollars. Changing the value of the loans doesn’t make the bank any more money (for REAL) – but in accounting fantasyland it looks to make them BILLIONS.

JPM isn’t the only one to benefit from this legalized book cooking, Wells Fargo, Bank of America, and others stand to benefit as well.

So what does it REALLY mean and how does it benefit? I think we have shown that it doesn’t generate any tangible REAL money, but it is just a valuation. So how does that help them? Well – it gives them more capital to leverage. That’s right leverage up again! Haven’t these guys learned anything?

Stupid games being played by the banks, regulators, and government. Thinking that padding the balance sheets with valuations will make a difference. It’s just reloading the leverage gun – because they haven’t figured out that it is NOT the accounting rules that need to be changed, but the business model.

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Futures Pre-market

The futures were down pretty good early on, but seem to be coming off their lows. Still negative will put some pressure on the market at the opening.

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Support / Resistance

The market is at a critical point in the short-term.

INDU 8250! (This is a short-term critical point. It looks like we will open below it, but watch the close. A snap below could spell 8000!)

NDX 1340! (This too is a short-term bottom area, we are above it and are looking at a 1355 opening from the futures – watch the close.)

SPX 881! (I keep hearing about the 880 level in the short-term. Blackrock said this morning that 850 and then 800 is the near-term low or support. But didn’t think we would break below that – as it is a level to start buying at again.)

RUT 470! (This is a big support area for the broader index. See if we can stay and close above it.)

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Conclusion

Between GM and North Korea – it looks to be a week of volatility. It is also a short week. What happens to GM and how does the world respond to North Korea?

The dollar is seeing some short-term specific strength which is putting pressure on some commodities. However, it is tepid because of the massive debt. I think large players (and nations) are trying to figure out the SAFE HAVEN, which traditionally was the dollar – but now there are more skeptics than before. We already saw China ask for a reserve currency and almost halt their long-term dollar holdings and concentrate on short-term paper (that is the get out of jail QUICK play). More short-dollar plays are making up the trade to allow for a quicker exit. So where is the safe haven? Gold? China and others seem to think so – but not everyone.

5/22/09 (Sears Shocker! GMAC Epic Fail! )

2009-05-22T09:43:00.004-04:00

Traders,

Yesterday we came down to those support levels – in some cases they broke. However, going into the close we had a decent rally (light volume and seemed more like covering) – but it did get off those support levels. The news about the S&P downgrading the UK and possibly lowering their AAA credit rating, created concerned. Bill Gross (PIMCO) said the US will eventually lose their AAA credit rating and US debt will reach 100% GDP. Geithner, in response said on Bloomberg that the US must reduce its deficit by at least 3%. Of course that seems to me predicated on the optimistic growth forecast by the administration economist. I would think it would be closer to 15% - if any measure of inflation is to be added to that calculation.

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Sears shocker!

Sears, the largest U.S. department store was expected to have a loss this last quarter as consumer spending, jobless claims, and retail sales continued to slow. However, Sears dug deep – with huge cuts to advertising, lay-offs, and inventory management. Additionally they amended some credit agreements as well as restructured debt. No doubt that revenue is contracting and it is about margins – Sears seems to have management in place that understands that is the core formula.
Expectations were for losses of 87 cents per share, so when Sears reported a PROFIT of 38 cents a share – a jolt to the stock in the pre-market sent it up fast and hard. Stock is up over $10 (currently $61 a share). An analyst on Bloomberg wants to take a closer look at the credit agreements to see how much of the profit maybe a onetime event. Concern going forward is also contracting revenue going forward – which is forecast lower. However, he concluded – that if Sears is able to continue to manage the margins efficiently they could maintain decent profit levels – even in a contracting revenue landscape.

Sears is driving higher and has pulled up some the index futures in the pre-market. Maybe the government could take a lesson from Sears and realize it is about MARGINS!

Personally – I love wondering around Sears tool section. I remember decades ago my dad said that if a Craftsman tool broke you could take it back and they would give you a new one, they are guaranteed for life. I didn’t REALLY believe that, so I had chipped Craftsman screwdriver and took it to them (to SEE if my father was telling me the truth) – the guy a Sears didn’t say anything and just gave me a new one with a smile. They had me for life! Now if I could just take in my broken DVD player and get a free replacement….

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GMAC – a failed company that continues to function.

Rumors about GMAC’s demise has been making rounds the last couple of weeks. A couple of articles (in Calculated Risk and Seeking Alpha) indicated that they actually FAILED the “Stress Test”. GMAC was not just LOW on capital they have NEGATIVE capital. They are technically DONE! Talk on the street was about the coming collapse and bankruptcy. The private sector would not touch them and so it would be hard to raise money.

While Wells Fargo, Bank of America, and others (also needing money to meet “stress test” levels) sold stock, sold assets, and raised debt – to meet those obligations. However, GMAC had nowhere to go. So to many people’s surprise the Treasury just gave them ANOTHER $7.5 billion to expand auto lending at Chrysler and also cleared to sell government-backed debt. WHAT? Their debt is rated at junk and they have negative capital. This is just insane…

A closer look reveals the truth – we all know they didn’t pass muster – a large portion of the “Funds to originate loans” is REALLY to meet capital requirements – to get them from negative capital to positive capital. The government is also going to let them sell debt that is backed by the FDIC. Also access to more money from the Federal reserve.

The spin coming out the administration is that it is to “stabilize” GM and Chrysler and help consumers finance vehicles.

Look – I understand the “Stress Test” and the need to raise capital. Other banks are now going it alone – selling assets, selling stocks, raising debt. Why did the government just dump MORE money into GMAC (and not other banks), allow them (while the debt is rated junk) to sell FDIC backed debt, and give them access to MORE money from the Federal Reserve?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRAYMq4..L8w&refer=home

Speaking of auto related companies – the story that GM may get some Treasury funding to help them pass the June 1st deadline to avoid bankruptcy. It’s just a rumor – but after reading about GMAC this morning – I wouldn’t be surprised if we give GM a 4th chance to get there business fixed and give them a few 10 billion more.

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Futures Pre-market

Futures are slightly up above fair value – Sears helped. But the possible credit rating drop in the UK and possibly the US is causing some concern. Also many don’t want to go home long positions.

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Support / Resistance

INDU 8250 / 8500 (We tested 8250 – but it held and rallied – do we revisit today and hold?)

NDX 1350 / 1400 (We got close – but also rallied off of 1350.)

SPX 881 (The 881 level is the talk on CNBC and Bloomberg – we closed above it)

RUT 470 (Again – rally at the close )

Interesting going into the 3 day weekend – we might have light volume – question is do we see people getting out of positions before the weekend or looking at yesterday’s sell off as an opportunity.

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Conclusion

Good news is that some companies (Wal-mart, Sears, etc.) are getting done and dirty – cleaning up their business with the massive contraction of revenue. They KNOW it is about margins that determine profit/loss. Sure we maybe in a recession, but that doesn’t mean to give up – it means that you have to tighten your belt.

Bad news is that our Administration, Congress, and Federal Reserve continues to toss 10s of billions at these FAILING companies. The government is already planning on wiping out the 50+ billion of debt they loaned GM if it files bankruptcy (that is permanent loss money to the tax payer). UK was downgrade and is facing a high possibility that they lose their credit rating and Bill Gross (PIMCO) – not to be ignored – said they US will eventually lose their credit rating. Sound crazy, maybe – but if we (and Congress) doesn’t even have a clue as to the kind of money, risk, and losses over at the Federal Reserve and they continue to print money and loan them to the likes of GMAC – it IS inevitable. Geithner asking for a 3% reduction in the deficit is a paltry suggestion as if that would make a difference.

Our Congress needs to get down and dirty like Wal-mart, Sears, and other companies that KNOW you can’t spend money right now and need to get on top of the balance sheet. If we don’t we WILL lose our credit rating.

5/21/09 (UK downgrade? Jobless Claims! Fed Reality!)

2009-05-21T09:20:00.003-04:00

Traders,

Running out of steam….two days in a row we rally above those resistance numbers and look strong – then we fall right back down into the close. Yesterday we also saw the VIX get CRUSHED intraday as the market rallied (from 29 to 26.5 = almost 10%) as if the green shoots had taken root and there was no fear. Then as the market fell back off the VIX retraced back. We are certainly at a struggling level to go higher or pull back.

Hidden volatility is ramping – the VIX is pricing in a 1.5% daily standard deviation in the S&P, but yesterday the S&P was trading on a 2.5% standard deviation. The volatility is getting cheap relative to the statistical volatility – that to me spells short-term concern. The options premium is getting cheap (over-all) relative to how the indices are actually moving.

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S&P downgrades the UK!!!

S&P lowered its outlook on Britain from “Stable” to “Negative” – indicating that it might lose its AAA credit rating as their nations debt approached 100% of their GDP (S&P say it is a 1 in 3 chance of credit rating drop). I ask myself how much debt vs. GDP do you really need to lose a AAA credit rating, seems a little subjective. One analyst on Bloomberg said this morning, if S&P is downgrading the UK, the US is probably next in line (with all its printing of money), if debt vs. GDP is a consideration.

Could we see rates increase on UK bonds to attract investments as the UK needs to finance more debt? Also what happens to the Pound vs. Dollar – we recently saw the Pound make a good run up against the dollar – getting close to that 1.60 level.

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Weekly jobless claims

The futures are seeing a little pressure as weekly jobless claims fell by 12,000 to 631,000, from a revised 643,000 the prior week (higher than initially estimated – which was expected to be about 625,000). Additionally – the number of Americans on unemployment benefits hit another record, over 6.6 million – which seems to be increasing. Economist have been slowly raising their unemployment forecast from 9 to 9.6% in 2010.

Chrysler’s collapse and respective job losses was partly to blame, but economist had included that in the forecast. Clearly the job market is not improving, while some of the economic data is showing the decline showing.

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Fed speak –

While it is hard to make heads or tails out of Fed speak – for the most part, yesterday it was clear the that Fed is unconvinced to the economy’s “stabilization” to persist. An analyst on Bloomberg this morning – said the government intervention did show serious signs of improvement and stabilization, but the focus was concentrated in the banking/financial sector only and while it did slow down the hemorrhage of the auto makers, it didn’t keep them from collapsing.

Let’s look at the consumer and think about them as a collective and business. The consumer is over 70% of the U.S. GDP and about 17% of the world GDP – and it is really the foundation of the economy. The consumer balance sheet is the biggest and the most over leveraged – which recently lost trillions of dollars. The consumer is also seeing a massive shrink of revenue – as jobless claims continue to rise, at that means less revenue to the balance sheet. Most of the credit lines are tapped or shrinking and the equity for the most part (being housing) has been wiped out.

The consumer really has to find a bottom and continue to deleverage before we can see growth.
It seems to me that the Fed is coming quickly to that realization. No doubt they have significantly helped the banks from collapsing – giving them access to the Discount Window, special loans, TARP, etc. But that is NOT filtering to the consumers and that is something they are concerned about. There is some skepticism about the LIBOR as well as a sign of credit easing, on CNBC this morning a regular guest indicated that LIBOR fell because there is no liquidity. Firms have been getting 10s of billions from the government at very low rates, lower than LIBOR – there is no reason to pay up in the LIBOR market if you are getting it cheaper elsewhere. LIBOR is contracting because there is no liquidity. It would rise if the government closed the taps and banks had to go back to each other to get the float.

The FED is seeing this as well and the massive printing that comes with bailing out. The report released yesterday indicated that they are ready to buy MORE treasuries (another $300 billion) should the economy deteriorate further. Clearly the retail sales down, housing starts down, and jobless claims rising – while all slowing – still haven’t found a bottom and more funding is clearly needed. The FED also become more skeptical to their earlier expectations of a recovery and indicated that the jobless rate may remain as high as 8.5% well into 2011. This morning’s weekly number indicates that it might even be higher.

The report certainly sent a negative jolt to the market and saw government bonds rally – as investors expect the FED to print more money to buy more treasuries.

It would seem that the FED, Congress, Treasury, and Administration have all but forgotten about the consumers and have been focusing on Wall Street and the Auto companies. The reality is the consumers of this nation make the wheels turn and drive revenue to companies and is also the prime source of government revenue (TAXES). Unless more focus is geared towards the consumers and the government reduces the consumer debt load – by bailing out banks – it is going to be very slow growth.

To sum it up – the Fed’s report does not spell a rosy picture as to a recovery and is lowering their forecasts.

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Futures Pre-market

The futures are seeing pressure this morning – after the FED report and weekly jobless claims show a recovery further off. Expect negative pressure in the morning.

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Support / Resistance

INDU 8250 / 8500 (We had two days of flirting above the 8500 level – but it really couldn’t close above it – yesterday it was hit into the close and now we are looking to head a little lower at the opening.)

NDX 1350 / 1400 (Again – 1400 seemed to be the area that support could have been built going forward – but we couldn’t keep our head above water. Futures looking lower at the opening – but watch the close.)

SPX 900! (We closed above it, but all eyes are on that 881 level to see if it holds – that is very short-term support. Watch the close.)

RUT 470 / 500 (That 470 level is key – we couldn’t stay above 500 – but watch the close.)

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Gold 950 (We are slowly moving towards 950)

Silver 14+ (We are above 14 – the question is really going to be on the dollar – which continues to show signs of weakness.)

OIL 60+ (Oil came off this morning but is still above 60. I think the dollar today will play a bigger role in oil prices in today’s action)

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Conclusion

Today seems like a test day – we couldn’t close above those resistance levels – and we did make some very solid tries over the last two days – only to close lower. The question is do we visit those support levels this week. It is certainly becoming more volatile, even though the VIX shows different. The disconnect between the implied volatility vs. statistical is reflecting that option premiums are oversold vs. expected standard deviation.

I think today could be a pivotal day between getting back to those resistances or making a good move down to support areas. Those short-term supports in the SPX and RUT is to be watched.

Recovery seems to be further off and even the FED is now on board with that notion.

5/20/09 (Fed Power!, Deere in the Headlights?)

2009-05-20T15:23:00.003-04:00

Traders,

Yesterday was interesting action – it seemed that we were to stretch our legs and continue with Monday’s rally to the resistance levels, but going into the close we headed back down sharply back to and through those levels. It was as if a magnet pulled on the indices back down. Even with that action – the VIX contracted more – below the 30 level.

Interesting that the dollar is becoming weaker as the Euro, Pound, and Franc – along with Gold, Silver, and Oil continue to push higher. Oil got back to 60 and this morning is pushing through 60. Silver broke through 14 and pound is almost to 1.55. Are commodities getting to far ahead of themselves or will we see some contraction in the equity markets?

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FED more power?

The Fed’s mandates and power seem expand. Not that it would normally be alarming for giving an agency any more oversight or power, however the concern is the transparency issue. The FED has been repeatedly asked (even sued by Bloomberg) to be transparent as to how much it has printed, who they have given money too, and what risks they have on their balance sheets.
The video of the Congressman asking the Inspector General of the FED (who SHOULD have oversight and be able to give SOME level on assessment), was embarrassing. She had no clue and we are talking about trillions of dollars. If you haven’t seen this video, it will seriously make you sick to your stomach. http://www.youtube.com/watch?v=PXlxBeAvsB8

Now the Obama Administration is thinking about stripping the SEC (which has proven their failure of regulation) power and granting those powers to the FED – giving it even broader and more sweeping power. It is interesting how critical Congress was of Bernanke as he handled the Bear Stearns, Lehman, TARP, Discount Window, etc prior to the election. If you watched his testimonies last year – it was as if he was Bush’s crony. Now all that criticism seems to have disappeared and they are looking to give the Fed more sweeping powers.

The problem is clear – it is not about WHO is the regulator as long as they can regulate. The further problem is the Fed is not “really” a part of the government, rather than a separated partner. That is where the concern lies – if we ask any agency to expand their power to oversee and enforce regulation – the Congress should be able to (needs to be able to) question and receive transparency as to what the Fed is doing and their balance sheet. If the video is any indication of how things are currently managed – we should take pause before giving them MORE sweeping power.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7YbbxHUZRqg&refer=home

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Bank of American – raising money…

The “Stress Test” revealed that several banks (more than half) need to raise more money to meet the government guidelines. The problem is that TARP is tapped and it would be hard to get Congress to approve more money to give to the banks. So what to do – we are seeing a three-prong approach. 1. Sell assets (a couple of banks have sold of positions and assets – some that are profitable – just to increase their balance sheet). 2. Sell bonds (this is a little harder, some have been successful – but without insurance or government guarantees the interest rates demanded for some of these are rather steep.). 3. Sell stock (No one really wants to do that – as it dilutes the equity position of the company, increases supply, and puts pressure on stock price.)

B of A had sold some assets, but it wasn’t enough. Now they are selling $13.5 billion worth (issued 1.25 billion shares at $10.77 price avg) below the current market value. Wells Fargo and Morgan Stanley had recently sold shares as well to raise money. Actually – why not – the stock prices have made huge gains off the bottom. B of A, which needed to raise more than the others – says they will probably have another round of stock selling to raise another $10 billion.

The problem is that while they may raise the $34 billion needed to meet the government threshold set by the “Stress Test” – they still face significant potential losses of $136 billion for 2009 and 2010. Of course that is all based on economic conditions. Of course the CEO of B of A (Lewis) said the “Stress Test” was based on a much worse economic condition than what most experts projected. Actually that is more spin – the reality is that it face more criticism and many said it wasn’t much of a Stress Test (Unemployment is almost at 9% already). That means that if the government’s projection is right – B of A has lost potential of $136 billion – but for those that believed that it was not necessary reflective of real stress- the potential losses could be much larger.

That brings up the second concern about those re-paying the TARP, which that request was delayed by officials yesterday. What happens if the economy continues to contract OR does not recovery as optimistically as the government “hopes” for? Will they need to come back to the well again (after they repay)? It would be mud in the eye of regulators if that was the case and it could mean a larger fall-out between Wall St. and Pennsylvania Ave.

For now – the banks are able to raise some money – maybe not enough. Loss expectations ranges are skeptical and while credit seems to be flowing via the contraction of the LIBOR – it is certainly not making it out of the coffers to the consumer level – which continues to contract. A clear sign of that was the retail sale contraction and the housing starts falling to a record low. Consumer are tapped.

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Deere in the headlights....

John Deere (an American icon company) – saw profits fall 38% for the quarter. The problem seems to be the commercial side according to Deere’s CEO. Certainly credit line contractions is curtailing farm equipment purchases – additionally forestry sales fell 55% and are expected to fall 42% on a year-over-year basis.

The big problem is revenue which is contracting (expected to be 1.1 billion this year, down from 1.5 billion last year). That means belt tightening to keep margins up. If revenue falls – then cutting costs is the only way to increase margins.

Deere does have a large global presences over the last decade – which may help off-set short-fall in revenues in the domestic market, a weaker dollar could help – if they can raise their percentage of sales oversea.

For now – forecasts are looking rather conservative.

DE is down in the pre-market.

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Futures Pre-market

We saw a fall in the futures after the close yesterday, but they are making a short rally this morning which has closed the gap on fair value into positive territory. Expect a slight pop in the market if the spreads remain positive.

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Support / Resistance

INDU 8500 ? (Above all day it seemed until the close and they we went negative and back down through it. Futures are pointing to a 8500 opening again – but can we remain above it?)

NDX 1400? (Just like the INDU we were above it and was the only index to close up on the day, but at the close if fell down through 1400. Futures are pointing at a 1400 opening.)

SPX 900? (We closed flat to slight negative, just above 900 yesterday. Does it hold above it?)

RUT 500? (The RUT fell below the 500 level – it is making a run in futures this morning – but still short of the 500 level)

Watch the close. We did sell off yesterday above these levels – do we see some selling pressure above these levels again?

Gold 950? (We did make a good run – but it is 950 that all eyes are on.)

Silver 14+? (Silver is making a good move higher – does gold continue to track higher as well?)

OIL 60+? (We are back here – do we fall back down to the 55 or 50 level or continue to head higher?)

The dollar seems to be the answer to the commodity market – as it has been falling. Does it continue to slide?

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Conclusion

Geithner and the Economic Advisory committee meet with Obama today as well as Geithner’s testimony. There is still many questions out there and this morning – some members of the Economic Advisory committee said we seem to be on the right track – but the economy remains negative and fragile. If the government’s data is any gauge it is certainly showing a continued contraction, while slow. When is the bottom?

The VIX broke down below 30 and could head lower. Certainly the market doesn’t seem to be concerned about the market and is rather optimistic. Is it too optimistic?

5/19/09 (TARP pay back?, Buffet All In!, What's Next?)

2009-05-19T13:12:00.002-04:00

Traders,

As I mentioned yesterday it seemed like last week’s sell off was controlled and low key – there was no GAP DOWN or panic. Even the VIX indicated that the selling was controlled. In that kind of an environment – there is more confidence at buying on the dips and optimism that it was just a slight correction.

Couple that with yesterday’s bullish news – Lowe’s getting on track, LIBOR spread decreasing, and Buffet’s investing in Wells Fargo – the futures were already to a good head start in the pre-market. The market rallied throughout the day across the board (3% rally) and we are now quickly back up to those resistance levels of 8500 in the INDU, 1400 NDX, 900 SPX, and 500 RUT. The question on everyone’s mind – are those just being tested again – or do we have room to again stretch our legs further.

The repeated concern is the disconnect between the market place and the economic conditions. Certainly the man on the street is not feeling the same bullish optimism that the market is seeing. Several companies announced more lay-offs, including a big cut at AMEX, meanwhile GM is knocking at the bankruptcy door, and lastly consumer spending and income is still contracting.
Why the disconnect? I would say that there was a general Doom & Gloom feeling coming into 2009 and when economic data should that the decline was slowing down (rightly or wrongly) the perception was that the market, primarily in the banking sector, was oversold and undervalued, hence the big rally. However, what is still the big concern – is the recovery – which economist and analyst continue to push out – from the end of 2009, to 2010, and now some are saying 2011. We certainly will hit bottom sooner, rather than latter, but the recovery and growth seem further off.

It is the reason that for long-term holders the focus should be on companies with solid balance sheets, revenue, and a management style that has come to reality that growth and revenue will continue to contract and how to expand margins. Lowe’s indicated as much yesterday – they have come to reality – the revenue is slowing down, they are not expecting a boom in housing, they are not expecting a boom in major renovation – so how to capitalize on that? Focus on what does move- people are fixing instead of replacing, painting instead of new cabinets, and homes are consistently in repair. Managing a business to those expectations and understanding margins are going to separate the solid companies from those that are still clinging on to failed business models (like GM or Chrysler).

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Pay back the TARP?

Goldman, JP Morgan, and Morgan Stanley had indicated in the past they wanted to pay back the TARP – especially after Congress slapped on all sorts of rules and penalties – from pay to board members. However, when Goldman and the other had indicated or attempted to ask to pay back the money (in full or in part) – there was Administrative and Congressional push back. Why, well some conclude that it may make the banks that cannot pay back look worst and others argue it is a ideological reason that the administration and Congress want to revamp and put in check the banking industry – beyond regulations. Regardless of the reason, they have not been able to pay it back – yet.

While now they have officially applied to pay back as much as $45 billion collectively and tax payers should rejoice – getting back that money that may not have been needed in the first place. It would also allow these banks to break away from some of the more troubled banks like Bank of America or Citigroup which have tremendous stress from acquisitions and other vertical market debt.

They question now is will they be allowed to. The administration, Congress, Bernanke, and Geithner are playing some spin games for sure and their motives are rather uncertain. Geithner said the other day he would welcome the payback of the TARP funds, provided the regulators sign off. Barney Frank made similar comments and added lots of buts and ifs. Certainly they know that the TARP’s strings are powerful and they don’t necessarily want to cut those strings. Some are afraid they may have to come back and get the money back if the economy nose dives again.

For now – the news had given Goldman, Morgan Stanley, and JPM a serious boost yesterday – but this morning they seem to be giving up a little ground.

One interesting observation I heard on Bloomberg – was that IF these few are able to pay back the TARP and others do not – will there be a disconnect in the financial and banking indices in which we could see a spread in price between the Non-Tarp vs. Tarp. Hedge fund traders are already looking into correlation risk and rewards and it could certainly bring some interesting volatility into that sector.

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Buffet - all in?

Buffet has been the face on the financial news over the last year. He made a bold investment (with some excellent strings attached) into Goldman ($5 billion), he had supported Obama, he had seemed to be on top of his game in the face of this massive economic slowdown. However – things are looking rocky over at Berkshire. Likes take a look….

1. He called derivatives, “financial WMDs” – but the primary business is insurance and he also placed the single largest derivative trade on the S&P 500. He sold $4 billion worth of out-of-the-money puts in 2007 – which recently went against him costing Berkshire $6 billion and causing criticism.

2. His Goldman, Wells Fargo, and GE holdings have been extremely volatile, even though they have gained recently.

3. Criticism from shareholders as they want to know his successor, but he will not give any definitive answer.

4. Berkshire lost its coveted AAA credit rating.

All these concerns have been reflective in Berkshires shares dropping significantly in price.

Buffet has stumbled in the past – in the airlines and financials, but has always recovered. He is certainly one of the brightest and most successful investors in history, but that doesn’t make him infallible. Recent, and fair, criticism has been his recent spending binge and risk taking in the economic times. The positions maybe too big or “all in” type beats. Not that his decisions are bad – but maybe just too big.

No the problem is that Berkshire’s cash holdings are dwindling fast and Buffet who is used to making decisions and investments without being handcuff is now being forced to reduce investments because of the drop in cash holdings. As one report in Bloomberg reflects – “He’s tapped out!” he spent over $600 million in stock purchases in the first quarter, but had to reluctantly sell other holdings to finance his new purchases. He is fully deployed, unless he sells something.

He does drive some of the best deals on Wall Street – from massive warrant attachments and high interest payments coupled with equity in his GE and Goldman deals. However, those were whopper positions – that certainly help dry the well.

Even Buffet admitted he had to sell three stock holding to fund other deals, that he preferred to keep.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ak_yonqvS.yg&refer=home

Why all the Buffet concern or “Buffet Watch” – just like the President – Buffet is very influential regardless if you’re an investor or not. He is closely watched and regarded – because if his perception or circumstances change – what does that mean for the rest of the market?

Keep an eye on his positions and media exposure – a friend of mine calls him “the billionaire economic gauge”.
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Futures Pre-market

The futures were up in the pre-market, following yesterday’s rally – but have come off sharply as U.S. Housing Starts (just released) unexpectedly fall to record low. Futures pointing to a lower opening.

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Support / Resistance

Resistance test?

INDU 8500 (We just got there – it looks to be a resistance level and housing starts down is showing a lower opening now. Do we close above or head back down?)

NDX 1400 (We are just below the number and futures looked to initially test it this morning – until the housing starts sent futures down. Watch the close!)

SPX 900 (Closing just above it and looking higher – but now futures are pointing lower. Watch the close.)

RUT 500 (Closing just below it after the big rally yesterday – does it get above it?)

It looks like the reality with the housing start data is sending optimism to the sidelines again and the resistance points will not see the hopefully breakout futures had been pointing too.

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Conclusion

The battle still seems to be between economic reality and the optimism that we are finding a bottom. Not that one is wrong or the other is right – the concern should be the spread or the disconnect between the market and economic conditions. There are 3 outcomes:

1. Economic conditions rally and we don’t just slow down but start a recovery with new jobs which closes the spread and reflects the market optimism – which seems unlikely.

2. Markets remain neutral to negative with volatility contracting as the economic conditions slowly improve and eventually over time (6 months, 9 months, 18 months) the spread narrows – seems more likely.

3. Market correct and head down quickly to meet economic reality as a recovery seems further off and then the market finds a bottom as the market and economic realities begin to track each other again – seems likely as well.

I think the only answers are 2 or 3 – because it will take a long time to see the economic conditions on the ground for the U.S. consumer to change. It doesn’t happen overnight and takes months, if not years.

If we see the flow of money (in and out) dwindle in the market we could have scenario two – where the market’s volatility and range decreases – up or down 5-10% annually – a neutral, range bound, or slightly negative market condition until the economic conditions can catch up.

Scenario 3 will only happen is the optimism and hope begins to fade – the economic data (like the recent housing starts) reflect negative conditions and with a GM bankruptcy that could be the straw that fades that hope and optimism we have seen the last 10 weeks and that could mean a correction in the cards – where the market quickly snaps down to reflect the current economic conditions and concern for growth.

I think if optimism and hope can continue – that scenario two is the most likely, but there are pretty high odds that 3 could happen. The problem is that when 3 happens – it happens when you least expect it. That means – be prepared.

5/18/09 (Well's Fargo, LIBOR?, Lowe's survives!)

2009-05-18T10:11:00.003-04:00

Traders,

Last week the market saw the first stumble in its 10 week rally. Mostly the news showing that the economic contraction is slowing down – has been seeming to slow – coupled with the banks not needing as much as one had thought – has all come all. Last week seem to be digesting the news time and see where we are to go from here.

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Wells Fargo gets a boost…

Berkshire Hathaway already had a large holding in Wells Fargo, after the “stress test” and recent news, Buffet is now increasing his holdings – which is given a huge vote of confidence into the banking sector. Berkshire will be one of the largest shareholders of Wells Fargo.

Expect to see some positive momentum in the banking and financial sector – as this is a clear vote of confidence by the billionaire.

WFC is up .75 in the pre-market

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LIBOR – show me the money

The London InterBank Offered Rate (LIBOR) the cost of borrowing dollars between banks contracted again. Showing that credit lines of the larger banks is improving. While this is a good sign that credit is easing – there remains two problems. First, there is a liquidity question. On Bloomberg an analyst mentioned that it was good to see it contract – showing that credit is available – the problem is the liquidity is far less than in the past. We need to see it continue to contract and more banks lending to each other. Second, the money (credit) is not getting down to the consumer level. Consumers – the core of GDP and consumption – is still not seeing credit lines or available liquidity increase. Where is the money going? The analyst indicated that it is still being used to maintain or expand existing holdings and used to off-set write downs. If there is anything left – the banks are holding on to it tightly.

Again – the news is good and a step in the right direction – we just need to see more volume, continued contraction in the spread, and credit available on the consumer level.

The news is helping to boost the financial / banking sector in the pre-market, coupled with Wells Fargo news – we could see a good boost at the opening.

GS, MS, JPM, BAC, etc – are all up in the pre-market.

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Lowe’s beat estimates…

Certainly, like others (especially in the construction / home sector) – have significantly lowered their forecast in 2008 going forward. However, maybe they lowered it too much.

Lowe’s first quarter profit fell less than expected – profit dropped over 22% year-over-year, to $476 million (32 cents a share). Even though revenue contracted significantly, Lowe’s cost cutting measures and inventory management help increase margins almost 1% year-over-year.

Lowe’s has been seriously reinventing itself – focusing on the smaller home projects, repair, and needs – rather than the bigger ticket item or renovation. Cutting costs, jobs, and inventory – keeps them running lean. They raised their annual forecast to as must as 1.25 (from their previous 1.20 – what was significantly cut). It is a boost, certainly not back to where they were, but any boost in this economy means that the company would seem to have a handle on revenue, costs, and margin expectations.

The question is how does their big brother Home Depot do, which reports tomorrow?

Lowe’s is seeing a slight pop in the pre-market.

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Futures Pre-market

The futures had been flat-to-down until the news of Berkshire and the reports of the LIBOR spread which seems to have boost the confidence in the banking / financial sector. Lowe’s is also helping. The spreads are in – expect ARB traders to short futures and buy the cash – giving a boost the market at the opening.

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Support / Resistance

INDU 8000 (8250) 8500 (We came off from 8500 to the 8250 level – which seems to be a pivot point. The futures are showing a good 100 point boost in the pre-market. Do we hold – it will depend on how solid the investment community feels about the news this morning.)

NDX 1300 (1350) 1400 (Like with the INDU – we seem to have had some profit taking and a little digesting of the recent run and economic news. The futures are showing a boost in the pre-market.)

SPX 880 / 900 (We are getting a boost in the futures to 890 in the pre-market. 880 is that 20 day moving average – that I keep hearing that has hold by the tech analyst. While NDX and RUT have not – there seems to be eyes on that level. Take it for what it is worth.)

RUT 475 (We we looking at a 480 opening, but it is that 475ish level that the broader market needs to hold to see some level of support.)

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Gold 900+ (We have moved into the 930 range – the question is do we break through 950?)

Silver 13+ (We keep bouncing up against 14 – we could break if we could also see gold get through 950)

OIL 55+ (We made a good run to 60, pulled back off, but now are heading back up. There is volatility in here – as the dollar value vs. oil demand is a push-me / pull-you.)

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Conclusion

We had a slight pull back – it was controlled and volatility did not spike – which clearly reflected there was no fear and that brought in some perceived buying opportunities. The news this morning is certainly confidence building in the financial sector – but it still doesn’t address the economic concern in the big picture. Lowe’s news was good as it seems the management is getting to grips with the slow-down and trimming the fat – however a 22% drop in profit is still a shocker, no matter how you cut it. The realization is that the past growth is probably not a realistic goal over the next couple of years and any growth is a good sign.

We are seeing a good pop in the futures at the pre-market, the question is – does the news maintain that optimism? That is the question – the economic vs. market still shows a disconnect as consumers struggle and we see contraction in the revenue. It is now about managing margins and coming to realization that revenue will continue to be down.

5/15/09 (CPI, GM 11th hour, Jack speaks out!)

2009-05-15T09:11:00.003-04:00

Traders,

A mixed market with a slight rebound after the sell-off. Tech. Analyst talk is that the SPX did NOT break that 20 day avg, but it did get close – and a test of those levels are still in the cards. RUT and NDX did not get back above it, despite the rally. It would seem the talk of “green shoots” is starting to turn to “weeds” on Bloomberg and CNBC, even the Economist is printing articles that said it is prudent to remain cautious.

I think that it is prudent to remain optimistic that the economy’s fall has slowed – but optimism needs to be combined with reality and caution. My concern is not that we will find a bottom or when or how far down it will be – we certainly will get to the bottom – probably sooner, rather than later. My concern is when will we see a recovery and the more I read and hear – the more I have a sinking feeling that it is certainly not going to happen in 2009, less of a chance in 2010, and we might be lucky to see it in 2011. That is NOT to say that the market and economy will continue to go down, but rather we will see a longer road of stagflation – and possibly follow in the footprints of Japan – the lost decade.

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Consumer Price Index (CPI)

Inflation, on the consumer side, according to the CPI was unchanged, but the core was up .3%. However, last report it was down and while it did come in line with expectations, it was the higher end – as many of those deflationist thought it would continue to contract.

I am becoming more convinced that we may be seeing the bottom in the deflation arena and that we will start seeing (like with the PPI) and increase in inflation at the consumer level.

Why? Well – we certainly will have a contraction of the CPI has existing inventory is moved out at a significant discount. We saw that with autos, electronics, and higher price ticket items. Certainly in homes and rent. But here is the tricky point, many only want to measure inflation from one variable – prices increase or decrease on a fixed value. However, the hidden volatility in the CPI is the strength or weakness of the currency as well as the amount of money that is pushed into the system (via printing of money).

The horizon at best if uncertain. On one hand – we are certainly printing tons of money and the risk of the dollar weakening is increasing – both spell inflation. On the other hand – consumer credit and income – which determines buying power is getting wiped out. It is almost like we will have inflation and deflation at the same time – or something new. Whatever the case – I certainly think the dollar will eventually be under serious strain.

For now – inflation seems to be in check and deflation is not getting worse – but at some point that will change and I am afraid it will change quickly.
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GM – is it the end?

GM insiders have been selling shares as June 1st deadline approaches, the probability of bankruptcy is increasing as the minutes tick by. The big news – and another job drain on the economy – is GM’s announcement of terminating over 1,000 U.S. dealerships – that means more job losses across the country and confirms that GM does not expect that auto sales will be increasing any time soon, regardless of how they spin it.

Tic-Toc….

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TARP – join the club

The latest group to join the government bailout group are the insurers, Prudential, Harford, Allstate, Lincoln Nation, and more are now approved and will soon be receiving billions in bailout money. Interesting that the banks are wishing they didn’t head down that path and make that deal – now the government forbids some of the banks from repaying. The government is putting pressure on B of A to fire the CEO and starting to set more policies at these banks that have received TARP funds.

Jack Welsh this morning on CNBC was shaking his head – and is very concerned that the government is getting into too deep and it could remain permanent. He made the interesting point – once the government does something and says it is ONLY temporarily, is it ever? One would think other companies would learn from the banks lesson, but as Jack pointed out – the ONLY reason you would ever get involved in the TARP is because you REALLY need the money and that means the company’s balance sheet has some serious problems.

Listen to Jack’s concerns: http://www.cnbc.com/id/15840232?video=1124823872&play=1

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Futures Pre-market

The futures are weak in the pre-market, but the CPI data gave a boost off their lows. The spreads are narrowing and if they continue to contract – expect a mix to weak opening.

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Support / Resistance

INDU 8000 (8250) 8500 (We got a little rally off that 8250 pivot point – but we can revisit that 8250 level – it is still a pivot / short-term support area. Watch the close.)

NDX 1300 (1350) 1400 (We closed up above the pivot point – the futures are pointing to opening RIGHT on that number. Which way do we go?)

SPX 900! (We closed below it – but we are right there – it is a pivot point – watch the close.)

RUT 475 (We got hammered in the RUT 4% the other day compared to the other indices and we didn’t get that big of a bounce, we are below the 500 level and futures are pointing to that 475 level.)

================================

Gold 900+ (We are above 900 – but to see some carry through we need to get through 950)

Silver 13+ (We are at 14 – and have made a good run – does it have legs?)

Oil 55+ (We are still above 55, had a good run to 60. Oil is coming off a little from the CPI data – but is still above 55)

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Conclusion

Jack Welch is right this morning on CNBC – some of these policies are going to serious curtail growth and some of the knee jerk and ideological policies coming from the administration is very short-sighted. Sure it may save a company via a bailout or solve some short-term problems – but it certainly is not building a foundation for this country to grow.

Ron Paul was on Joe Scarborough this morning – mentioning his concern as well – note, Joe read Ron Paul addressing Congress in 2003 – predicting the housing bubble, the collapse of Freddie and Fannie. Joe made an interesting observation, why do Congressional members say they DIDN’T see this coming, why did Bernanke say he didn’t see it coming? How come Ron was able to see it and not them? Ron’s answer – if you believe in something like Keynesian economics – you don’t want to see the truth or the math. Faith is certainly stronger than math. Ron when on to make another interesting observation – if these SAME people didn’t see the WORST financial crisis coming are we to believe them that we are now seeing a bottom, “green shoots”, and we should be back to a 3+ % GDP growth by the end of the year?

These are both smart people – we should take pause and listen to their concerns.

Jack Welch – CNBC this morning: http://www.cnbc.com/id/15840232?video=1124823872&play=1

I wish I could find the Ron Paul clip this morning…

5/14/09 (Wal-mart! Green shoots yellowing?)

2009-05-14T08:56:00.003-04:00

Traders,

Yesterday we saw the short-term supports that were tested the previous day not hold and the indices continue to move lower throughout the day. Whether this was a short-term retracement or the beginning of a correction has yet to be determine – 20, 30, 50 day averages have seemed to hold but could easily be tested.

The concern is that while all seem to agree that the contraction in the economy has slowed the recovery seems to be farther off. Consumer spending seems to be the driver that all eyes are on. It is the consumption of goods that drives the wheels of the economy. With a trade deficit widening and shipping traffic at anchor it is clear that the consumption continues to contract. Revisions of growth for 2009, 10, and 11 continue to be lowered – which is alarming on the national deficit side – as the administration expects (or hopes) for growth in the 3+% range – which is needed to reduce the debt and deficit.

______________________________________
Wal-mart – stays inline…

Wal-mart the recession company – as people of all consumer class steps down to Wal-mart to buy their essentials. Wal-marts might is their many vertical markets – from food, clothing, pharmaceuticals, etc. They are the one stop shop and prices are competitive. As consumers have less to spend – a one stop, low price shop is the answer.

But even Wal-mart is seeing contraction in growth. While they are gaining market share – the consumers are still spending less and focusing on essentials, rather than big ticket items (like TVs). That realization was also seen in Sony’s recent report of losses as revenues drop and lower prices to move merchandise means leaner margins.

Wal-mart reported their profit was in line with estimates (note: those estimates had been lower). Their revenue dropped by $2 billion in the quarter (from 96 to 94 billion) and while margins determine profit potential – it is revenue that drives in the money. Business formula is simple, if revenue drops then cost cutting is necessary to keep margins in line.

Expectations for next quarter [83-88] bracket the analyst estimates of 85 cent per share, which is good news that Wal-mart didn’t lower guidance.

Wal-mart still seems to be the leader of the retailers, which the retail sales report showed a surprising drop. Wal-mart now needs to focus on gaining market share, keeping it, focus on the margins of essential goods, and manage the high ticket items. They will no doubt remain a foundation in a contracting economy and have continued to beat the INDU and S&P.
While I wouldn’t get long retail stocks in general, Wal-mart is the exception to the rule. Make sure to hedge and use options for short-term yield enhancement.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aetDKT5OYyMM&refer=home

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Jobless and Inflation

Jobless claims were up by 32,000 and the total now on unemployment have risen to over 6.5 million.

Producer Price Index (PPI) which measures inflation at the wholesale level among producers was up .3%.

Both indicators released today, after the lower retail numbers yesterday, are starting to bring a skeptical eye to those “Green Shoots”. The talk has turned from short-term optimistic view of finding a bottom, to a skeptical concern about the long-term recovery.

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Future Pre-market

Futures seem to see a little volatility in the pre-market, up a little to slight better than fair value, to head back lower. The Wal-mart numbers – combined with the Jobless / PPI numbers injected some down/up knee jerk action. The ARB traders are sitting on the sideline as the opening looks mixed and Asia / Europe looked weak. Look for a mixed opening if the fluctuation remains.

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Support / Resistance

We didn’t hold the recent short-term supports, but the sell off - while broad – was contained and mild. The VIX, while higher, didn’t spike. I gauge the sell off as a controlled profit taking and certainly not a panic. But if we get a follow through to the downside – we might begin to spark fear and see a rise in the VIX. The question today – is this a buying opportunity or was yesterday a confirmation of a profit taking indicator?

INDU 8000 (8250) 8500 (We are in the middle of the range – and waiting to see a move up or down – perception and renew concerned will be the driving force.)

NDX 1300 / 1400 (We are in the middle as well – which way do we drive?)

SPX 875? (We are just above the 20 day moving average – which this is a fairly good bottom support measurement of the recent rally. It is 879, which we closed just above. While the self fore filling prophecy of moving average watchers that causes concern if we close below it? Watch the close – so far it has closed above it since March 12th. – make of that what you will.)

RUT 470? (Unlike the SPX the RUT seriously broke the 20 day – and as a broader measure of the market – it didn’t look good yesterday. Pressure is on. If the RUT is any indicator yesterday of the SPX, than expect the SPX to visit and pass through that 20 day.)

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Gold 900+ (Gold is still in the 900 plus range and some have said it looks like it may have broken support. But I didn’t see it make the serious leg up yet. I would like to see 950!)

Silver 13+ (We broke 14, but came back a little just below.)

OIL 55+ (Well it was a one day visit to 60 and now we are heading back down to 55. Dollar value vs. supply & demand. There are two factors playing on oil price)

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Conclusion

The sell-off yesterday was mild – sure it was over 2% in most indices (and 4% in the RUT) – but it didn’t GAP down, it was a controlled sell off. The VIX did move higher – but not in a knee jerk panic sort of way. And investors had time to sell out positions through-out the day. So as the jobless and PPI information is absorb the market participants will have to determine is today a buying opportunity or was yesterday a reminder to maybe take some profit off the table.

Certainly the contraction in the retail sales, jobless claims up, and inflation starting to see signs in the PPI – are not economic good news. However, the market moves on perception. Yesterday I mentioned that there is a wide spread between recent market values and economic reality. Sure the spread can widen more (stock can go up or the economy get worse) and it is also questionable as to when they start tracking each other again. But as the commentator on Bloomberg said as he reported the jobless and PPI numbers, “The green shoots are starting to yellow.” – It is now up to the market participants on how to absorb that news.

For those long equities, it is probably better to lock in gains and hedge positions – as the data continues to show a contraction in the economy, regardless if that contraction is slowing.
I don’t think the move yesterday reflected the hidden volatility that is building. I was surprised that the VIX didn’t even make it to 35 - which clearly showed that there was little concern, or as the talking heads say “Fear”. As optimism rises and fear subsides , in the face of poor economic data – that should be a warning sign.