5/20/09 (Fed Power!, Deere in the Headlights?)

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?