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

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.

_________________________________________________
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.

______________________________________________________
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.

__________________________________________________
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.

___________________________________________________
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.)

_____________________________________________________
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.