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.
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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
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