Tuesday, June 30, 2009

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

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.

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