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Monday Market Mayhem

Democrats and Republicans debating the right direction for thiis countryNow what?


In the Weekly Wrap-Up we were discussing the 5% rule in detail and I said of last week's action to members: "Finishing at the 5% rule is considered a bad thing as it means the index simply ran into a wall and didn’t have the push to complete a breakout in one day and it’s rare that they do (the big ones). We have little to hang our hats on here as we are below the 40% off the top line on the Dow (8,400) and it would be easy to go to 50% off (7,000) from here. IF however, we do hold 8,000 and get back over our 40% line and are joined by other indices - THEN we are reinforcing our bottomish premise that we are NOT going back to 7,000. If ANY index other than the SOX, who have been there for a while, go to 50% off, they are very likely to drag the rest down - that’s what we were very concerned with on the last Big Chart review."


Yesterday I posted our Economic Overview 2009 and I did come to the conclusion that we are priced about right for a bottom at 8,000 but that Keynes (who is very popular these days) warned us that "the market can remain irrational longer than you can remain solvent." So we will not be betting counter to this trend, stocks are cheap enough down here that we can wait until they are on the way up before jumping in - there is no need to catch the falling knives, we already have a full set! We have been playing it bearish since last Tuesday so we're fine overall and we had NO reason to change our stance into the weekend as we expected plenty of doom and gloom in the weekend news to sour the mood of investors today but let's take a look at the week ahead and see if we can find a path to navigate out of this mess. Hopefully we can find a good reason to do a little bottom fishing off our buy list (hedged, of course) and sell a few puts into the morning dip.


Today is a big data day for a Monday with Personal Income and Spending before the bell and Construction Spending and the dreaded ISM at 10. Tomorrow we have Pending Home Sales and Auto Sales (or lack thereof) and Wednesday we have the ADP Report for January, which spooked the markets last month by showing 693,000 jobs lost (and it was "only" 588,000 officially) anead of the bell followed by ISM Services and, as usual Crude Inventories. Thursday we have Q4 Productivity and Factory Orders and we finish the week with Non-Farm Payrolls and the Unemployment Rate for January and, way down at 2pm on Friday, we get Consumer Credit, which we already know from the chart in my Economic Overview will be down for December.


There are SO MANY earnings reports this week I'm just dizzy. Boeing Buddy, BEAV, had a nice beat this morning but guided down and HUM and MAT disappointed us already. It's time to pay the piper on our AFL play this evening and there is still time to chicken out and take our already great profits off the table there. CCK, FMD, GKK, PBI, RCII and SNDK are also earnings of interest this evening. This is the first time in a while we have not liked SNDK but it's too risky to hold into this report. Tomorrow we have ADM, AVP (got 'em), BP, CME, CMI (got 'em), DOW, DHI, ETR, HW, IACI, MAN, MRO, MRK, MOT, NOC, PNR, PNC, PEG, TYC and UPS in the morning and ACTL, CTX, ERTS, SOLR, LEG, MEE, MET, TZOO, TUP, DIS (need 'em) and YUM (need 'em) - Wow! Those are just the ones we care about... Forget the rest of the week but here's the full list.


Dude, where's my economy?There are some, but not many, signs of life in the global markets and, while we wait for our lawmakers to stop squabbling over a bank bailout, the ECB is moving ahead with theirs, led by Germany, who are moving forward with legislation that would effectively set up individual "bad banks." Under the plan Germany is considering, banks' toxic-asset units would be able to book assets at values above their current, often negligible market values. That would reduce the need for asset write-downs in the short term. If bad banks could only recover part of the assets' book value later, then parent banks would have to pay for the losses and apply to the government for more capital if needed. Perhaps if they called it IVFULTA (investment vehicle for underperforming long-term assets) rather than "bad banks" the measure would garner more general support.


Our own futures look glum this morning as Senate Republicans "vow opposition to the Stimulus plan," over the weekend, something we discussed in the Economic Overview post and the Wrap-Up as this is simply undermining market confidence at this point. "A trillion dollars is a terrible thing to waste," said Sen. Roger Wicker, R-Miss., standing with Republican colleagues who said they feel shut out of the process of crafting the stimulus despite Democratic promises of bipartisan cooperation. This is, perhaps, the funniest thing I've heard all year as Senator Wicker has been in office since 1995 and has been one of the best performing conservative voters, siding with President Bush 99% of the time (I think he was sick the day of the 1%) as he added $6Tn to the National Debt.


Wicker and his diversified group of collegues vow to hold things upDemocratic leadership in the Senate remained optimistic. "I am confident that we are going to get Republicans to vote (for) our bill," said Majority Leader Harry Reid, D-Nev. "If we don't, it's not our fault." The cost of the economic stimulus package rose to $888 billion in the Senate because of a $70 billion addition to protect about 24 million Americans from paying higher taxes under the alternative minimum tax. The House version, which did not include the tax patch, carried an $819 billion price tag. As with the last stimulus package, we can expect the Senate Republicans will ultimately sell their votes for pork, driving the package up closer to the Trillion dollar mark but, until then, the markets are acting in fear of no stimulus at all.


Asian markets slipped as financials led the downturn followed by exporters as the Pound collapsed this morning. South Korea had a 33% drop in exports in January and that report spooked everyone else while Australia's government projected a deficit and their Central Bank began selling gold on the open market, driving prices back for the moment. "Negative news is spreading across markets and global demand is slowing down," said Hirokazu Yuihama, head of regional strategy at Daiwa Institute of Research in Shanghai. "When we look at the region, the domestic Chinese market is the only bright spot now because of the huge infrastructure projects and government spending."


Russia ProtestDespite making some progress on the "bad bank" program (and again, a little spin on the name would work wonders) the EU markets are getting hit hard this morning with roughly 2.5% declines, following through on last week's dip as we expected. RYAAY (got 'em) posted a loss but upped guidance so last chance to get in on this one and the Ruble fell to new lows and is flirting with the level the RCB pledged to defend. Kazakhstan looks like they will be nationalizing a couple of their banks - something we predicted in the fall as we expected the Russian breakaway Republics to start falling like dominoes as this crisis runs its course.


Thousands of protesters gathered in Russia to protest Kremlin policies while Communist Party chief Gennady Zyuganov said the government must abandon Western economic models and conduct broad nationalization. Police detained several protesters, and activists of pro-Kremlin youth group brutally beat some others, but several dozen demonstrators marched on a downtown street, shouting slogans: "Down with the government!" and "Russia without Putin!" The authorities sought to counter the opposition protests with a rally of the main pro-Kremlin United Russia party next to the Kremlin -- the area off limits to any other demonstrations. Army soldiers served hot tea and offered cookies to some 9,000 participants.


This is one of our great market fears: The failure of a major country (not Iceland!) or the failure of a major bank or the collapse of one of the Big 3 are all things I have long said can send us quickly down to 7,000. Unfortunately, none of those things are really off the table yet and GM just asked for another $7Bn in tax relief (for good reasons) and it's not even the March deadline yet, when we were expecting to hand them another $10-$20Bn to keep them going for another quarter. So we will continue to hedge for a 20% downside and simply hope it doesn't happen as the realization of one of our major fears can easily lead to the other two quickly following and those 20% drops would be additional drops, not just the one 20%!


Can America be so foolish as to let this happen? Well, listening to Senator Wicker over the weekend I would have to say the answer may be yes. We'll see how the week works out. I predicted 8 more sessions of a flatline around 8,000 into expiration day, where we expect a rally of sorts but, after that - who knows? Even if we get a massive stimulus bill and set up an "awful bank" program (even better/worse than the "bad bank" program) in record time - is it going to be enough to change the mood of the consumers, who make up 70% of the GDP and, according to the December report, are spending 1% less and saving much (3.6% of income, up 40% from November) more.


We're certainly going to be picking up some financials on the dips this morning, if the XLF can't hold $9 maybe we'll bail but this is a very nice opportunity to pick them up cheap again ahead of a possible bailout passing so that would be my speculative play of the day. We should be able to sell the Feb $7.50 puts and calls for $2.50 so that would be in at $6.50, called away with a $1 profit if XLF finishes over $7.50 on the 20th (up 15%) and having the stock put to you at an average entry of $7, a 22% discount off a $9 entry otherwise so, hopefully, that covers us all the way to Dow 7,000.


Remember, this is what we played for - no reason to panic... yet!


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