Just two weeks ago, on October 17th, I warned in the Weekly Wrap-Up that it was "Dow 10,000 or Bust" for the next week and we failed that one and last Wednesday we were looking to hold NYSE 6,900 and THAT failed too. Now we enter into the second phase of our limbo game where the deep-voiced guy asks the question "how low can you go?" and we’ll be setting our next bar at our long-standing 9,650 target for the Dow, which we are already hitting in pre-market trading. If that fails, we’ll have to look down to S&P 1,000. As you can see from Jesse’s Chart, we took a nice bounce off serious resistance yesterday but we’re just not feeling it yet, even though the market is now as technically oversold as it was in March.
Yesterday was like a roller coaster and my first Alert to Members of the morning targeted 9,775 as the on/off line for our bullish/bearish posture on our DIA covers. We whipped past that line right about 10 am as we got good reports from ISM, Pending Home Sales and Construction Spending but by 12:45 we had broken back down so I sent out an Alert calling to refocus back to 55% bearish by adding the DIA Jan $100 ($5) and Jan $102 puts ($6.20), already covered by the Nov $99 puts ($2.50).
The reason we mess around with our covers is we don’t want to flip in and out of our option positions, which are generally either straight bearish or well-hedged long positions, is because options carry a relatively large bid/ask spread and cost you money every time you get in and out. So, on the whole, we’d rather let our over-riding cover plays, like our DIA spread, adjust our stance as conditions change, making a single adjustment that keeps us balanced as we ride out the market waves.
It’s been a couple of weeks since we had a good, old-fashioned stick save but we got a mother of one yesterday (as seen in Dave Fry’s chart) which was right on schedule as Kustomz bought it up in Member Chat at 3:09 and I agreed at 3:19 that "It does feel like a pre-stick move" and we grabbed VIX $25 puts at .85 to protect ourselves from a sudden surge in complacency.
By 3:33, my next comment to Members was: "The stick lives!" but…
Our theoretically conservative $100,000 Virtual Portfolio dropped 6% in one day as we had a farily bearish position into options expiration that I stubbornly refused to adjust this week. Surely, I thought, after running up 250 Dow points from Thursday, 10,000 would act as some kind of resistance? We’re also up a neat 500 points for the month of October so that’s our 5% rule and to not get a 1% pullback, even in the most bullish of markets, is very rare indeed.
So we stayed bearish yesterday and got crushed by the AMZN $90 calls we sold as well as UYG calls we sold and our PSQ calls we bought for protection got slaughtered as the Nasdaq flew up not 5% but 5.5% for the month and up 6.2% from it’s October 2nd low. While we are disappointed, we’re not terribly concerned as we’re only going to roll the calls to November anyway and I did promise the members that, if we hold our breakout levels for 2 closes, then I’ll be shifting more bullish. I’ve been trying to identify more bullish positions this week but our mix has still tended bearish as I’m just having so much trouble buying into this rally.
I do wish we were more bullish, this is a very smart group of people and we’re pretty bearish but so is the general investing public or there’d be volume to this rally. I have a hard time ignoring the fact that 600,000 more people lost their jobs this week and, even if it’s "only" 500,000, I still think that’s not really a sign of a healty economy. I think the REITs are off in fantasy land and I think so is the government, who cannot keep borrowing money at these low rates. The dollar has dropped 25% of it’s value since March so the market is only 25% ahead of the currency fall which means a flight back to the dollar, which could happen very suddenly if an EU nation like Spain collapses, could send our market down as fast a 9/11.
That being said, we have no choice but to follow the technicals and now that we can look at nice, easy support levels like Dow 10,000, S&P 1,100, NYSE 7.200, Nas, 2,200 and RUT 620 and simply
Well, it looks like they "fixed" everything over the weekend.
By fixed, of course, I mean like Tony Soprano fixing the race results as opposed to any actual improvement in the economy. Nonetheless, these fixes come much easier to the Gang of 12 than actually doing anything to promote a healthier economy. Heck sometimes G12 members don’t even WANT the economy to improve. Take CIT, for example. Our pals at Goldman Sachs structured a deal to "save" CIT with a $3Bn rescue package. Interestingly, that structure put the taxpayers on the hook for $2.3Bn if CIT fails but it PAYS Goldman Sach $1Bn if CIT files Chapter 11.
Our focus is on originating loans for mid- to large-sized leveraged and management buyout transactions, recapitalizations, refinancings, financings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. We will also make opportunistic purchases of senior secured loans in the secondary market. We target high-quality companies with $500 million to $10+ billion of enterprise value; leading market positions; high barriers to entry; well-regarded management teams; and stable, cash generative businesses.
Let’s not forget that Goldman IPO’d CIT with $5.8Bn of sucker investor money (pocketing a huge fee) and last year got a huge payoff for advising CIT on the sale of its Construction Finance business at the bottom of the market just months before GS predicted that sector would be turning around. GS then rode to the rescue and got the government to put CIT on life support while Goldman raised $10.5Bn behind the scenes to create a competing operation that could cherry pick CIT’s top clients leaving taxpayers to pick up the tab for all the toxic crap that is left after Goldman skims the cream into their new operation. Game, set and match – nice job GS!
As if we needed yet another example of how the taxpayer should have been better protected when bailing out Wall Street last fall…
If CIT goes bust, Goldman Sachs will get a $1 billion "make-whole" payment for an earlier emergency capital infusion.
The U.S. taxpayer, meanwhile, who should have been entitled to the usual last-in-first-out protection any private investor would have demanded (as Goldman did), will lose $2.3 billion.
Henny Sender and Saskia Scholtes, FT: Goldman Sachs stands to receive a payment of $1bn – while US taxpayers would lose $2.3bn – if embattled commercial lender CIT files for Chapter 11 bankruptcy protection, people familiar with the matter said.
The payment stems from the structure of a $3bn rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought $2.3bn in CIT preferred shares to prop it up at the height of the crisis. The potential loss for taxpayers would be the biggest to crystalise so far from the government’s capital injection plan for banks.
The agreement with Goldman states that if CIT defaults or goes bankrupt, it “would be required to pay a make-whole amount” that totals $1bn, the people familiar with the matter said.
While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part of that sum, these people added. A CIT filing last week said that it was in negotiations with Goldman “concerning an amendment to this facility”.
One can only hope that at some point irresponsible, speculative and highly destructive stock calls like this would see some regulatory intervention.
Citi and CIT Are Primed for Upside, by Jim Cramer, 9/29/2009, 1:54 PM EDT
Citigroup’s on the move, so is CIT . I think that Citigroup will be the biggest beneficiary of the new plan to buy toxic assets, because it is basically running its SIV as discontinued operations and it could benefit from the new program. CIT is about the possible IndyMac link-up courtesy of John Paulson, a real smart guy who was negative about mortgages before it paid to be negative. Dan Freed on CIT CIT Surges on Report of IndyMac Deal I put both of these up there as examples of companies that won’t die, and because they won’t die, they live. I know that seems a little circular in reasoning, but because Citigroup never suffered a run like Wachovia and Washington Mutual did, it made it and as our flagship site mentioned, it is safe. If it is safe, it can go higher. Because no one forced CIT into bankruptcy, it can live to play again, and when I read in the New York Post that Paulson owns CIT debt, I realized that he’s powerful enough to save this company, particularly because he is one of the investors in IndyMac and knows his way around the bottom of the debt barrel. These two stocks represent lottery tickets that are no longer rip-ups because they have made it out of the "critical care" stage and are recovering. I would buy them both.
I titled the morning post "Confidence is Key" and decided that, since my targets were dead on Monday, that we should stick to our bear plan into the Consumer Confidence report which was, as we expected, a huge disappointment. My 9:50 Alert to members suggested the DIA 9/30 $99 puts for $1 into the report and then we got a nice 100-point drop for the rest of the day that ran those puts up to $1.60 (up 60%). Also, in that same alert, we went back into SRS (now dubbed "The Widow-Maker") at $9 and those finished the day at $9.50 (up 5.5%) and the Nov $8 puts we sold for .75 dropped to .60 (up 20%). These are not bad trades to make while we wait around for the market to pick a real direction.
In addition to a poor Consumer Confidence report (53.1 vs 57 expected), we also got a very poor Investor Confidence reading at 118.1, down from 122.8 in August, which was a 5-year high. "There is a recognition that a portion of the recent rise in global equity prices can be attributed to liquidity expansion rather than fundamental opportunities. Institutional investors are pausing to assess this balance," study says.
Speaking of investors who are not confident, GE’s own Jeff Immelt, unlike his army of pump-jocks on CNBC, isn’t willing to sully his own reputation by mindlessly cheerleading the economy. He was in Singapore yesterday and said that: "high unemployment and slower lending will drag on U.S. economic growth, likely resulting in the weakest recovery in decades… Easing up money has always been the elixir to keep the economy in recovery mode," Immelt said. "But once you get interest rates to zero percent, you can’t go much below that, which is kind of where we are right now. A lot of the jobs lost in financial services and construction are never coming back."
If you don’t think Immelt is in touch with the economy despite GE’s Global footprint and $180Bn in sales, perhaps we can listen to WMT CEO Robson Walton (yes, nepotism), who oversees $400Bn in annual sales and he said at yesterday’s CEO conference: "The World recovery is going to be led by Asia although it’s going to be very challenging. I think this recovery is going to be a slow one – sales have been tough."
The WSJ is reporting that CIT has reached an agreement with some of its bondholders that will give it some breathing room:
CIT Group Inc. was close to securing $3 billion in last-minute rescue financing from its bondholders Sunday in a deal that should keep the struggling firm — once the largest issuer of small-business loans in the U.S. — out of bankruptcy court, people familiar with the matter say.
The deal, which was being considered by CIT’s board Sunday night, charges CIT very high interest rates, and it doesn’t permanently fix the company’s long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders’ losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.
If the deal is completed, it could help reduce CIT’s debt load, strengthen its capital position and alleviate pressure on CIT to pay down $1 billion in debt that comes due in August. It may also preserve the U.S. Treasury’s $2.33 billion investment made as part of the Troubled Asset Relief Program.
The development appeared to vindicate U.S. regulators, who balked at appeals to help CIT. And it suggested that, unlike in recent months, private capital is available to plaster over cracks in the financial system.
The deal carries a heavily punitive interest rate of 10 percent over LIBOR (the relevant LIBOR index isn’t specified but the Journal references 3-month LIBOR) and requires CIT to pledge high quality assets.
It appears to be a stop-gap measure to buy time to allow the company to either arrange some debt for equity swaps or to swap some near-term debt maturities for more extended maturities. Sadly, there still appears to be some intention to secure government financial assistance.
The article notes that CIT still has a rough road ahead and I couldn’t agree more. Regardless of how much it shores up its balance sheet the core problem is asset quality. The longer the recession keeps the economy down the more severely are CIT’s customers financial conditions going to be strained. Their asset quality is suspect now and given management’s penchant for growing the
Just when you thought the market couldn’t get more pumped up – this morning CIT has been "rescued" and GS is raising their price target on the S&P to 1,060 (up 13%) by the year end. Kudos to our government for not bailing out CIT – it turns out they DID have alternatives to having their bones picked clean by GS and JPM although perhaps this only puts off the inevitable, we’ll have to see. I see CIT trading at $1.50 pre- market and they make a tempting short here as not actually filing for bankruptcy doesn’t means your have "saved" your company and what’s good for the bondholders is often not what’s good for common stockholders….
Does this mean the stimulus is kind of working? Bondholders have $3Bn to give CIT and structure a deal that does not require government intervention. The free market triumphs – maybe. There is certainly no shortage of companies in loan trouble as U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years, according to an analysis by The Wall Street Journal. At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.
The commercial real-estate market, valued at about $6.7 trillion, represents 13% of the U.S.’s gross domestic product. But the recession and scarce credit are pushing more commercial developers and investors into default. Meanwhile, property values continue to decline, and banks are required to record a loss on any troubled real-estate loans where the appraised value falls below the amount owed. Delinquencies on commercial mortgages held by banks more than doubled to about 4.3% in the second quarter from a year earlier. In contrast to home loans, the majority of which were made by about 10 lenders, thousands of U.S. banks, especially regional and community banks, loaded up on commercial-property debt. "Net charge-offs to date have been highly inadequate," said Richard Parkus, head of commercial mortgage-backed securities research at Deutsche Bank. "This is clearly a problem that is being pushed out into the future."
Yes, I know – as I said in the weekend wrap-up, we have committed the great sin of being skeptical based on fundamentals and we may have cashed out too early by taking things off the table on Friday and, judging by the pre-market (8am), it looks like we were also…
When one of your ardent supporters likens your business model to that of Fannie and Freddie you have problems. That is how the Wall Street Journal on its editorial pages described the Goldman Sachs that has emerged from the financial crisis.
Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.
Goldman’s traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman’s own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.
Goldman will surely deny that its risk-taking is subsidized by the taxpayer — but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it’s not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs — or should we say Goldie Mac? — enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.
The Journal goes on to suggest that Goldman’s newly acquired special status entitles the taxpayer to some say in the way the company operates which is strong stuff indeed coming from them. They suggest that absent a policy that no bank is too big to fail — an impossibility in their opinion — the rarefied atmosphere that Goldman and the other chosen few inhabit should be subject to either a proscription against proprietary trading or a special FDIC bailout tax perhaps tied to leverage.
CIT had friends, but not enough - and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged.
CIT’s small and mid-size customers are important to the recovery. But the reckoning is that this business can be easily sold to someone else – after all, this is exactly what bankruptcy can get right in the U.S.
So the question became: is CIT too big – on its liabilities side – to fail? And if $80bn financial firms are now “too big to fail”, what does that imply for other potential bailout conversations and for our fiscal future?
In the final analysis, CIT wasn’t even big enough to meet Secretary Geithner face-to-face – he’s still out of the country.
The bottom line: we need fewer $800bn firms and more $80bn firms. If Goldman Sachs were broken into 10 independent pieces, we could all sleep much more soundly.
By Simon Johnson
(More in my NYT.com column this morning – what are the implications of CIT’s failure for overall levels of capital in the banking system? This will run shortly.)
Everywhere I go I’m asked, “Will there be inflation or deflation? Are we in a bull or bear market? Is the bond bull market over and will interest rates rise?”
The flippant answer to all those questions is “Yes.” And that can be the correct answer as well, but it depends on what your time frame is and what tools you use to measure the markets and inflation. One of the newer members of the Mauldin Economics team is Jawad Mian, who writes a powerful global macro letter from his base in Dubai. He has been making the case for the “end of the deflation trade” (or more properly the return of a reflationary period) and the knock-on effects that would cause. Longtime readers know that I am in the secular deflation camp ...
Just when you thought the US regulators may have finally become less tone deaf to the shame of the revolving door, especially following last year's latest scandal confirming Goldman runs the New York Fed (and every other central bank), here comes the SEC with an absolute shocker, not only proving once and for all that when it comes to regulatory capture, there is nobody in charge quite like Lloyd Blankfein, but unv...
The tug of war between the bulls and bears has created an unusual situation this year, a historically tight trading range! The chart below reflects that the Dow Jones has traded within a 6.68% high to low trading range this year. That is the 4th tightest trading range through May, in the past 115 years.
CLICK ON CHART TO ENLARGE
The inset table to the right looks at future performance of the Dow following narrow trading ranges through May. As you can see, most of the time the market has ended the year to the upside. Will it be different this time?
Wednesday’s action was almost a 180 degree turn from Tuesday’s with the S&P 500 up 0.92% and the NASDAQ 1.47%. Sone vague belief in (yet another) resolution in Greece seemed to be the catalyst. Greek Prime Minister Alexis Tsipras said on Wednesday the negotiations are on the “final stretch” towards a positive deal, Reuters reported. Later in the day, German Finance Minister Wolfgang Schaeuble said there was not much progress in the Greek debt talks and he was surprised by the upbeat tone from some Greek government officials. Athens must make a 300 million euro payment to the International Monetary Fund on June 5, ahead of several other payments due to the IMF later in the month, for a total of 1.6 billion euros.
We’ll see if yesterday’s move was the head fake or today’s was shortly.
Early last week, stocks broke out, with the S&P 500 setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the t...
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Understanding the new normal of a business model is key to the success of any company. The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place. Big Pharma's business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.
Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants. This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales. However, in the c...
Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad, and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would ...
Chris Kimble likes the idea of shorting the US dollar if it bounces higher. Phil's likes the dollar better long here. These views are not inconsistent, actually, the dollar could bounce and drop again. We'll be watching.
Phil writes: If the Fed begins to tighten OR if Greece defaults OR if China begins to fall apart OR if Japan begins to unwind, then the Dollar could move 10% higher. Without any of those things happening – you still have the Fed pursuing a relatively stronger currency policy than the rest of the G8. So, if anything, I think the pressure should be up, not down.
UNLESS that 95 line does ultimately fail (as opposed to this being bullish consolidation at the prior breakout point), then I'd prefer to sell the UUP Jan $25 puts for $0.85 and buy the Sept $24 call...
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
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Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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