Asia Vu All Over Again!

March 5, 2007

364

Asia is off another 3-4% today…

At this point I suppose we'd have to call it a pullback, don't you think?

I made my bearish case in the previous article and there are a million reasons for this market to go down, most notably the sub-prime melt-down (which we said was the straw that would break the camel's back way back on 2/20 when our friends at The Wall Street Journal said the "markets are moving into a sweet spot" and that "the mood is downright bullish." and I countered with:

"I hate to hear that kind of talk, it’s often the sign of a top when everyone starts telling you how great the markets are but it’s also hard to argue with our year to date performance. As I said last week, while I’d love to go gung-ho bullish here, we are at an inflection point and we need to break out right here, right now to make a real rally of it. Much as I hate to take the role of Prophet of Doom, I do think it’s important to remind you that this sub-prime mortgage problem is NOT going to go away:"

This was a follow up to our 2/9 discussion of HSBC's mini-meltdown where I said "This is nothing to panic over – yet! If it starts spreading we can panic but for now, HBC and their "150 Ph.D.s skilled at modeling credit risk" can simply hang their heads in shame…"

So let's not say we didn't see this one coming.

We started tracking the implode-o-meter when lending failures were in the teens, last week they added 4 more disasters bringing the total up to 31 lenders in crisis. I don't care what they try to tell you on CNBC or even at the Fed but there's no way $2-300Bn in bad debt doesn't end up having a ripple effect! NEW is threatening to shut it's doors today, CFC is badly tainted, GS and MS are big buyers of long-term credit risk (something I warned about way back in September).

Oddly enough, the ones that got the ball rolling HBC, held up pretty well, "only" losing about $10.5Bn on bad debts but making so much money from other activities that the full-year net still rose 4.7%.

I'm actually feeling pretty good about the markets though. I'm tight for time so I'lll skip ahead (I know, how professional!) and just say a big "so what" to the sub-prime lenders, they're big boys and they knew the risks and "wah-wah" to the bloated commodity pushers, including homebuilders and brokers who also knew the risks going into this.

These are the people who overcharged the rest of the S&P 500, the ones who actually produce things and employ people, for pretty much everything they needed to run their companies, including capital and what is bad for the emerging markets (the producers AND consumers of vast quantities of commodities), is not bad for the 80% of the US market that just wants to run a nice old-fashioned business.

In an article that should matter but might not in a bearish market, global semiconductor sales jumped 9.2% in January, now that's a commodity we like to see moving – we'll see if the SOX respond to this excellent news today.

We'll see if we can find a bottom on this morning's sell-off. Hopefully we won't need to trigger our mattress plays but, just like last week, let's not get all excited until we make a proper retracement:

Dow 12,200 needs to be retaken. Remember – If we are coming back, we have 600 points ahead of us and you won’t miss out if you don’t catch the first 100!
- Transports were what I called on to lead us back and we must make 2,850 but it will be meaningless unless oil gets back under control.
S&P 1,400 is the obvious line but 1,377 is the 5% rule there, below that and we go short again.
NYSE is actually holding up very well with 8,900 functioning as it’s danger zone 9,000 must be retaken and I’m looking for 9,200 today as a turn signal.
The Nasdaq drop only looks bad because it had such a big pop this month – throw that spike out as an aberration and 2,388 is our 2.5% rule. I said on Friday that the Nasdaq drop isn’t real until you see 2,300 fall..
- The SOX are in a similar situation, 470 is the median line of the consolidation we’ve been in since mid-November. 5% above that is 493 (Monday’s high) and 5% below it is 446, a level we haven’t seen since early November!
The Russell also looks bad because they just had a big run but they are still up 10% from last summer’s lows and won’t face any real danger until 750. Doesn’t this chart make you think that this may be a lot of fuss over nothing?

Any red close is still very bad and there is no way I go into the evening without cash or covers but I do want to see if the markets are inoculated against this second round of Asian flu – hopefully we've built up a little resistance.

Oil should be ashamed of itself, dropping another dollar in overseas trading even as the dollar continues it's decline. Why you would think the price of oil was some kind of sham, rather than a valuable and scarce resource we have to overcharge for due to the boundless demand and severely limited supply… Don't worry though, we are still at a two month high and not too far our September high of $64 – certainly much closer to that than the January lows of $51.

XOM was at $63 in September, VLO at $46, TSO at $52, SU at $64, SLB – $54, CVX – $60, XLE – $50, OIH – $118…

The markets took the drop-off in those issues quite well in the fall with the Dow gaining 400 points between July and September even as major component XOM dropped 10%. We've still got to watch my $60.50 break point on crude and then it's back to $58.50 and, hopefully $57 on the way back to $55.

ZMan has an excellent list of oil sector plays and we will be going after the stragglers today in comments.

Copper went down 3% in London trading along with most commodities so look for a confirmation of another big drop in gold as we move towards a possible downside test at $625 with $650 now forming upside resistance.

I remain cautiously optimistic but be very, very careful out there!

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If the market can't get positive or starts turning back down (let's keep an eye on Europe's finish, here are some mattress plays. I priced these out when the Dow was down around 100 pts so these should be pretty conservative numbers (marked in units of 10):

For the DIAs
- 10 Apr $115 puts at $1.25
- At $1.20 (ie. IF it gets there) buy 7 Apr $114 puts and place a stop on the $115s at $1.25
- At $1.20 buy 7 Apr $113 puts and place a stop on the $114s of $1.25 and raise the stop on the $115 puts to $1.40
Lower than this (250 point Dow drop) we probably want to roll the $115s over, taking profits off the table and buying $112 puts – wash rinse repeat down to Dow 10,000.

For the QQQQs
- 10 Apr $41 puts at .90
- 7 Apr $40 puts IF they hit .85, setting a stop at $1 on the $41s
No more on the Qs as we'd need a catastrophic failure to really cash in here

For the IWM
- 10 Apr $72 puts for $1.22
- 7 Apr $71 puts at $1.10 IF they hit it, stop out $72 puts at $1.40
- 7 Apr $70 puts at $1.10 raising stops to $1.75 and $1.40 on the higher puts