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Wednesday, February 21, 2024

Auto Freak Out Friday

No auto bailout!

GM cut in half in pre- market trading!  Senate Majority leader Harry Reid says: "It's over with" as the Democrats lost the vote to break the Republican filibuster 52-35 (they needed 60 votes to override the Republican objections).  GM has already stated under oath that they need $4Bn by Dec 31st or they are insolvent.  According to the WSJ: "Sen. Christopher Dodd, a Connecticut Democrat, complained that Republicans had attempted to turn the wage issue into a political matter about organized labor, instead of making it an "an economic issue." With the economy in recession, he suggested it wouldn't be fair to force auto workers to accept wage cuts in 2009. "I'm deeply saddened. But more than saddened, I'm worried," he said. "This will fail, we will go home, and I'm afraid our country will be in deeper and deeper trouble."

The bankruptcy of GM was one of the three things I said could take us down to 7,000 – I'm VERY glad we went bearish on Wednesday although the writing was very obviously on the wall from our perspective.  While this was easy to see coming, what we didn't see coming was former Nasdaq chairman Bernie Madoff being arrested by Federal agents in a "$50Bn swindle" that may be more damaging to investor confidence than the failure of the Big 3.   "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew M. Calamari, associate director of enforcement in the SEC's New York office.  If this triggers another round of frantic hedge fund redemptions, we may be wishing to hold 7,000!

Also playing the role of Scrooge today is BAC, who announced 35,000 job cuts, about 15% of their workforce over 3 years.  I mentioned CX's troubles yesterday and that company fell further as the company was only able to swap debt on $72M out of $415M of short-term notes at an auction, sending shares right back down to where they were before they ran up on hopes Obama's infrastructure plan would boost their business (it will).  If they fall back to $5, we want them again but at $8, with today's mess, we'll just keep our eye on them. 

Finally our FXP hedges are justified as Asia falls past the 5% mark with the Hang Seng off 5.5% (erasing a week's worth of gains), the Nikkei also dropped 5.5%, back to their 8,200 mark (in anticipation of the Dow doing the same), which held and the Shanghai dropped 4.3%.  India, notably, held flat, capping off a very strong week since the terror crisis.  As I warned on Wednesday about the Gobal Dow (chart left), when we flipped bearish early in the session, "until we get through that magic 1,500 line – it's still a bounce."  Sadly, the Global Dow is back at 1,453 today as the fundamentals that made us nervous come home to roost.

Auto makers, parts suppliers and banks led Europe downhill this morning followed by a pullback in energy companies as they are once again threatened by the possibility that gas guzzling American cars will no longer be available, even if people want them…  The FTSE took a hard fall back to their 4,200 line (down 3.5%) and our "must hold" level from Monday's Big Chart was 4,250 and the 40% line is 4,052, below which lie TERRIBLE things so let's hope we can hold our must hold or we may have to get a little more bearish into the weekend.  The CAC is at the 5% rule to the downside and gave up the whole week's gains, and they must improve 30 points to get back to our "must hold" level of 3,200 or we'll be testing the 50% line at 3,084.  The Dax also gave up all of the week's gains and is well below the 4,750 level, which it barely held yesterday.  The German index is worrisome as Europe's largest economy still has 10% to give up before testing the 50% line so we could see a cascading failure next week if the markets can't pull it together before the close.

Let's keep in perspective though, that this is nothing more than our roller coaster model playing out as we had our stimulus on Monday that gave us an uphill push and now the gravity of reality is pulling us back down.  The only question is, where is the floor?  Just like any good roller coaster, there is the illusion that you are going to keep falling but, in reality, you are just moving up and down on a pre-determined track and well governed by the laws of physics.  Two weeks ago, I said that we were entering the market maelstrom, where we would roll around the edge of they abyss – either to be sucked into oblivion or thrown out into clear waters.  Today will be our second bottom test but the auto news has made us a little more cautious so I'm not sure we're going to want to do any more bottom fishing ahead of the weekend but I will be very pleased if we hold our lower levels (and we certainly should), which are 8,200 on the Dow, 825 on the S&P, 1,425 on the Nasdaq (our famous 27.50 on the Qs), 5,100 on the NYSE and 425 on the Russell.

Keep in mind that Hank Paulson can (and should) say "Screw the Senate, I'm writing a check" and boom – we are back on the uphill track.  This is a lot of bad news all at once and just holding our levels will be impressive.  Keep in mind we have a nice list of 36 Stocks to Buy at the Bottom and we'll be looking at all of them today for new entries and, of course, there is always naked put selling into the initial excitement, which could be a real winner with just a week to expiration so lots and lots of ways for us to take advantage of the carnage today – this is the joy of being well positioned for the drops as our short plays are well ahead and taking disciplined profits there leaves us with cash to speculate on the long side while still remaining well covered.

PPI data is, of course, good with November prices down 2.2% led by energy and "core" PPI is up 0.1%, not exactly deflationary.  Retail Sales are down 1.8%, a little better than expected  and we can thank Nintendo for that as Wii sales are up over 100% with over 2M consoles sold in November vs. 981,000 last year.  Overall US video game sales are up 10% from last November and were up 18% last month over the previous October so we still like GME , even though it's way up from our entry last week. 

Our other gaming favorite, ATVI, had the top selling game "Call of Duty" with 3.5M units sold but we like them for their "WarCraft" revenue stream of monthly subscriptions.  They are back in our buy zone at $9.50 and you can knock that down by selling the Jan $8.75 puts and calls for $2.25, which gives you a net entry of $7.25, so a $1.50 profit if called away on Jan 16th (20%) or an average entry of $8 if the additional stock is put to you at $8.75 (a 16% discount from today's price).  A less conservative play would be to buy the stock and sell the Jan $10 puts for $1.30 and wait to sell the Jan $10 calls for $1.50+ assuming the stock does well – I do like ATVI enough to risk an average entry of $9.10, which is the worst case there.  Obviously, we will let them sell off a bit with the market before entering.

So how low can we go today?  I'd be less concerned if it wasn't for the potential for aftershocks from the Madoff scandal as it was relentless fund selling that took the markets too low in the first place.  Retail sales are simply not that bad with sales that rose 0.2% at furniture retailers; 0.8% at clothing stores; 2.8% at electronic stores; 0.2% at eating and drinking places; 2.8% at sporting goods, hobby and book stores; 1.2% at general merchandise stores; 0.3% at food and beverage stores; and 1.0% at health and personal care stores.  Sales fell 1.2% at building material and garden supplies dealers and 1.3% at mail order and Internet retailers as consumers followed the sale signs to hunt for bargains.  None of this should be a surprise, nor should the fact that the auto industry can't be saved (anyone paying attention in 1980 knew that!).

Oil is coming down nicely, with GS capitulating and now saying they see $45 oil next year and possibly $30 next quarter.  This will be nice for our short XOM plays and, to the extent that OIH and XLE are taking down the markets – we will be ignoring them as they never should have run up in the first place (as I've been saying all week).  Hopefully we hold up this morning and have a reason to cash in some of our short plays and press our longs a little but, as I said, it's the weekend so we're not going to go too crazy either way.

We have Business Inventories at 10 (yawn) and Michigan Consumer Sentiment (don't they all work for the auto companies?) and next week we have the dreaded Empire State Index, strong Net Foriegn Purchases (we may be awful but have you seen other countries?), Cap Utilization and Industrial Production all on Monday.  Tuesday we get Building Permits (all 6 of them) and Industrial Production (or lack thereof) along with the CPI but don't forget we have the last Fed Statement of 2008 at 2:15 on Tuesday so it is VERY possible that we have a pre-cut rally starting with a check being written to the auto industry this morning – that would be our "best case."  Thursday is Leading Economic Indicators (leading us down) and the equally dreaded Philly Fed to bookend the week. 

The Fed could take us halfway to zero on Tuesday so strap in for another wild one, as long as we confirm the bottom, this roller coaster is good for another run up the hill I think.

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