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$200Bn TALF Tuesday

Wheeee, yesterday was fun wasn’t it?

While we did go into the weekend bearish, it’s still actually depressing to see the market fall apart.  We love the market, that’s why we’re traders, to see it BROKEN like this is very sad.  Our futures look a tiny bit better this morning but I’m watching the FTSE, just like we were yesterday and that does NOT look good (7:30).  As I said in yesterday’s morning post,  the FTSE is the ONLY major index holding the 50% line (3,377) and the way the Dow fell through 7,011 yesterday, it’s more likely that the FTSE will follow us down to oblivion than every other index in the World retakes their 50% line

The bears want a capitulation event and yesterday may have finally been it.  The S&P just barely hung on to the 700 line yesterday, which is widely regarded as being the death cross for US markets.  As I said yesterday morning, we’re not going to be impressed with any "rally" that doesn’t take the Dow back over 7,000 (and how pathetic is that anyway?), which is now almost 5% away.  In our new alert system, I was able to send out watch levels right at the bell and none of them held, which kept us nicely bearish all day.  While we were hoping to have a reason to stay bullish, at 10:07 I sent the third alert of the morning, calling for covers with a mattress layer on the long DIA puts as well as a new play on QID July $57s at $14 (now $16.80).  We like those because we’ve been expecting the Nasdaq to pull back and we were able to cover those with March $65 calls at $6, leaving us in a no-premium spread.  There are always lots of high-premium covers to sell against the longer QID calls to work off the premium.

While we did a little (very little) bottom fishing, I warned members early in the morning: "Everything can drop lower, value has no meaning here."  Overall, every attempt to get bullish was slapped down and at 12:01 I was just fed up and sent out the following alert:

  • NYSE hits 5% rule very soon at 4,380.  From there we expect a bounce to about 4,425 – not getting that bounce and holding it is DOOM! 
  • Next to watch would be Russell at 369, need a bounce back to where we are now at 373 and must hold that or DOOM!
  • S&P would be next lemming.  Right at 700 and needing to get back to 706 or DOOM!
  • Qs, on the other hand, need to save us by getting back over 27, Nas 1,340 (-2.5%) and staying there while the other indexes get back over -4%.  Won’t be good but it won’t be doom.
  • Meanwhile, my DIA put sale just triggered.  Obviously back to naked puts at DOOM levels!

Yes, it was not a pretty day!  Notice on the NYSE that’s exactly what happened over the next 3 hours, and the Russell, the S&P bounced off 706, failed our morning watch level and finished the day at 700 while the Nas went on to test 1,340 twice in the 2 o’clock hour and failed there.  As I always say, I don’t MAKE the markets do these things – I can only tell you what’s going to happen!

I did send out one last alert to members at 3:49, just one line: "There goes S&P 700 – 60% bearish may not be enough at this point!  Must now close over 706 or still bearish into morning."  This is exceptionally sad as we are even expecting government intervention in the form of Geithner’s TALF announcement but we’re no longer sure it’s going to work (but we did grab some FAS, just in case and shorted the SKF).  As I said to members, at this point I’d rather get stung to the upside than wake up to yet another day of this nonsense.  All we need to do to get bullish is cover our long puts with the appropriate DIA front-month puts and that’s our plan in the morning but we’ll be watching our Doom levels very closely to set our stops.  As of yesterday’s close, we can pick up $4 for the $70 puts and we’re hoping we have a reason to sell them this morning – for our country’s sake!

[Bad Bank Funding Plan Starts to Get Fleshed Out]So there is a plan of some sort this morning to bail out our banking system.   The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month.  No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

Under the Fed’s program to jump-start consumer lending, known as the Term Asset-Backed Lending Facility (TALF), investors, including many hedge funds, will get access to cheap loans from the Fed to purchase securities backed by consumer debt like car loans and credit-card receivables.  The Treasury has agreed to provide up to $200 billion of capital to the TALF, and the Fed will lend up to $2 trillion through the program.  Sounds like a lot of money but it’s also very convoluted and subject to debate.  Unfortunately all of these programs face the wrath of the opposition party, now known as the Republican’ts, who have talking points for any and every program to pronounce it a disaster before it’s even rolled out.

We’ll have to wait and see what is officially announced but it doesn’t look like we’re in any danger of being blown out of our bearish positions at the open although we should get a bounce back to our watch levels and can hopefully build from there.  6,800 on the Dow is exactly 20% down from 8,500 and 6,920 is 20% off our mid-point of 8,650, which is looking very far away at this point.  The good news is we’ve had strong volume on the move down one can hope that those who wanted to get out of the markets are finally out at this point but hope is not a strategy and we’ll continue to watch our levels.

[Koreans Take Pay Cuts to Stop Layoffs]Asian markets turned lower this morning with the Hang Seng dropping 2%, Shanghai off 0.7% and the Nikkei off 0.7% as well.  In order to prevent layoffs, South Koreans are accepting across the board wage cuts – better that everyone get a little less than some people get none at all.  I wonder if that would work in this country?   Last week, leaders of major industry groups, unions, civic groups and government ministries struck a "grand bargain for social unity." Under the plan, which isn’t legally binding, employers won’t fire workers, unions will accept wage freezes or cuts, and the government will provide tax breaks to companies that preserve jobs.  "We find it’s getting more serious than the [1997-98] period," said Kang Choong-ho, a spokesman for the Federation of Korean Trade Unions. "This time we thought we must keep jobs and yield what we can, sharing the pain."

Europe is trading slightly down ahead of our open, with the FTSE now down "just" 1%.  Bayer gave a very miserable outlook for 2009 and Munich Re posted a 76% drop in Q4 profits but at least there were profits.  Overall, the EU manufacturing sector is very weak as we wait for the ECB and BOE policy decisions later this week. 

We’ll be keeping a close eye on our levels and I do like FAS (closed at $3.97) as an upside momentum play if the TALF catches on as it can easily hit $5 or even $6 on a good run so buying it just above $4 with a stop at $4 is a fairly low risk way to play for a good run in (as opposed to on) the banks.  Let’s watch our levels and be very careful out there, we are still in our roller coaster model and if $200Bn in additional stimulus can’t give us a proper lift, the next leg down may find new lows for us.



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Asia Markets :    Wednesday, March 04, 2009
(The following is from WSJ; please cross check with other sources to confirm.)   

Nikkei Average*                      7290.96      61.24    0.85%
Hang Seng*                          12331.15    297.27    2.47%
China: DJ Shanghai*               251.13      15.35    6.51%
Seoul Composite*                 1059.26      33.69    3.29%
Bombay Sensex*                   8446.49      19.20    0.23%
Baltic Dry Index                       2034.00      20.00    0.97%

*at Close

Asian Markets Swing into Black, Banks Still a Concern

Asian markets climbed into positive territory while the U.S. dollar rose to a three-year high against a basket of currencies Wednesday, after Federal Reserve Chairman Ben Bernanke gave a grim view on the financial sector. The only market to fall was Australia. Shares dropped to the lowest since August 2003 after a report showed gross domestic product unexpectedly shrank in the fourth quarter for the first time in eight years, as the steep slowdown in global demand tore through Asian economies.

Australian stocks closed down 1.6 percent to their lowest close since August 2003, after a surprise decline in fourth-quarter gross domestic product raised concerns on the outlook for company earnings. Australia’s economy shrank for the first time in eight years in the last quarter even after the government handed out money to families and pensioners in a bid to boost spending. Banks weighed on the Australian market, falling further amid investor concern about lenders’ ability to perform through the global financial meltdown.

The Nikkei  finished 0.85 percent higher, erasing earlier losses as news that China will increase stimulus spending buoyed construction and other machinery stocks.

South Korea’s KOSPI reversed earlier losses to end up 3.3 percent on hopes for additional stimulus plans from China, with gains led by steel and shipbuilding issues.

Hong Kong shares rose 2.5 percent, after opening lower, as Chinese industrials, banks and property counters climbed on encouraging economic data and the promise of bigger stimulus spending.

Singapore’s Straits Times Index was rose 1 percent.

China’s Shanghai Composite Index surged 6.1 percent, led by property, coal and non-ferrous metal shares, on encouraging economic data and a pledge by the government to increase its stimulus spending. China will increase spending in areas such as infrastructure and manufacturing on top of the 4 trillion yuan stimulus package that it unveiled in November, a senior economic planning official said on Wednesday.

Bombay Stock Exchange’s Sensex closed at 8458.53, up 31.24 points or 0.37 per cent. The index touched an intra-day high 8501.46 and low of 8373.24. Key indices ended choppy session higher on Wednesday led by gains in metals and oil&gas space. Second rung stocks closed marginally lower.

Euro Shares Break Losing Streak

European equities rebounded early on Wednesday to snap a three-day losing streak as miners and oils gained on firmer commodity prices and banks advanced after recent declines.

The FTSEurofirst 300 index of top European shares was up 1.6 percent at 680.42 points. On Tuesday, the benchmark fell 1.9 percent to the lowest close since the index’s inception in July 1997.

The broader STOXX 600 index rose 1.6 percent, with energy shares topping the gainers list, followed by banks. The FTSEurofirst 300 hit the lowest point in its near 12 year history on Tuesday, while the STOXX 600 plumbed depths last seen in late 1996.

Oils tracked crude oil prices, which rose more than $1 to near $43 a barrel. BP, Royal Dutch Shell, BG Group, Tullow Oil, Repsol, Total and StatoilHydro added between 2.3 and 3.9 percent. Among banks, Standard Chartered Bank was up 7.5 percent, Barclays rose 2.8 percent and Commerzbank advanced 4.8 percent. But Credit Agricole fell 2.8 percent after it posted a fourth-quarter loss that was worse than analysts had forecast as France’s biggest retail bank suffered from writedowns at its Greek and investment banking operations.

Adidas shares rose 2.5 percent after the world’s second-biggest sporting goods maker posted better-than-expected fourth-quarter results. But the company said it expected sales and earnings to fall in 2009.

Holcim tumbled 10 percent to top percentage losers in Europe after the Swiss cement maker posted a worse-than-expected 54 percent drop in full year net profit and gave a gloomy outlook for 2009.

Adecco, the world’s largest staffing company, posted a surprise loss in the fourth quarter and said it saw no immediate improvement in business conditions, sending its stock down 7.8 percent.

Though they were higher on Wednesday, banks and insurance shares have been the worst hit so far this year, with the DJ Stoxx European banking index and the DJ Stoxx European insurance index down 33 and 35 percent year to date.

Across Europe, Britain’s FTSE gained 1.7 percent, Germany’s DAX rose 1.6 percent and France’s CAC 40 added 1.5 percent.

Oil Above $42, Eyes China Recovery, OPEC Cuts

U.S. crude oil futures jumped more than $1 towards $43 per barrel on Wednesday, supported by better economic news from China and expectations by some traders that OPEC oil producers may further cut output.

The main gauge of China’s manufacturing sector, its purchasing managers’ index (PMI), rose in February, suggesting the country could be on the brink of economic recovery. China’s PMI index rose for the third month in a row last month as factories restocked in anticipation of an early revival in the economy despite deepening global gloom elsewhere.

US light, sweet crude [ 43.28    1.63  (+3.91%)] for April delivery rose to a high of $42.78, before slipping slightly, but was still higher on the day.

London Brent crude [ 44.61    0.91  (+2.08%)] rose.

Weekly inventory figures from the U.S. Energy Information Administration (EIA) due later on Wednesday, which will likely show rising crude stockpiles, could signal further weakness.

The 12-member producer group has already promised to reduce oil output by 4.2 million barrels per day (bpd) from production levels in September and a Reuters survey suggests OPEC members have already met at least 81 percent of their promised cuts.

Dollar Rises vs Yen as Market Stress Mounts

The dollar surged on Wednesday, closing in on 100 yen, as contracting Australian growth and concern about Japan’s economy heightened global financial stress, drawing investors to the highly liquid US unit. Broad dollar gains shook the euro to its lowest in more than three months, while yen weakness was amplified by the arrest of a close aide to Japan’s opposition leader in a fund-raising scandal that further clouded the political picture.

On the stimulus front, China will increase spending in areas such as infrastructure and manufacturing on top of the 4 trillion yuan ($584.7 billion) stimulus package unveiled in November, a senior economic planning official said.

Data showed the euro zone’s service sector was still in decline in February, with services PMI hitting a record low.

The dollar index hit a three-year peak at 89.624, fast approaching 89.90, which would mark a 38.2 percent technical retracement of its long-term decline from 2001 to 2008.

The dollar was up on the day versus the yen, [ 99.23    1.09  (+1.11%)    ] having earlier hit 99.48 — its highest since early November — according to Reuters data.

The euro [ 1.2533    -0.0026  (-0.21%)   ] fell against the dollar, as far as $1.2457 on trading platform EBS to its lowest in more than three months. It was down versus the yen.

The Australian dollar [  0.6397    0.0021  (+0.33%)   ] tested its lowest levels in more than a month versus the dollar.

The yen has already lost favour after Japan’s finance minister resigned last month and as the economy, which many had once expected would weather the global economic storm quite well, struggles with a collapse in export markets and mass lay-offs.

Gold flat as investment demand cools

Gold was little changed in Europe on Wednesday as traders stuck to the sidelines ahead of a rate-setting announcement from the European Central Bank and key U.S. jobs data later in the week. A recovery in other assets such as stocks is also distracting attention from gold, analysts said.

Gold was at $915.00/916.20 an ounce at 1015 GMT (5:15 a.m. EST) from $915.70 late in New York on Tuesday.

Equities rebounded in Europe to break a three-day losing streak as miners and oils gained on firmer commodity prices. Asian stocks bounced back earlier on hopes Beijing will step up efforts to support the Chinese economy. The news helped prices of industrial commodities such as oil and base metals to rise.

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust, said holdings remained at a record 1,029.29 tonnes as of March 3, unchanged from February 26. The trust’s holdings surged by over a quarter or 205 tonnes in the first six weeks of this year, but have climbed by just 5.2 tonnes in the last fortnight.

Meanwhile sales of scrap gold have rocketed as prices have risen. Gold refiners are running at full capacity across Asia as people cash in jewelry and coins, dealers said
. Turkey imported no gold at all for a second month in February as burgeoning scrap supply met domestic needs. Jewelry sold in the domestic market was being melted down for bullion and exported for sale, a new phenomenon.

Among other precious metals, silver edged up to $12.84/12.92 an ounce from $12.80. Silver has also suffered from falling demand from ETFs and even some liquidation, with prices down 12 percent from the six-month high they hit in February. The world’s largest silver-backed ETF, the iShares Silver Trust, said its holdings declined for a third successive day on Tuesday, by three tonnes to 7,981.17 tonnes.

Platinum edged up to $1,040/1,055 an ounce from $1,031, while  palladium eased to $191.50/196.50 an ounce from $191.50.

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