Man what a fun week, I can't believe it's ending so soon!
We are already on vacation, having followed our plan to cash out at the bottom yesterday anticipating some short covering today that would take up the markets. Actually, we took some bullish plays into yesterday's close as it was such an obvious set-up for a stick save and there was so much bad news out already that we weren't too worried about more. My hot streak continued as I posted to members at 11:13, with the Dow on the rise at 8,267: "OIH now at the 5% rule (94) and XLE at -4% (47.50 is 5%) and Nas at 2.5% rule (1,685) along with RUT (477) while S&P needs 880, Dow needs 8,220, and NYSE 5,725. Those are the points that should hold and bounce us at least back to -2% but, after the way they behaved at 1.5%, we need to see them retake -1.25 before we’re even slightly safe."
The Nas bottomed out at 1,678 at 2:45 but came back 20 points to -1.89%, the Russell hit 474 at the same time but finishe down 1.66%, the S&P hit 880 on the nose at 2:53 before recovering to -1.68%, the Dow hit 8,224 at 2:52 but rallied back to down 1.54% and the NYSE bottomed out at 5,728 at 2:58 before making it back to -1.53. Now I know there are lots of stock services that can tell you exactly what the market will do for the day 3 days in a row and I'm certain that there's no way to profit from that kind of information anyway so, whatever you do – don't sign up for this service (see, we are cleverly experimenting with reverse psychology!). We took quick profits on our DIA calls into the close but left our DDM (ultra-long Dow) calls on for fun and they should get a nice pop this morning. We also couldn't resist some great buy opportunities during that sell-off and we picked up new, hedged positions in HMY, FIG, DRYS, RF, DAL and UYG in addition to our Dow plays. As we also sold the Dow puts to cover our longer covers – we ended up pretty darned bullish after being 100% bearish at the open. We are flexible if nothing else!
Our futures are looking pretty good this morning despite BKUNA being siezed by regulators in a move that will take a $4.9Bn bite out of the FDIC. The FDIC sold the company's banking operations to a private-equity team headed by John Kanas, the former head of North Fork Bank. The bank's 85 branches will reopen Friday during normal business hours under the same name. The sale protected depositors. BankUnited had $12.8 billion of assets and $8.6 billion in deposits, and regulators said it was critically undercapitalized. Mr. Kanas's team agreed to pump $900 million in new capital into the bank and to acquire $12.7 billion of the bank's assets and $8.3 billion of certain deposits that are considered less risky. The FDIC agreed to absorb most future losses on a $10.7 billion pool of assets that the investment team will manage. BankUnited's collapse puts further strain on the FDIC's deposit-insurance fund, which guarantees most deposits against the risk of a bank failing. BankUnited is the 34th bank to fail this year, after 25 went under last year.
A BankUnited spokeswoman referred questions to the FDIC. The FDIC said the investment group's acquisition of BankUnited was the "least costly" resolution for the deposit insurance fund. The FDIC's deposit insurance fund had just $19 billion at the end of 2008 to backstop trillions of dollars in deposits. To replenish the fund, the agency is scheduled to vote Friday on a controversial plan to assess a special one-time fee against more than 8,000 banks. President Barack Obama signed a bill into law Wednesday that allows the FDIC to borrow as much as $100 billion from the Treasury Department to shore up its fund, a measure the FDIC had sought for months.
So don't worry kids – $100Bn fixes everything and there's plenty more where that came from as surely Uncle Ben's face will be plastered across the new $1,000 Bills soon as there is no way we can print $100s fast enough to cover these little financial gaffes as they pop up. Not surprisingly, the dollar fell to 6-month lows against the Euro and the Yen, which we don't mind but even the Pound is pushing $1.60 and their country is on probation! As I said yesterday, if the UK is on probation over their balance sheet, then the US is on double secret probation for sure….
Not at all surprisingly, the Nikkei fell half a point this morning and the Shanghai composite and Hang Seng were down a bit more despite the BOJ holding rates steady at 0.1% and RAISING their asessment of the economy, saying the recession may have already hit bottom. With the dollar at 94 Yen, Japan actually did hold up fairly well and the Baltic Dry Index continues to march upwards, now 2,707, challenging October highs. Copper, on the other hand, continues to slide along that declining 200 dma into our test zone at $200 next week but I'm getting nervous as the weak dollar isn't helping copper at all so demand must really suck.
Nonetheless, miners are leading the EU higher while banks and airlines are dragging on the markets this morning. Overall, Europe is up about 1% ahead of our open (9am) and it's very possible that one new source of dollar weakness is Dutch cable company UPC Holdings (owned by LBTYA) issuing $206M in junk bonds, the first major junk offering in Europe in 18 months. "It is a very strong statement, I call it the opening of the European high-yield market," said Marisa Drew, managing director and co-head of the European Debt Advisory & Restructuring Group at Credit Suisse. UPC's issues come less than a week after Finnish paper, packaging and forest products company Stora Enso tapped its existing 5.125%, 2014 bond for a further €232.45 million, paying a yield of 12.25%. Prior to that, the only significant deal in the European market this year was an $860 million issue from German health-care company Fresenius AG in January. Some said that because Fresenius is such a well-regarded high-yield company, that deal wasn't a true test of demand. The European market had effectively been closed since late 2007. The effects of the credit crunch caused investors to shun companies with poor credit ratings.
Restored confidence in global markets quickly becomes a double-edged sword as US T-Bills MUST be sold and now have to compete for global cash with very attractive interest rates offered by major corporations. Let's call this step one on what is likely to be a VERY steep inflationary ladder. Adding insult to Dollar injury, UPC ended up issuing the bonds in Euros as well as dollars because: "We had very strong demand [for the Euro-denominated bond] from the absolute who's who of the type of investors you would want in a transaction like this and it was very significantly oversubscribed." There are just so many bad nuances to this story I can't even get into it now! Have I mentioned I like gold lately?
We will be flipping back to at least 55% bearish into the close, more so if we get a nice run-up today but it's going to be a very low-volume session so not much can be read into the action, no matter which way it goes. We're sill hoping for a proper bottom test next week – I'm sure they'll think of something to properly spook the markets over the weekend. Oil was back to our $62 shorting target on the futures already this morning and we'll take the USO puts again if they try that nonsense during the session but the futures already look to be a big winner into the open (9:15) with oil back to $61.25 already.
GM is a very tempting short at $2 but, as we discussed in member chat on Wednesday, we don't want to end up bitter, angry and confused – like Jeff Macke was on CNBC Wednesday night as GM demolished the shorts and put on a 4-day squeeze that doubled the stock of this train-wreck of a company for no rational reason whatsoever. Yes they worked out a deal with the UAW but so what? They are still a losing operation and there is no way they can survive with their current debt load. So I would say stay away from GM but you can sell the July $2 puts for $1.34 and sell the July $1 calls for .90 and that puts $2.24 in your pocket so you make .24 even if GM goes BK and GM has to go higher than $3 before you would have to cover your position. Even if that happens and you lose money – at least we'll have the fun of watching Jeff Macke hauled away in a straight jacket, babbling incoherently as he goes.
Have a great holiday weekend!