Yet another Wednesday when anything can happen.
We have a bailout of AIG and, as expected, a $85Bn commitment by the Fed is putting inflationary pressures on commodities sending oil back near $95 pre-market, not what we like to see ahead of an inventory report that will be affected by hurricane Ike. I wrote extensively about the levels we need to watch in last night's Big Chart review so let's just move on and see where we are now.
We have, as usual, been keeping tabs on the NYMEX and now there are 4 trading days until the close of October trading and there are still 151K open contracts, which were traded 335,000 times yesterday (one contract equals 1,000 barrels) and it's a difficult roll as 270M barrels are already stuffed into November with 192M on order for December (January has "just" 44M barrels, the actual amount that can be processed at Cushing in a month). At the same time as pressure mounts to do something with these contracts, the little guys are getting squeezed out of their positions as the margin requirements have been doubled causing, according to GS: "forced deleveraging among it's clients."
So the little guys are being forced to dump barrels at 40% off and Nigerian attacks have stepped up again and we have 2 consecutive hurricane-affected oil inventories today and next week and LEH and MER are out of the picture. That means GS and MS can set oil prices pretty much anywhere they want by just passing each other by on the street and muttering a price target – is that free market capitalism? We're so happy for financials to be alive no one is questioning this concentration of power. Meanwhile, betting against oil is not going to be a safe bet this week and we can expect volatility in that market to shoot up with far fewer traders moving contracts.
Over in Asia, the Hang Seng fell another 663 points, all the way down to 17,637 but the Nikkei held onto a gap up over 11,700 and finished up 140 points at 11,749. Keep in mind for the Nikkei, that 140 points is almost exactly a 20% UNMIPRESSIVE bounce off the 5% rule decline that took them from 12,350 last Wednesday to 11,609 on Tuesday's close! That bounce reflected the optimism following the announcement of the AIG bailout. The BOJ pumped $28.4Bn into domestic money markets to shore up liquidity. "This is a short-term relief for the market, but the credit crunch is going to continue. It may even worsen worldwide," said Dale Tsang, managing director at Imperial Dragon Asset Management Co. in Hong Kong.
The big news in Europe is HBOS (UKs largest mortgage lender) announcing they are in merger talks with Lloyds, which saved the EU markets from disaster as HBOS dropped 52% near the open, after already losing 36% on Monday. The bankruptcy of LEH on Monday sparked fears about toxic assets that might flood the market at bottom dollar, which would force banks like HBOS to rethink the valuations set on their credit investments. Moreover, there has been strong concern about HBOS''s exposure to the U.K. mortgage market, which has yet to implode like that of the U.S. A combined Lloyds/HBOS would control 28% of the UK mortgage market but, like the US, regulators are looking the other way while heads continue to roll in the "Highlander" financial sector.
In another beheading, BCS walked away from saving LEH over the weekend and are now happily picking up the good parts, leaving the junk for the bankruptcy court to deal with. While 10,000 jobs may be saved, 10,000 jobs will be lost, not to mention many Billions in pensions that were wiped out with Lehman's stock. This is another straw on the camel's back of the NY economy and shorting NYC apartment prices might be a good play for the next quarter or two if we can't turn these markets back up and create jobs that can pay for $1,000 per square foot condos…
Also in Europe (busy today), Russia now has a banking crisis and the government is putting an emergency $43.8Bn in liquidity to work, which is massive given the much smaller size of the Russian economy. Russian stocks hit the lowest level in almost 3 years (it seems like they have halted trading) and this is a VERY bad time for Russia to "only" be getting $95 a barrel for oil and $7 for natural gas (but I believe it's a higher number in Europe). Last and unfortunately not least, UK jobless rates hit a 15-year high in August.
Our own Current Account Deficit (Debt) for Q2 was $183Bn, up from $176Bn in Q1 and Aug Housing Starts fell 6.2% with Building Permits dropping 8.9% – those are not, by any stretch, good numbers. For the deficit, I will point out that the war is an "off balance sheet" item but for housing starts, let's remember these are coming off record levels and it would be more worrying if there were crazy builders out there continuing to put up properties that no one wants (indicating there were crazy lenders putting up money for them too).
MS is heading down despite beating earnings expectations by a wide margin and the House approved an offshore drilling bill but oil is heading up so we're in one of those markets where no news can be interpreted as good news and we'll be very, very happy just to hold yesterday's lows but hopefully with something positive towards the day's end. We'll be watching the Qs closely as they need to retake 42.40 soon or it's going to form a tough top to break out of and without rotation into tech, I don't see much hope for a recovery. A commodity rally may boost the indexes, but it will erase all the good CPI and PPI news and take money out of consumers' pockets and that's something they just don't have at the moment.
