OPEC left production alone, that dropped oil prices 5% from Friday’s close back to $44 a barrel, saving global consumers $1.2Bn a week.
That, by itself will make for an interesting day. Also this weekend, the G20 ended up pledging a "sustained effort" to end global recession and to "cleanse banks of toxic assets." Of course, this is a meeting of finance ministers so there may be a will, but will there be a way when their bosses (the people who have to pay for it) get together April 2nd?
It’s an interesting mix of things because they did double the IMF funding, something the US and China had to agree to do as well – so we’re giving in there, but I see no change of stance on the global stimulus issue, which we are kind of alone on in wanting to do more. “Our key priority now is to address the value of assets held on banks’ balance sheets, which are constraining banks’ lending” and damaging economies," the G-20 statement said. Banks are still hoarding cash after being stung by more than $1.2 trillion of write-downs and losses. Interbank lending rates this week rebounded to the highest level since Jan. 8.
They laid out principles to be followed in bank bailouts that I am surprised isn’t freaking people out. Among them: shareholders should be exposed by the “maximum possible” to losses or risks prior to a government intervening. There should also be flexibility when judging which assets can receive support, and it should be clear how they are valued. Credit rating companies, hedge funds, off-balance sheet vehicles and credit derivatives markets will be subjected to greater oversight. G-20 central banks also committed to maintaining expansionary monetary policies for “as long as needed” after cutting interest rates to records and will use all the tools they can. Have I mentioned I like gold lately?
Participants said they were pleasantly surprised by the meeting’s unity of purpose, given comments beforehand from the Germans and the French rebuffing U.S. calls to make further commitments to fiscal expansion. But it was also clear U.S. officials had a long way to go before they could satisfy concerns about the banking sector, which emerged as a surprising point of contention during the negotiations.
The Hang Seng sold off pretty hard after the open and is right on their 10% line at 12,650 at lunch but flew up in the afternoon to 12,976, setting the tone for Europe’s strong open. The Nikkei is also right at the 10% line at 7,700 at their close and the BSE is also right there (8,800) at 8,756. So at or above 10% lines in Asia, which was led by the banking sector, which offset declines in the energy sector. "With several strong days (in the U.S. market last week), risk seekers can claim their first weekly victory in more than a month," said analysts at RBC Capital Markets. "However, a back-to-back weekly gain has not been recorded since the October 2008 meltdown and we need to see another strong week to start allaying fears of a bear market rally."
Over in Europe, the markets went flying right out of the gate and our 10% lines are: Dax 4,015 (now, at 7:30, 4,038), CAC 2,750 (2,797) and FTSE 3,850 (3,833). Obviously, if NONE of these indexes can make a 10% bounce, it’s not smart to assume we’ll hold ours. Our 10% lines are Dow 7,150 (Friday’s close 7,223), S&P 748 (756), Nas 1,430 (1,431), NYSE 4,620 (4,721), RUT 380 (393), SOX 209 (220) and Transports 1,375 (1,415).
So we have NYSE, RUT, SOX and TRANQ outperforming (and Russell and Transports were our index calls in addition to QLD thank you very much!) on the global stage. No reason the Transports can’t keep it going today after the OPEC news and I see nothing damaging for SOX so it’s all up to the RUT and NYSE to lead the way. I think my main concern for the morning is that the G20 will be perceived as good for foreign banks, who are rallying now, and not so good for US banks, who face a lot of regulation ahead. Also, the OPEC meeting may affect OIH and XLE, who are 20% of our markets and OIH is up 12% from the bottom and XLE is up 10.5% so we need to watch them but they may not take it badly as low oil prices means more fuel demand, which is good for OIH and a lot of the XLE have chemical and refining business which benefit from low oil prices.
Definitely one of those days when news could be interpreted different ways and we need to let those 10% lines be our guides. Europe is up on Bernanke’s comments on 60 minutes as well as what they consider progress at the G20 as they are keen to see US banking globally regulated. Russia has also had some success stabilizing the Ruble and that’s very encouraging for EU traders and the Nasdaq will be opening an exchange in Russia later this year so perhaps an interesting market to dip our toes back into. The RSX has already made a nice comeback off the floor at $11 to $13.46 but you can still buy the ETF and sell the Apr $13 puts and calls for $2.46, which is net $11 if called away at $13 (18% profit in 32 days) or an average of $12 if put to you below $13 on April 17th. Not a bad way to establish a small position in Russia. With the April $14s fetching $1, the 2011 $9s at $6.85 are not a bad deal either – the RSX was in the upper $50s until oil collapsed last year so not a bad way to play a bottom on crude as well.
The big news of the day hasn’t happened yet (8am) as we wait for "clarification" on mark to market accounting for our financial institutions. A simple change in wording can increase the liquidity of US banks by Trillions but then the question is: Would anyone trust their books enough to invest in them? That may be the experiment our government is willing to take today and FASB chairman, Robert Hertz has already stated: "a great preponderance’ of assets at U.S. community banks are not subject to mark-to-market accounting." Also, Kevin Bailey, deputy comptroller at the Office of Comptroller of the Currency, says bank regulators ‘do have a large degree of flexibility and have exercised it‘ in determining capital adequacy ratios while the SEC’s Kroeker says the objective of mark-to-market rule is not to Mark assets to fire sale prices.
It’s possible we get a major change in the regulations, Congress has already threatened FASB to play ball or have laws passed that will change the rules entirely. We can debate the propriety of this all day but the fact is that we could have a game-changing event today or we could have a fizzle that ends the financial rally so let’s be on guard!
It’s going to be 7,450 or BUST this week and we have tons of data to climb over as our wall of worry. Already this morning we have the Empire State Manufacturing Index at an awful -38.2 (50 is expansion) but that’s nothing we didn’t know. We have Industrial Production and Cap Utilization just ahead of the bell and any increase in Production would be an upside surprise with just 72% of US capacity used in January but, since it’s a February report, we’re not expecting much. Tomorrow we get Building Permits, Housing Starts (which can’t really get worse) along with PPI at 8:30. Wednesday we get CPI (these are Feb numbers) and, at this point, we’re looking for a lack of DEflation as a good sign. We will also be reminded of our negative Current Account Balance for Q4 on Weds morning and we get a Fed Rate decision at 2:15 (nothing left to cut). Thursday is another 600,000 jobs lost along with Leading Economic indicators and a Philly Fed that willl likely be the same as today’s NY Index so no surprises there and Friday is a data holiday.
So, whichever way they take the market this week, the data is just an excuse, we need those 10% levels or we’ll be seeing the 5% levels (and maybe lower) very soon!
