Thrill-Ride Thursday

Gosh, we thought we were pretty clever yesterday!

We weren't buying into the afternoon rally and I had predicted the day would finish at 7,850 in my 1:08 alert to members and, at 2:59, with the Dow up at 8,004 I reminded members: "That was a gift for taking out putters ahead of tomorrow’s data – I hope you guys took advantage of it!"  We promptly dropped another 125 points from there and we thought we had played it perfectly into today's unemployment data yet now, at 6:45 am, the futures have made an AMAZING recovery, jumping more than 1% since the close.

We expected good news from AAPL so that can't be it (could it?) and  we played them the way we played GOOG, selling front-month premium looking for not much of a move over $125.  It's a long way to the open and I probably should ignore the pre-markets entirely but do they really believe in Asia and Europe that the US is going to pop 75 points at the open just because AAPL is still the best consumer product company on Earth?  More to the point, have our memories gotten so short that GM defaulting on a $1Bn payment and the carnage that may cause in the banking sector is already water under the bridge just 90 market minutes after we found out? 

See, this is the kind of trouble thinking leads to.  I will just take my own advice and watch our levels and trade accordingly.  Fortunately, we are 1/2 covered on our long puts with DIA $79 puts at the moment so it's very easy for us to fully cover and flip more bullish, that's they whole idea of using a flexible cover system like this.  Our reason for being slightly bearish into the close was mainly the Unemployment Data at 8:30, once we get past that – IF the markets hold – we would be willing to join the party. 

China had a party this morning with the Hang Seng bouncing back 2.25% (336 points), popping right back over the 15,000 mark but, on the whole, it's just where we gapped down to on Tuesday morning's 600-point drop (5%).  So down 5%, down 2.5% more, up 2.5%.  Yay, I guess…    China's Central Bank said the country is back on track to hit 8% growth after GDP came in at 6.1% for Q1 and sent the markets lower on Tuesday.  "The economy is going forward as the stimulus package has started working," Yi Gang, a vice-governor of the People's Bank of China, told a financial conference. "The second quarter and the remainder of this year will continue this recovery trend."  Goldman Sachs is even more bullish, upping China growth forecasts to 8.3% and forecasting 10.9% for 2010 as they look to peddle their massive commodity positiions to a new round of suckers who are ready to buy the same old "China Growth" story they used to bankrupt the planet last time.

The Nikkei also managed to gain 1.4% despite an IMF report that says: "The global economy is in the grips of a deepening recession that isn't likely to turn around until sometime next year."  Overall, the world economy is now expected to contract 1.3% this year — a sharp reduction from the IMF's January estimate of 0.5% growth for 2009 — and then grow just 1.9% in 2010, well below the global growth rate before the economic crisis hit.  "By any measure," the IMF's twice-yearly World Economic Outlook concluded Wednesday, "this downturn represents by far the deepest global recession since the Great Depression."

Yes, I know – "Don't confuse us with facts!"  Goldman and pump-monkey Cramer say BUYBUYBUY and oil is flying back up to $50 this morning despite a MASSIVE build in inventories yesterday of 3.7Mb of crude, 800,000 barrels of gasoline AND 2.7M barrels of distillates (7.2M unwanted barrels in one week!), bringing us up to 370M barrels of crude inventories in the US – the most since September 1990, when oil was around $25 per barrel. The EIA report also showed that weak demand triggered the inventories buildup. Total demand for petroleum products in the past four weeks fell 6.5% from a year ago. Among them, gasoline demand fell 0.4% while distillate consumption slumped 9.4%.  U.S. refineries operated at 83.4% of their operable capacity last week, higher than a week ago but still in a low range.

UPS reports a 13% drop in revenues and earnings, down 55%, came in well below analyst expectations, yet another indicator of weakening demand for everything but IPhones.  Nonetheless, Europe held our marks yesterday and are holding positive ahead of our open although nowhere near the party levels that our pre-markets are indicating, now with 10 minutes until the Unemployment Report.  The EU economy is forecast, in that same IMF report, to contract 4% this year and those figures came as the U.K. released a budget that includes its biggest jump in the national debt since World War II.  German Finance Minister Peer Steinbrück on Wednesday said it was "not unlikely" that the country's economy will shrink by 5% or more this year, and leading German economics institutes said GDP is set to contract 6%, which would be its worst recorded performance since 1931, and that was NOT a good time to be in Germany!

The worsening outlook for the 27-nation EU is a blow for many of the region's governments, who have argued that the U.S. is the center of the global economic storm and that Europe's problems are smaller. Because of that, plus fear of rising inflation and public debt, authorities in much of Europe have been slower than those in the U.S. or leading Asian economies to cut interest rates or adopt ambitious fiscal-stimulus measures.  "At some deep level the European banks and policy makers don't get it: that they helped cause the crisis, that their slow response is part of the reason that the economy is bad, and that more is on the way," says Simon Johnson, a former IMF chief economist.

Speaking of precursors to fascist regimes:  BAC's Ken Lewis claims (under oath) that former Goldman CEO, Hank Paulson and our beloved little professor, Ben Bernanke, threatened his job and instructed him to keep silent about deepening financial difficulties at Merrill.  Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.  Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead.  BAC stock fell from $38 to $8 since making that deal, costing their shareholders $200Bn in value.

"Isn't that something that any shareholder at Bank of America…would want to know?" Mr. Lewis was asked by a representative of New York's attorney general, Andrew Cuomo, according to the transcript.  "It wasn't up to me," Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would "impose a big risk to the financial system" of the U.S. as a whole.  Yeah, well thank goodness we dodged that bullet!  Mr. Cuomo's investigator asked: "Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?"  Mr. Lewis said, "Over the short term, yes."

"Regulators are supposed to tell you to obey the law, not to disobey the law," said Jonathan R. Macey, deputy dean of Yale Law School. "If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders."  The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis's testimony with the New York attorney general's office corroborates that account.  Mr. Lewis has previously said that he first considered backing out of the Merrill deal on Dec. 13, when he said his chief financial officer told him projected after-tax losses were "about $12 billion."  During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis's own job was at stake if he did not complete the deal.  Forcing BAC to swallow MER eliminated yet another potential rival to GS for financial dominance once the smoke cleared – coincidentally, I'm sure.

Well it's 8:30 and we "only" lost 640,000 jobs last week so everything must be great.    Continuing claims rose an alarming 93,000 to 6,137,000, the highest level on record but this is alarming only to people with brain stems so don't look for it to stop investors this morning as Goldman Sachs has upgraded both China and the auto sector, which means everything must be great.  Speaking of GS manipulating the markets, here's an interesting article that links GS to the rapid rise in SPG last week, using Fed money to create an artificial short-squeeze that boosted the stock almost 50% in a week.  I'm sure Ken Lewis would not be surprised to hear Goldman is using their postion to profit while destroying retail shareholders, not in the least.

As Mike Morgan of http://www.goldmansachs666.com/ concludes: "Remember that our markets are not rational, fair, or efficient. And that is not likely to change. Banks are entrenched in Washington, and they’re going to defend their position of power ferociously. So hedge, hope you’re trading with the Quants and big boys, and try to be lucky with your timing."  Amen – and be very careful out there!