I was tempted to title this article Thursday Thump but I am trying to stay positive.
Perhaps I will change my mind after GS and FDX report but, just so you know, at 7:30 am, I'm not that sure which way we will go. I still want to be positive, really I do – especailly as we are starting 3 new virtual portfolios next week so I'll be hoping we hold on here and manage to rally on the global story, rather than fall on the local one…
I'm not the only one who was concerned by our "weak" 76-point gain yesterday. The Nikkei got off to a good start but dove over 100 points mid-day and was rescued from negative territory by a late afternoon rally that left it up just 32 points. The Hang Seng took a rest and only gained 146 points today. Another "Duh" stock has IPO'd in China (Chinese stocks whose name alone means you should throw money at them) as the Bank of Beijing closed up 81% for the day.
Hong Kong Banks (through which flows half the world's money) cut rates by only a quarter of a point, not quite matching the Fed's half-point cut. That puts their lending rate at 7.5%, sitll quite a bit higher than US rates (and their economy is thriving, imagine that!). The Hong Kong Monetary Authority, Hong Kong's de facto central bank, said yesterday it would match the Fed's move by cutting its base rate by a half percentage point, to 6.25% from 6.75%. Hong Kong typically follows Fed monetary policy because the Hong Kong dollar is pegged to the U.S. dollar. But commercial banks in the city don't always follow the monetary authority's rate moves.
Over in Europe the markets are of a bit over half a point in early trading. The Euro hit $1.40 against the dollar, its highest level ever and gold is flying on the International exchanges, up about $7 in overnight trading. Publicly traded hedge fund, Absolute Capital froze redemptions and announced that 25% of its assets are "tied up in illiquid assets."
Ah, here's Goldman's earnings! Significant losses in loans were offset by short positions on mortgages – Yay! These guys are geniuses; it's almost as though they know what the government is going to do before they do it…
GS reports $12.33Bn in revenues, blowing away the $9.5Bn estimate and earnings are $2.85Bn or $6.13 per share, close to double last year's $3.26. This should offset FDX's not so good report.
I took naked GS calls off the table yesterday, expecting the volatility crush to exceed the gains and that premise may be shaky but that's what cash is for, we'll keep an eye on them in the morning for a possible momentum play. "Max Pain" for option traders on GS would be flat into expiration so we will concentrate on October calls that are $10 out of the money.
Speaking of brokers – the SEC is expected to file civil charges against current or former employees at several brokerage firms in connection to a years-long investigation into abusive stock lending, according to the WSJ. The types of alleged schemes that authorities are investigating vary. Under one such alleged scheme, an individual at a brokerage would divert money to a family member at a finder shop, a way to artificially inflate the cost of borrowing. Under another alleged scheme, loans were being passed through several firms or intermediaries without any purpose other than to drive up the cost of borrowing the stock.
Which reminds me, there's still 89.5Mb of open contracts over at the NYMEX and today is settlement day. You may have noticed a lot of discussion as oil apologists scrambled the spin doctors to explain that "no one is manipulating the markets." Just like roaches, when you shine a light on them they run for cover!
It will be interesting to see how today settles out. As of yesterday's close we have 89.5Mb in October at $81.93 (up .17), 358Mb for November at $80.85 (down .18), 215MB in December at $79.12 (-.23) and 82Mb in January (-.01). Isn't it amazing that the months that are gaining barrels are going down while the month where the barrels are being sold is going up. November 2008 settled at $74.71 but only 14.9Mb are open at that price…
Jobless claims FELL this week, down 9,000 to 311,000, another signal that the Fed overreacted and has probably put us on a path to massive inflation.
Bear Stearns (8:30) just came out with not so good earnings. BSC reports an EPS of $1.16, down 62% from $3.02 last year. Net income was just $171.3M, down 61% from $438M in Q3'06. Revenues were also off at $1.3Bn, down 38% from last year. Now we know why GS is worth $84Bn and BSC is worth just $16.7Bn. Of course, this just illustrates what has been going on in this country for years – the super rich (embodied by GS) are crushing the poor, the middle class and now, even the upper classes as their constant need to make more than last quarter sucks up all available recourses.
Also gaining at the expense of others was BBY, who apparently buried CC, who just reported a net loss as lower margins destroyed their profits as they tried to stave off their rapidly expanding competitor. Like GS, this is just good old-fashioned survival of the fittest competition but, when "there can be only one," it's not exactly a picnic for the losers.
There is no question that GS alone will boost the Dow a bit at the open. BSC and FDX agreed that International business is strong, it's the US that is failing them. I was just having that very discussion at lunch yesterday where we were discussing whether or not the rest of the world can move on without us. Here were the main points:
- Average US consumer is $8,000 in debt. Japanese households have over (no joke) $12.5T in savings! That works out to $125K in savings per US household!!!
- Europeans are net savers too and India is getting stronger every day.
- We are logging perhaps 2.2% growth in consumer spending, while spending rates in China are going up 11-12%. Now the truism there is that one US consumer is worth 5 developing nationals but China has 1Bn consumers and a $10T economy that is growing at 10% while we have a $13T economy that’s growing at 2.5%. Like Japan, China has Trillions in “mattress money” that will also come into play in the near future and, of course, China is running such a huge surplus that they have $1.4T of our money sitting around in their Central Bank.
- Then there’s Europe. When most of us went to college there was no EU so our deep impression is that we are far bigger than European nations but the combined GDP of the EU just passed ours and is growing 50% faster than we are.
So our investments in international companies are the safest way to play this rally, despite any reservations we may have. Both Happy Trading (who is having a fabulous month) and I will be working on officially rolling out the Happy 100 Virtual Portfolio next month, which will start out with $100,000 and run through the December expiration. All selections will be published right here on the day they are made but intraday entries will only be available to members only. These will not be day trades and should be accessible to all.
While the Dow may do well, let's keep an eye on the Nasdaq, which really needs to step up if we are going to have a true rally and let's keep in mind that tomorrow is a triple witching expiration day – where anything can happen and probably will!
Bernanke started his speech to congress and said subprime issues may continue to rise. There is nothing devastating in his statement but he didn't exactly sugar-coat the problem either so it will be interesting to see how the markets take this news.
We'll see how today shakes out and we'll continue to watch yesterday's levels, if we hold 13,700 for the week there is nothing to do but be bullish as the chartists will rule the day. With the boost from GS, it would be very disappointing if we can't retake yesterday's highs.
Be careful out there.
