HPQ had great earnings, that's a good start!
Several members were speculating that I would title this one "Turnaround Tuesday" and it pains me that I haven't beaten the bullishness out of them yet so we are back to "Tempting Tuesday" and you can see that none of the problems I warned about on October 23rd have gone away, we've simply gotten tired of worrying about them after nearly a month.
On October 23rd we opened at 13,568 and climbed the famous wall of worry all the way up to 13,962 on All Hallow's Eve before investors finally got spooked and dropped the market 700 points in 9 sessions. Exactly 1 week after that 9 session plunge, we sit at a lower low than last week AND PEOPLE WANT TO PUT ON THEIR RALLY CAPS! We need hard hats, not rally caps people!
I know that less than 12 hours ago I called a bottom but it's still the bottom of my 13,000-13,300 range. Bouncing to 13,300 after falling from 13,962 is not a rally at all, it's a confirmation that the people who bought stock at 13,962 were nuts… Oil is at $95 a barrel, the dollar is at an all-time low and we don't even flinch anymore when another bank and another announces they lost $1Bn – as if $1Bn isn't a lot of money (it's 1,000 million you know, so if you have worked all your life to make $1M, just do that 1,000 more times and flush it all down the drain and that's how much these guys are losing every day).
My wife is, sadly, a Redskins fan and this Sunday the Redskins got the ball back at around the 30-yard line with 1:34 to go and one time out remaining. Sure it was possible that they could win, it happens perhaps one out of 100 times when a team is in that situation, but only a fool runs out and places bets on that outcome (Tina shouted herself horse but, fortunately, no cash was lost). There's a difference between marching up the field with a dominant offense and making a few 10-yard gains into a prevent defense while the Bears (actually it was the Cowboys but Bears make a better market analogy) are willing to give up some yardage to protect their superior positions.
Learning not to be fooled by false rallies is the key to taking your investing to the next level. Any sporting event goes through several changes in momentum and leadership but, over the long haul, more often than not, the better team prevails. Football (US style) is a ground acquisition game and many of the strategies of position management have strong parallels to trading strategies – including Washington's last minute "Hail Mary" pass, which I see a lot of traders making in an attempt to save a bad day. As with the Redskins, these high-risk plays do not often end well.
Since it's Tuesday, I won't go off on that tangent but, suffice to say that we do not call a small recovery a rally and we don't change our bets until we see, not just a single score, but a game-changing event whose momentum AND timing lead us to believe the tide has finally turned.
The tide not only turned on the Hang Seng this morning but it did a complete 180! After gapping down 1,000 points following up on a lousy US session, the market rallied back 1,300 points to finish the day up 311. The Nikkei made a similar recovery, coming back from a lunch that began at 14,756 to finish the day nearly 500 points higher at 15,211. Hopefully they will serve sushi and dim sum on Wall Street today as that seems to be the magic market formula over in Asia.
One major item moving the markets is the early movement of the China Investment Corp, which we have previously discussed is China's sovereign wealth fund looking to deploy $200Bn of China's $1.5Tn capital surplus by playing the markets. Could GS have been showing off for their prospective Chinese masters by giving them a good entry point for the markets? That would be idle speculation at best and we won't indulge in it here. After all, it's been a whole year since Goldman did anything so blatant. Also helping Asian markets – CB Governor Zhou Xiaochuan say no rate increase next week, that's a BUYBUYBUY on the FXI (perhaps the May $210s at $10 as we can sell closer months once we get a nice run)!
Europe is flat ahead of our open and the only turn-around we have so far this morning (8:30) in the US markets is a sharp drop in futures due to a 6.6% drop in Building Permits and the poor Target earnings we were expecting. Also not at all helpful is FRE stepping into the housing confessional with a $1.2Bn write-down and a $2Bn loss for the quarter. This is very nasty as FRE is supposedly buying PRIME mortgages only. Freddie Mac said it made the provision for credit losses in the July-September period because of defaults on home loans, which "reflects the significant deterioration of mortgage credit." Losses at FRE for Q3 are $3.29 per $37.50 (not for long) share which compares poorly with the 0.22 per share that the brain trust of 15 "top" analysts (not a single sell rating) who follow this stock for a living had expected.
I am telling you that these analysts have NO CLUE as to how deep and severe the mortgage crisis is, not by a long shot and a miss of this magnitude by FRE should make people run, not walk, away from financials. Sadly that means we will be selling and covering into whatever is left of this pre-market rally as I fear what the next week will bring. Contrary to what I said yesterday, sometimes when you see a crowd running in sheer terror, there may actually be something to be afraid of.
The Nasdaq should fare well and that's where most of our open plays are but this is FUNDAMENTALLY bad news folks. FRE and FNM are critical to the operation of this country and FRE's numbers are so bad that they may fall below covenants (we discussed this yesterday), which would, in itself be a disaster. The "good" news for the bulls is this is the kind of thing that almost forces Fed action as there is no way they can let FRE twist in the wind.
Aside from being an indictment of the idiots who pass as analysts these days, the FRE problem hints at a very broad spread of consumer loan defaults that will endanger auto loans as well as the credit card (back to the banks!) business. Gee, how many income streams can we take away from the financials before one of them collapses? Sadly, I think we're about to find out!
Not surprisingly, the Gulf nations are seriously rethinking their peg to the dollar, a move that can send oil way over $100 while HURTING the revenue stream of US oil importers. Wow, high oil prices and lower energy earnings, we've really pumped ourselves into a nasty corner haven't we boys?
It's going to be a crazy day but, at this point, we need to cover up those open plays, cash out the poor performers and have ourselves a nice Thanksgiving with a well-hedged virtual portfolio backing us up. If we miss a 200-point rally, so what? We'll get them next week but the alternative is looking pretty grim if this keeps up. So our plan for the day is to stay light on our feet and watch out for that top. Don't forget we have Fed minutes this afternoon but, if that's not a rally point, we are out of here!
Our focus puts for the day is going to be the QID (QQQQ Ultra-shorts) Apr $40s, currently $6.10. They have juicy premiums to sell (the current Dec $44s are $1.95 but we're not selling yet) and lots of brackets to roll to so we can scale into these, taking advantage of whatever rally we can get today to keep ourselves well covered for the weekend.
It's going to be a crazy day, be careful out there!
