Monday Morning Markets

Ahead of the Fed tomorrow I'm not too keen on buying much.

It's going to be a good day for going over our positions and planning for contingencies as tomorrow is likely to be hectic, no matter what the ultimate decision.  I'm way too scared to short after last week's move and too cheap to buy so it looks like it will be a good day for a long lunch as we prepare for the last Fed meeting of 2007.

Am I being a Scrooge or just a cautious investor?  While I want to believe in a Santa Clause rally, the 900 points we've gained in the past 10 sessions just seems like a little much to me but holding 13,600, or even 13,500, is going to be a very bullish sign overall. 

Of course a long lunch would not have been a good plan in Hong Kong as the Hang Seng again dropped like a rock after lunch, falling 350 points in 90 minutes to close right at the 28,500 line, down 4.87% from Fridays high.   There's a very big gap to fill all the way down to 27,000, conveniently another 5% away from today's close.  We can blame China's move to raise the reserve ratio for this one, a full-point hike as opposed to their usual half-point moves shows they are very serious about fighting inflation as the other 9 raises this year have so far proved ineffective.  The US, by contrast, requires only 10% of the money a bank takes in to be on reserve, meaning for each $1M the bank takes in, it can make $10M in bad loans!

This is how the US banking system gets itself into such trouble and it's far worse in the UK, where they have NO reserver requirement so a bank can just make up any number they want and put it on a check as opposed to US banks, who are limited to pretending they have just 10 times more money than they actually have.  By the way, that is your money – the money you earned and entrusted to them, that they get lend out 10 simultaneous times as they charge other people more for each loan than they pay you in total.  When the bank does this it's called LEVERAGE, when you do it it's called FRAUD…

We discussed a much larger fraud in this weekend's wrap-up regarding the financial markets as "The Plan" rolled out by the administration last week does nothing, other than buy some time for the financials, as it does nothing to solve the problems of the actual people trapped in these mortgages.  What difference will it really make to a person who (according to the needs test) is barely able to make his teaser payments to have them extended?  What it does is it keeps that person in as a renter for the bank on a property they will repossess later, as it is very unlikely, given our low rate of wage inflation, that that person will EVER be able to afford their loan.  The Paulson Plan merely staggers the banks' land grab over time so they can foreclose on 2-4M homes over a 5-year period, rather than all at once.

By keeping "homeowners" on as tenants, the bank has a patsy to pay the taxes and insurance, keep up the home and pay them more than they are likely to get in rent while they wait for the market to bounce back – at which time they can double the mortgage, toss you our of your house and sell it for a nice profit.  Meanwhile, if the homeowners all walked en mass, the banks would be forced to pay those taxes, keep up the homes and sell or rent them at much lower prices which may initially crash the economy but would force a much needed correction that would make all homes more affordable.  "The Plan" takes all the pain away from the people who caused this mess and places the costs right back on the consumers who can afford it least.

This is not, on the whole, bad for the markets as screwing the American people over is what US corporations are all about, but we're still looking at a massive correction in housing prices and it remainst to be seen how the post-holiday consumer holds up in the face of all this financial worry that will only be exacerbated by election-season rhetoric.

While our country squabbles over how to handle our massive deficit, China's SNP just signed a deal with Iran that should increase China's oil supply by 5% (300Kbd) along with 10M tons of LNG a year for 25 years (and I have no idea how to do that conversion!).  Either way it represents China NOT supporting sanctions against Iran since they will now be sending them $27M a day for the oil alone.  Don't worry though, that money doesn't ALL go towards making roadside bombs.  UBS, who just announced yet another $10Bn in subprime write-downs, is making up for it by taking on $11.5Bn from Singapore's Sovereign Wealth Fund as well as "an undisclosed strategic investor in the Middle East."  This is great news for the Bin Laden family, who find US banking regulations make it very difficult for them to get an auto loan, as their name tends to get flagged for some reason.

"UBS, based in Zurich, also revised its outlook, saying it now expects to post a net loss attributable to shareholders in the fourth quarter, after having said earlier that it expects a profit overall. The bank said it was now possible that it will record a net loss for the full year."  Gee that doesn't exactly give me the warm fuzzies if banks can't figure our DURING the quarter, whether or not they'll be profitable.  Well, maybe they were just lying before, covering up their losses until they could broker a deal to offset them by selling 10% of the bank – that makes me feel better!

Europe is up a point on this investment as well as a deal from French cement maker LaFarge, who have been acquired for $12.9Bn PetroDollars by Egypt's Orascom Cement.  So our nation's plan is: To use the hard-earned dollars we have to buy oil, which we burn in low mileage vehicles.  The OPEC nations turn around and use our money to buy global assets while our government stops them from putting the money back into this country by blocking deals and generally hassling them at the airport so they don't even want to come here anyway.  Oh yeah, this is going to end really well!

 There's a very good overveiw in the WSJ (as we welcome Uncle Rupert into the big chair this week) of the current banking crisis, including a great perspective chart saying "How Big Is It?"  It turns out that it's pretty much in-line with my $200-400Bn prediction I made in the summer, which is now becoming consensus.  That means, like UBS, lenders are still holding out 1/2 of their losses from us and that is not cool!  If Congress wants to do something really useful, they can demand full disclosure by the Q1 report so we can finally put this thing behind us.

In my weekend reading I find my negative sentiment has a lot of reenforcement which makes me think there are still some bears left to capitulate before we head back down so let's look for this rally to continue, probably through the Fed.  After this next round of indulgence that may take us to 14,000 again, I think that we may be heading in for a doozy of a correction, possibly all the way back to 12,000, led down by brokers and energy, the people who led us up, if this "fix" isn't accepted on a global scale.  Meanwhile, everything old is new again so let's get back to our old favorites like DRYS, RIMM, BHI, our various gold plays, BA, SNDK, MU, TXN… if we can hold these levels but, as I said above, I'm not anxious to jump in ahead of tomorrow afternoon but we can start building set-ups as we watch the day's action.   

BX, who has already opened their own fund to Chinese investments, is now supposedly working with the China Sovereign Wealth Fund in the never ending quest to pretend RTP is worth $200Bn.  As these stories get more and more outrageous, the "boost" from each one fades yet the Clueless Narrators Broadcasting Crap will repeat anything a hedge fund tells them every hour on the hour for a day or two without ever checking the facts so expect this to be the story of the day, even after the last 3 RTP rumors all proved false.  Our current RTP strategy is to sell current puts on the dips against longer puts and buy them out on spikes like this morning.  It is safer to run this play with puts than calls, just in case something actually happens, but the huge premiums (the $470 puts are $20.65 and the Apr $470 puts are $52.40) make it a really fun spread and the plan is to roll up with our putters.

C's board is expected to finally announce a CEO and this is NOT a reason to buy them as the first thing I would do as the new CEO is force them to write off as much junk as possible so I can blame it on the previous administration which will lead to 2 spectacular quarters as it would for any bank who decided to write off their underperformers ahead of schedule,  Nonetheless he will get credit for it and the stock will go from whatever it falls back to (probably $32.50) back to the $40s in short order so  we will be buying this one on the dip for sure.

MSFT takes the first great step forward in ruining the mobile Internet today by placing ads on its MSN Mobile Page but, just to let their customers know how much they respect their intelligence, they will also start hawking an astrology service.

If you want to bet on the Paulson Plan working, you can take a stake in HYG, a high-yeild bond fund that  keeps investors interested with a 7% return.  We can do better than that by buying the Jun $102s for $1.98 and selling the Dec $102s for .40, a nice 20% return for our first two weeks.  The Jan $102s are .93 and if the options weren't so thinly traded it would be a no brainer.  Also interesting on this one is the very, very high premium on the put side as investors are understandably VERY nervous which leads to interesting spread possibilities.

It's been 2 weeks since we ran the big chart and, despite the China-like gains of the past two weeks, we're still in surprisingly weak shape.  Of course an optimist could say "look how much room the market has to go!":

While we gained 3 green boxes on the Dow and 2 on the Nasdaq, we have gotten little confirmation from the other indices with just 3 green boxes total added to the other 5 indicators.  702 points was not enough to put the Nikkei back on track while the BSE and Hang Seng are so far off in space we have only orbital decay to fear from them.  The Dax and the FTSE added one green box but all 3 EU bourses sit at critical points and we will watch their close with great interest today.  If they can't break and/or hold 8,000, 5,750 and 6,550 then something is probably very rotten in Denmark…