Wow, talk about an obstacle to overcome!
The news of the morning is that a 30 year-old trader at Societe Generale (France's 2nd largest bank) lost $7.6Bn in what the bank is claiming was "fraud" as he had concealed his losses from the bank until last Friday. Though Societe Generale says it first learned of what it termed "massive fraudulent directional positions" on Jan. 19, it waited until it could close out those trades before going public with the problem.
Whether this kid was scapegoated or not remains to be seen. I don't care how a trader loses $7.6Bn, I'm still going to fire the whole chain of command from him to the CEO for allowing this to happen. "Conveniently", this news serves to cover up the fact that the non-rogue traders at the bank seem to have lost another $3Bn on their sub-prime investments. This effectively wipes out all of 2007 profits and trading on the stock has been suspended while the bank tries to raise $8Bn to cover their losses and replenish reserves. Let's hope none of their other 100,000+ employees "went rogue" under the bank's obviously very lax controls!
Congratulations to the unamed trader, who has beaten the previous record loss of $6Bn – held by 32 year-old Brian Hunter at Amaranth, who "only" lost $6Bn betting on natural gas futures. Fitch downgraded Soc Gen's credit rating from AA to AA- so this story is far from over.
Asia was mixed in trading this morning with the Nikkei adding another 2% but the Hang Seng gave up 2% and India dropped 2% again but a lot of this was the result of the Soc Gen news, which spooked the financials. China reported 11.4% growth for the final 2007 total but the forecast is for "just" 9% growth this year as the government shifts their focus to inflation fighting.
Singapore is also suffering from runaway inflation (4.4%) and China is facing widespread power outages as the national capacity to produce is approximately 10% lower than demand. China has 100 Gigawatts under construction and is adding one plant PER WEEK. These are coal-fired plants and, pollution issues aside, they should use A LOT of coal. China has already turned into a net importer to meet demand and a drout (possibly casued by the global warming from all the coal!) has lowered the electric output from the dams that provide 16% of the country's electricity.
That makes BTU a great candidate for our Bargain Basement Virtual Portfolio and we'll play for the summer spike with 5 June $45s at $8.30 and we can add them to the Long-Term Virtual Portfolio as well with the Jan '10 $45s at just $14.75, a fantastic deal since we can sell the current $50s for $2.53 (but no hurry).
We timed our exit very well on NEM last week and I'm looking at getting back into them with the March $52.50s back at $3.40, they should make a very nice play if Soc Gen knocks gold back over $900, which looks likely in pre-market trading. The European markets have taken the bank scandal with the best possible spin with the logic that the bank's emergency liquidation of who-knows-how-much equity CAUSED the Monday meltdown so indexes over there are up 5% this morning, bringing the DAX back over that critical 6,800 level. If this is all true, it means our Fed MASSIVELY overreacted and made a mistake that can lead us to spiraling inflation and price instability.
As I said at the time, the timing was just all too coincidental and we've already discussed all the conspiracy theories involving secret societies (generale?) and global conspiracies that are aimed to force governments to act in favor of the uber-rich so we won't get into it here just becasue all the facts are falling right in place exactly as predicted by those wacky conspiracy guys… Remember the time they crashed the currency markets and blamed a "rogue trader?"
NOK beat estimates but Trichet continued with his tough talk on inflation and went so far as to tell Gordon Brown to stop following Bernanke like an idiot and start running a responsible economy. Louis Vuitton will export some inflation to the US as they raise prices 5% to try to make up for the declining dollar, which is cutting into their earnings and to put that into inflation perspective, a 5% increase in just one of their bags can feed a family of 4 for a week!
In a nice boost to our solar plays, the European Commission is firming up targets to have 20% of the EU's energy come from renewable sources by 2020. According to the commission's most recent data, only 8.5% of the EU's energy consumption in 2005 came from renewable sources. But the percentages vary widely by country. Tiny Malta and Luxembourg used almost no renewable energy that year; in Sweden, almost 40% of energy consumed was renewable. The US currently gets 7% of its energy from renewable sources thanks to massive hydroelectric projects that were built in the the last depression (Niagra Falls, Hoover Dam) but we haven't really done a Dam thing since then.
In the US market, we have more evidence of Fed overreaction as jobless claims remain at 301,000, further lowering the 4-week moving average down to 314K . This is probably good news but the repercussions of the Fed overshooting the mark by perhaps half a point are yet to be factored in. Will this take next week's expected .50 cut off the table? If so, will Cramer cry about it?
T had great earnings but they already gave us poor guidance last week so the reaction is muted. Still, as I said about GE's indications a week ago, perhaps things are not as dire as the bears would have you believe. The crisis this country is facing is not an economic one but a crisis of leadership, a lack of regulation that has allowed abuses in the financial market not seen since before the Great Depression. Did you ever stop to wonder why the EU seems to find monopolistic activities and price fixing among major corporations at least once a month, yet US companies don't seem to have broken a rule since, well since AT&T was broken up (and we know how that ended up!).
I wish this rally wasn’t mainly based on bailing out the bond insurers and I wish we could figure out what the truth is between SocGen, the Fed, who caused the crash and which covert organization was behind it all but all we can do is watch our levels and make sure we regain critical footings before we go hog wild. In last night’s Big Chart update we saw that the Transports (2,591, -57), the Nasdaq (2,380, -64), the Russell (712, -19) and the SOX (352, -113) all have a ways to go to make us comfortable that we are on the road to recovery.
The Dow must hold 11,808 (should be no issue) but is still 1,103 points below the 200 dma while the NYSE needs to hold 8,642 (now 8,805) and is 970 points away from its 200 dma. If the DAX hangs tough at 6,800+ and the CAC manages to get to 4,934 (doubtful as it’s 70 points away) then we can hope for continued improvement in Japan (miles from safe) and Hong Kong ("just" 500 points below our worst level) and we can hope India doesn’t fall off a cliff AND THEN we can get happy.
Right now, I’m still a bit cautious!
