Thursday Thump

Not again!

How many times to I have to call my Thursday post "Thursday Thump?"  It's been pretty much every one this year and that is NOT a good pattern, even if we do recognize it.  I detailed our woes in yesterday's wrap-up but today my worst fear came to pass as the dollar finally fell below 100 yen, it's worst level since 1995, when we were just recovering from the economic disaster left to us by George Bush the First.

Needless to say, the Japanese stock market, very heavy with exporters (1/2 of their GDP comes from exports), did not take it well, dropping 3.3% (427 points) on the day and finishing at the year's low.  Our all-time low against the Yen was 79.95 yen to the dollar in April 1995 and we are now down 30% since last August!  Tokyo was a picnic compared to Hong Kong, where school picnics (and schools) were canceled due to influenza.  The Hang Seng dropped 4.79% today (1,121 points) and, like the Nikkei, was only saved by the closing bell.  The flu scare seems to be overdone but the dollar scare is very, very real and very, very scary.

Europe is trading off about 2% this morning as news hits that Carlyle Capital is likely to be liquidated and lenders have already seized the assets and began selling off the fund's $21.7Bn in mortgage backed securities.  We talked about this last week (Thursday actually) so it's no surprise to us but apparently not everyone reads PSW and many people seem to be shocked that the $100M "loan" from their parent group last week wasn't enough to bail out this 26x levered fund.

Last week we entered some of our financial plays a little early on the Carlyle news so we're going to watch and wait this week but we are less than a week ahead of another massive Fed cut so let's hope we can form a nice bottom here on the XLF, which we fortunately covered yesterday.

Retail sales in the US knocked ANOTHER 50 points off the Dow at 8:30 (now down 150 pre-market) as they DECREASED 0.6% in February against an estimated 0.1% increase.  Excluding autos and gas sales, retail sales were only down 0.1% but no one is going to be in the mood to hear that today so we'll skip it.

INCLUDING gas, import prices are up 13.6% from last year, just a hair behind the previous record in dollar destruction held by the elder Bush but junior still has 8 month left to completely and utterly annihilate the enemy (that would be US) so we're all rooting for him to crack that record.  $1,000 gold is a good way to start and we're going to be hitting that mark this morning as the dollar races to record lows against the Euro as well. 

So we have 13.6% import inflation, oil up 91% since Q1 last year and the dollar down 16% since last March.  It will be great if we can hold Monday's levels as this is still not news – these are all the same exact things I said would tank the markets last summer but no one believed me then and no one believes me now so we'll just have to watch and wait as my mistake last summer was trying to pick a top (it didn't come until October) so let's not get too far ahead of ourselves looking for a bottom.

I don't want to sugar-coat it but Carlyle is THE WORST of the worst and, much like Amaranth at the time, the panic will wash over the whole sector but, if we don't get follow-through failures, things will eventually get back to normal (or as normal as they can be in this crazy market). 

While all this is going on, WM got an offer to recapitalize the bank.  Yesterday's gains will be erased on the Carlyle news but they are certainly one we can play for a rebound.  Another story nobody wants to hear today is that ABK will hold their AAA rating from S&P while Fitch will hold them at AA, sealing the deal on their $1.5Bn capital infusion.  ABK is another one we can pick up on today's dip.

Thankfully we killed our March positions yesterday and sold a lot of March calls too, we'll see about whether or not we want to roll down but I think I'll just be stopping out the callers (3rd time this month) and giving the market a few hours to see if we can hold Monday's levels.