Testy Tuesday Morning

Was Cramer right yesterday?

Should we all be removing what we need to live on for the next 5 years from the market?  He made that statement on yesterday’s Today Show and, when Ann Curry asked him "Even if you would take a tremendous loss in selling your stocks at this decline, you say take it out?"  Jim’s answer was "I don’t care.  I do not care where stock have been, I care where they are going, I do not want people to be hurt in this market."  It’s good that Jim doesn’t care as there was a low-volume, massive sell-off that was indicative of retail capitulation followed by strong waves of program buying indicative of Jim’s hedge fund buddies jumping in and scooping up the bargains.

At least Cramer gave us a good bottom test so we should thank him for that, I drew up a new Big Chart last night and it is truly terrifying how far we have fallen and even more terrifying when we look at Asian markets and see how far we may still have to go if things do not turn around very soon.  Both the SOX and the Transports are more than 40% off their highs of last year and the SOX are teetering right on the 50% line at 274.  If they go down, there is not much hope for the broader markets and it will be time to re-up our ultra-shorts for the next leg down.  The TRANQ (Nasdaq Transport Index) is already below 40% after dropping 72 points yesterday (and that is AFTER a 100-point recovery) and, if they don’t retake 1,868, I wouldn’t put much stock in a "recovery."

Let’s keep in mind that last week we were worried about breaching the 25% lines on the Dow and the Russell as a sign that we’d get a broader decline.  As I said last Tuesday morning: "The Dow MUST NOT cross that 10,644 line again as it’s a long, long way to the bottom that is being shared by the Hang Seng and the Shanghai at 50% off the highs (that would be Dow 7,000!)."  Unfortunately, we coasted along that line last week, before we well and truly gave it up on Friday and now we need to get it back before we can really do anything more than day trade to the upside. 

The upside will be severely tested this morning as BAC pre-announced a lower profit and cut dividends in half while Iceland took control of it’s second-largest bank today, borrowing $5.4Bn from Russia to prop up the nations’ finances.  Iceland already took over the 3rd largest bank last week and loaned $700M to the largest bank to try to avoid taking that over too.  Bank assets in Iceland are nine times the $19Bn GPD of the country and the Krona has gone from 131 to the Euro to 200 to the Euro in the last few weeks.  As with LEH in the US, the failure of Iceland’s banks could spread around Europe as they are heavy investors in other EU banks and corporations (there’s not much to invest in in Iceland).

India boosted the Banking sector by cutting its cash-reserve ratio in order to quickly put liquidity into the market and they also made moves to attract foreign capital by removing restrictive regulations.  Short-term money market rates in India have spiked up to 16% from a normal 6% but the rupee is in free-fall so it’s not such a great return.  Again, do not think this can’t happen in the US – currencies are a funny thing when Central Banks start messing around with the economy.  Nonetheless, the BSE fell 1% on the day, 46% off it’s highs at 11,695. 

Australia made an emergency rate cut, a very logical move for a commodity-driven economy but the BOJ held steady at 0.5% (not much room to cut) and the Nikkei fell 3% after failing to recover off a huge morning gap down and the Hang Seng was closed for the day.  "Credit markets remain in gridlock, credit spreads remain wide, and this credit crisis which started in the U.S. over a year ago has well and truly gone global," said ANZ Bank’s New Zealand chief economist Cameron Bagrie. "It remains to be seen how Asian financial institutions hold up. This could well be the next stop."

Europe is trading mixed ahead of our open, which is not bad considering the bad news in Iceland but the markets there, along with our futures, were up considerably ahead of the EU open (3am) on anticipation of a coordinated, emergency rate cut.  Much like our own Congress though, the EU could not get it together and agree on a course of action and the markets plunged at the open and have been struggling to recover as they head into the US open. "Europe must prepare to put in place a collective line of defense," said Dominique Strauss-Kahn, director general of the International Monetary Fund, in a speech in Paris on Monday. "The stability of the world economy is at stake." 

Meanwhile, Russia’s massive bailout has been a disaster as the RTS dropped 19% yesterday, a full month after $120Bn was put into the markets, a larger percentage of GDP injection than the one Congress just approved in the US. Investors have complained that a lack of detail about the bailout, as well as its slow implementation that has sown fears about whether it will be competently handled. "In the current environment, its not clear that a package will work anywhere in the world," said Charles Ryan, chairman of Deutsche Bank in Russia.  "No matter what the fundamentals, [investors] are afraid that tomorrow everything will be cheaper than it is today."

When Russia announced its bailout last month, the government was praised for its quick action in rescuing flailing financial markets and providing a massive infusion of funds to restore trust between banks.  The package included up to $20 billion to buy stocks, and $60 billion in deposits at banks to boost liquidity and billions more to banks via repurchase operations.  Four government-controlled banks have received many of the cash infusions, but little money has been lent amid persistent fears about credit problems and counterparty risk.  "There’s all this money promised, but so far it’s not on the market," said James Fenkner, head of Red Star Asset Management in Moscow. "Banks are still not lending money to each other. It’s disheartening, because the government was supposed to do something."  Hopefully the US will learn from Russia’s mistake but, then again, we did start a war in Afghanistan after seeing Russia fail at that for 10 years…

In keeping up the $200Bn a day average that the government has been pouring into the system for the past two weeks, the Fed unveiled  a new lending program aimed at helping U.S. banks finance purchases of a kind of commercial paper called asset backed commercial paper, which is secured by collateral such as securities backed by mortgages or car loans.  The move was aimed at stabilizing money market funds that were being forced to dump illiquid or risky holdings as investors redeemed their money.  I discussed the need for action in commercial paper in Friday’s post and the Fed has a $600Bn gap to fill here. 

Its going to be rough sledding in the markets and investors will not be happy with anything but a massive rate cut.  Obviously we can now use Dow 10,000 as an indicator to get in or out of our puts and ultra-shorts.  Oil is also being kind enough to give us another opportunity to short it at $90 and it’s a long way back to $70 if we have a long recession so the USO Apr $78 puts are pretty good looking at about $13.50 (last sold at $14.50) as you can pick up a quick $3 selling the October $71 puts with plenty of good rolls to November. 

We have Fed minutes this afternoon but the market is clearly in panic mode and we get the Consumer Credit Report at 3pm.  Tomorrow is Pending Home Sales and Crude Inventories and Thursday we are back to Jobless Claims and Wholesale Inventories, which may give us an early indication of the holiday season.  Friday’s data is limited to trade so not too much to go on and it is going to be all about the Fed this week.  Earnings are so far, so bad and AA reports tonight along with YUM but I’m getting concerned about the retailers as this credit crunch may ruin Christmas – more on that tomorrow…