Thursday Morning

Well yesterday was disappointing.

A 0.5% global rate cut with something like $60Tn worth of global debt outstanding was effectively dropping just $300Bn into a $50Tn global economy, not much at all, and the markets dropped almost a percentage point on the news.  Now, we could say that at least they didn't drop 5% again but we did manage to test new lows and the Dow is still down 15% in 5 days and that is, as they say in the business, bad.  Following our 5% rule, there is no recovery in the weekly chart until we get a better than 3% gain (and hold it, of course).  That would take us back over the 9,500 mark, the level we were watching with great interest yesterday. 

Sadly, it's our downside levels we are watching now as last night's Big Chart Review shows the S&P (946), the NYSE (6,232) and the Nasdaq (1,717) all dangerously close to the 40% off line for the year.  The SOX need to get back over 329 before they are back to 40% down and the Transports have more of a prayer of getting back over 1,868 but it's a long way from 1,689, where they closed yesterday.  In Europe, we are keeping our eye on the CAC, who need to get back over the line at 3,701 and the DAX, who will fail the test at 4,891.  If we lose those levels, we'll be looking down at the 50% and 60% declines that Asia is now experiencing and it's not entirely clear that they have bottomed there.

With lower rates and lower oil and other government bailouts, the Dow should be the ones to lead us higher, especially if the Dow Financials (AXP, BAC, C, GE and JPM) can pull themselves together.  Unfortunately, XOM and CVX have a long way to fall if oil breaks down below $80 and they could weigh down the index as the two Energy components outweigh the 5 Finanicals by 20% in the index.  On the bright side, other than JPM, the Finanical group is alredy down 50% for the year and are undeperforming the broader index by 20% so we can at least hope for a nice bounce off the 50% line.  John Mason has a good article outlining the sentiment in the financials that is holding them back, despite all the cash they are being infused with.

Hyenas continue to attack the financials with baseless rumors flying around that Mitsubishi would be backing out of the MS deal, that sent the stock down from $24 to $15 on Tuesday and they are drifting along at $17 and probably will until the cash is in hand – although the way things have been going, there's not guarantee that the stock still won't get "sold on the news" when the deal is finalized.  We really can't afford another bank failure, confidence is already shot so we need to watch very carefully what happens now that the short sellers are back in business today.

Iceland had their final bank failure today as the had to take over the largest and 3rd of its 3 largest banks, Kaupthing.  This is just the last straw for Iceland as there was a run on the bank and the $683M emergency injection we talked about on Tuesday was nowhere near enough to stave off the calamity.  Iceland has shut the markets until Monday but the 3 banks now under state control have over $120Bn in assets that may need to be liquidated (Iceland's entire GDP is $14Bn) and that is making the EU financial sector very nervous.  We've been looking at gold as a hedge against this issue spreading and The Gold Report has a good interview with Roger Wiegand so I won't repeat myself here.

The WSJ continues to headlining both gloom and doom with a page one article titled: "First Into Recession, California Shows Possible Future for U.S."  The chart on tax receipts is especially telling as surly this will be mirrored in New York and, as I said in our political post this week, it is ridiculous for both candidates to be talking about more tax cuts when clearly the government is going to have a massive shortfall in revenues in 2009, perhaps over $500Bn less than projected under the current structure. 

The London Times is leading off with the headline "Savers Vault from the Banks to a Safe Place at Home" discussing how people in the UK are pulling money out of banks and buying safes to keep cash in the home.  This is pure global panic and it's usually the kind of thing you want to buy into but the situation really is that shaky and the panickers may be right this time.  All we can do is continue to play the ultra-shorts on the upswings and hope that one day it turns out to be a bad bet.  Sadly, it hasn't been since 9/22.

We also have our trusty list of long plays and those are playable now above 9,500 on the Dow but it's worth taking a chance if we retest and hold 9,200 again as well as we did yesterday during member chat.  It looks like C and WFC are going to split the WB baby and the two are currently carving up the assets in an attempt to stay out of court.  The WB deal took C from $15 to $22 on the 19th and they are back at $14.40 as of yesterday's close so it will be interesting to see if there's any enthusiasm for the new structure.  IBM provided some much needed good news, with a small beat but that small beat is 20% better than last year's Q3 and they reiterated guidance at 22% earnings growth for the year.

Everyone is trying really hard to turn the markets.  Both China and Korea announced rate cuts this morning and the HSI responded with a 3.3% (511-point) rally but 16,000 held firm to the upside and that is the 50% line that we really need them to retake.  Japan simply has no room left to cut their 0.5% rate, a fate the US is just 1.25% away from and the Nikkei quickly shed a brief rally to finish the day down half a point, just a hair above the 9,150 line which marks a 50% decline in that market.  Europe is drifting along up about 1.5% ahead of the US open, which is looking up at the moment (8:30).

The good news for today is that Jobless Claims did not go up and we didn't break 500,000 as feared.  New claims actually fell 20,000 to 478,000 but continuing claims went up 56,000 to 3,659,000, indicating that jobs are getting harder to come by.  Let's not forget that the bulge that was caused by the hurricanes has likely snapped back the other way as people return to work and other people are hired to help clean up so more weight should be given to the poor continuing number although that's not what's happening in the pre-markets, who jumped 50 points after the announcement.

In the continuing sage of the US's $200Bn a day parade of bailouts and stimulus, the government is now considering taking equity stakes in banks like the UK did yesterday.  The FTSE is actually trading LOWER than yesterday's open but I can't disagree with the idea of the US picking up the financials on the cheap.  The XLFs are still very low and, at $15.28, yesterday's close is 60% off last year's highs of $38.   With the 2010 $15s going for $4.05, it's not a bad way to partner with the US government on a bank recovery.  The UYGs are an ultra-long ETF to the XLF and they are down from $75 to $10.75 in the past 18 months.  While I guess they can go to zero, the March $13s at $3 were $10.50 on Sept 19th and can only lose $3 if we go to zero in the financials and, frankly, the loss of an option contract will be the least of your worries if that happens!

We have our critical levels for the day:  Dow 9,400, S&P 1,000, NYSE 6,400 – If we can't hold those, there's no reason at all to be bullish but, as I said, if we dip back to 9,200 and hold that, then picking up a few of these bullish plays on the cheap could work out well if we bounce back up but setting realistic stops is key because if we do break below 9,000, then Cramer's 8,000 prediction looms large and, ahead of the weekend, I can't imagine investors getting all brave on Friday if we fail our levels today.