The futures markets are on fire (7:30 am).
The Dow is up about 4% and the S&P is up about 5% and the Nasdaq is up about 4% as well thanks over $1Tn being pumped into the markets this weekend by Global Central Banks. $2Tn is almost 2.5% of the global GDP so you would think we could get at least a 2.5% pop off that news alone, right? In Washington, the Group of Seven agreed to a common framework, calling for recapitalizing banks with public and private funds, insuring depositors and unfreezing credit markets. Euro-zone nations, meeting in Paris, said they would guarantee loans between banks through 2009 and allow governments to buy stock in distressed financial companies.
"Central banks and governments are getting more aggressive and ever more proactive in targeting the banks and money markets," said strategists at Goldman Sachs in London. "Many of the recent steps taken are, we feel, very constructive and should contribute to a market rally," they added. The UK is putting $63Bn into HBOS/LYG and RBS (with LYG paying less than proposed for RBS and paying a whopping 14% dividend I like this stock at $12.25, which can be covered by selling Jan $12.50s for $4!). The European Central Bank, the Bank of England and the Swiss National Bank on Monday said they would lend unlimited dollars to its banks. Germany is set to approve on Monday a plan to support its banking system that could involve up to $540 billion.
The U.S. Federal Reserve on Monday will begin providing unlimited dollar funding under its swap facilities with three major European central banks to ease strains in the financial markets. The European Central Bank, the Bank of England and the Swiss National Bank said in a joint statement that the terms of their respective currency swap arrangements with the Fed have been altered "to accommodate whatever quantity of U.S. dollar funding is demanded." The Bank of Japan said in the statement it also is considering lifting its allotment cap. The Fed also has existing swap arrangements with set ceilings with the Bank of Japan, the Bank of Canada, the National Bank of Denmark, Norges Bank of Norway, the Reserve Bank of Australia and the Riksbank of Sweden. Added up, the previous allotments came to a total of $620 billion. The Gulf states are also stepping in with substantial bank guarantees.
Our own Treasuy is now planning on making Buffet-like injections of capital into banks and are promising a plan as soon as this week. Paulson is also considering whether to implement a large-scale guarantee of bank lending similar to moves taken by the U.K., among others. The government is still proceeding with plans to buy assets from troubled banks and is expected to select asset managers this week. Topping this all off, the IMF said they will "use all available tools" to prevent the failure of "systemically important" financial institutions. Essentially that meant "no one is going to let an important financial institution fail," said the IMF chief, Dominique Strauss-Kahn.
So wow! That is some big effort being made to prop up the financials. When they fly in a team of doctors from all over the world and put the patient in a world-class facility with all the best equipment and vow to do "whatever it takes" to save him – is that a good time to sell him life insurance? That's the question facing investors this week as you are not only betting that the patient will live, but that he will be able to get up and run a marathon for your virtual portfolio in the future. Think of this weekend's action more like a shot of adrenaline for the financials – they may be able to jump up briefly, but it's an emergency measure and needs to be seen as such. We are not out of the woods just yet and LIBOR remains stubbornly high considering all these moves.
The WSJ has a nice interactive graph of the damage done to major world indexes in the past 90 days but the fact that they have a key that includes 60% drops makes you realize just how serious this disease really is. We need to see real improvement over last week's losses before we even think about catching up for the year. The Dow lost 18% last week but the break point from September was 10,500 and 8,450 is just about the 20% rule so we'll be looking for a 20% retrace of that loss (410 points) to 8,860 before we'll even call it a bounce for the day and not retracing 1/2 the los, to about 9,500 for the week is going to be downright pathetic after all this effort is put in to revive the markets.
The Hang Seng made it's major breakdown at 20,000 and finished Friday right around 15,000. Today they are up 1,515 – an impressive 10.25% move and a 30% retrace of the loss. China was also aided by a record high trade surplus, despite (or perhaps because of) the global slowdown. Higher priced Japanese products may not fare so well but the Nikkei is closed today (I did not know Columbus was Japanese) but the EWJ is already up 10% in pre-market trading, anticipating Japan will mirror Hong Kong's rise when they open tomorrow. $8.50 is still very cheap for the EWJ and we'll be looking for a good spread on them later today as the front-months should pay us very well to wait for a recovery. As a long-term play, the ETF can simply be bought with Nov $8 calls sold against it for a very nice monthly return. The Nikkei is already 55% off it's highs so we can expect a bounce to 40% (11,000) if this rally has any steam at all.
Over in Europe (8:50), the CAC is up 6%, the DAX is up 7% and the FTSE is up 3.65%, lagging despite the very aggressive UK bailout. We are not going to be impressed until we take back AND HOLD our target 40% lines on the DAX (4,891), CAC (3,701) and the FTSE (4,052) with the CAC needing the most to catch up after dopping 10% on Friday. Overall, any index or stock that can't take back Thursday's close after $1,000,000,000,000 is put into the global markets is simply not impressive!
As usual on Manic Mondays, we take our gains with a grain of salt. We already made a lot of bullish calls last week and took our ultra-longs during member chat on Friday afternoon so there's no need to chase things up until we see some indications that this rally does represent more than a shot of adrenaline that is giving the markets a temporary boost without delivering an actual cure. There may be yet another announcement from the Treasury tomorrow so I'm certainly not going to be bearish for the week but let's keep a very high degree of skepticism until we get some real trends.
In the US markets, getting bullish over 40% requires Dow 8,400, S&P 950, NYSE 6,300, Nasdaq 1,725, Russell 515, SOX 329 and Transports 1,868. The SOX and the Transports are way off the mark and our other indices should be gapping over those levels but, if they fail to hold it – we've got serious problems!
As new plays, we'll be looking at the same companies we went over last week during member chat that are slow out of the box like MSFT, who are still around $22.50 with the 2010 $17.50s offering a low-premium entry ($6.68 at Friday's close) with very liquid front-month contracts to sell into the initial rally at good premiums. TM is outrageously low at $60 and you can take advantage of the Nikkei being closed to grab the Apri $50s at $17.50, also with great front-month sales premiums. CVX at $60 is an excellent opportunity as well. On Friday the Dec $45/$55 spread was $6.60 so taking a chance on the $45s with the emergency cover if it breaks below $60 is an interesting play too.
I do hope this rally sticks but it's a holiday and we need to watch the action and particularly see where sellers kick back in. There are LOTS of things to buy and there will be lots more if things continue to rebound but let's make sure we get past the bounce first…
