Just Another Manic Monday

Another day, another $1,038,000,000,000.

Today the rain of cash comes courtesy of Sweden, who have launched a "Financial Stability Package" of $1.5 Trillion Crowns ($205Bn) along with a separate "Financial Stability Fund" and South Korea will pony up $130Bn, injecting cash directly into banks and exporters along with $100Bn of foreign debt guarantees.  Also joining the party is the UAE with about $6Bn dropped in their banks and Oman with an undisclosed injection of cash into their banks.  We can expect much bigger numbers from the Saudis and other Arab states to come later this week as these markets don't just fund themselves you know – it's cost us an average of $250Bn per day in October in order to lose "just" 20%!

Of course, that was just this morning.  Over the weekend the Netherlands put $13Bn into ING and Germany is finalizing a $675Bn package (the one they objected to just a week ago) and President Bush announced a summit of world leaders to discuss how much more money they will throw on this financial bonfire (did I mention that buying gold is a good idea lately?).

Over $3Tn flooding the market since last Monday has had the net effect of lowering LIBOR just 4 tenths of one percent, down to 4.4% but still way above the 2.8% rate that was normal in the first half of the year.  Of course, with the global rate cut of 0.5%, the difference between LIBOR and the Fed Funds rate actually INCREASED last week.  The same goes for what I call the "crack spread" for the banks as mortgage rates have also shot up (IF you qualify) while bank borrowing costs have gone lower.  Overall bank assets have increased $712Bn in the past 4 weeks but that doesn't do us any good if those assets are frozen and not lent out into the economy.  As I've said for quite some time, the money would have been much better spent aiding the actual homeowners who are in crisis, rather than their creditors. 

There are "only" 5M homes currently in default in the US, even if the government had stepped in and paid off the ENTIRE average mortgage of $225,000 on every single one of those homes – the entire crisis could have gone away for $1.125Tn.  It can still be done and yes, it's a "moral hazard" but I think we crossed that line a few Trillion ago don't you?

Why the focus on bailing out the lenders while leaving the homeowners to fend for themselves?  Perhaps it can be explained by the massive increase in lobbying money spent by banks like MER, MS and WFC – according to the Wall Street Journal.  Bans on lobbying were not part of the bailout agreement with banks, although they were included in the FRE/FNM plan so it isn't from lack of thining about it.  Merrill Lynch, for example spent at least $1.5 million on lobbying between July 1 and Sept. 30, according to filings. That is up from $1.2 million in the previous quarter and approaches spending at the beginning of the year, when the company racked up a $1.7 million bill for its in-house lobbyists and help from at least six outside firms. Bank of America, which will soon acquire Merrill, will sell $25 billion in preferred stock to the Treasury as part of the government's rescue plan.  AIG is using government funding to lobby against government regulation: "AIG has spent millions to lobby states to soften the licensing provisions, even after taxpayers loaned AIG more than $120 billion to prevent its collapse precipitated by excessive risk-taking," wrote Democratic Sen. Dianne Feinstein of California and Florida Republican Sen. Mel Martinez. "We find it unconscionable."

Another form of bailout that is coming through the EU are changes that will allow banks to reclassify some assets as long-term investments, a shift that will grant them a great deal more leeway in deciding what those assets are worth — and how much they have lost in the latest bout of financial turmoil.  Effectively, this is removing "mark-to-market" accounting rules, which require banks to value investments at the price they would get if they sold them immediately.  The new rules will bring European accounting standards more in line with those in the U.S., where reclassification of assets to and from trading books is permitted in rare circumstances. In Europe, which lacks an overarching regulator like the U.S. Securities and Exchange Commission, banks could have an easier time bending these rules to their advantage, analysts say.  "Given the current weak accounting enforcement in EU countries, any proposal permitting certain exceptions in 'rare' circumstances is open to abuse," wrote J.P. Morgan analyst Sarah Deans in a recent report.

Despite a sharp slowdown, China is still growing at a 9% annual pace but Japan is downright lethargic.  Nonetheless, the Nikkei posted a 3.5% gain on the day, pushing back over 9,000 at the close on very strong earnings by Panasonic.  Both Nippon Steel and JFE Holdings RAISED their profit forecasts so don't forget they are still selling X for $41.25!  The Hang Seng added 5.3% and the Shanghai Composite rose 2.5%, both pushed higher by government pledges of new policy measures to support exporters, spur construction and keep markets steady which fueled an afternoon rally.

Europe is up about a point ahead of our open and that's pretty pathetic on a day when 2% of the global GDP is dumped on the markets.  If you need to review history, I suggest going back to last Monday's post, where being skeptical about the rally saved us from making some big mistakes.  When we get a real breakout, we'll know it, but drifting around the 40% line on our indexes and anything below 9,000 on the Dow (35% off) is just not going to do it.  Same as last week, not getting over 10,000 this week is a FAILURE, nothing less will satisfy. 

We have very little data this week with Leading Economic Indicators at 10 today, Unemployment Thursday and Existing Home Sales on Friday so the focus of the week is going to be on the 626 companies that report earnings this week, including about 1/3 of the S&P 500 along with Dow components BA, CAT, MCD, MMM, MSFT and T.  AMZN and UPS also post this week and I'll get more into that and others in this evening's post.

Gold is heading back over $800 but oil is moving up as well as hope springs eternal in the energy patch.  We did think XOM and CVX got too cheap last week but I wouldn't look for XOM to break $70 if oil can't hold it so profit taking is probably the right move there.  OPEC has a special meeting on Friday and a production cut is expected but the US alone is piling up well over 1M barrels a day of unused crude and China's slowdown also bodes ill for the oil bulls. 

From a chart perspective, all indexes are consolidating into symmetrical triangles, which do not give a signal in either direction but do indicate a possible extreme breakout in either direction so we need to watch our support and resistance levels very closely.  On the Dow, we'll be looking to get over 9,400 with a hopeful floor at 8,400 – a pretty big swing to watch but one we can visit both sides of on the same day!  The S&P has a top at about 980 and a bottom (hopefully) at 880 while the Nasdaq is hoping to get over 1,775 on AAPL earnings and hopefully won't fall below 1,600 again.  The NYSE contines to need to retake that 6,232 line or there is no hope anyway so happy Monday to you!

Hedging is key, the upside remains speculative and we should be balancing the rallies by taking some more ultra-shorts.  The next few weeks are more about surviving than winning – we have a lot of earnings to get through and next week we have the Fed on Wednesday (Bernanke speaks today) along with the Q3 GDP on Thursday so busy, busy as we barrel through to the end of the month, hopefully we can get the negativity out of the way in time for a Santa Clause rally but, at this point, we're just wishing to see 10,000 hold by Christmas.  It will be all about the earnings this week – finally some fundamentals to sink our teeth into!