Just Another Manic Monday

$326Bn for Citigroup – Yippee!

That was a real painful one to ride down and I was getting really concerned that I was wrong and the government was actually crazy enough to let C fail.  We decided to stick with them and roll the adjustments (see Friday morning's post) to bring our net down to $4 but that didn't make us feel much better with the stock below that mark.  On top of that, our decision mid-week to switch to UYGs as they fell below $4 should also work out well!

Under the non-TARP portion of today's bailout, Citigroup and the government have identified a pool of about $306 billion in troubled assets. C will absorb the first $29 billion in losses in that virtual portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though C could have to share a small portion of additional losses. In exchange for that protection, Citigroup will give the government warrants to buy shares in the company.  Just for good measure, C will also get $20Bn of TARP funds – just in time for holiday shopping…

90-95% of these assets are part of C's $2Tn in assets that are "on balance sheet," the bank has another $1.2Tn of assets that are not reflected in their books, many of which are tied to mortgages that will still need to be addressed down the road.  The assets affected under the government plan are largely loans and securities backed by residential and commercial real estate. "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury Department, Fed and FDIC said in a joint statement issued late Sunday.

Whether this is enough to inspire long-term confidence in US financials or whether is leads to panics out of banks that are not given $300Bn by the government remains to be seen but the immediate upshot of this is it is finally occurring to investors how far the US is willing to go to save the markets.  Just looking at the mechanism put in place on the C deal and we can now see that $300Bn in TARP money can be leveraged by the Fed and Treasury into $4.5Tn of bailout funding WITHOUT further Congressional approval.  The net effect of this is that gold is flying up in pre-markets as global investors are finally seeing how wet this flood of dollars might make us all (have I mentioned I like gold lately?).

Also putting their hand up for a hand out (and the line is getting very long) are the homebuilders, who have gotten together (the polite word for lobbying group) to ask Congress for, get this, a $250Bn stimulus package that they have packaged with the alliterative name: "Fix Housing First," arguing that the financial markets won't recover until new home prices stop falling.  They are calling for a generous tax credit for home purchases and a federal subsidy that would lower a homeowner's mortgage rate.  A rate reduction of about 1% on a 30-year mortgage typically costs the lender — in this case the government — around 4% of the principal. So a 2% buy-down on a $200,000 mortgage would cost $16,000. The NAHB estimates the subsidy portion of its proposal would cost the Treasury $143 billion.

My long-time members will find all this very funny as I had proposed a $13Bn a month solution that would have solved the whole mortgage crisis back in April as a follow-up to my emergency economic package of January and, as recently as September 16th, I had refined my package to allow just $70Bn to do the job in year one.  At the time, people said I was too radical or some kind of socialist – now I'm the freaking conservative compared to what's actually happening!  It's interesting to go back now and reread those articles in context of what's happening in the economy and with housing.

It's not just America participating in the Great Money Dump of 2008 – it just happens to be our turn this Monday (last Monday no one stepped up and look what happened!).  Also pitching in this weekend are our pals at the Saudi Arabian Monetary Agency that cut it's rate by a point and, more importantly, cut banks' reserve requirements from 10% to 7%.  The Saudi stock market is down 61% this year and, at $50 a barrel, oil is dangerously close to the Gulf's "break-even" price of $47.

Japan was closed today for a holiday but the Hang Seng dropped off 1.5% on light volume and the Shanghai composite pulled back 3.8% as both of those markets closed prior to the announcement of the C deal so we won't put too much stock in those moves.  China's massive stimulus proposal has economists over there worried that they will end up spurring a culture of waste and corruption as local governments begin fighting for their share of $4Tn Yaun (about $600Bn). 

Europe did get the bailout news this morning and those markets are up 3-4% ahead of the US open.  German Business Confidence dropped yet again, causing the DAX to lag the other markets and there is more data every day suggesting the Euro-zone is slowing considerably while unemployment is rising fast so we still need to remain cautious about these stimulus-induced rallies.  As I mentioned in this weekend's wrap-up, we expected to see a retest of 8,200 and that was WITHOUT the C bailout so anything less than that is less than nothing from a technical standpoint.  The UK is right on the money as they have resorted to threatening their banks with full nationalization if they can't find someone to lend money to pronto as the capital markets are still frozen solid despite Trillions of dollars being pumped in by central banks.

We'll be watching the same range we were watching last Monday with 8,200 being our "must hold" line on the Dow and 8,400 giving us a reason to look a little higher (but first things first!).  On the S&P we must hold 800 and anything less than 860 is no reason to be bullish at all.  Nasdaq requires 1,400 and 1,500 for breathing room while the NYSE MUST hold 5,000 and get 10% over that just to not be bearish.  On the Russell, we'll be looking for 420 to hold and 460 to be retaken, the SOX are a lost cause but we'd like them to break 200 out of principle and the Transports bear watching as we need rotation out of energy and into things that use energy so they will be our canary in the coal mine if they can't hold 1,500 with 1,750 giving us our first signs of a real recovery (now 1,532).

Since we are looking for a 20% pop in the transports just to get bullish, it makes sense to make UXI our speculative upside play.  IF we break 8,200 and hold it, we'll be looking for UXI, which is an ultra-long of industrials that includes the transports, to take off fast.  Currently at $17.12, they have no options so we'll just be looking for a nice 20% gain on the stock at which point we use a 5% trailing stop but I expect a test at $20 and $25, which is our target for this run.  UWM is our big index play on the Russell taking off but we picked them up 20% ago on Friday and they are tough to chase.  Still, the April $15s are $3.95 and UWM was in the $50s in September and even a recovery to "just" $23 would give us a double so it's worth the risk and selling the Dec $22s for $1 (now .45) makes this a very nice spread.

Let's be careful out there and stay skeptical if all we get is another test of 8,200 in the morning.  Obama makes his cabinet announcement around 12 and that is supposed to be our reason to rally – if that doesn't do it, time to buy more covers but let's make sure we have some at the first test of 8,200 as well (the DIA puts we discussed on the weekend are best).