What a day we had yesterday!
I called the morning post "Tempting Tuesday" as we expected to "look" good out of the box but we creeped up to our levels in such a forced march that by 12:16 I sent out an alert predicting a retest of 7,550 despite the run-up. In my 1:47 comment to members we were looking for an afternoon Mega-Pump, which we got and our DIA $77 calls jumped from .19 to .43 just 90 minutes later and we even made money on the back end of the same spread (DIA $76 puts) as they flew up into the close. I hit the turn pretty much on the nose with my 3:15 alert to members, where I said: "Good time to go 60% bearish, buying out front month putters but no roll-up on the long puts. We can re-cover if we make new highs on Dow and S&P but, otherwise, easier to sleep with downside protection after a 2% up day that made little sense."
The markets pretty much fell off a cliff soon after that (maybe it's just our members selling off that causes these things?) and this morning it looks like we will be opening at that 7,550 target (8am). Of course we have the ADP report pre-market and ISM, Construction Spending and Pending Home Sales at 10 followed by crude inventories at 10:30 so we had lots of good things to worry about in addition to the G20 protests, which are no surprise to us as I posted the schedule for the "Storm the Banks" rally in Monday's post. I know I seem to ramble from topic to topic sometimes but a large part of calling the market moves is paying attention to little things like that!
Speaking of rambling – Yes, G20 Trillion Dollars is my new catch-phrase for the week as that's the current global stimulus commitment with the US leading the way with $12.8Tn already promised. I find this totally ridiculous as that's $128,000 for every home in America – surely we could have solved our mortgage crisis by simply paying off everybody's mortgage at this point, rather than bail out the banks who leveraged those mortgages 40 to 1 and made the World insolvent. I had a much more modest plan on "How to Solve the Housing Crisis Tomorrow" since Jan 2008 that would have made this whole thing go away for $2.7Tn – it doesn't seem like too much now does it?
The chart on the left is from February and only includes direct stimulus measures, not bailouts, which are the bulk of the US "commitment" to this crisis. As I have long said, the US policy of bailing out the banks and not the homeowners is like having a burst pipe in your basement and the government's solution is to come in with a LOT of paper towels to soak up the water, then they replace the carpets and the furniture and leave without ever even looking at the pipe – which continues to leak water. The government keeps spending money on more and more paper towels until the carpets and the furniture need replacing once more and then they come in and replace it all again – STILL without ever doing anything about the source of the damage. This is what's happening in housing: Foreclosures lead to lost jobs, which lead to more foreclosures, more lost jobs etc and the cycle will continue no matter how many banks you reemburse for the damages!
Bankrupt homeowners don't have lobbyists. Bankrupt homeowners don't get to sit down for special meetings with the President and other World leaders but it is the Bankrupt homeowners and the ones that are heading that way, that need the government's attention in this crisis – not the banks, who aren't going to lend to these people no matter how many Trillions of Dollars you throw at them! $20Tn is not enough money to bail out banks if you allow just $1Tn worth of loans to default when the leverage is 40 to 1.
I had predicted this weekend that – while Obama's away, the bears would play and we already have spin articles in Bloomberg putting words in Obama's mouth saying: "Obama Said to Conclude Bankruptcy Best Option for GM, Chrysler." I read this article as "Good time to buy F, which is down for no reason" but that's just me… We don't expect much out of them but you can buy the stock for $2.50 and sell the Jan $2.50 calls for .95 and sell the Jan $2.50 puts for $1.20, which puts you in the stock for net .35 so you either get called away for $2.50 in January (up 614%) or you have F put to you at $2.50, which would give you an average entry of $1.43, a price at which we don't mind owning Ford long-term, hoping they don't go bankrupt this year, of course. You can also naked short the 2011 $2.50 puts for $1.59, which is a net entry of .91 if put to you and free money if not. One thing we love about all this panic selling is it gives us great premiums to sell options into!
Is $12.8Tn (close to 100% of a year's GDP) enough to boost the US economy? Of course it is! It's the rest of the world that needs to wake up and smell the crisis. Our government has already said they will print as much money as it takes to push our economy back up the hill and the IMF has already told the rest of the World they must do more, much more, to forestall a crisis in other countries. China is on board, Japan is on board and this week we will find out if the EU is on board or if they will keep fighting inflation at ALL costs. This would be fine with US, as we owe them a lot of money but we owe it to them in dollars so, if $1Tn is 700 Billion Euros today – we'll be happy to give them a Trillion when it's down to 350 Billion Euros next year…
We got our ADP numbers now (8:30) and they are down a disastrous 742,000 jobs. That is the ENTIRE population of Iceland AND Luxembourg losing their jobs in one month! Iceland's GDP is $20Bn and Luxembourg's GDP is $50Bn – that's the value of 742,000 jobs – $70Bn of economic activity wiped out in the month of March. The true economic impact is actually far greater because only about 35% of the population of those countries is actually employed and, of course, they have much lower per-capita incomes than in the US so if you think that $70Bn a month is shocking, try tripling it and then adding some more and we've got AT LEAST another $250Bn hole drilled into the US economic pipe last month. Quick – more paper towels!!!
A strong dollar (the height of irony) boosted Asia this morning as financials led the Nikkei 3% higher (the reverse of Europe's problem in lending out money and getting paid back in inflated dollars) as both Japan and China pledge to keep pace with US bailout measures. Nonetheless, the "rally" is likely to be short-lived as Japan and China's Manufacturing numbers are simply terrible and the Baltic Dry Index falls yet another 2% this morning. "I think in the second quarter, markets may see a correction in April and May. Many investors are expecting good news from the G-20 meeting, but I don't think so … the disappointment may pull down the market," said Patrick Shum, strategist at Karl Thomson Securities. U.S. corporate earnings were also expected to be bad, he added.
Europe is off about a point as protesters storm the BOE and other G20 locations this morning. This is no surprise as 8.5% of the EUs people are out of work and have nothing better to do this morning. GM's entire Opel division in Europe may be joining them as German Chancellor Merkel has backed away from bailing out the auto company – a sensible move considering the US may not save GM.
“If GM Europe isn’t sorted out by the end of April it will run out of money,” said Tony Woodley, general secretary of the Unite trade union, which represents many of the 4,700 employees at Opel’s Vauxhall brand in the U.K. “The chances of Vauxhall surviving a GM collapse are nil. Opel and Vauxhall together could survive only with great difficulty.” The failure of Opel would threaten the livelihoods of 50,000 workers, half in Germany, and could cost 250,000 jobs at suppliers and dealers. “Obama has rolled the ball to Germany, but Merkel doesn’t want to get her fingers burned,” said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. “A state stake is the only solution. If GM goes into bankruptcy it’ll likely end in liquidation for Opel.”
So the wild mood-swings continue and we are hoping to see signs of a bottom here that's higher than our 3/9 fall. I was watching my 3/6 broadcast on Livestock again, as that was a pretty good panic day that came at the end of a failure off the same 7,900 mark we touched last week. 7,200 gave us brief support there but we never saw 7,550 again once we fell below it so we'll be HOPING to get back over that level but that's the first place we would consider flipping bearish until we retest 7,100 or (unfortunately) all the way back to 6,550 – following the sad chart I laid out this weekend.
