So far so bad!
Sadly, we called the action pretty much on the nose yesterday. In the morning post I said that we would: "see where the bottom is today – hopefully we find it early on" and my 9:36 Alert to members I noted: "it will be impressive if this morning dip is all we get." I set our watch level at 8,130 and the Dow was rejected just under there twice and by 12:12, with the Dow at 8,106, I called the top and sent out an alert saying: "All the advance/decline numbers are very red, this is a highly selective rally and we just tested the top again and failed – I have to think it’s worth chancing going short here."
While we were expecting a follow-through to 7,900 today (same action as last Monday/Tuesday) we were concerned by the afternoon stick save attempt and did go into the close just 55% bearish (1/2 covered on our DIA puts) as we had already caught a 100-point drop perfectly and we didn't want to be too greedy. This morning the futures are indicating that bearish greed may have been a good idea as the futures (7am) are pointing down another 1.5% on news that C and BAC may need to raise more capital along with the continuing flu scare. I emphasize scare at this point because, in a typical year, over 60,000 Americans die from "pneumonia/influenza" and, while we don't want to make light of a virulent new strain, it's a bit out of proportion to begin panicking when 150 people die of one particular strain.
Unfortunately, there's a very fine and quickly crossed line between an outbreak and a catastrophe and the government is right to overreact but the markets are not. Being a forward-looking mechanism doesn't mean seeing doom around every corner but that's the kind of nonsense the media likes to stir up and it was amazing to see the Transports take such a huge hit – down 5% on the day with airlines down 10-20% – as the media begins recounting the damage done to the travel industry in the 2003 SARS outbreak. On the whole, this was the last thing we needed with the markets already weak but, as I said yesterday, there is great opportunity growing in this sector. We picked up a hedged entry on UAUA yesterday and CAL will be our next target as they retest $11 (hopefully $10). Since we can sell June $10 calls for $2.50 and June $10 puts for $1.50 against the stock, that gives us a net entry of $7 with an average cost of $8.50 a share if put to us on June 19th and a 42% profit if called away. The bottom line is – do we want to own CAL for $8.50 (a 22% discount). Yes!
Asia continued their sell-off, this time there was no "stick save" for Japan, who fell 2,5% and broke just below the 8,500 mark at the close. I had said last week that the Dow and the Nikkei usually aren't so far apart and one was likely to break – we're certainly not too surprised to see the Nikkei pulled down rather than Japan pulling the Dow up. Note the Nikkei lost pretty much all of it's 232 points after lunch and were literally saved by the closing bell. That was about the time the WSJ published the report on C and BAC needing money and Asian banks led the declines into the close. The Hang Seng fell another 2% this morning but they were bad right from the open. Alex Wong, director at Ample Finance Group in Hong Kong, said that in addition to concerns of likely recapitalization of U.S. banks and swine flu, investors were also worried about capital raising by companies.
"A lot of companies need to raise cash and improve their balance sheets, and equity is the best route for them to do so. When you notice so many companies are willing to sell at a level, it means the level is fair. I don't think we have too much upward momentum… The short-term momentum is quite bearish."
EU markets are testing the 2.5% rule to the downside this morning and UK mortgage lending weakened in March, reversing the one-month trend that was celebrated when February's data came out. ECB President said: "We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence." Fresh from a meeting of financial officials in Washington for the Group of 20 and International Monetary Fund talks, Trichet also urged "effective, efficient, convincing, as well as quick implementation" of the decisions made. "Regulatory arbitrage across countries and across continents would be a recipe for catastrophe. We will ensure that inflation expectations remain impervious to short-term changes in inflation, even in the face of sharply falling inflation," he said.
Trichet's deflationary predictions took the steam out of the commodities markets and gold spiked as low as our $850 target in overnight trading and looks to open today below $890 (as I predicted yesterday). Oil was unable to hold $50 and it's inventory day again tomorrow but the overriding concern is a reduction in jet fuel consumption if swine flu really begins to affect summer travel plans. Also of note in Europe: DB had very strong earnings but not strong enough to support a 100% run since March 9th and are off almost 10% in early trading. If fear is creeping back into the banking sector, things can turn ugly very quickly.
Speaking of ugly, we get the Case/Shiller Home Price Index for February at 10 am along with consumer confidence (or lack thereof) for April. Last month's consumer confidence was a record low 26 and a 3-point improvement is expected and is very possible with the dramatic market rally we had from mid-March to mid-April. Tomorrow we get the GDP at 8:30 and that will give us an idea of US inflation rates (or lack thereof) and the Fed weighs in at 2:15 with their rate decision (or lack thereof). So, plenty of data to chew on in the next 48 hours while the earnings are coming in fast and furious but not quite as good as last week with 11 guide-downs already vs just 6 upward revisions so far.
A lot of today's movement will hinge on whether or not it's true that BAC and C are capital deficient. If they are, it will lead to speculation about what other banks are short and we already rallied the financials based on word that NO banks had failed the stress test. FAZ is always a good way to cover the financials and you can buy them for $9, sell the June $7 calls for $3.30 and sell the June $8 puts for $2 and you are in for net $4.70 with a $2.30 profit if called away (50%) and, if your financial longs do well and FAZ falls back below $7, you end up owning another round of the ETF at an average of $5.85 per share, making good long-term coverage for financial positions.
The $10 line MUST hold on the XLF or we may see some serious panic again (good for FAZ, bad for FAS). Also, looking ahead to tomorrow we need to watch that dollar as it may retest 95 Yen, a line that will drop the Nikkei another 250-points if we fail it (bad for TM, SNE). I posted a copper chart last week and they have not improved and weak copper is much worse with a weak dollar backing the price. The Baltic Dry Index is also looking iffy at 1,800 and we need to hold that line as much of the market's current hopes are pinned on things in Asia not being so bad.
X earnings certainly sounded bad with a $439M loss ($3.78 per share), twice as bad as expected on 47% less sales. GM and Chrysler shutting down plants sure isn't going to help Q2 and the company said it plans to dillute offer 18M shares of stock AND $300M in notes to raise money to repay a $500M loan. "We continue to face an extremely difficult global economic environment," said Chairman and Chief Executive John P. Surma. "We expect an operating loss in the second quarter as our order book remains at low levels" and plants continue to incur carrying costs. Surma said the troubled state of the automotive and construction industries made it difficult to forecast "beyond a very short horizon."
In other words – let's be VERY careful out there!
