Happy May Day!
I remember when Russia used to parade their nukes down Red Square and we used to do "duck and cover" drills in the schools during one of the greatest bull market runs in history. Now we have turned into such wimps that we panic out of our stock holding over fear of germs! Chrysler workers of the world united yesterday as the failed capitalist corporation filed for bankruptcy and agreed to give control (55%) to it's workers. I am thrilled with this outcome as it's going to be a fascinating socioeconomic experiment to see what decisions the workers make regarding Chrysler's major long-term issues like retirement benefits and health care. I'm sure the administration is happy too to have a petri dish in which to watch the issues that plague this whole nation long-term play out in microcosm. If we're lucky, we will even be able to blame the Italians (Fiat) for anything that goes wrong.
Many global markets are closed today for various celebrations and, ironically, many countries around the world still honor a US labor incident that this country has swept under the rug – the 1886 Haymarket Affair, which took place in our President's hometown of Chicago when a workers strike for an 8-hour workday got out of hand and about 50 people died (4 police, the rest strikers). 8 Strike organizers were tried as anarchists and seven wer hung and if you thought the NYTimes was always a liberal paper, read 1886's "Anarchy's Red Hand: Rioting and Bloodshed in the Streets of Chicago" and compare that to the more balanced Wikipedia account of the incident. Anyway, that's why we don't celebrate May Day in America even though the American Haymarket Affair is the one that inspired this memorial holiday in the rest of the world.
Speaking of our government sweeping things under the rug, it's incredible that people are buying this nonsense that Chrysler will have a quick and painless bankruptcy. If you think the trial of the union organizers as anarchists was a farce, imagine the joke of a court proceeding that we'll have to have in order to steamroll billions of dollars of debtholders into submission. It was less than 2 years ago, August 2007, when Cerberus Capital took a majority stake in Chrysler and the company quickly turned around and borrowed $10Bn against questionable assets like auto patents and things like the Jeep brand name. They burned through that money plus $4Bn from the Treasury and the government offered to pay creditors 33 cents on the dollar and half refused. I say they got what they deserved, they took a risk to get a high yeild and, not very surprisingly, the company tanked. The government offered to salvage their $10Bn position for ANOTHER $3.3Bn on top of the $4Bn we just gave them as a gift to save their investment so don't pity the bondholders unless someone told you that Chrysler bonds were a "sure thing" during the past 24 months. Still, with all this contention, it is very doubtful that the bankruptcy will be quick or painless.
We're hoping we can end the week painlessly. Most of Asia and Europe are closed today but the Nikkei is up 1.7% on a recovery in the dollar (back to 99 Yen), which cheered up exporters but we are down 1% against the Pound, the Euro and the Aussie and Canadian dollars so we have to assume the Yen has been manipulated to help Japan's exporters. That's why we bought gold futures for a quick trade this morning in member chat but that play already stopped out profitably ($1 trailing) and we'd love to reload if we get another crack at $881 but I think we're going to hit my $890 target into the weekend. With the mixture of a workers holiday (and the rest of the world is keenly aware of the history we choose to forget) and a bad economy, it's very possible we get some unrest over the weekend that makes gold an attractive hedge – just in case.
South Korean exports fell 19% in April, indicating continued weakness but the good news was that they also had a record trade surplus, indicating their consumers are cutting back more than the people they are building things for (mostly us). MTU and Macquarie posted bad earnings and both need to raise capital but those sort of things seem to be getting filed under "so what else is new" and are being ignored by the markets. The FTSE is open but not the DAX or CAC in Europe but they are flat ahead of our open (8:30) as are our own futures now.
Overall, earnings on the S&P have been strong. We were bearish on MA yesterday and they didn't disappoint with an 18% drop in income with an overall drop in US card spending and rising interest costs hitting their bottom line. That will kill the premiums with a more or less flat open but most of their dip is due to the 50% reduction in fuel spending and we will be liking them (and V) again once the smoke clears. On the whole, 70% of the reporting companies have beat their low estimates and we just have the stress test to get through next week to give us a real pullback test so we'll be staying at least 55% bearish into the weekend and we're not expecting any huge movement today as long as the financials don't jump off a cliff (possible ahead of Monday's results).
We already took a nice hedge using SKF in yesterday's morning post and yesterday we got another chance to sell FAZ $7.50 puts for $1 for even more financial coverage. That puts us in good position to buy bank stocks on the dips as we're well protected to the other side so we'll be circling the markets today and Monday, looking for opportunities in that sector. Despite the stronger dollar, oil is up this morning and we've liked shorting them at $51.50. Mainly oil is up because Mexico is shutting down for a few days over flu concerns and they are expecting oil production to suffer but that is an asinine reason to pump oil up as we have a near record surplus in inventory so there is no logical support given by a short-term production decline.
Have a great weekend,
– Phil
