When the nearly $1 trillion economic stabilization package for Greece (and other troubled southern European countries) was announced on Sunday the markets around the globe roared their approval on Monday with the largest one-day rally in years. In reality, of course, what actually occurred was that all of the day's gains happened in the futures market before the cash market opened. This forced fund managers to buy the stocks in the underlying indexes. Once the huge gap up opening occurred, the markets simply traded flat for the rest of the day. This is not unlike what happened on last Thursday (except in reverse).
Now that the dust has settled it is time survey the landscape and see what really happened and assess the new realities. The problem started with Greece, who economy is about the size of the Dallas/Ft. Worth metroplex (insignificant in the grand scheme of things). Of course it was evident to most intelligent observers that Greece was merely a symptom of a larger malady that affected the entire region. The European finance ministers' decision to monetize the debt did little to address the structural changes that will be necessary (and difficult) to return the region to a sound financial footing. Jim's analogy in last night's Wrap was probably pretty accurate when he said that it was like taking a cash advance on one credit card to pay off the balance on another credit card.
Since the end of WW II most European countries (including England, Ireland, and Scandinavia) have opted for what, I shall euphemistically refer to as a "progressive" form of government. Some might be offended if I called it socialistic. They like 35-hour work weeks; they like two months of paid "holiday' per year; they like to be paid when they don't work; they like free universal health care; they like labor unions because labor unions do what labor unions always do - negotiate contracts that provide more benefits for less work, and make it harder to fire or lay off workers; they like generous pensions that can be taken early. All of these "entitlements" have been woven into the social fabric for decades. It all works well and good until an economic downturn occurs and governmental tax revenues are slashed.
My oldest son heads the internal audit division for a Seattle-based equipment manufacturing business that has plants in Europe, South America, and Australia. His job requires a lot of travel. He complains that when he goes to Europe he is often frustrated because the people with whom he must interact come in late and leave early or are absent because they are on "holiday". The point is that it is going to be very difficult to get Europeans to accept the new reality and do the things necessary to straighten out their mess. I predict widespread social unrest. Witness what is already happening in Greece with strikes, protests, fires, etc.
Australian Treasurer, Wayne Swan, unveiled a national budget Tuesday that forecasts a return to a surplus in two years and retiring the country's debt by 2019. Wow, does Australia occupy the same planet as Europe (or the United States)? Australia has raised interest rates twice.
NEW YORK (MarketWatch)-- Shares of Wall Street investment banking giant Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 27.29, -1.09, -3.84%) fell about 4% on Wednesday morning after the Wall Street Journal reported that federal prosecutors are conducting a preliminary investigation of the firm's mortgage trading business. Morgan Stanley told the paper is has not been contacted by the government regarding a probe, and its Chief Executive James Gorman reiterated that point at a press conference on Wednesday in Tokyo, the paper said. Morgan Stanley shares fell 3.98% to $28.38 in preopen trading.
That's the way they do it in Washington - pile on and kick 'em while they are down. The public outrage over Goldman Sachs has no doubt emboldened Federal prosecutors to launch additional witch hunts.
The U.S. Senate is poised to pass a bill that would direct the GAO to conduct a one-time audit of the Federal Reserve. This would be the first time in the Fed's 95-year history that they have been audited. While the Congress and the American people were fretting and debating about the $700 billion TARP package last year, the Federal Reserve was quietly and secretively loaning out over $2 trillion. They have refused to disclose to whom it was loaned, in what amounts, and the terms for repayment. Congress would like the answers to those questions (and so would I). My only question is, "Why did it take you so long and why limit it to only one audit?"
"A veteran is someone who, at one point in his life, wrote a blank check made payable to the United States of America, for an amount up to and including his life". Now that is honor, courage and commitment. Please don't ever, ever let this country treat its service men and women the way my brothers and I were treated when we returned from Vietnam. They work very hard, for very little pay, in some of the harshest conditions imaginable. They deserve your respect. Remember, they are following orders. If you don't like what they are doing take it up with the people who sent them there.
Gold has gone absolutely bonkers. It makes new highs every day. Presumably, these goldbugs are betting that the shiny metal will protect them from the perceived threat of future inflation coming out of China or the monetization of the European debt. In any event gold has disconnected from the dollar and is marching to the beat of its own drummer. Despite prediction from various talking heads that see gold going to $1500 or even $2000 I would be hesitant to buy at these nose-bleed levels. It could be forming a double top here.
One of the proposed provisions that are being considered by the Senate as they debate financial regulatory reform is a ban on proprietary trading (trading their own account as opposed to trading their client's account). This primarily would affect the five or so large banks (formerly investment banks). This will probably cause a hue and cry from those institutions because last quarter their huge earnings were largely attributable to massive profits made by their trading desks. I can envision legions of lobbyists being assembled, getting ready to go into battle to thwart this attempt. In my humble opinion Glass-Stegall should never have been repealed.
Boeing Aircraft (BA) unveiled today its latest design for a new UAV (unmanned aerial vehicle). They will call it the "Phantom Ray". It employs stealth technology and uses the "flying wing" design used by the B-2 bomber. The "Ray" will be able to operate at 40,000 feet and travel at 640 mph (Mach .8). Its mission could either be reconnaissance or direct interdiction. Military procurement has dropped off for manned (piloted) aircraft but continues at a high level for UAV's.
Last week's blood bath did considerable technical damage to the major indexes. Previous levels of support were easily broken and have now turned into resistance. The first level that SPX must regain and close above is the 1170-1171 area. The 50 DMA and the 62% retracement level reside in this area. If it can successfully conquer this level it will run into heavy resistance again at the 1180-1185 area which had previously acted as support since the first of April. SPX charged boldly out of the chute this morning and headed for its first test. It briefly touched 1169 at 11:06 AM and promptly bounced back and retested it again in the early afternoon.
SPX - Daily
It is rather interesting that a fractal pattern very similar to the one that exists today happened in October, 2008. In that previous instance the market imploded (like Thursday and Friday). It gapped up huge on the following trading day (think Monday) on news of a big bank rescue (I think). What happened after that is what I find interesting (and perhaps instructive). SPX lost almost 300 points over the next month before it began a recovery. I have borrowed one of Keene's charts from yesterday's Market Monitor to illustrate the point.
SPX - 2008
Jim did a masterful job of covering the oil spill in the Gulf in yesterday's Wrap so I won't go into any more details other than to say that the "blame game" has already begun. We could probably tag this as the "Lawyers' Relief Act of 2010". The Goldman Sachs (and now Morgan Stanley) case will enhance the solicitors' bank accounts as well. I smell a new "cottage" in the Hamptons.
Yesterday a friend emailed me a picture of an order that he was contemplating placing with E-trade. I have attached the picture below, but it may be difficult to read. Essentially, he wanted to buy 10 contracts of the March, 2011, 87 put on SPY. He was placing the order as a market order which would mean that he probably will be filled at the "ask" price. He wanted my opinion on the trade. He obviously has a very bearish view of the future. I pointed out to him that there is almost a 100% chance that he will lose his money if he plans to hold it until expiration in March, 2011. However, if he is willing to trade the position at any time he could make some good money if the market took a major dump (like last Thursday).
Buying deep OTM options is a crap-shoot, but they can yield huge dividends (percentage-wise) if they make a big move in your direction. I was struck by something that Linda said in her Trader's Corner article last Friday. Since she primarily trades credit spreads and Iron Condors, directional trading is not something she does routinely except that she sets aside 10%-15% of the credit she receives to buy long puts. Now, that's a good plan.
You have heard us preach for months now how market declines can be swift and vicious. If you didn't believe it before, you just witnessed three month's worth of gains wiped out in three days. Sometimes you simply don't have time to do something to protect yourself. You buy insurance for your cars; you buy insurance for your house. Why not buy some insurance for your portfolio? As with your car and your house you hope you never have to file a claim, but it is comforting to know that it's there.
What is mankind's greatest invention? If you answered "The Wheel" or "Beer" I would give you high marks, but that's still not the right answer. For someone who spent the first sixteen years of his life growing up in Florida without air-conditioning, the answer is obvious - A/C. Without it, Florida would still be a steamy, insect and reptile-infested swamp. When the first window units showed up, my parents bought one and installed it in their bedroom. My brother and I had to do with the attic fan. If that were today I would march right down to my local office of Health and Human Services and file a child abuse complaint.
So, where is this market headed? I don't know the answer, but I have an opinion. I think we will see lower (and maybe much lower) before the April 26th high is breached again. The 14-month rally from March, 2009, came too far, too fast (IMO), and was not consistent with the economic realities on the ground. The last leg of the rally was characterized by low volume on up days (like today), and much higher volume on down days. This all suggests waning momentum and a lack of participation by the bulls. If proprietary trading is ever banned (don't hold your breath), the markets will be less manipulated than they are today (maybe). I don't mind telling you that some days (like today) I hate this market, and wish that I were doing something else for a living.