The Dollar, the rally, commodities, and the Fed - What you don't know

The Fed did not just give loans to lenders and banks. Starting this week, it also gave loans to vanilla investment houses.

Those investors turned around and shoved it into the market. Classic pump and dump. That explains the volatility. Borrowing at 2.25% annual (about 0.2% monthly), that's free money.

They have 28 days, or roughly until mid-April. So I expect a lot of 1 day large swings as they seek to capitalize on the free money. We have to follow suit: one day buy-and-sell strategies.

Next, the dollar. The dollar stopped falling and even rose a bit. This runs counter to common sense - pumping more money into the system, dropping interest rates, and a slowing economy all serve to weaken the dollar. Answer: central banks worldwide are buying dollars to stave off the drop. Even tiny Israel bought a few billion. It isn't a sign of a successful Fed policy but a sign of coordinated fear amongst foereign central banks.

Commodities also fell. Partly from a slightly stronger dollar, partly because of the profit locking after a major run up. When looking at commodities, not all commodities are alike. Wheat is consumed. Gold, however, is stockpiled: only 20% is actually used. Oil rises and falls on dollar swings as well as some seasonality: as we move from Winter to Spring, consumption tends to dip a bit, only to spring back as folks get out and drive.

It is entirely possible that the Fed loans come with a price: public messages about inflation are followed by clear private directives to stop driving up commodity prices. "You want the money, we want lower prices."

I am going to do a special report on Cruise lines this weekend, followed by commodities

In the meantime, the Fed direct intervention in the stock market (giving loans to stock investoirs to buy stock) means that this rally has legs. I am sitting tight on my puts, but it does mean a lot of paper loss in the short term.

Oh, and

Nike Does well

My premise with Nike was that the would start to see problems
1. US market weakness - both from slower consumer spending and from competition (CROCS and UA).
2. Problems from the weak dollar reducing US margins

I was correct: US sales are slow - up 5% and probably slipping to 1% next quarter.

I saw only margins squeezed in the US and I discounted overseas sales too much. Growth is indeed slowing but sales in Euros translates into higher dollars and thatis outweighing the US slowdown.
Exchange rates added $140M in profit from Europe, $40M from Asia, and $20M from Latin America.

Nike had $350M in profit last year and $464M in profit this year. Netting out the exchange rate, that's actually a drop of almost 30% in profit.

I am concerned - this trend will continue at least into the Fall. I suggest we exit these PUTs at the next crash.

Rally or False Rally

This is a false rally that will continue into earnings season next week.
At least that's my view.

The DOW could go to 12,500 but it will drop hard. There are some strong sectors (Agriculture, chemicals) but mostly this is a pause in the fall.

I missed selling the PUTs on Monday, but there will be other opportunities. In the meantime, the rally is a chance to buy Puts.

Up day Today? May sell out some puts or buy more

Both Goldman and Lehman Brothers reported a fall in earnings.

Goldman beat expectations, whatever that means. Expectations were dropped from $5.64 just 90 days ago to $2.60. Lower that bar far enough and anyone can beat expectations.

Lehman reported weakness in bonds but strength in M&A. They had a wild ride yesterday, swinging down to $20 and back up to $31.

I like that M&A comment. I'd like to think that some big deals are heading our way.

Then today the Fed will be doing something spectacular with the interest rate. I'd love to see a curve ball - maybe no change to the rate. Markets will rise if the Fed drops 1% and they will be mighty pissed off if it drops only 0.25%.

I expect a sizeable drop followed by drops in Europe. Yes, Europe is facing inflation as well, but they will have to follow the US. This is to forestall any slowdown as well as to protect the dollar.

Stopped out of MICC

Sold 190 shares MICC @ $99

Selling CF Calls

Selling CF Calls $120s 10 contracts $7

Market not dropping significantly

After reading that the Nikkei was crashing ~5%, I went to bed last night expecting a bloodbath in the US.

It certainly opened that way, but now, everything is turning up again. Unbelievable. I wonder what the Fed will do tomorrow and how the markets will react. It could be anything from Euphoria to disappointment.

Buying CF Calls

April $120s 10 contracts $5.40

Bankruptcy is Ok

I predicted that the social stigma associated with declaring bankruptcy would soon be a thing of the past. Well, look at what the SF Chronicle is reporting:

“Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But some are deliberately choosing foreclosure as an early option. ‘It’s throwing good money away after bad’ to pay an escalating mortgage on a home that’s plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February.”

“They have no regrets about their decision. ‘I feel like the pressure has lifted off my shoulders; before I was trapped,’ said Nicklaus Skaggs. ‘In the long run, I think this is the best financial solution. I have to do what’s right for my family. I don’t care if someone judges me. I certainly wouldn’t put my family in a position to lose $150,000 if I can help it.’”

“A Discovery Bay man who asked not to be identified said he is ‘upside down’ on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.”

“‘I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool,’ he said. ‘Now I’ve got this fabulous pool and fabulous house, but it’s not worth anything. Why shouldn’t I be building equity over the next four to five years instead of playing catch-up?’”

“The man said he has not made a mortgage payment for five months.”

“‘I’m playing the bank game,’ he said. ‘I’m playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I’m really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I’d love (to have it) lopped down to a $450,000 basis rather than $710,000.’”

“If the bank won’t negotiate, he’ll walk away, the man said.”

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So this will only become more and more common. When will it show up in the market? Right now, banks are playing along to avoid having to foreclose and declare even more losses. But it will be ugly within 6 months.

The volume of short sales will pick up by Summer's end, but the Bay Area won't see major panic until next year. But Banks will continue to tumble. As the man says, why play catch-up when you can walk away and start over. The common man knows that houses are at least $200K over priced. That's a 30% drop.

I wonder how this will affect credit card companies. On the one hand, Mastercard will continue to make a lot more money off higher gas prices and the associated charges. But will defaults rise as folks go bankrupt? I actually think they are safe from this to a certain degree.

These folks have the money for everything but their mortgage, which means that they will continue to spend spend spend.

Which is not to say that consumer spending wil lrise - it will still drift lower. Partly because folks don't need a lot of consumer durables (cars, washing machines, couches, etc). And partly because a lot of folks do think the time has come for belt tightening.

I'd say a 10% jump in gas related charges and a 5% drop in consumer spending. That will be a wash for Mastercard. (gas is ~30% of total charges, I believe). Now throw in the benefits of another rate cut. MA is ok for now, but they'd look like a short candidate in 1 more quarter.

Fed Desperation grows - markets to tumble

Didn't the S&P just say that the worst was behind us? LOL
Bear Sterns technically went bankrupt Friday, surviving on a $30B Fed purchase of toxic loans and a nominal buyout by JP Morgan (so long 15,000 BS employees).

That makes $330B so far that the Fed has dumped into the marketplace. To lower the carrying costs, they also conveniently lowered the borrowing rates - again.

The message is simple: the Fed is abandoning the dollar in favor of saving banks, whatver the cost (including inflation). This is causing massive panic overseas in countries that export to the US. The yen is now 96 yen to the dollar - a 15% drop in 3 weeks. The Dollar/Euro as of Friday was down 10%, probably will be even more Monday.

This will also lead to massive, heart-rending inflation and margin hits to every company importing fuel and products.

The Fed's efforts to date are not accomplishing much. A major investment bank just went belly up weeks after $200B was made available. What the Fed has accomplished is massive dollar weakness, loss of faith in the dollar, guaranteed double-digit inflation, and global recession. The Fed clearly has no gameplan and is just winging it. Yikes.

This is leading to panic. Lots of dollar dumping and Central Bank intervention, but the result is the same: a weak dollar.

I expect our SRS shares to vault on this - everyone will bail on banks now.

Gonna be a rocky week ahead. Especially with options expiration - no such thing as a short squeeze this week.

LiveRocket 3 Week Performance - Down 8.5%

No doubt abpout it, a horrible 3 weeks. The main cause was my not applying STOPs sooner and not buying PUTs sooner. I sought to correct that by holding on thru earnings because a few stocks I see bouncing up hard.

Nevertheless, I will definitely recover by aggressive trading. So there will be several moves each week, I expect. Normally I would go for some automatic trading, but this market is too volatile for that. SoI am planning on trading the volatility.

I want to buy CF calls - perhaps the April $125. MVL as well.

The big curveball is the interest rates. The Fed will lower rates Tuesday, and the Market will like it.

For the most part, I am not very worried - we have long term puts. But for buying in, I want to be careful. My goal is to average 5% per month on these options. On a big down day, I will look to sell my puts and buy calls. And vice versa on up days.

In general, I believe that PUTs should be overweighted for a while. many think this market is oversold, and I don't think so. maybe when it hits 11,500 - it might pause again. The direction is obvious but the timing isn't, so I need to move carefully and lock in gains where appropriate.

I do believe that there are some stocks to go long. Agriculture and chemicals in particular.

Put choices are all over: BBBY, Pier One. BBY in particular ($30 Jan 09 Puts). I will keepa strong cash position to move quickly (I really do see a lot of 5% swings as we head into earnings season)