Traders,
Yesterday saw the market initial under pressure as Citi earnings started to reflect a similar story to JP Morgan and that the lending/debt side of the business still has problems. Europe's pull off as well on weaker investor confidence also brought selling pressure to the pre-open. The market then opened and in the first couple of hours rallied and pushed back up to those resistance levels. One analyst said we are still climbing the "wall of worry", no doubt there is some volatility in the market with those kinds of moves - regardless of what the VIX states. We did see the VIX continue to slide and now is in the 17.50 range. As I pointed out that a visit to the 16 level could be in the cards, if the risk trade maintains momentum - that is a concerning thought. 11,000 is certainly in the cards for the Dow Jones - right now we wait to see how the market absorbs the earnings news, but the underlying driver is the Fed monetary policy and if it continues status quo we can see the equities move higher. I guess you can say that the rally is in Bernanke's hands at this point. |
| B of A
similar story... |
JP Morgan and Citi reported lower than expected results based on an the continual trouble on the lending side of the business. They also cited that some of the losses were based on repayment for government aid, but the balance sheet continues to reflect the credit problem remains an issue. Now it is Bank of America's turn and they too post a wider than expected loss in the fourth quarter, with revenue missing expectations. Of course they too had a significant ding to their earnings from repaying the TARP. Many are starting to ask is the majority of the problems in the 4th quarter earnings the repayment of government bailout or is the problems on the balance sheet with loans and credit still something to be concerned about? If we listen to the CEO a JP Morgan - it was clear - it is still a fragile credit market and they shored up their loss reserves up to 4.6 billion. Yeah - they are still expecting problems.
Bank of America reported 60 cent a share a loss for the quarter, with expectations for a 52 cent loss. Revenue came in at 25 billion (up a significant amount from a year earlier, but we need to remember to factor in Merrill Lynch revenue - since it is now a part of Bank of America), however analyst expected 26.8 billion. The CEO's message was similar to Jamie Dimon (JP Morgan's CEO) - he states "... economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth."
Why is Bank of America's earnings and the CEO's statement so important? Simply, because roughly 50% of all American consumers, mortgage holders, and investors have some type of relationship with B of A (which bought Country Wide and Merrill Lynch). If the B of A's CEO sees unemployment and consumer spending and growth dragging - that is probably a better indicator than any government data.
That said, B of A has done a good job (way better than Citi) to get in front of many of their problems and look to see some improvement, even in a fragile economic forecast. They are taking the conservative position and setting the bar low. This was the same story as last year and the question is will investors mind hearing a conservative story and low bar, or are they now expecting for B of A and other to start raising guidance and estimates?
B of A knows that consumers continue to struggle and that will affect top line revenue, the question is how have they positioned themselves for this slow growth and are they valued appropriately?
The stock initially saw some pressure in the pre-market - down .30 cents to 16, but has since slightly rebounded.
http://www.cnbc.com/id/34950446
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| Buffet vs. Kraft
not pleased... |
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Buffet is the largest shareholder of Kraft, but because of the circumstances of the deal he doesn't get to vote. He stated on CNBC this morning that he would oppose the deal if it came to a vote. He stated he wasn't happy that board members agreed with him that the share/company was undervalued, which would stand to reason that a company should not use its shares to purchase another company. He certainly didn't seem happy about the deal when he was interviewed on CNBC, but he also didn't indicate that he would vote with his wallet either.
He clearly stated he is a price or value investor and for him it has nothing to do about timing. Now I wonder what he thinks about Kraft's long term future, if he thinks Kraft is currently undervalued and if he thinks this is a good long term deal. He also thought Kraft selling their pizza business was below value and their purchase of Cadbury is overvalued significantly.
When asked if he would hold cash, bonds, or equities - his answer was clear - equities at this point. With his continual concern about the dollar and inflation - holding either cash or bonds is not the place to be. His recent largest purchase (in which he even had to borrow money) was the rail-shipping company that not only gives him control of some of the largest shipping in the U.S., but also converts cash (and leveraged capital) into tangible hard assets which is a sound inflation hedge.
It's about value investing and long-term. |
| Morgan & Wells
same difference? |
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The Morgan Stanley earnings seems to be following the Citi, JP Morgan, and B of A story - all missing estimates and looking at charges both paying back the government and continual balance sheet issues. Net revenue again down - same story. The stock is under pressure in the pre-market
Wells Fargo on the other hand seems to be the only shinning light. Which reported better than expected results, even as it repaid the government bailout money. Analyst expected a loss, but Wells surprised. Of course they too are looking at a fragile economy and sluggish growth going forward. They did report an increase on loan losses, just like the other financial institutions. Clearly it remains a problem.
The story seems to remain the same and investors - who expected a more positive story are being reminded that banks believe the economy is still fragile enough to remain concerned and are making conservative estimates. I personally don't know how much longer we can continue to set the bar low and climb the wall of worry. The VIX continues to move lower
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| Futures Pre-market
Where's the action! |
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The futures are under pressure after the great run yesterday, mostly it seems the financial story remains cautious and futures are off. Expect a weak opening. |
| Support / Resistance
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INDU 10,500 / 11,000 (The Dow Jones made a strong move upward yesterday, but it looks like it may give half of that away this morning. Expect a weak opening.)
NDX 1850 / 1900 (We had a solid run almost to 1900 yesterday, but it seems to be giving up steam.)
SPX 1100 / 1150 (We are right at the resistance number, but it doesn't look to be a breakout this morning.)
RUT 600 / 650 (Again right at resistance level, but showing weakness in the pre-market)
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| Conclusion
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The dollar is seeing some strength in the pre-market, some of that may have to do with the Republican capturing the late Ted Kennedy's Senate Seat and breaking the Democrats control in the Senate. That means more pressure to end the spending spree. The news also gave some medical/healthcare companies a boost in the pre-market. There are lots of news about grading Obama's first year in office and surprisingly even NPR is not giving it high marks, even though they are trying. Obama's popularity is declining to the second lowest levels for a first time president and that is clearly reflected in his failed campaign efforts for the recent Senate seat and two Democrat governor races. After his visit to help the Democrat Senator running for office, her points actually slipped. He was no help and some pointed out maybe a hindrance as the current health care plan remains unpopular and the promised changes in Washington have not happened. Two of his promises that he failed to live up to was to limit lobbyist and not hire any, instead he has hired several and lobbyist have spent more in 2009 than in the last several years. The second fail promise was to post for 5 days any bill or legislation for the public to view before a vote, that too has failed as several bills have been voted in the middle of the night to pass them quickly and are choked full of pork. He has focused on Health Care - rather than the Economy and 2010 could be even a more difficult time. However, his biggest detraction among voters according to a recent poll is his cozy position with the big companies and the financial institutions that continue to receive billions of dollars and pay record bonuses. One Democrat said, he expected that from Bush - certainly not Obama. The Senate Seat loss is a massive blow to the Democrats and clearly shows the people are not seeing the "change" they expected and that government spending is running out of control.
All this news will certainly put pressure on the Administration and possibility the Fed - monetary policies, regulation, and taxes may all see significant changes in 2010 - the question is how will it impact the market, my guess is it will not be a positive step.
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| Author |
| Michael Williams has 20 years experience as a institututional floor broker and options market maker. He is a partner in both Silexx Financial Systems (a trading software company) and Kinetic Strategic Group (a private investment firm). He co-authored the book "Fundamentals of the Options Market" a McGraw-Hill text and has lectured throughout the country on Options, Risk Management, and Volatility. | |
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