Traders,
The market continues to slip to the downside, we see a few patches of good news but they don't seem to help keep the market from slipping. The earnings season so far is sprinkled with better than expected results, but the focus remains the 2010 outlook - as companies continue (for the most part) to issue caution and concern - most of the guidance for next quarter and 2010 have been lowered. Investors were hoping, in fact expecting, that guidance would be higher after last year was about setting the bar lower.
What has crept into the earnings cycle and overshadowed it for the most part has been politics as during any economic crisis the government plays a bigger role and that means direct injections of volatility into the market. With crisis comes more changes, trying to fix things, more government control, punitive legislation, for the government needs to find some group to blame (barring themselves) for the crisis. That means we should expect more volatility.
|
| Obama's Budget
OUCH!
|
|
The current year deficit will hit a record $1.6 trillion (which calls for another $100 billion in additional stimulus spending) and Obama proposed his new 2011 budget, over $3.8 trillion. The plan calls for imposing more than a $800 billion in higher taxes and fees on those earning more than $250,000 and industries including banks, oil, gas, and coal companies. His plan talks about reducing the deficit in years ahead, but if you read the fine print - that reduction is not below the deficit prior to when he came into office.
Senator Judd Gregg (nominated for Secretary of Commerce by Obama - before he withdrew his nomination) was on CNBC this morning and stated, "Eight years of trillion dollar deficits is not any different than Central American Banana Republics!" "Borrowing to pay our interest payments, if that doesn't define insolvency I don't know what does." His points are well taken, he pointed out that the government spending is quickly out pacing growth and will do so for the next 10 years. That is a fairly alarming calculation as it clearly puts the government's debt/deficit on the hope that it will be able to raise enough money (sell enough treasuries) to fund its spending. If last year was any measure, there is not enough interest to purchase treasuries - clearly as the Fed had to print money to buy our own treasuries. Currently - even with higher taxes purposed we will not collect enough to even pay our interest payments.
The question we must ask, will foreign nations continue to buy even more treasuries and do they have enough faith in the U.S. dollar to keep it afloat? Remember last year China openly laughed in Giethner's face when he mentioned we had "Strong dollar" policies and Hillary Clinton (Sec. of State) was also sent to ease concerns of the Chinese about the U.S. government debt.
We are not alone, Greece and Spain are starting to rattle the Euro community (which is now all in bed with each other as they share a common currency).
While it is true we may not see problems materialize from the current budget deficit or even the 2011 massive deficit - but we will no doubt begin to see the stress and breaking point in the future (2011, 2012, 2013) who knows - but Senator Gregg's Banana Republic analogy is not too far from the truth. We rely on China.
Cleary the dollar didn't like the news and is under pressure in the morning.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiHxBMm.6mgo |
| Consumer Spending...
slightly higher |
|
Consumer spending saw an increase of .2% in December, while less than expected it did show growth for 3 consecutive months. Incomes also climbed .4%, which exceeded expectations. Prices on durable goods seem to have slightly stabilized for now - which was driven by tight inventories during the holiday season. Companies will continue to maintain narrow pipelines, until they see a solid pick-up in consumers spending. For now - the .2% was less than expected, but still up - companies will remain cautious going forward.
|
| Futures Pre-market
Where's the action! |
|
The futures are seeing higher action - expect a higher opening.
|
| Support / Resistance
Going higher or lower? |
INDU 10,000 (OUCH - we almost closed below it and this is a key area from a psychological stand-point. We are seeing a seeing some support as futures are up in the pre-market.)
NDX 1750? (1800 didn't hold and we slipped fast and hard. Apple seemed to have the iPad priced into it and the stock slipped down helping pull down the NDX. We are seeing a slight increase in the futures - but can we get above that 1750 area?)
SPX 1075 (This too is an important support area - we need to see strength return .)
RUT 600 (So far the RUT has held the 600 level - but we are right at that area.)
This is either a support and buying opportunity or a key pivot area with a high volatile move away from here. I would be cautious about getting long at these levels - making sure to hedge long deltas.) |
| Conclusion
|
Obama's budget for 2011 is eye watering and even his rhetoric about reducing the deficit in the future (down from $3.8 trillion in 2011) will still be in nose bleed levels for the next decade - well above any previous administration. We all understand the need for the government to help during the economic crisis - but fiscal responsibility even in the time of crisis is key to future economic recovery. If the government is not able to reconcile these numbers and cut them drastically, Obama's legacy could be bankrupting the nation. I understand his want and even need to help the economy in the short-term and his spending and stimulus policies may indeed "seem" to work in the short-term. We may see, what many will believe, some type of recovery, but it will be covered in a fog of uncertainty. Did we recovery or will we be living off of government stimulus. Will more companies be under some type of government plan, like AIG, GM, Chrysler, Freddie, Fannie, GMAC, and others - in which the formula of business (revenue - cost = margins) is washed aside and companies are able to visit the Fed Discount Window or some other government aid vendor? Cloaking recovery with government stimulus may work for now - but eventually the crutch of stimulus will become the expected welfare state.
The government needs to learn what many small and large business have had to learn - CUT COSTS! Congress has clearly not read Sun Tzu's Art of War - they seriously need to brush up on it. Some day's I wonder if the Hunt Brother's were wrong in saying "Any fool can operate a printing press!"
| |
|
|
|
 |
| Obsidian |
| Professional trading platform!
FREE DEMO |
|
| 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. | |
|
