WHICH WAY THIS MARKET IS
HEADED
As
you can see from the charts above they are both pointed higher at the
moment. The bullish case is that most of the bad news is known—what is
not known is how much the Fed is going to cut rates on Tuesday (if at
all), and how many skeletons are hiding in the closets of the major
financials reporting this week.
Current consensus has the Fed cutting .25 basis point on Tuesday with
three more .25 point cuts by June. That forecast remains in doubt
however as the Fed is being dogged by signs of inflation as commodities
and energy in particular continue to trend higher—and the dollar
continues to plummet.
At
this point a .25 basis point cut may be baked into current stock prices
and may not produce a material rise in the markets—a .50 point cut would
be a different story. The Fed’s language toward further rate cuts will
be just as important as what they actually do Tuesday—traders want to
know the Fed is ‘on their side’.
The
extent of the damage caused by the credit markets implosion will be much
clearer by this time next week as the four out of the five major
financials announce earnings—and anything else they need to tell us
about.
We’ll
hear first from Lehman Brothers on Tuesday, Morgan Stanley
on
Wednesday, followed by Bear Stearns and Goldman Sachs Group Thursday.
With
Lehman first on the list any positive surprise should translate into a
big bounce on the rest. Goldman is the healthiest in that sector and
buying them on positive Lehman news could be a profitable move. Bear
Stearns is the most feared report but at this point most of the bad news
is already priced into the stock.
We have
seen some advance evidence however that all may not be well with the big
brokers.
Merrill Lynch (MER) warned on Friday that the subprime problem and the
credit crunch in corporate paper was forcing a reduction in the value of
securities on their books resulting in a lower profit for Q3. The
earnings warning was made in a SEC filing in regard to a $1.3 billion
buyout of subprime lender First Franklin Financial.
Merrill
did not state how much the write down would be and on what assets
leaving analysts to wonder if this was an advance warning to signal
worse news to follow. If Merrill has to warn on subprime issues you know
the other brokers are also going to have some dirt to sweep into the
spotlight.
Here’s another hint that things may not be all rosy in brokerville--Goldman
just announced that another of their hedge funds had a significant loss
over the last month. The key here is whether or not it will affect the
stock--daily hedge fund implosions are barely making the news any more.
Some
estimates have over 2000 of the 9000 hedge funds in existence going out
of business by the end of the year. Many are hanging on by a thread
hoping for a miraculous recovery in the credit markets. Once the major
brokers identify debt valuations this week those funds will have to mark
their assets to market and it won’t be pretty.
Bear Stearns (BSC) rebounded about $12 from their lows on Monday at
$105. The major mover ahead of next Thursday's earnings was news that
billionaire Joseph Lewis bought 8.1 million shares in late August and
early September bringing his total stake to 7% and making him the
largest shareholder. Lewis said he had no activist interest in BSC and
just bought the shares as an investment. Lewis currently controls more
than 170 companies. Having a knowledgeable multi-billionaire invest
nearly $1 billion in BSC stock did wonders for investor confidence in
the stock.
British
bank Northern Rock--the 4th largest mortgage lender in England--had to
be bailed out on Friday by the Bank of England immediately crashing the
stock by 31%. Depositors stood in line for hours to withdraw their
money. The bank confessed it had been unable to raise funds since last
month when the global credit markets froze up. The amount of the bailout
was not disclosed and the BOE of course said Northern Rock was in no
danger of collapse. The bank on the other hand said there was no sign of
easing in the credit markets and conditions could continue to be grid
locked through year-end.
So the
credit markets are still tight and the Financial sector—especially the
big financials and the hedge funds--are likely to continue feeling the
pain. Anything less than a .50 basis point cut on Tuesday won’t likely
be enough to head off more failures in the sector—so strap on your seat
belt and get ready for Tuesday.
Oil
prices hit another new high on Friday at $80.35 before selling off at
the close knocking the price down to $79 to finish the week. The quick
appearance of Hurricane Humberto caught traders leaning the wrong way
and shorts were caught in the crossfire. Fortunately the three
refineries knocked offline by storm will all be back online by this
weekend plus there was no material disruption and no refinery damage.
Tropical
storm Ingrid is now moving east of Puerto Rico tracking northward toward
Bermuda and currently not a threat to the Gulf. Add in the normal weekly
inventory numbers due to be released on Wednesday morning that are
likely to show a big inventory build and the stage is set for a massive
sell-off in the oil sector next week.
So we’ve
got a super closely watched FOMC meeting on Tuesday, the major
financials reporting on Wednesday and Thursday and an oil sector poised
for a major breakdown—the question is…
HOW DO WE
MAKE MONEY ON IT?
We’ve got
two high potential plays lined up this week—one bullish and the other
bearish. Both plays are in the energy sector but one is poised to leap
higher while the other is on the verge of collapse—and the good news is
neither one of them is subject to interest rates either way so no matter
what the Fed does on Tuesday we’re still liable to make a fortune.
We’ve got
two great plays lined up and a market ready to rock-n-roll—so let’s get
to it…
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