Banks Enjoy Higher Markets

wells fargo stockTrading is remaining rather moderate to close out 2009. In fact, since September, we have remained rather flat in trading. In most circumstances, such resistance would lead me to believe that we are heading into an exhaust period in the rally, but such conclusions can't be drawn in our current trading environment. Whatever the case may be, much of 2010's success will depend on the moves of the government and on the transparency of the banks.

Those who have kept up with this blog will remember me discussing a big reason why a rebound in the markets were so necessary. In march, when we are that lows, bank's stock prices were at record numbers and their balance sheets looked as though most would not survive the summer. A large influx of capital was greatly needed, but investor's confidence was reduced to nothing. From there we saw the massive government spending and incentives that were put to market, which has helped jump start this aggressive rebound rally, which continues to go. Now we find ourselves at much stronger levels, especially for financials. Thus, banks are taking advantage of it.

Last week I discussed Citi's stock offering, which was going to assist in paying back TARP funds. Now, Wells Fargo is doing the exact same thing. At these stock levels, banks can afford to do it. However, just paying back government loaned capital, won't be enough to save these banks. They need more. The commercial debt that is due the next two years, is estimated to be 7 times greater than that of the residential "credit crunch" we saw hit the banks back in 2007. Thus, banks will need confidence to remain in markets for quite a while.

Other companies are taking advantage of inflated stock prices at this point by offering more shares to the public, hoping to build up more cash reserves in case of a second round of the recession. Lets be honest, we cannot go from being in one of the worst recessions in our country's history, to everything is fine. Markets have been damaged, fundamentals have been broken, and consumer confidence has been hit hard. All it takes is another scare to send markets spiraling once more. As of now, we are very vulnerable to just that.

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Inventories Help Hold Confidence

mcdonalds salesMarkets replenished about half of yesterday's losses today as wholesale inventory levels gave investors some confidence. 3M also saw some movement as Citigroup upgraded it to a buy. The market was able to fight its way out of the red with about an hour left of trading left, which as I have said before, can be very easy with such low holiday volume.

Citi is hoping to soon payback TARP funds and follow suit of other banks in hopes to relieve themselves of the strict employee payment limits the government has on banks who choose to accept their help. It amazes me how just months ago, almost all banks were under fire as the country wondered if there were any that could survive. Now, magically, after just a few months later, a few accounting changes later, and about 5000 points on the DOW later, everything is fine and dandy. I find it very hard to believe that banks are actually out of the woods. Sure, they have enjoyed a recovering stock price, but they continue to have billions worth of loans that will be on the chopping block in 2010 for both residential and commercial real estate.

So how will Citi come up with $20 billion so quickly to payback the government. You've got it, from you and I! Citi would like to payback the debt with a $20 billion stock offering that would open up to investors. Such a plan would have been useless back when the stock was under a $1. However, back at $3.86, this can easily be done. Some investors worry that the bank will have enough cash reserves after they pay the $20 billion back. If not, they just will continue not to issue loans as they currently are doing.

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McDonald's saw sales drop this quarter as they reported this week, which to me, is a bit scary. When we reach a point in this recession where McDonald's begins to see sales drop, watch out. McDonald's has been that light in the Dow, however, they too are now beginning to feel the heat of the recession. I mean, who can't afford a $1 McDouble?

Oil is continuing to struggle as inventory levels remain high. With this being the winter season and still oil is falling, I don't see it being much of a good 2010 for oil, especially when summer rolls along. There are many pitfalls that could easily hit the economy next year, and all it takes is that "black swan", to send us spiraling again. Happy Trading.

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Dollar on the Rise

rising dollar deflationAfter several days of rather flat trading, markets finally made a move on Tuesday as the Dow closed down over 100 points. The close marked the biggest down day for markets since the end of November. Trading volume continues to be light, which has a tendency to bring volatility to markets.

Markets continue to act adversely to a rising dollar, which could prove as a rough beginning for 2010 as the dollar definitely has room to run. It's recent demise was mostly due to investors moving into riskier assets, as sentiment was strengthened. However, we are much too early for an inflationary state from our recent government splurge, so a strong dollar should be in the picture for 2010. Also as a result of the strengthening dollar is the dropping of gold. My GDX put options saw some good green today as commodities continued to struggle.

Many companies do not like to see the strengthening dollar as it can put a big burden on export profits. I plan to open up some positions in UUP as I feel the dollar should go for a bit of a run.

The government is looking at a legislative bill to stimulate the employment market that could use up to $200 billion of taxpayer's money. The money would most likely be used for roads, bridges, and infrastructure to help spur some employment. I do not see how better roads and bridges will assist in building up the economy. Sure, it will create jobs for some (for a time), however, the end product will just be a mound of gravel that has no net changing effect. Why not invest in companies who could then build their business, which in turn would allow them to hire more employees. Sometimes I feel that the government just spends money because they can.

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Like I've said before, I am not ruling out the very good possibility of markets taking a turn before the new year. Yes, volume will be light, which could bring some manipulation, but we are finding ourselves at very high support levels. Deflationary levels are still present and with a now rising dollar, these manifests should grow stronger. Happy Trading.

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Year End Brings Nervous Investors

gold crashMarkets opened up on fire Friday morning, after a much better than expected job report that came in for November. However, as a result, the dollar saw big gains, which as we have seen lately, caused for an adverse effect on overall trading, especially energy and commodities prices. Both gold and oil are traded down today as a result and most of the big gains which we saw when the market opened were given back by close.

The unemployment number came in almost too good to be true for economists. Just 11,000 jobs were estimated to be lost for November. Quite frankly, I am not that surprised. For the time being, we've seen a bit of stability back in the economy, and most businesses are not anxious to cut jobs in the middle of the holiday season. I expect December's number to be favorable as well. It will be very interesting to see what January and February brings, as I believe many companies will begin a new round of layoffs.

Gold really got hammered today (and even harder after hours). Lately, gold has been on a high. We may continue to see a push upward, but as soon as we see weakness in gold, it could come crashing hard. Foreign markets have been buying up gold quicker than they can get their hands on it, but that would stop as soon as the dollar found some strength. Oil would also most likely come down in price, in turn causing even more concern for deflation.

Manipulation still seems to be present. Even, with the 200+ point swings today, somehow, markets were able to close in the green. Like I've said before, during these low volume trading days, it can be a volatile storm.

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Options are becoming very cheap due to VIX levels dropping. I am finding prices for options very tempting. If indeed we see a next down leg, the VIX will be sure to spike, thus inflating option prices. Even 2011 options are reasonable at this point, which should not be a bad option. We could see this market take a turn for the worse even before year end. We are at very high support levels, and I believe this market can't handle it. The next few weeks should bring some fireworks. Happy Trading.

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Government Slowing Bailouts

geithner bailout crashThe government is beginning to take steps to slow spending, showing consumers that they do not plan nor want to be in the business of bailouts for much longer. I think most would agree that the continuation of government bailouts to businesses, will eventually lead us into a massive whole of debt and even more risks of inflation. The big question is will the government really have the courage to let go and allow the economy to walk on its own feet. My worry is that, lately, we have depended so greatly on government stimulus that if they were to cut off all bailouts, it would send us into another down spiral. Just as we saw with Cash for Clunkers, consumers have become very comfortable with subsidized purchases and as soon as they are gone, the consumers are also gone.

Financing terms for Fannie and Freddie debt were tightened this past week, showing that maybe some underwriting standards may start to get more conservative. The institutions are increasing the amount required for a down payment, as well as raising the minimum credit score for eligible borrowers. The changes were not too earth shattering, but show that steps are being made.

Secretary Geithner also announced that the $700 billion bailout fund will soon be not needed. The government plans to cut off the fund as soon as they can and are hoping that the economy will be able to move on without it. Unfortunately, I believe the only thing consumers have learned this past year is that, "when times get rough, don't worry, Uncle Sam will fix them." Who will step in to help grow the economy when the government leaves? I, personally, do not believe the government will be able to do all they plan to. For instance, putting stops to home buying incentives and loan purchasing would open up the doors to yet another housing crash. As such, we would see that trickle back into consumer spending, once again bringing down the entire economy.

For the time being deflation is being covered up by continual government spending, but trust me, it still exists. All economic signs are pointing to the existence of massive deflation, and as soon as this kicks in, I expect to see a lot of selling pressure in the markets. Oil and gold continue to see success, but I still believe their highs are coming down very soon. Gold will once again be a superstar in 2012-2013, but for now, I believe it has some retracing to do. I also see the dollar bouncing back as investors come back to safer investments. There are a lot of changes are economy currently faces, and I expect to see some major changes coming in the beginning of 2010. Happy Trading.

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