Wednesday, February 4, 2009

Morning Update/ Market Thread 2/4

Good Morning,

Futures are mostly flat this morning.

President Obama put a $500,000 cap on executive compensation for firms that are taking bailout money. They can take stock above that amount but they cannot sell it until the government gets paid back. Now, while I’m a free market kind of guy and would normally be against any type of government price or pay controls, if you are going to give them my money (which should have never been done in the first place), then I say YEAAA! Cap their ASS! BRAVO. BUT, understand that I believe most of these firms are dead anyway, they are simply on life support. Don’t give me that “have to attract quality people” NONSENSE. That argument is plain unadulterated bullshit. The havoc that’s been wreaked by these people cannot be overstated, they deserve far worse than salary caps in my opinion, and for $500K a year, if they really need a cleanup man, I’ll gladly take the job and I guarantee you I can’t do worse!

And I’ll give Obama a little credit on the Daschle debacle… at least he is man enough to admit he “screwed up.” Boy, is that ever a change. Maybe he got the message that change means putting people upfront who haven’t cheated on their taxes. Would’ve been nice to have him set that standard right upfront, but admitting he was wrong is an improvement for certain.

Evidently Geithner is shying away from the bad bank idea and is instead focusing on placing a government guarantee behind the bad debt that will remain on the bank’s books. From the taxpayer’s perspective, what’s the diff? Nothing. From the banks perspective this keeps them from taking write downs right away, but it also keeps their books cluttered and under the control of the government who has now capped their salaries. Oh well. But it’s all too bad, because the right solution is to force the banks to immediately mark to market and take their losses. There will be many losers and I say adios, see ya later! Plenty of good banks will survive, so don’t buy their end of the world talk.

Hey, let’s get to the real news. This morning Panasonic announced they are laying off 15,000 workers.

And regarding economic data released this morning, the MBA Purchase Applications Index was estimated at 294.3 but came in at 261.4, much weaker than expected.

The following quotes are from Econoday:
Today's MBA data for the Jan. 30 week won't be feeding any new optimism over the housing sector. MBA's purchase index fell a steep 11 percent to a depressed 261.4. Mortgage rates also moved higher in what will definitely disappoint the Federal Reserve which, in an effort to lower mortgage rates, has been buying mortgage-backed securities and is considering whether to buy long-term Treasuries. The rate for the average 30-year fixed mortgage rose 6 basis points in the week to 5.28 percent with rates on 15-year and 1-year adjustables also rising. But the rise in rates didn't keep homeowners from refinancing, an important plus in the report that shows the refinance index jumping 16 percent to 3,906.3. High levels of refinancing will help homeowners avoid defaults.
Then the Challenger Job-Cut Report also came out this morning and was weaker than expected:
Company layoff announcements were unusually heavy in January, indicating that the shock to the labor force is increasing in intensity and pointing to severely depressed readings in Friday's employment report. Challenger's layoff count totaled 241,749 vs. 166,348 in December. The total is the highest since the end of the last recession. Layoffs in January last year, right when the recession was beginning, were only 74,986. Retail and industrial goods, two sectors hit extremely hard by this recession, showed the heaviest losses. The report also counts hiring intentions which were up due to government openings, a theme that is likely to emerge in the months ahead.

And then the ADP Employment Report also came out, and was better than expected, but they have been shooting themselves in the foot with regards to their credibility lately. They have changed their methodology and I discount their report pretty much and think others do too:
ADP is calling for a 522,000 drop in private payrolls for Friday's employment report, a call in line with prior months and in line with expectations. Always heavily revised, ADP's estimate for December was revised to a loss of 659,000 from a loss of 693,000.
The Service ISM will be released at 10 Eastern.

Remember that the NDX will be key for today. If it takes off, I will be stepping out of the way. Same goes for the XLF. If we are going to sell off, I would also want to see the VIX rise above the 46 level again, but that’s not what it signaled yesterday, so again needs to be watched. We are still inside the pennants, so anything is possible, and therefore I’m still playing pretty small.

Please share your thoughts on our daily thread, everyone will appreciate your insights.

Have a good day,