Monday, December 14, 2009

Morning Update/ Market Thread 12/14

Good Morning,

Equities, as overbought as they are, continued higher last night as news broke that Abu Dhabi has agreed to bail out Dubai and to back their bonds. This sent prices immediately right back to the top of the range, then prices began to fade right back down. Here’s the overnight action in the DOW and S&P:

The dollar fell on the news, but has since bounced back up to about even, now back above 76.50. My comment in this regard is that the dollar strength seems to be holding, and that is going to make it tough for equities to continue their path higher. Bonds are flat to a little higher, oil is down slightly at $69, gold is up slightly, now $1,120 an ounce.

Here’s what happened with the Dubai bonds according to Bloomberg:

Dec. 14 (Bloomberg) -- Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, avoid defaulting on a $4.1 billion bond payment that roiled global financial markets during the past month.

Dubai World will use the money to cover debt of real-estate unit Nakheel PJSC that comes due today. The rest of the money will cover Dubai World’s interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai’s government said in an e-mailed statement.

After the emirate and its state-controlled companies borrowed $80 billion to diversify away from dwindling oil supplies, Dubai’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, has been forced to seek Abu Dhabi’s help three times this year as the global financial crisis dried up credit and triggered a property crash in the city state.

“It comes as a relief for the market, underpinning hopes that the implicit government support for Dubai corporate issuance is intact,” said Jason Watts, head of credit trading at National Australia Bank Ltd. in Sydney. “Whilst we are not out of the woods yet, it is definitely a step in the right direction.”

The Dubai market jumped 10% on this news. So, it may keep the immediate ripple under control for now, but what has really changed? NOTHING. The world is still saturated with debt, we still have governments coming in to bail out moronic ventures, and all this does is transfer the risk from one party to the next.

The next big news is in regard to Citi Bank. Here’s what’s happening there:

Dec. 14 (Bloomberg) -- Citigroup Inc., recipient of the biggest U.S. bank bailout, struck a deal with regulators to repay $20 billion to taxpayers and escape government-imposed pay restrictions.

Citigroup, the only major U.S. lender still dependent on what the government calls “exceptional financial assistance,” will raise the funds with a sale of $20.5 billion of equity and debt. The New York-based company also plans to substitute “substantial common stock” for cash compensation, the bank said in a statement today.

Chief Executive Officer Vikram Pandit has pressed for an exit from the Troubled Asset Relief Program out of concern that TARP pay constraints make Citigroup vulnerable to employee poaching by Wall Street rivals. Bank of America Corp. exited the program last week after paying back $45 billion of rescue funds.

“It’s great news,” Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, an investment firm in Chevy Chase, Maryland, said in a Bloomberg Television interview. “It’s important for Citi to exit these extraordinary agreements with the U.S. Treasury and the government as quickly as possible. It’s expensive perhaps, but I think it had to be done.”

Stock Sale
The bank will sell $17 billion of common stock, with a so- called over-allotment option of $2.55 billion, and $3.5 billion of “tangible equity units.” The U.S. Treasury will sell as much as $5 billion of common stock it holds, with plans to unload the rest of its stake during the next six to 12 months. An additional $1.7 billion of common stock equivalent will be issued next month to employees in lieu of cash they would have otherwise received as pay.

The TARP payments will result in a roughly $5.1 billion loss. Citigroup will also terminate its loss-sharing agreement with the government on $301 billion of its riskiest assets. Canceling about $1.8 billion of trust preferred securities linked to the program will result in a $1.3 billion loss, the company said.

Citigroup fell to $3.86 in New York trading at 8:03 a.m., down from its $3.95 close on Dec. 11. The stock has tumbled 41 percent this year, valuing the lender at about $90 billion.

“It’s GREAT news!” LOL, let me translate. Their massive bonuses and paychecks based on nothing aren’t big enough, so their top employees are having difficulty affording their house in the Hamptons, their yacht, their second and third beach home, their fleet of Ferraris, AND their corporate jet. Soooo, they need the ability to crank out more paper, diluting current shareholders while getting the Treasury off their backs.

But here’s the deal with this deal, it’s the same as with the others, especially Bank of America… what they are doing is paying back the tarp and then turning right around and borrowing the same money right back from the Treasury at little to no interest as it’s subsidized from the Treasury, and in that way they still have funds from the people without all the strings attached, and the people are none the wiser, all they see is the front page headline – “Citi Repays the TARP!”

And what else happened over the weekend? Nothing much, just more looting of the taxpayers.
Senate passes bill to keep government funded

The $447 billion bill spending bill also features provisions to reinstate auto dealers closed down by General Motors and Chrysler.

WASHINGTON (CNN) -- The U.S. Senate on Sunday approved $447 billion in spending for several Cabinet departments and other agencies for the 2010 budget year -- money needed to fund the federal government after the coming week.

On a mostly partisan vote of 57-35, the Senate approved the compromise omnibus spending plan worked out with the House, which passed it last week. The measure now goes to President Barack Obama to be signed into law to succeed the previous funding resolution that expires December 18.

The vote occurred in an unusual Sunday session as the Senate worked for the second consecutive weekend in a push by the Democratic leadership to complete work on a sweeping health care bill and also get the appropriations bill passed.

The omnibus bill, which combines six separate appropriations measures, provides money for for non-defense government agencies including the departments of Transportation, State Department, Veterans Affairs, Commerce and Justice for the fiscal year that started October 1.

A separate defense spending bill is expected to be considered later this week.

The omnibus measure also authorizes about $600 billion in mandatory federal spending on government programs such as Medicare, Medicaid and Social Security, funding that is set by formula and cannot be altered by Congress.

Republicans denounced the bill as bloated with wasteful spending. On Saturday, the Democratic-controlled Senate cleared a procedural vote needed to end a Republican filibuster and allow for Sunday's vote to take place.

According to the independent, nonpartisan group Taxpayers for Common Sense, the spending bill includes 5,244 earmarks -- or pet projects sought by members of Congress -- that total just under $4 billion.

"I demand the president of the United States keep his word, when he signed another pork-laden bill last March, to veto this bill," Republican Sen. John McCain of Arizona, who lost to Obama in last year's presidential election, said before Sunday's vote.

Among its many provisions, the bill would allow the government to transfer suspected terrorists now held at Guantanamo Bay, Cuba, to the United States to stand trial, and allow guns in checked luggage on Amtrak trains.

It also would provide auto dealers closed down under the General Motors and Chrysler restructuring an opportunity to be reinstated. The bill sets up a binding arbitration process that would let dealers present evidence that could allow them to reopen.

SWEET! Failed auto dealers get bailed out with your money, while 5,244 earmarks go sailing off into the sunset, their $4 BILLION now such chump change that it won’t even be mentioned beyond this site by sunup tomorrow.

$447 BILLION, a HALF A TRILLION just to keep SOME government entities going through the fiscal year. You know that they say a stalemate is truly the best thing that can happen in politics, there’s proof right there of the type of things that happen when one group is given too much power.

No economic announcements are released today, of course this is FOMC week, they will jawbone us once again on Wednesday while keeping interest rates at ZERO. Friday is quadruple witching with options expiration, I’m sure that all the quants will be spinning their computers in overdrive in order to ensure fat Christmas bonuses for them and so as to not ruin the “mood” of the Great Deception just before the holidays. Boy, are their year end numbers going to look good compared to last year!

But then we can see that the weekly MACD is rolling over, that the markets are extremely overbought, that historic sized divergences are still in place, that the dollar has broken out higher and that the long bond has broken lower. So much debt, so little time and room to push in more. And so the conundrum continues… can true “recovery” really occur once stimulus funds are truly pulled? And if the economy is really as strong as they say, why are short term rates still at zero? What happens when they no longer are? These are questions that I think we’re going to get answers for pretty soon.

Meanwhile the expanding megaphone in the DOW and the bullish looking flag in the S&P continue for now with no movement outside of the range. Since we’re now back at the top of the range, we either start down once again for the bottom of the range, or we break out higher. If we break higher, the flag target is 1,200 on the S&P, an easy 8 to 10% higher from here, a move that would take us from a 50% retrace to a 61.8% retrace. If that move occurs, then it will be an unprecedented rally in terms of comparisons to past credit collapses where we usually see 50% or slightly more on the retrace. For now, however, the ceiling is holding, I’m still sitting on my hands and if we break higher I know that everyone will be jumping in, but I will still be sitting… patiently. I will not put my personal money at risk unless the technical and psychological indicators align with my fundamental understanding. When they are disconnected, I have learned that patience is my friend.

I spent a good portion of the day yesterday doing some interviews with Steve of Two Beers fame. Portions of that will be out soon. Right now I’m racing to get a basic outline of Freedom’s Vision out, but I’m not sure it will be in the condition I would like before I leave on Thursday – I’ll be traveling for one week. So, hopefully I’ll get it all out before I leave, if not, it will be right after Christmas which might be best anyway. I can tell that people are starting to tune out already, traffic is down at the site and I expect market volume to stay low.

Meanwhile, the Beat Goes On…