Trade Team Update - - 9/23/08

Most all markets were relatively quiet today, a lot quieter than I expected them to be. I guess global market players were busy watching the Fed and Treasury testify in front the lawmakers and were left confused by the political grand-standing we saw in DC.

Circus comes to town:

I don't really like the circus too much, it's kind of weird to me but I did enjoy today's circus on Capitol Hill. The clown car brought in Bernanke, Paulson, and Cox to testify before a Senate banking panel. Some of the politicians hit the Fed and Treasury hard, I was surprised.

Several Senators ripped up the plan and basically called it unworkable. Paulson's clause to give him free reign in decision making was challenged. Most Senators offered an alternative that made much more sense and wouldn't cost nearly $700 billion.

The idea is to tackle the issue a piece at a time and work through it sensibly and economically instead of creating a mass amount of debt and a mega burden being placed on the taxpayer at a time when the taxpayer (consumer) has gone into survival-mode.

From the wires:

Senator Dodd: Draft legislation from Treasury is unacceptable in current form - Insists it remains possible to get lawmakers to pass the plan before the November election if changes are made. 9/23/2008 2:34:05 PM

Senator Shelby: Reiterates that Congress will not rubber stamp the Treasury plan, will consider alternatives 9/23/2008 2:34:37 PM

As I said, I do not believe this program will get signed this week. The Senators overall displayed very strong concern and showed a real lack of faith in Paulson and Bernanke.

Paulson never expected this fight. He's up against the ropes and he's not pushing the plan through as easily as he expected. He has no real answers to offer and keeps repeating the same lines about how the plan must get signed this week in order to save Wall St. from Armeggedon. DC isn't buying it.

Paulson did more stuttering and circle-talking than selling. Bernanke was way more comfortable and more forthright with his answers. Bernanke said in very plain terms that the cost could exceed $700 billion and that the plan "might turn a profit, but couldn't be sure". At least he was honest about that...

Bernanke also made it clear risk was on the taxpayer. Bernanke painted a different picture of the bailout compared to that of Paulson. Paulson is a spaz and he's not doing a very smart job selling this to the lawmakers.

I think Paulson's in for a bigger battle tomorrow. Our favorite politician, Ron Paul, will get a shot at the goon squad and it should be at least entertaining. I really hope Ron hammers the Fed on this plan.

We knew there was going to be a political battle and we're seeing it play out in real-time. I do believe the legislation gets passed eventually, but it won't come easy. Americans are bombarding their legislators with calls and emails and telling them not to let the Treasury have the $700 billion. People are really pissed and are pressuring their representatives.

Stay tuned...

EUR and USD Risks:

Today I was talking with a respected trader and wanted to relay our conversation... we were talking about the EUR/USD and the risks on the pair -- equal risks on the euro and the dollar. This is food for thought type stuff, but issues that must be considered as we draw close to the extremely volatilie October through December session.

One of the equal risks is that of a rate cut. The Fed and ECB are both in positions to cut rates. The ECB has a slight advantage over the Fed and is not as likely as the Fed to cut, but there's a high enough probability the ECB gets forced to cut in the near-term.

How would the market handle a dual Fed and ECB cut? I can't answer that question because it will put us in unchartered waters. And speaking of unchartered waters, the EUR is also at risk because we've yet to have a real fundamental or financial disaster in Europe.

The market has not had to deal with a failure or a large downside shock out of the Eurozone. I'm still very much concerned about a larger European bank failure and what that could do to the euro.

Paulson has urged the ECB to enact a similar bailout plan for European banks. And as I said yesterday, we know Credite Suisse, UBS, and a few other big European banks have come to the Treasury for a piece of the $700 billion. Does Paulson know a failure is probably going to happen in Europe?

Look at this comment that came over the wires today:

EU Bank Supervisory: EU financial system exposure to LEH and AIG are somewhat muted 9/23/2008 1:52:18 PM

Lets read between the lines... this dude is not saying Europe's financial system isn't exposed to risk from those companies. So, if he's not saying there's no exposure, then he's probably saying there is exposure, especially when you read the last part of his comment about the exposure being "somewhat muted".

The question is, we know they are at risk, but what does "somewhat muted" in liquid cash terms?

I think any signs of weakness or some big downside surprises in the euro fundamentals, or a shocking bank failure, or a surprise move by the ECB cannot be ruled out and taken off the table. Those are valid risks and just another reason why we cannot establish a clear trend under current market conditions.

Bernanke made a comment this afternoon that was related to an issue I've been talking about with bonds. He said something about not knowing how the credit rating agencies would look at the U.S. debt. Two seconds later the euro started moving up and made an 80 pip retracement in under an hour. That's a miniscule example of what the euro would do if a bond downgrade were to happen.

Fundamentals:

Most of today's euro data was worse than expected and shows further proof that growth is weak in Europe. Today's Home Price Index showed that home prices dropped a dramatic 5.3% y/y in July. We are not close to a bottom. The bailout will not fix these housing issues, it won't stop foreclosures, and it won't create easier access to credit.

Bernanke said that if the House doesn't pass the bailout plan the U.S. "might" go into recession. We're already there based on what we've seen in the housing, consumer, and jobs sectors. Forget this "two negative quarters of growth" textbook crap. We're not in the Great Depression, but overall economic condition points to recession. The fundamental landscape is worse now than when the euro was at 1.6000. Europe is not far behind...

Fundamentally, we have another big day with the circus show part II. We get German IFO and the Eurozone's Current Account. I don't expect any big downside surprises with tomorrow's euro data.

Existing Home Sales is the big piece of data in addition to Crude Inventories. I have mixed view on the home data. Mortgage apps have been stabilizing and based on some reseach I believe we could see a print at expected or even above. I would be more surprised to see a strong downside number.

Obviously the big event is on Capitol Hill. I really hope this next group of politicians hammer Bernanke and Paulson on two fundamental issues that don't sit well with me...

1. Allowing foreign banks to get a piece of the bailout money.
2. Adding credit card debt and student loans to the bailout plan.

EUR/USD:

The euro retraced just as we expected. Our low today hit my 1.4621 downside key level to the pip and held before moving up after Bernanke's credit comments.

I'm not ruling out further downside testing and I have not taken any new longs above the 1.4550 level. I'm short from up at these levels above 1.4720. I mostly sat on the sidelines today and may do the same tomorrow if the markets behave the way they did today.

Now is not the time to get impatient about trading. With this bailout plan potentially getting signed into law at any moment, the whole ballgame could change in a matter of seconds. I don't want to get caught up in that kind of risk and chaos.

If the Asian markets are quiet we may see some decent ranging during Tokyo. I expect to see the volatility pick up after London and we'll hopefully get a better idea of the markets at that time.

1.4660-1.4680 is a key area to watch along with 1.4620 and 1.4580 levels on the downside. There's some decent resistance ahead of the 1.4730 and 1.4775 levels.

Today's key levels worked out well so I will post more later on. Be smart with your trades and your risk management.