Davis's Wednesday Outlook

 |  Includes: DIA, QQQ, SPY
by: Philip Davis

I love short weeks!

Especially when it’s a lousy week as this one is quickly turning out to be already. It may truly be time to go to cash at this point, certainly we are going to mattress our protections as we’ll be happy to escape today neutral but it’s obvious that there is a total loss of confidence in the US markets that is not showing much sign of letting up.

The big sell-off Wednesday morning is centered on 2 major events - Apple’s (NASDAQ:AAPL) miss and ECB President Jean-Claude Trichet effectively told Ben and the Fed to go stuff their insane policies, indicating the ECB will NOT follow with rate cuts as "it was his duty to solidly anchor inflation expectations to avoid additional volatility." Mr. Trichet said chain of players who gave out and resold these loans needed to be looked at, saying they and the rating agencies that rubber-stamped the debt as good "should have the right incentives to undertake proper assessment and proper monitoring of risks." This echoes the European Commission, which criticized a possible conflict of interest at credit rating agencies, ordering banking supervisors to report back by April on whether the agencies could have been influenced because they are paid by the banks whose debt they rate.

Trichet must have watched the video on the Fed conspiracy I linked to in yesterday’s post because he’s talking about cracking down on the whole banking system and, when the world’s most powerful banker speaks (it ain’t us anymore!), then we’d better listen… His statement has sent both US and European markets plunging, despite tremendous gains in Asia where the Hang Seng popped 2,332 points (10.7%) and the Nikkei ran up 256 poins (2%). BOJ’s Fukui, who already has a 0.5% rate, indicated he may consider cutting rates down the road but the board voted unanimously to keep rates steady at yesterday’s meeting. Personally, I’m waiting for just one more cut, when they will have to pay you to borrow money - I’ll be looking for a point up front and the BOJ will have to show me a clean credit report before I’ll take their money…

Because the BOJ did not cut rates to 0.25%, the dollar dropped 2% against the Yen, putting further pressure on the carry trade and we can expect a mass exodus from US instruments as Japanese traders fear losing further ground on the exchange.

In Europe, the markets are off SEVERELY with the DAX leading the fall, down 5% at 6,442, well below the 6,753 mark we’ve been watching and even under the 6,494 mark that denotes a 20% drop from the top (see Monday’s Big Chart for today’s danger levels). On the bright side, Berkshire Hathaway bought a 3% stake in Swiss Re and will assume 20% of the reinsurer’s business over the next 5 years - not a bad deal for $812M! In the tradition of full disclosure that is popular in Europe and unheard of here, BOE Governor King (I know, that’s confusing) said "the British economy could slow quite sharply in the near future and the central bank’s 5.5% bank rate is probably restricting economic growth." In remarks prepared for a speech to business leaders, Mr. King also said consumer-price inflation could accelerate above the 3% level that would force him to write a letter of explanation to the government.

According to the WSJ: "The remarks illustrate the difficult position in which the U.K. central bank finds itself as it seeks to balance support for growth while controlling inflation. Mr. King’s comments suggest the Bank of England will continue to cut its bank rate, but cautiously. It is therefore unlikely to make a move similar to that announced by the U.S. Federal Reserve yesterday, when the federal-funds rate was slashed by three-quarters of a percentage point to 3.5%." In other words Ben, "It’s the Inflation Rate, Stupid."

I told Ben this already back in September, when I mentioned that the Fed was pursuing a policy of putting out fires with gasoline in my morning and afternoon posts. That was also the day I reposted my market safety video of August 28th saying: "The video on the right is a fantastic illustration of the current investing climate. I especially like the way that Homer is repeatedly smacked in the head on the way up (rescued by Helicopter Ben?) and the end is just perfect!" Unfortunately, that video of Homer falling off a cliff has been removed by Fox!

So all that being said, Warren and I are buying - not with abandon but we are dipping our toes in the water and hoping this morning is nothing more than a retest of yesterday’s lows and the Big Chart levels we expected to see this week. Thankfully we re-covered with (NYSEARCA:DIA) puts and we will again be cashing out at the open and layering down only if we break below yesterday’s lows. That will give us play money to roll a few more positions lower and buy out a few more callers in hopes that this isn’t the end of the line. If not, I think we’ll have to begin to cash out a little more as it’s a very nasty fall once we break below support at 11,354. Meanwhile, we’ll be watching 11,808, which has to hold by the day’s end, along with 1,2761 on the S&P as a 20% bottom and 2,289 on the Nasdaq.

Don’t panic today - let’s watch our levels and remember we felt the same yesterday and it all came to nothing but let’s not hold on to false hopes if we can’t maintain the bounce we hoped to see yesterday.