With the rebound in the stock market on Friday after a climactic sell-off after hours Thursday on fears of the auto bailout collapsing, it looks as this next week will see a good move upwards at least until expiration. Should the automakers be left alone to go bankrupt? From the automakers short term point of view, it would be in their interests to go bankrupt. They can renegotiate union contracts and debt in their favor. However, the banks stand to lose a lot as the banking sectors sell-off on Thursday pointed out. They have a lot of money vested in the automakers survival. Not just a lot of capital at risk, but also profit, due to the risk reflected interest rates the automakers receive. Some banks have loans out to these automakers for $500 million at 8%. Any defaults or renegotiating of these terms will not be good for the banks bottom line and will affect the automakers chance of receiving credit again in the future, or at least at an affordable rate. So it is true that the capitalistic view should be to let them go bankrupt and reorganize, but the knock on effects of this will not be pretty at all for anyone.
S&P 500 As expected we did see higher prices early on, yet as uncertainty in the auto industry rose, steam began to leave the rally and sold off on Thursday. The upside volume on Friday was decent but not spectacular, building cause for an upside rally for this coming week likely to the 950 level. 920 however will be the next level to break for us to know whether this achievable. CURRENCIES As we have mentioned a number of times, I feel the recent rally in the USD is now overdone in the short term. However, the USD may rebound somewhat this week before selling off again, this should provide an excellent long entry point in the AUD and also the GBP. RECAP Last week we mentioned the possibility that crude oil could hit $37 in the near term. Although it bounced sharply this week, there is still chance that we could see $37 before moving higher. Late December and January are historically excellent times to buy sell offâs in energy, especially crude oil and also RBOB. Grains enjoyed a strong move up but corn notably failed to close above resistance. How it reacts this week will be a key indicator as to whether we can buy at lower prices or whether the bottom is in. A low risk play would be the etf DBA.
As fears over the economy weigh on the markets much talk is going on about how to stimulate the economy. Credit has always been an important part of stimulating growth. The problem that exists today, however, is that there is a difference between borrowing money to stimulate the economy and borrowing money to improve ones standard of living. Borrowing money to improve your standard of living creates debt with no reasonable way of repaying, this is the situation that we are faced with currently. Individual debt needs to be resolved by creating ways for individuals to be able to create savings and wealth. Taxation on savings in this environment is becoming a flawed idea. We can expect inter bank lending and overall business credit to recover at a faster pace than consumer credit in this environment. EQUITIES Trading in the markets this week has been difficult to read due to it being expiration week. Yet it does seem apparent that the markets look poised to go higher if the S&P can take out and close above 920. As mentioned earlier this week, any sell off to 870-850 levels should be treated as buying opportunities. Stops should be wide on this trade as trading could potentially go down to 820 intraday, so keep positions small and build into the position. Expect volume to be light this week and next and the markets to really show their hand on the week beginning January 5th. CURRENCIES Concerns about deflation in Europe and speculation about an ECB rate cut should weigh heavy on the Euro coming into this week, but as the volatility has been high stops need to be extremely wide. After seeing a 2000 pip run up in the Euro in the past few weeks coupled with poor producer price numbers from Germany and the French business survey contracting the likelihood is that the Euro is still somewhat overpriced to the USD at this price level and may correct at least to the 1.37 area. The correction in the CHF could potentially present a buying opportunity if we see another intraday sell off, the 1.04 level offers a great deal of support and, as was seen this week is viewed as a strong buying opportunity. Short term traders should look to buy at that price.