Federal Reserve mulls issuing its own debt

The US Federal Reserve, a private bank, is mulling issuing its own debt.  There are several problems with this, one of which is that if the debt is backed by nothing, no one will buy it. If it is backed by the full faith and credit of the US Government it needs Congressional approval.  Either way, the fundamental story is clear.  The Federal Reserve has overextended itself and finds its balance sheet loaded with worthless assets that it can not sell.  Karl Denninger has a nice rant about this on his blog that I recommend for your morning reading.

Don’t own a GM or Chrystler car? Too bad!

You’re being billed for one anyway!  That’s right, the $15B auto bailout seems likely to pass and be signed in to law, using funds for the DOE’s energy efficient vehicle program to instead bail out the very non-energy efficient American auto makers.  I am personally opposed to assisting any enterprise that cannot sustain itself in a free market.  This decision is not going to save the auto industry, but instead it’s as though the US government has bought some time for the auto makers to show us they can fail again.

The markets reacted positively overnight, with Asian equity indexes rallying and US futures shooting up about 1%.  The key number of 900 on the S&P 500 has again been flirted with and will be important to watch throughout the day.  The traders I’ve spoken to seem to think that the bail out was already priced in so we’ll see if the optimism lasts today.

Sector focus (COMMODITIES): DRYS

This is not a call on either side, but a recommendation instead to watch the action in DRYS as we are seeing incredible buying interest in this stock over the last few days and especially today. Again, I don’t recommend buying or shorting here. The interesting factor is how this optimism is related to the future expected performance of and demand for commodities.

Commodities have seen a sharp and unprecedented sell off after their inflationary highs earlier in the year. Many, including myself, feel this sell off is overdone. The action in DRYS may confirm that theory. Watch this one closely in the days and weeks ahead!

Sector focus (AUTOMOTIVE): GPC

In addition to my short call on APOL, I’m making a short side call on GPC. This stock is intertwined in the automotive parts industry in Northern America and is poised to experience significant deterioration regardless of whether any bail out packages are passed by the US Congress. Recent talk of the bail out has been supporting the stock’s rally, but my analysis says that this stock’s run is out of steam.

Diminishing volume during a rally is a sign that it is going to fade. I am calling this short because I feel that American automotive business related activities, such as demand for parts and vehicles will diminish in this recessionary environment. My target on the downside is $36. A stop around $41 is prudent.

Sector focus (EDUCATION): APOL

I’m making a call on the short side for APOL. I feel that private education companies will be impacted by the lack of credit availability, slowing growth and higher unemployment constricting the pocketbooks of Americans. My target on the downside is $65. We see higher than average put buying activity at that price.

Apollo Group runs University of Phoenix. They’ve seen increased enrollment over the past several quarters, but with the US economy significantly deteriorating, I feel that this trend is poised to sharply reverse.

The charts show us that $78 is an area of long term resistance, so a stop around $81-82 is a prudent measure to protect against a potential breakout in this stock without giving in to higher than normal volatility.

US markets bumping near 50 day moving average

Prior rallies during this bear market that hit the 50 day moving average have been rejected.  This rally seems to be bumping below the 50 day moving average and is seeing that as an area of resistance. 

Stock market vs. moving average

This trend is important to watch because if the market decisively breaks above the 50 day moving average that will add to short term bullishness. If the market can not break above the 50 day moving average and slumps lower, that may be a sign that the uptrend is ending.