Wednesday, December 19, 2007

Volatility Remains, Stocks Struggle

[Editor's note: The Update is going to be taking a break over the next few days and will publish only on the days that give us a reason to write. The market is in a place that does allow for that possibility so if you see a day that has a dramatic move please come here to view the Update. The Update will return on January 1st for your reading pleasure on January 2nd. We'll see you on the other side.]

Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.

In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.

On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...

Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...

With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.

Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.

The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.

We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.

FSI: 102.16

Tuesday, December 18, 2007

"Volatility" or "Are the Horses Out of the Barn?"

Top Line: The stock market spent some time doing big zigzags on Tuesday which represents extreme volatility. To us, this is not a bullish sign. People don't like to see this type of action because they think the market should only go up, not down up down up. Our position did not change on Tuesday and it says that the Dow is headed towards 12,500.

In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.

That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.

The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...

The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.

FSI: 101.37

Monday, December 17, 2007

Just Waiting

Top line: The stock market gave up some ground on Monday but the Dow didn't participate on the downside as much as the NASDAQ indexes. We continue to keep our eyes on the downside strength for clues on the future move. The bulls seem to be content to buy these little drops which is why we don't see a collapse in prices just yet. Currently, we are still thinking 12,500. World markets are quiet this evening with US Futures up slightly.

For a Monday with a lot of price movement down, we don't seem to have a lot to say. The basic pattern is still in tack but the downside strength seemed to wane a bit on Monday. True, the NASDAQ did seem to drop a little harder but the power down is not here right now. This is options expiration week so we don't think people are gone but trading is fairly light as it usually is just ahead of the holidays so traders may be happy to let things drift here.

The only thing that went on Monday was the big auction--TAF. We should hear on Tuesday how that went. Meanwhile the ECB was set to guarantee loans for European banks for unlimited amounts and to take them through the end of the year. This article seems to be a WSJ exclusive again so find out about it in Tuesday's Journal.

There doesn't seem to be much urgent news or pressing issues for the market to digest. The drop on Monday does come without news so it is worth noting. The prices are in a down pattern and could continue to drop. This would eventually bring out sellers. We continue to watch.

The gold market is in an interesting situation right now with the gold mining stocks dropping and the precious metal itself kind of holding its own. We generally say that the stocks move in front of the metal so maybe we will see a drop in the metal coming up. This market is always on our radar screen even though we don't mention it every night. There is an opportunity coming but it's not here just now.

FSI: 100.89 (The horsemen did take a hit on Monday)

Sunday, December 16, 2007

Further Weakness Directly Ahead

Top line: Our target for the Dow is 12,500 which is right around the August low. If the market can punch down to there, then we can see how much downside strength there really is in this current move. If we see any support between here and there, we may need to revise our outlook but for now the stage is certainly set for a run down to test the August low.

The stock market opened broadly lower on Friday due to C's news. We still think C is doing the right thing by taking these SIV assets onto its balance sheet, where they belong. Shortly after the open, C was trading down but soon rallied on a display of strength which failed by the end of the day. C had received an analyst downgrade after their news--good timing, strong analysis.

The stock market did have difficulty as the day wore on Friday and the Dow fell 178 points by the end of the session. This was not a very good showing but one that we think is justified. This move down is not over and we should see some more selling as the week gets going. The futures are down this evening as we write but this could be just a reaction to the weak Asian markets which is definitely a reaction to the US trading on Friday; as the world spins.

We don't want to bring this up but since it is the "biggest" news of the weekend we thought it should be mentioned. Greenspan has now become an "expert" in the field of guessing what's going to happen next. He's trying to figure out if the odds of a recession are more or less than 50-50: "Whether it's above or below [50 percent] is really extraordinarily difficult to tell," Greenspan said. We'll let you read for yourself some of the other things he said. Yicks.

FSI: 104.43

Thursday, December 13, 2007

C Doing the Right Thing

Top Line: The market found some footing on Thursday afternoon and the financials led the late day rally. We'll be watching to see if the market's strong down move will continue. Currently, our position has the Dow dropping to 12,500. If it can't make it to there, we will take another look. If it can make it, then there is more downside after that. We'll watch and see.

Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.

One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.

What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.

With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:

From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.

From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.

Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.

FSI: 105.13

Wednesday, December 12, 2007

TAF To Save the Day

Top Line: Market is in a down phase with a Dow move to 12,500 expected.

How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.

Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"

To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.

Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.

The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.

The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.

Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.

Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.

FSI: 105.04

Tuesday, December 11, 2007

Fed -25, Dow -294

When does -25 = -294? That would be on December 11, 2007 when the Fed ldropped the funds rate by 25bps and the Dow followed that with a drop of its own of 294 points. What caused the drop, was it that the Fed decided not to lower rates by 50bps?

Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.

Here is the meat of their statement:

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.

You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.

Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.

So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?

FSI: 104.53

CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).

Monday, December 10, 2007

All Eyes on the Fed, Again

As the market awaits the next widely anticipated reduction the cost of funds to banks, the prices go up. We are ever so close to the 13,750 level we have been discussing for a few days. This is a plus or minus 150 points so the move should be fairly close to being over as the Fed manages to excite the crowd on Tuesday afternoon.

Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.

The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?

The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."

As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?

These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.

We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.

FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)

Sunday, December 09, 2007

Fed to Lower Rates on Tuesday

As we look at the coming week, the possibility exists that we will get to see the top of the recent rally. The runup from the lows of a couple weeks ago has now pushed into our target range near 13,750 and we are very alert to a reversal. Friday's trading did little to change the view that the market is now finding a top. The problem now is not that we have a top in place so much as if the next move is the one we have been anticipating for a Long time.

The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.

Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.

Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.

The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...

The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.

FSI: 107.51

Friday, December 07, 2007

13,750 Give or Take

We had technical difficulties last night--internet was down--so no Update.

The market has come up to the area we have been talking about, give or take. With the FOMC next week, it might try to hold on until then with an upward bias toward that 13,750 mark in the Dow.

The jobs' report came in just a bit over expectations but not much. As expected, at least as we envisioned it last night, the market didn't react much to the news. Now, as we write, the market is pretty flat.

We'll be back Sunday evening for Monday's post.

Wednesday, December 05, 2007

News Day

The market makes a big up push on Wednesday which should be the start of the "fill" we have been discussing recently. There is a problem with this thinking process, the move wasn't big enough on Wednesday. It failed to get above the highs of the last week in the indexes we follow which leaves the door open, at least, to a total upside failure. We see the futures are trading higher this evening offering the possibility of higher prices than last week.

The problem remains that the major indexes are weak. Normally we would see a stronger push than we did on Wednesday leading to a full move up to the 13,750 we have been mentioning. If the market can not get over last week's highs, the stage will be set for a huge drop. We don't see that happening because of all of the possible bullish news items due out over the next week. Weakness is clear but how weak is it, really.

The news is thick with Wednesday Update type items. The first is the front page article on Thursday's WSJ, a story on Auto-Loan delinquency. You may ask, what does that have to do with the Update? Well, this one of the fallouts from the housing situation and the WSJ seems to connect the dots:

"Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.

By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy. "

Then, on Thursday, the Bush administration is unveiling a plan to help the homeowners who can make their payments under the pre-reset interest rate but not after the reset. The politicians want to swoop down and save the day. Unfortunately, the problem is Too big to solve. When the problem started everyone, including the politicians, were considering that home prices would naturally go to the moon.

The President's proposal is designed to help a small segment of the foreclosure pool. Not everyone can be satisfied but as Fleck reported this evening, there was a Contract signed at the outset of the mortgage. Contract law has a long history that is being questioned at this moment in time. Do politicians really think they can just wave their hands and break these contracts? If they can do that, they can do anything.

And, without much detail, MBIA dropped 16% to 27.42 which seems a little lower than its price back in early October, 68. (symbol MBI if you care to try it on From the WSJ: Moody's Investors Service said that it considers MBIA "somewhat likely" to fall short of its capital requirements. Investors seized on this wording, since Moody's put MBIA in the less-likely camp just one month ago.

And, last is the Fed outlook. On Wednesday ADP, the payroll company, said that their employment estimate had jobs increasing by 189K compared to an expected number of 60K. Still, the estimate for Friday's report remains closer to 60K, at 78K. Plus, the productivity number was stronger than expected, too. So, the economy seems to be percolating along and at the same time the credit market is in a crunch and the dollar is declining, or was going into the last few weeks.

What's the poor Fed supposed to do? As mentioned in our last post, the Fed has plenty of room to lower rates if they so choose but with the GDP up over 4% in the last quarter, the employment numbers in pretty good shape, and the stock market in pretty decent shape, an interest rate cut seems pretty self serving, for the banks only. We have yet to decide what the number will be but we will make a stab in tomorrow's post with an refined number early next week--before the number comes out. Our initial thought is, "How can they lower by more than 25bps?"

FSI: 104.70 (and RIMM is down four days in a row, not much but down???)

Tuesday, December 04, 2007

One More Rally Left?

The stock market attempted to go down on Tuesday but it didn't have much punch with fairly low volume and prices down about half a percent. Our opinion is that the wave c, Fill, is going to be right around the corner with a pretty good sized jump--a jump that should be sold. One other opinion would be that the market would just drop right now, but we think one more attempt to rally is probably the right outlook. The futures are up a bit this evening but we all know the significance of that.

The news at the start of the trading day was JP Morgan's downgrade of its competitors. This pushed stocks down generally but most of the damage was done before the market opened. After that announcement things were pretty quiet.

Canada decided to lower its interest rates due to their currency running strong. The officials want to continue selling their products to the world and they are much more expensive with a 20% higher currency. The magic potion is to lower rates and thereby lower the currency.

Here at home, the Fed is now expected to lower rates next week, too. Somehow, we don't think the driving force is the currency is too strong but we could be wrong. As many times as we read that the Secretary of the Treasury wants a strong dollar, there are as many times as we don't think he does. The actions by the Fed are very loud indeed and Fleck describes so of it in his latest Contrarian Chronicles.

Getting back to the interest rate cut due next week, there is some division on the subtraction. What we mean is that the opinion is divided whether the Fed will subtract either 25bps or 50bps from the current level. Recent action in the credit markets are pushing rates down on the Treasuries. The 3 month bill is very near 3% which is lower than it was in the mid-August credit crisis. With the fed funds rate at 4.5%, the Fed could theoretically lower by 150bps but they wouldn't do that next week, would they? We haven't decided what we think they will do next week but we will have an opinion sometime this week.

After the market closed the word from FNM (Fannie Mae) was that they would try to raise some capital, $7 billion, by selling some nonconvertible preferred stock and cutting its dividend by 15 cents or 30%. No one is too surprised by this news but it will be mentioned casually on page three of Wednesday's WSJ, yawn.

FSI: 102.92 (RIMM is down three days in a row, now down 17%)

Monday, December 03, 2007

Hope Now

The stock market opened down a tad but soon the buyers were in there taking the market back up. The market then spent some time moving back down toward the close with most indexes closing near their lows of the day. One of the four horsemen, RIMM, has not fared well over the past two days dropping nearly 15%.

We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.

After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.

The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.

As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.

We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?

Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.

We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.

We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.

FSI: 102.55

Sunday, December 02, 2007

California Real Estate Troubles

The stock market starts a new month with a bit of a rally just behind it. The current situation is giving a little time for the bulls to gather some steam for one last push. We think this should be a move that takes the Dow back up to around 13,750 give or take...

The next ten days have the possibility of a little volatility due to the position we find the market in currently. The first week of the month has the employment report on Friday and then there is the FOMC meeting next week on the 11th. With the market set up for a rally to relieve the extreme oversold condition the market was in the last couple of weeks.

The WSJ has another front page article, Monday, that talks about the higher credit score borrowers that decided to take out subprime mortgages for whatever reason. We recommend the article for your Monday reading. The article does suggest that with some of these higher credit score borrowers in the mix there might not be as much damage created by interest resets over the next few years. There are other interpretations.

The housing market is in a difficult situation and California seems to be the center of it. The Prudent Bear's Doug Noland shows the drop in the median price of a California home has dropped... from the California Association of Realtors (C.A.R): "Home sales decreased 40.2% in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9%... 'Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,' said C.A.R. President William E. Brown. 'The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.'”

Mr. Noland points out that...California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months.

FSI: 104.84

Thursday, November 29, 2007

Let's Go to School In Florida

With the market not giving us much to talk about this evening, we were encouraged to see a comment out there today. We will get to that in just a second but first, we wanted to mention the news you probably already have heard by the time you are reading this post. That would be, our friendly Fed Reserve Chairman decided he couldn't contain himself anymore and had to say that the Fed would consider a rate cut if they judged the threat to the economy was growth over inflation.

Here we are about two weeks in front of the FOMC meeting and we have heard from two big guns at the Fed in as many days say that the Fed may (we read it "will") lower rates at the meeting. We are almost surprised that they haven't pulled the trigger already in an panic move where they would lower rates between meetings. We think that just the fact they are out prancing around with the "Fed will take care of it" talk suggests they believe the world will act better if they say they will do something if needed.

This all fits very nicely with the rally attempt going on right now. The Fed has jumped into the mix with both feet and this should push up the market on Friday, the last day of November, how nice.

The other news on Thursday was the headline that should scare a few people:

Home prices: Worst drop since '70

New home prices were down 13% in October, yet sales pace still falls well short of forecasts. August and September sales reading cut.

We want to mention that 13% by itself sounds pretty bad but take a look at a $400,000 home purchased in October of 2006. That house has just dropped $52,000 to $348,000. The 13% amount can't be applied to Every house but that's a big number. Not only that, the lower prices didn't bring out buyers. Inventories keep going up and buyers keep their distance.

Getting back to Charles' comment on the Florida fund that froze their accounts Thursday: We had seen an article on this yesterday but didn't include it in our post. The news on Thursday indicated that Florida had decided to halt withdrawals. This "run on the pool", which invests money for schools and local governments, took the fund down from $27 billion in assets to $15 billion today after $3.5 billion had been withdrawn earlier today. These are Large depositors taking their money out of this fund which was supposed to be short term safe money market funds.

What this action does is to disallow others from withdrawing funds. The hit from the subprime is going to be borne by somebody. There hasn't been enough information available so far as we can tell that indicates what the level of losses is, just that losses have happened. If you read today's article, there are some familiar names and some names that are SIVs. We wonder if the rules for withdrawing the first $12 billion which has already happened will be different than for the remaining $15 billion, like spreading losses.

Please clarify the second question on the "feds" and funds under their jurisdiction. If you mean the Fed, we want to emphasize the point that the Fed didn't buy any "loser" investments, they just provided short term funding to the banks by buying some of their top rated assets.

FSI: 106.09

Wednesday, November 28, 2007

Cue Up the Same Old Tired Line

The stock market had no trouble blasting off on Wednesday morning. Sometimes the technical position doesn't need too much in the way of fundamentals to trade. But, when the market moves the way it did today, someone has to come up with a "reason" for the move. Today's reason was that the Fed Vice Chairman Donald Kohn said that credit conditions had worsened and that the Fed could step in to help. Let's see, what does that mean??? Fleck's title tonight was "Bulls party at Kohny Island".

With Kohn's remarks, the Fed Funds futures are pricing in a 100% chance of a 25bps drop at the December 11th FOMC. Based on the way these guys operate, they will lower the rates 25bps at that meeting but facts don't get in the way on days like Wednesday, just the hint of a little possibility. The reason for the rate cut is not bullish but the market thinks the rate cut itself is bullish because it can fix anything, including the common cold, we hear. How does a little rate cut help a housing market that is tipping over?

With the Fed behind them, traders were in a stampede to buy stocks from one bell to the other. We got the feeling that the buying was pretty much across the board as the recent losers, like banks, brokers, housing, and the Transports, went on a tear on Wednesday. The move was particularly strong with volume up and up volume swamping down volume. This was the strongest day we have seen in a very long time.

Strong days like this have to be looked at in context. As mentioned some of the weaker stocks performed pretty well on Wednesday which leads some of us to believe that there was a lot of short covering going on putting the squeeze on the shorts even more. Short covering, if that's what it was, is not bullish by itself because once that buyer is gone, stock ownership hasn't changed. The reason for advancing prices is more about forcing shorts to buy and that alone pushes up prices. There aren't new buyers in there taking new positions which they will hold for a long time.

We think the move is the start of a general up move that will alleviate the oversold condition we have been in for a few weeks now. Looking at the calendar, we see that the advance has come right on schedule, just around the end of the month. Here is a good opportunity for us to sit back and wait for a very good opportunity to use whatever loose change we have left to position for a very steep drop.

This move shouldn't last too long and it shouldn't go too high. We will focus on the Dow over the next few weeks to see what it will do. The past month has been a strong down move consistent with the start of something very important. This up move relieving some of the oversold condition should lead to a drop that will take out the August lows and leave no doubt in anyone's mind what direction we are going. The first dig was from about Dow 14,200 down to Dow 12,800, or about 1400 points. So, when we move back up to about 13,750 we should drop at least another 1400 points down to 12,350. These points will be refined as we move forward over the next couple of weeks.

We want to focus on what the market is doing, not what the media is saying. Whoever is quoted in the media is only one voice, the market is the collective voice and we should pay attention to that. Right now we think the market is telling us that the market has turned down at the intermediate time frame and maybe the long term time frame. If that is correct, this little rally phase will whimp out long before we get back to 14,000. Stay tuned...

We'll save the SIV talk for another day.

FSI: 105.28 (up 3.28%, yes, that's good but the Transports were up 3.55%)

Tuesday, November 27, 2007

Volatility Remains High

As expected, the Citi news lit a fire under the stock market on Tuesday even though C itself didn't really get a lot of attention. C opened up about 3.5% but promptly dropped back to even before closing up about 2% on the day. That didn't stop the rest of the market from partying with the banks and brokers faring the best on the day. The techs were at the party, too, with the NDX up over 2%.

...A couple of comments have emerged on C that we thought worth sharing in case you hadn't heard them. The first is that the 11% rate on the convertible bond represents "junk" status. Second, why did C have to go to a foreign government to get financing? Or, why did it need financing at all? Our reading indicated that the interest paid to foreign entities is Not deductible??? Third, some thought that the loan was to continue paying the dividend. The question exists, "Why not cut the dividend instead of paying 11% interest? ...

The 200 plus point move in the Dow didn't come without some volatility. The Dow jumped 100 points at the open and by early afternoon had zigzagged its way up to a gain of about 250. At that point sellers took it down so that it was only up about 100 and then it ran up into the close, up 215. This is the kind of market that drives bulls and bears crazy due to the extreme volatility.

After the market closed, Wells Fargo announced a loan loss provision. These news items are so common that the market seems not to even care anymore. But, a steady drum beat of negative hits to earnings by some of the leading banks and mortgage companies will take its toll eventually, if not sooner. The Wells Fargo item has a bit of a twist, that being they will be trying to sell some of their poor performing assets. That could sting a little. Wells Fargo only thinks the sting will be $1.4 billion. What's a 14 with 8 zeroes worth these days???

Anyway, the Update has been expecting a bit of a bounce from the lows due to the persistent nature of the market holding above the August lows. The players seem to be respecting that support line for now. Our thought is that the volatility now is due to a possible turn in direction from down to up. We do use the word possible because the market has not proved that it will go up, or if it does, how far it wants to go. It is weak and any selling at all will have a cascade effect with fear driving sellers into the market.

The news on home prices and consumer confidence should have dampened the overall bullish spirit on Wall Street but the party was on and nothing seemed to distract it. The other item was lower oil prices. We think that the oil price has tracked pretty well with the stock market for a long time so today's $3 decline would seem to be bearish for stocks. We could make the argument that that oil prices have lagged the decline in stocks so it had some makeup work to do.

Speaking of makeup work, we thought we'd review the homework assignment from our last post. Your first question is something new to us, too. What is a VIE? Well, in short, it's short for "variable interest entity". Our take on the VIE is that it is a way for a company, like a bank, to report on their SIV's, you remember those, the Structured Investment Vehicles.

A bank sets up a SIV in order to reduce its capital requirements. By setting up a SIV, the assets in the SIV do Not show up on the bank's balance sheet and do not need to have capital backing them, interesting concept. Meanwhile, the SIV can go about its business of borrowing money in the CP market (Commercial Paper) and buying longer dated obligations like subprime mortgages.

In the reading material, the author speaks about CDO's (Collateralized Debt Obligations, if you want to know) and how they were the big problem. Well, CDO's can have a variety of assets in them including subprime mortgages. Since the SIV is not a publicly held company it doesn't have to report its earnings or losses to the SEC and the bank that owns it only has to provide some footnote info on the VIE (the SIV and its assets).

There is an accounting rule that says that banks need to report the Maximum losses from their VIEs. The banks can report the Maximum loss but not the Actual loss. And, the banks can downplay the number as it's the maximum and will never materialize. However, as we found out this year, the actual losses can be quite substantial. The article says:

Take a look at Citigroup's second quarter filing, posted Aug. 3, which was well into the summer credit meltdown. In it, the bank said actual losses from its unconsolidated VIEs, which included $75 billion of CDOs, were "not expected to be material." It has since estimated losses could be between $8 billion and $11 billion (which is most definitely material).

More tomorrow...

FSI: 101.93 (not a particularly robust move on a day like Tuesday)

Monday, November 26, 2007

C Convertibles at 11% for $7.5 Billion

There seems to be a lot of ground to cover this evening especially with the recently released news from Citigroup (C). So, let's start with that and work forward and backward from there.

As you will no doubt hear on Tuesday, C has received a cash infusion to help it with its short term capital issues which it has said it doesn't need help with and will have resolved by midyear 2008. C has been falling all year from 57 early in the year to Monday's lows just under 30. Now, tonight according to the WSJ, an investment arm of the Abu Dhabi government is investing $7.5 billion in C. As we write this, the US futures jumped on the news but let's take a closer look at the deal.

ADIA (Abu Dhabi Investment Authority) is going to get convertible securities from C that will yield 11%. One sweet deal. This is what the WSJ had to say:

"In exchange for its investment, ADIA will receive convertible stock in Citigroup yielding 11% annually. The shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011."

The Asian markets don't seem overly impressed with the news and our futures are not quite as high as they were an hour or so ago.

If the financial stocks take this as good news on Tuesday, which seems difficult to believe on the surface, then we may have seen the lows for this move. As always, it is month end this week and as we move into the first part of the month we sometimes see a rally. The stock market is extremely oversold and could rally on this news just because of that. We still don't know that is what will happen.

Based on Monday's action, the stock market certainly seemed to want to rally in the morning but after the news from HSBC, there was some hesitation in that point of view. HSBC announced that it was having trouble with some US mortgage investments in its SIV and has decided to buy some of the SIV's assets rather than risk a fire sale on them.

The stock market didn't like that news and pushed the higher futures down so that the open was flat to down. But, as is so often the case, the buyers came in. They were in control for about a half hour before sellers took over and then there was a little fighting back and forth for control until a couple hours before the close. That's when the market fell out of bed with the Dow dropping over 200 points after running up 180 points on Friday. All of that may be up for debate as we go into Tuesday.

We have been watching the pattern developing in the stock market and see that the August Dow lows have been holding in this last few volatile days. Yes, we did see a new "closing" low but the real intraday low is still untouched as far as the Dow is concerned. Given that the market wants to put in a low here, and it certainly could, there is ample room for it to move up to alleviate the oversold condition. We noticed that the FSI seems to have bounced off its lows as well. More after we see Tuesday's trading.

In the mean time, we have a couple of comments on the SIV's. We received an email from one of our readers last week who asked about whether one could tell if you have a SIV in your money market fund or any exposure to subprime debt. The first comment is that SIV's are the fund that operates by borrowing short and investing long. So, they would go to your money market fund and get money from there to fund buying something with a longer term, recently that would have included subprime mortgages of one kind or another.

Money market funds generally loan out cash to corporations that are in need of some short term float. Many times the corporations just roll over the debt since it is normally 30 day "paper" or commercial paper. Normally this is ok debt to hold because these corporations are good at paying off short term debt. If a SIV is the borrower, that's where the problems started to occur. We need to put off the rest of this discussion. We will make it the main topic for the week and add more info over the next few posts.

There is much to discuss and for your homework assignment, we received another email from the same reader who sent us this link discussing CDO's. There is a CDO primer article built into this article but we are providing that link here, too. Good reading material and thanks to our readers who help make this blog so good.

FSI: 100.16 (holding up pretty well)

Sunday, November 25, 2007

FSI Back Over 100

Thanksgiving has now come and gone. It's the best weekend of the year in our opinion but that's not why you're here so...Let's talk about the past few days trading and see what lies ahead.

On Wednesday, the stock market fell out of bed and the Dow put in a new closing low for the move, closing below August low. The trading low is much further down than this so the market seemed to take comfort with that. If you read the news about the Dow Theory, you know that the Dow Industrials confirmed the Dow Transports drop to new lows and thereby confirming that the trend is down. This news is little followed anymore and hardly registers on anyone's radar screens either. We thought we'd mention it here in case you hadn't heard it.

With the Dow closing at a new low for the move, Friday's trading day could have been down but the market was looking at pictures of shoppers at 5 o'clock in the morning spending money they probably don't have. With everyone thinking the customer is back in business, the stock market thought it could rally off the new closing low. So, as Wednesday gave us a down Dow of 211, Friday erased most of that with a 181 point up move.

That is the case this evening, too, as we see the futures and the Asian markets all trading markedly higher. Whatever is left of that 211 on Wednesday should be swallowed up on Monday morning unless something negative is announced before the trading day begins.

Let's keep this brief this evening and get back together tomorrow after we have seen what a real day's trading can bring.

We trust you all had a nice Thanksgiving holiday.

Wednesday: 99.02 (up when the Dow hit a new low)
Friday: 101.33

Tuesday, November 20, 2007

Amazing Volatility

[Editor's note: There will be no Update posting until Sunday evening. We wish you and your families a Happy Thanksgiving and we will be back next week. If something big happens on Wednesday, there may be a short post on Friday morning but we don't expect it.]

There is much to cover this evening so we better get to it. First, there is the stock market action on Tuesday. Without anything else to mention, the action on Tuesday is a good reason to be cautious when day trading. Last night HPQ announced somewhat good earnings but that seemed to be trumped by the...ok, somewhat twisted...assumption by the market that the Fed would have to lower rates.

When we saw the news this morning on Freddie Mac, we figured the market would surely be down big today but in the market's infinite "wisdom", it assumes that such bad news could only be a trigger to have the Fed lower interest rates, which is deemed by itself to be bullish. At any rate, the market jumped on the early news as they stomped on Freddie Mac, Fannie Mae, and for good measure Countrywide.

Freddie Mac was down about 35% by itself based on news that an Update reader has been reading for months. Freddie Mac and Fannie Mae are called GSE's, government sponsored entities. What that means is that the government set them up, not that the government is there to bail them out. There does seem to be an immediate problem with Freddie Mac which of course is just now coming to light, Right.

Freddie Mac has capital requirements set by Ofheo, Office of Federal Housing Enterprise Oversight, which are higher than normal due to some problems they and Fannie Mae have had with delivering proper earnings statements in the recent past. These capital requirements were put to the test this past quarter at FRE, Freddie Mac, when it announced Tuesday that it had lost $2.03 billion. FRE's remaining capital of $34.6 billion is only $600 million over its minimum requirement. With a loan portfolio of over $700 billion, that paltry $600 million could be gone in a house payment, ah excuse us, we meant to say a heartbeat.

Now, FRE and FNM (check a three month daily chart of the two stocks with the BigCharts link to the left--of course, after you're done reading this post), are supposed to be the big brothers in the mortgage industry, the ones you go to when the going gets tough, like now. Here we have the two of them in tough shape themselves. The trouble they are in puts Countrywide's problems in sharp focus and that stock is now near 10 bucks. Those January 20 calls we mentioned that we had heard someone talking about on the bus seem to be a lost cause.

Then in the afternoon, the Fed released its minutes from the last FOMC meeting which indicated that the economy would slow going into 2008. Its original forecast was for growth between 2.5% and 2.75% and now they are saying 1.8% to 2.5%. This represents a significant shift in their thinking and what did the market do? Surprisingly, it went up but that didn't last too long and that was sold taking the market to the lows of the session. But, at the end of the day a screaming rally unfolded to bring the major indexes into the green. It was truly a stunning day with the most volatility we've seen in a very long time, if ever.

With the big rally at the end of the day, in what most certainly had to be short covering, the trading in the Asian markets this evening is taking prices down and our futures are down as well. We aren't totally surprised by this but the true test is always what the trading day brings not the overnight markets.

One of our readers asked us to take a look at an Asian fund so we did. Before we comment on the fund, we need to say that we keep an eye on Asia but we don't really follow those markets. We just think they are very over bought and have the possibility to drop. These markets have pulled back with the US market and we think they will pull back more. Even more important is that we are value investors here and do not see value in any stock markets except on a very short term basis, once in a while.

The fund mentioned to us is a fund that does not include Japan's market. It has been going up along with the Asian markets for the past several years and the question is, now that the Asian markets have pulled back, is this a good time to get back in? The conversation revolved around an upward trending 200 day moving average with a price above it.

The fund has a vertical rise in it from mid-August to late October moving from about 32 to about 49 or about a 50% move. Now it is back to 42. On the surface without looking at the size of the move the chart looks pretty good but the 200 day moving average is flattening out even with the price above it. That is because there is an upside down V in the price pattern. This is not a bullish price pattern. Vertical rises are followed by vertical decents which normally happen a lot faster. We have not mentioned the name of the fund but have given enough info about it for people to find it but we can not recommend it this evening to our readers so we won't mention it either.

Erick has left us a comment that we wanted to mention here in the post this evening. He seems very bearish which is not unlike what we are but sometimes we do feel that oversold is something that can get relief only by a small rally. We do Not argue that the market will go down. We in fact are short and will continue in that mode until we see some value being created by the markets we follow.

Erick did say that Fleck is having "free week" on his daily stock market commentary which we subscribe to and think is great. We don't know how to sign up for it but you can start here.

CM--we owe you an email but haven't been able to determine enough information to answer your question. We want to share this type of info here at the Update so more readers can benefit from your question. We hope to have something next week after doing some research.

Monday, November 19, 2007

Goldman Sachs Downgrades Citi

There were some developments on Monday. Let's start with the news on Citigroup, C. A Goldman Sachs analyst downgraded the number one bank to a "sell" rating due to its mortgage holdings. The analyst thought there might be $15 billion of problems in their CDO holdings (collateralized debt obligations). C was down nearly 6% to 32. C was trading around 48 just a month ago. Other financials faired poorly as well.

Is GM a financial? Well, many do consider it a finance company and not a car company due to its GMAC loaning activity, both for houses and cars. Tuesday GM was treated as a finance company. The housing market/mortgage market is working to take down GM. Monday, the stock was down about 8.5% on mortgage worries. This represents a new 52 week low.

Then there was the news from Lowe's. They are suffering from the current problems in the housing market. LOW dropped to its Lowest point in several years, down about 7.5% on Monday. Housing stocks were pounded again, down over 5% as a group. They are down about 50% over the past year.

But...then after the market closed the big news from HPQ (Hewlett Packard) gave the bulls some hope. Even though the stock was down during the day along with the market, its news did manage to bring it back. There is a chance that this news can revive the flailing tech bulls, at least temporarily.

Let's spend some time on the near term market movement. The market is oversold and probably needs to rally some. This evening, the Asian markets opened down strongly but have managed to come off their lows, for now. Our stock futures are up probably in response to the HPQ news. Some of the analysts we read are looking for a rally to relieve some of this oversold condition.

As we look at the situation this week, there seems to be a strong sense of selling going on. The rallies that happen are suddenly knocked off their feet. The holiday week brought some significantly bad news on the housing front, including the Goldman Sachs downgrade of C.

We think the market participants have strong underlying bullish notions. They think the market is only temporarily going down and that ultimately, very shortly, the market will come back to life. They could be right but what if they aren't. If the market continues to go against them, these people may change that underlying notion to some fear and drop out of the stock market--in droves.

More tomorrow...

FSI: 94.89
Arithmetic and Market Cap are not showing much different numbers so we will post the Arithmetic version from now on.

Sunday, November 18, 2007

Fed Exp Tells Us Expected News

Last Friday the stock market managed to jump around like it had its feet on hot coals. We consider this was caused by the options expiration. Of course, there are several forces on the market pulling it in different directions.

Early Friday, Federal Express, a small delivery company that you may or may not have heard of, announced they would have lower earnings in this quarter and for the full year. The company said "soaring" fuel costs combined with lower freight orders to lower their earnings. For this, the market decided its share price should be less by the end of the day, but only by about a little less than 5%.

This news had a detrimental effect on the Transports for the day, which were down by over 1.5%. This compares to the higher Industrials and most other indexes. That doesn't really match up with the broader market which had negative breadth.

In our quest to bring you some information that is useful to you we always try to share information from other sources. Today, we see that CNN Money had a little article about the ABX indexes. These are the indexes that are based on some mortgage debt. The five pages of info give some nice basic info on the indexes.

The real estate market is part of the fabric of the country and will be part of the news over the next several months. The WSJ has an article on Fannie Mae and Freddie Mac that may be interesting to you if it appears in the Monday paper. We'll try to bring more info on this tomorrow.

We are expecting a little less activity in the market this week as the Thanksgiving holiday may keep many away from trading--this may be totally wrong but we are not expecting too much.

Arithmetic: 95.77
Market Cap: 95.44

Thursday, November 15, 2007

GE Breaks the Buck

In the morning, the market had to deal with that pesky consumer who wasn't shopping at JC Penney. The company reported lower earnings due to slowing sales in the past couple of months. This news was a blow to those who thought Penneys would be a bright spot in holiday shopping due to their product line. With this news, the market had to almost concede that the consumer might not be in such good shape after all.

The market had more bad news to face on Thursday afternoon after Wells Fargo announced that the housing gloom is the worst since the Great Depression. As we were reading the article, we thought they were going to say "since 1991" like we hear all the time but to hear them say Great Depression was a shock. It means they are very pessimistic about the current state of the housing.

The other troublesome item came from GE. We had seen this last night but couldn't find a free link to it for you to read but the coverage expanded to Bloomberg on Thursday. We thought this news deserves some attention due to the blunt nature of their announcement. Of course, the article does a good job explaining the situation and you should take a moment to fully understand the implications to you and your money market fund but...

GE has invested some of its short term assets in vehicles that have been going down in value such as mortgage backed securities, notably subprime in nature. GE sent a notice to "depositors" saying they would be offering to buy them out at 96 cents on the dollar. If you have a money market fund, you probably know that the Net Asset Value (NAV) is usually $1 and as interest is credited you just get more shares but the $1 stays the same. Well, not in this case apparently. This time GE is going to "break the buck".

To be fair, this is not a Money Market fund but an Enhanced Cash fund which does have a bit more risk to it than the money market fund. That's because it is trying to "enhance" the return on the fund by investing in more aggressive assets. This time, those assets went down in value and did Not enhance the return at all.

This news did push the Treasury market up due to a flight to quality at the longer end of the curve. With the short end trading down over the past several sessions, the drumbeat is getting louder that the Fed will cut rates again at its next meeting. Since we don't think the Fed would dare stand up against the market, it would seem the Fed is free to lower rates once again.

FSI Arithmetic: 94.66
FSI Market Cap: 94.14

Wednesday, November 14, 2007

News is Getting Un"bear"able

One thing that can be said about the market these days is that it's not boring. Tuesday the market jumped out of the Monday lows and it looked like it might be off to the races. Then on Wednesday the market tried to follow through on those gains but at the end of the day the sellers took over again.

We need to take some time to evaluate the position of the market. The past week has shown us that the market is truly on a weak footing. The market has its ways to confuse as many players as possible and it seems that now is one of those times.

As we have watched the news over the past couple of months, the market has seen the same news and decided that in the end it didn't really matter the way the housing world was going. Every day that goes by, there are more and more billions of dollars that are being "written down" and it seems that the sheer volume of items is finally waking up the market.

Today's news includes a couple of items that work into our viewpoint. The first is a Bloomberg article describing a situation about a Florida agency that had nearly 5% of its assets cut below investment grade with possibly more downgrades coming. These assets are short term and should be fairly safe but not in today's environment. Will this mortgage monster affect the money market funds we all hold?

The second item relates to the general softness in the retail sales data released on Wednesday morning. The dots are finally being connected by other people who agree that maybe holiday shopping may suffer somewhat from the issues at hand, reporting directly from the article:

"This [sales report] is the worst performance in five years and we expect a further deterioration as consumers cut back in the face of soaring gas prices, falling stock prices and the continued disaster in housing," Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote in a note Thursday.

These statements will continue because that is the trend of the economy. The consumer in general will find it difficult to spend the money they don't have. They used to be able to do that when the ATM they were living in was coughing up large chunks of money. Now they are trying to pay back the amounts they borrowed. There are some who won't be able to do that.

The WSJ reported that UBS might be reporting a $7.1 billion charge. CNN Money was kind enough to report the story so that we can bring it to you here for free.

We seem to be overly pessimistic this evening but the world is about to be set on its ear as the great speculation of the past several years starts to unwind. The unwinding of all the debt that will never be paid back will cause the investors to get less than they expected. The deflation we have talked about in the past is about to come into view. We will continue to watch this.

The stock market will put on a brave face and try to rally under any circumstance but we see that more and more there are still sellers. As the buyers get thinned out or sold, they will disappear and we will see a free fall in the market. Fear is a powerful emotion.

Arithmetic: 96.74
Market Cap: 96.22

Tuesday, November 13, 2007

Bears KO'd

The stock market staged its comeback pretty much on cue. It seems as soon as a little bearishness creeps into the market, an upside reversal is almost certain and quick to happen. The market was extremely oversold going into Tuesday's trading which allows almost any little good news to push up the market. Enter Wal-Mart...

Whatever Wal-Mart said was enough to start a wild frenzy of buying or at least that's what the media told everyone. We don't really think the Wal-Mart news had much to do with the big rally but WMT did move up on its own as well. The news from WMT could almost have been thought of as not very good news but that's beside the point. The media needed a reason for the rally and WMT seemed to be it...oh, well.

The news from Bank of America that came out in the morning, too, was not really very good either. BAC announced another $3 billion of losses due to the normal old news. The stock market thinks that the news is just more of the same with barely any consequences going into the future so BAC was up over 5%. Crazy.

Arithmetic index: 99.33
Market Cap index: 98.69

Monday, November 12, 2007

Bearish Sentiment Returns???

The stock market made an attempt to rally on Monday but at the same time the four horsemen were headed in the other direction, charging South. Our new index, the FSI which stands for the Fo(u)r Speculation Index until someone can come up with a better name, has plummeted over the past few sessions dropping over 5% per day for three days in a row.

As a reminder, there are four stocks in the index and those would be AAPL, AMZN, GOOG, RIMM. The drop in these stocks has put a chill on the NASDAQ 100, NDX, which itself has dropped over 11% in the past four trading days. With such action, the fear is now that the four horsemen may be telling us there is a bear market in place. This talk has us shaking our heads once again since it means that just when we were getting the market going on the downside sentiment has shifted. This could easily suggest a bounce is in the works.

According to some, this drop is just a little correction that will lead to a bit of a rally and then another decline. This decline would be contained to levels above where we are at present and cause buying to come in to drive the market to new highs for the move. What might actually happen is that the leadership would move to new highs but the broader market won't be able to go to new highs which means the move would be the last.

We think the leadership is mostly in speculation and mostly represented by our FSI. These stocks are not currently in a position to lead the market anywhere but Down. That could change as we are solidly oversold, the sentiment is starting to get a little bearish, and the Thanksgiving holiday is fast approaching.

You can keep an eye on the FSI to get some clue as to where the Market might be going:

Arithmetic price weighted average: 93.75
Market cap weighted average: 92.17

Sunday, November 11, 2007

Important Days Coming Up

We barely had a chance to put up the title of the post this evening when the futures decided to drop. We had already noticed that the Asian markets were down but probably reacting to last Friday's drop in the US market.

We did notice an article in the WSJ that tries to make a statement about the US markets: "A new fear is helping fuel the latest stock-market rout: that booming global growth -- for years the engine of the world's financial markets -- may have trouble pulling U.S. markets out of their swoon this time around."

The other item, which may not have anything to do with this drop, was an article about Citigroup (C) wondering when the company actually knew about the bad news on their writedowns.

Either way, the Asian markets have dropped more and the futures are down nearly a percent. This follows a dramatic drop in the final minutes of trade on Friday. As the market had opened poorly on Friday morning following news from Wachovia. Wachovia kind of derailed the rally in the overnight futures on Friday morning.

The Dow opened lower by about 150 points and then traded in a range for the better part of the day. There was a brief drop that took the Dow near the 13K line but it bounced out of that range quickly. The rally that came with about two hours to go brought the Dow back to the 13,200 range going into the final hour of trading.

With about 40 minutes to go in the session, something happened that started some selling. We haven't been able to determine what that is and you know how we think about things like that...with no news, the move is much more significant. The drop into the close was impressive with the Dow dropping back to the lows of the day.

This down move tonight seems to be an overnight futures situation meaning it's not very important but the Asian markets are still getting hit pretty hard. Our opinion this evening is that the market is in a decision-making point. The poor trading over the past few trading days gives the buyers a chance to sit back and wait for better prices. Then there is the fear factor for those who have been watching their stocks drop.

Of course, the market is now oversold and that breeds bounces but there are many questions in the minds of investors. What will the answers be? We can only wait and find out. Meanwhile the overnight futures have found a trading spot so we'll see if there is any follow through in the morning. The Asian markets are still down and making new lows for the evening.

The fear factor is exhibited in the FSI index where the prices have now dropped below the 100 level:

Arithmetic index: 99.19
Market Cap index: 98.04

Thursday, November 08, 2007

NDX Gets Hit With Four Downed Horsemen

The NDX, NASDAQ 100, had a rough day of it on Thursday. The four horsemen didn't have a very good day either considering the drubbing they took and that they are being over ridden by the Senior Senator from New York, Charles Schumer. Here is the statement from CNN Money:

"I think we are at a moment of economic crisis stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices," Schumer said. "Each of these problems alone would be enough of a threat to our economic well-being. But taken together, they are essentially the four horsemen of economic crisis."

Well, there you have it. In one fell swoop, the Senator has eliminated the "traditional" four horsemen and replaced them with the "new" and improved list. The list is only part of the whole story but since it includes the falling housing prices, we thought we could include it here. We received an email from CM saying that, "I think everybody loves the 4 horsemen tag. Somebody better copywrite it quick or it could get ugly." We had thought there might be a link to the Schumer quote but...luckily we had accidentally seen this quote.

Back to the action from Thursday: As the market opened, CSCO had set a pretty negative tone from Wednesday evening's news. That news had dragged the over night futures down but as the Asian markets closed, down pretty hard actually, and European markets opened, the futures found a way to come back up. The techs did have a weak opening and they were able to encourage the rest of the market down.

Soon after the initial drop, there were some buyers willing to come in and buy the Dip. That action did Not last very long and about three hours into the day the market looked as if it was going to yawn into the deep cavern. But, as the last seller was exiting, the buyers entered and the ensuing rally was impressive (probably short covering at any cost). This rally brought the SP 500 to Green and then the Dow to green but the Dow couldn't hold its color and left the day in the red. The SP 500 was about even on the day.

Ok, that wasn't what happened to the NDX. This index, along with the NASDAQ Comp, was down a bunch even at the end of the day. Yes, the general shape, meaning the way the index traded, was similar to the overall market as it normally is but the weakness in NDX was more pronounced. The NDX was down about 3% on the day, around 63 points, but it had been down 103 points earlier in the day so it had a big rally along with the rest of the market.

So, the "traditional" four horsemen are in the NDX and they powered the index down. GOOG was down 40, AAPL was down 10. The now famous index, the FSI, developed here this week, was down over 5% on the day.

Arithmetic index: 104.62
Market Cap index: 103.82

Wednesday, November 07, 2007

Market Down Hard on Wednesday

Well, that was different. We knew that the market might open down on Wednesday but to actually stay down and go down further, well, that is hard to believe. We mentioned GM last night with their $39 billion news and figured the market could swallow that whole and not have much trouble coming back from that. You know, it's company specific so the broader market could keep going, or so it would seem.

For its part, GM was down but not that much and not even close to the lows from earlier in the year. So, what was going on this morning? From what we could tell there were a few comments coming out of China suggesting that country would start investing in "strong" currencies while getting out of "weaker" ones. What is the weakest currency on the planet? That would be the US dollar. It seems only about a week ago that it was at parity with the Canadian dollar and today it traded at 1.10, oh my.

What exactly does China mean? Looking at their huge holdings of US Treasury bonds denominated in US dollars, they could mean that they won't be buying any more and they might just decide to sell some of what they have.

The other implication here is that the US dollar is suffering a major selloff that will cause a flight from the US stock market. A lower dollar suggests higher inflation and a poor store of value for investors. The Fed (there they are again) has been lowering short term rates putting even more pressure on the dollar.

The subprime situation is getting more attention, too. The New York Attorney General Andrew Cuomo has ordered a review of all Washington Mutual (WM) appraisals and mortgages purchased by Fannie Mae and Freddie Mac. It seems the purpose of this investigation is to find out if Fannie or Freddie should stop purchasing WM's mortgages because WM "improperly pressured appraisers to provide inflated values that best served the lender's interest." WM sold $24.7 billion of loans in 2007 to Fannie and another $7.8 billion to Freddie.

The Attorney General's comments are particularly harsh, "WM compromised the fairness of this system by illegally pressuring appraisers to provide inflated values. Every company that buys loans from WM must be sure that the loans they purchased are not corrupted by this systemic fraud." As you might imagine, WM didn't fair too well in the market on Wednesday dropping nearly 20% to close at a seven year low near 20. WM had been in the high 40's earlier this year.

But, after the market closed on Wednesday, CSCO, a familiar name, announced their earnings which were pretty good, actually. The problem was that the normally optimistic John Chambers expressed some concern about the future. The market took one whiff of this and sold CSCO on that news. CSCO was down almost 10% in after hours and has put a drag on stock futures in general this evening. The Asian markets are also down in reaction to the US stock market and CSCO.

Let's see what Thursday brings us...

FSI arithmetic: 110.64
FSI Cap weight: 109.92

Tuesday, November 06, 2007

Fo(u)r Speculation Index, FSI

The answer to yesterday's title question "Are there some sellers out there?" was answered with a yes for about an hour in the morning but a no after as the market started a big rally that went vertical in the last half hour of trading. As we mentioned in our last post, the market would need to go down soon or there would be some possibly quick upside. Well, surprise, surprise, surprise (Does anyone know Gomer Pyle?) the market decided to rally. Now, we are wondering what else can happen in the short run.

After last week's Fed letting, the market couldn't hold its gains and on Thursday dropped, a lot. Since then the market has struggled to get back to those Wednesday highs. The NASDAQ indexes have faired better than the blue chips, like the Dow and the SP 500 which have struggled.

With GM's news of a $39 billion write down in the third quarter, due to a tax credit that they now can't take because they weren't profitable, the market needs to take a few seconds to deal with that number. Shouldn't be a big deal, it's only $39 billion after all.

CM sent us a URL of a Jim Jubak article on MSN which pretty much will write our blog for us this evening. He hits on several of the points we have mentioned over the past few weeks here so we recommend it to clarify some of what we have been trying to say.

We have been working on our Horsemen index which we now need to name. Some of our choices are 1.) HMI, HorseMen Index; 2.) FHI, Four Horsemen Index; 3.) HIP, Horsemen Index Phour (ok, ok, maybe not); 4.) FSI, Fo(u)r Speculation Index; 5.) Something you call it???

Anyway, we have some fascination for the arithmetic index with simply adds up the value of all the stock prices and then we "normalized" it to start at an index level of 100 on October 22, the day before a big increase in prices. We will show the market value weighted index as well but with the market value of GOOG and AAPL being larger than the others, it may not be the way to go. Here, too, with the market cap weighted average, we "normalized" it to start at 100 back on October 22. We plan to keep track of this to get an idea when the overall market will turn down. (Jubak seems to think after next year's election.)

Arithmetic Price weighted average: 111.86
Market Cap weighted average: 111.35

Monday, November 05, 2007

Are There Some Sellers Out There?

Citigroup changed CEO's and put former Treasury Secretary Robert Rubin into the Chairman of the board position after the company announced that it would be taking a possible $11 billion hit on its mortgage portfolio in the coming quarter. Mr. Rubin had been working at C already but now has quite a visible position. We were somewhat surprised by the stock market's reaction to the C news. C dropped a bit and is now trading at a price it hasn't seen since 2003.

The rest of the market decided to take a cue from C and trade down, too. Most of the indexes opened down on the day but immediately decided to rally. Then there was another dip that took the market down below the opening lows. With about 90 minutes to go the market was on its lows of the session and suddenly a fierce rally took hold pushing the SP 500 up over 20 points into green territory in about a half hour. From there the market sold off into the close with only modest losses across the indexes.

Somehow, we think the stock market thinks it has now dealt with the issues at hand. It thinks all of the bad news is out on the mortgage/housing situation and can now go back to the business of going up. We see that sentiment indicators are flashing red on the bullish side meaning, of course, that the next move should be down.

The opinion here is that we should have some more downside but the market is at a minor crossroad right now. It has to move lower in order for a bearish pattern to emerge. If it decides to rally from here, there will be a quick run to new highs in the Dow. We do not think this is the next place the Dow goes but if sellers don't come in to continue the downside, then there will be some upside pressure and could develop quickly.

We haven't worked on our Horsemen index this week but we will do that before the weekend. We think the end of tech is coming and that will signal the big downturn in stocks. We want to be prepared. The global stock bullishness is almost getting boring.

Sunday, November 04, 2007

Fed Ramblings on Sunday Evening

This evening we look back to some of the events of last week. As we saw the headlines on Friday morning, we realized that we didn’t even mention the jobs’ report in our last post. We didn’t mention it because we didn’t think about it which means that we didn’t think it had much to do with the market. The market did get to see a rather nice jobs’ number, up much more than was expected.

When the jobs’ report came out just a while before the open, it gave a lift to the stock futures which eventually gave the opening a fairly green hue. As sometimes happens, the news-related move quickly dissipated so that the market was down about a percent shortly after the opening but by day’s end the market was able to rally into the close.

With it being Sunday evening, we thought we would spend some time on the Fed. We have made several comments on the Fed over the past several posts and would like to present our position on the Fed. So, here we go:

The very idea that the Fed has to “follow” the market rather than lead it dismisses the notion that they have any control over short term interest rates. We certainly do Not believe this. They have the power to say, “No, we don’t like where interest rates are currently or we don’t care where the market would like rates to be. We think rates need to be raised due to the inflationary pressures that easy credit and low rates create.” The Fed has been duped into believing that what’s best for the stock market is best for the world. Short term gains in the stock market do not necessarily provide lasting gains.

The situation over the past ten years has given the Fed very little credibility because it has not only allowed easy credit but also has encouraged it with lower rates. The ridiculously low published inflation rate has allowed them to avoid looking at “asset” inflation. This has never made much sense to us in our normal analysis. The problem is that the idea of independent thinking doesn’t provide anything satisfying when the Fed just jumps in to save the day. Billions of dollars do have some power and the Fed does have that kind of power and money.

When the Fed is in “control” the market actually can’t set rates at will. The Fed can make a difference by controlling the amount of liquidity sloshing around. Instead, when rates on the short end drop to 1% and stay there for many months, asset inflation has a real chance to percolate. The Fed doesn’t really understand that asset inflation can lead to the opposite, asset price depreciation, with the unfortunate speed of lightening. The Fed is emboldened by their past ability to “reinflate” but this time the credit market is in control, not the Fed.

As credit is, and will be, shrinking, the Fed will truly be pushing on a string when it tries to reflate by lowering interest rates. The credit behemoth needs more and increasingly more additional credit in order to sustain itself. This credit (remember it’s called debt) has to be generated by borrowing and borrowing more than was done before. This has been going on but now we will see if that trend has reversed. Losses being reported by big brokers and banks indicate there may be some slow down in borrowing. We will keep an eye on it.

Thursday, November 01, 2007

What Has Fed Done for Us Lately?

You may have already seen the little drop in the market on Thursday but we wanted to emphasize a few minor points about it. The biggest news of the day is centered on the situation that Citigroup finds itself in. We have been discussing SIV's here off and on for a while now, that would be Structured Investment Vehicles, and C (Citigroup) is purported to have several big ones. The reports are that there are about $350 billion of assets in all SIV's and C's SIV's have $80 billion or over 20%. When the Super SIV was being proposed, C was/is one of its biggest supporters and the reason is that they have a lot of exposure.

We don't want to get into SIV's tonight but they are a part of the underlying problem in the financial world. The problem in the real world is that mortgage debt is in the process of being submerged. We refer you to Friday's WSJ where there should be a front page article that gets pretty close to what is going on.

Before the market opened on Thursday morning, an analyst decided to downgrade C and said that it may have to sell some assets or lower its dividend in order to shore up its capital base. This sent stocks in Europe down and led to a drop in the US markets as well. We care about this because it is stock market related but there is significantly more going on in the real world.

Deeper into the article we find out that the bulk of the resets on ARM's have yet to come. This sentence is followed up with "The percentage of subprime mortgages...that were more than 60 days behind in their mortgage payments topped 20% in August..."

The next topic is CDO's, collateralized debt obligations, some of which are based on mortgage debt. Some of the riskier tranches, classes, had been trading at 50 cents on the dollar in August and now they are 17.4 cents. For the triple A tranches, which the rating agencies had, repeat, had rated there, some of them are 79 cents on the dollar after being about 95 cents about a month ago.

And, then at the top of the stack there is a tranche called Super Senior. These are the problem for many investors, banks. "In October alone, ratings firms Moody's InvestorsService, Fitch Ratings and Standard & Poor's have downgraded or put on watch for downgrade more than $100 billion in CDOs and the mortgage securities they contain. In a glimpse of how much banks have at stake, Swiss-based UBS holds more than $20 billion of super-senior tranches of CDOs. They're among the reasons UBS, which reported a third-quarter loss of 830 million Swiss francs ($712.8 million), has warned that its investment bank is likely to face further losses in the current quarter."

We wanted to put these big numbers into some perspective. We read about billions of dollars and we think it's a lot of money but how much is it? Back in 1998, a hedge fund called LTCM, Long Term Capital Management, had leveraged itself against what they thought were solid trading positions.

What ended up happening was these trades went against them and their leverage destroyed their capital. When that happened it put a huge strain on the banks that had lent them the money against their margin. At the time, the stock market felt the liquidity strain and LTCM almost took down the entire financial system were it not for the intervention of the Fed and the banks.

Here is why we have spent the time to discuss this: The consortium of banks that discussed this bailout for LTCM were considering less than $4 billion between all of them. Less than ten years later three banks are trying to set up a Mega SIV that will be about $80 billion. Anyway, we just thought it might help put some of these huge dollar amounts, being thrown around like it was play money, into a recent live situation that was thought to be large enough to dismantle the financial system.

So when the Fed lowers rates on a Wednesday by 25 bps, the world celebrates but the reality is that those few bps will not cover the mortgage problems that are going on out there right now. Of course, meanwhile the housing market continues to deteriorate with prices expected to fall more in the coming year. Are they kidding?

The stock market is now going to have to figure out some way of convincing everyone it's ok to buy stocks. Even the Asian markets are down this evening.

We have thought it might be a good idea to put together a new index, one based on the four Horsemen. We are in the process of designing an index that properly reflects the four stocks and gives us a sense of the speculative juices that the market has. We thought maybe we should do just an arithmetic index by just adding up the prices, like the Dow; or, should we use a capitalization method like the NASDAQ. We will try to put this together next week so we can watch it daily.

In the mean time, the stock market is in some trouble now. There should be some more downside to come. Let's see what happens.