As we were writing our last post on Wednesday evening, the stock futures were trading higher but overnight they faded. By the opening bell, stocks were trading lower and that’s exactly how they opened.
The NDX, NASDAQ 100, traded down to 1800 a number that has been like a magic magnet for this index. Back on November 15th the NDX moved above the 1800 mark for the first time in several years and since that day it has traded at 1800 on 28 separate days out of 57 days. Don’t forget this period of time has been an extremely bullish time in market sentiment but this index has done Nothing since November 15th except trade around 1800. As per usual, the early morning sell off was greeted with buying and the NDX rallied into the close but failed to close positive.
As for the other indexes, the Dow stayed in negative territory all day long. The SP 500 traded about the same as the Dow with just a little green late in the day before closing down only slightly.
With the SP 500 closing at a new relative high on Wednesday, this index needed to go down from the bell in order to preserve the bearish nature of our last post. When it did go down, and fairly strongly down, at the opening, we were thinking the market was confirming the top for us. As the day wore on, we were a little disappointed in the lack of downside follow thru. It was just like most other days when the market opens down, the buyers think it’s an opportunity to buy. This day still leaves the jury out deliberating.
We are aware that it is Thursday evening and that we won’t be writing again until Sunday evening but we have to wait for more info. The important thing to remember in all of this is that the market is in dire need of a pullback and we think it will be a very harsh pullback indeed.
Thursday was real estate day in the Wall Street Journal (WSJ, as we usually call it). There were no less than three prominent articles on real estate in Thursday’s edition. We recommend taking a little time to read through them. The first is on the front page and is entitled “Faulty Assumptions: In Home-Lending Push, Banks Misjudged Risk.”
This article talks about the way HSBC aggressively pursued the sub-prime mortgage market over the past few years. This week HSBC announced that it was increasing the reserve for bad loans by 20% or $1.76 billion. Most of these loans are considered to be second liens or home equity loans and most at the time of the original mortgage in order to eliminate the need for mortgage insurance. As these loans are starting to deteriorate, they can only be described as financial “rot” in their balance sheet. HSBC loaned or purchased mortgages for the sub-prime market and now the debt is no longer being serviced.
One of the items in the article struck our attention. Back in late 2005 the bankruptcy laws were being revised making it more difficult for people to file for bankruptcy. (You may recall that mid-2005 was the peak in the real estate market by most standards.) When the default rates were going up in late 2005, HSBC thought the reason was that people were trying to get ahead of the new bankruptcy laws. As time went on, they began to realize that “they had a broader problem.”
Another topic in the article is “stated income” loans. You’ll want to find out about those.
The other two articles are in the Personal Journal section of the paper (Section D). The first is on the front page of that section and is entitled “Mortgage Refinancing Gets Tougher.” On the second page you’ll find another article entitled “Glut of Homes Supply Deters Price Growth.”
All three of these articles are important to the future of the economy and again encourage you to read them. We would normally give you some analysis of the articles but you should read them for yourselves. We have been saying some of these things were going to happen a long time ago and now the media is getting around to telling us the horror stories.
Dow Industrials: 12,637.63 -29.24