Tuesday, July 31, 2007

A Nasty Down Turn

Tuesday's action in the stock market can only be described as bearish with the Dow collapsing at the end of the day after being up strongly in the early going. As the market opened on Tuesday, the Dow jumped about 140 points in the first hour or so. When we read about the day there was some talk about AHM, American Home Mortgage, the company we discussed here last night and higher oil as the two leading "causes" for the decline. Well, we can't really understand that as well as that there really was no real "reason" for the decline, which should be very scary to the bulls.

Markets like to be able to explain why things happen and today's explanations just don't hold water. Yes, it is true that AMH did have a bad day on Tuesday, down 90%, but we knew about that a day earlier so the market had to know about it sooner than that. And, normally the Dow and oil have made new highs for the move together looking back on the past several years of trading.

Our caution to you is that in a bear market the rules can get a little bent or broken especially if you are looking at the rules that "work" in a bull run. Tuesday showed up early and fade to Black late which is what happens in bear markets. This is just opposite of what happens in bull runs where markets will get scared in the early going and sell off but manage to rally the rest of the day.

Bear markets are especially treacherous for traders and Tuesday is a great example of that. The market has made everyone who buys dips look like a genius for so long that now buying dips seems almost automatic. Except, today for the first time in this Bear move, the market did not reward the, pardon the expression, "dipsters".

Most of what happened late on Tuesday should help convince some that a change has occurred. As these people are now convinced, we rather expect a bounce off Wednesday morning's lows. Oh, we haven't had a chance to mention the futures market this evening. We should probably do that first. As the evening has worn on, the overnight futures markets are falling. This seems so out of the ordinary because it has been a very long time since we saw the futures show these extreme numbers. There doesn't really seem to be much news to explain it at least as far as we can find but the market is down hard this night.

We think the Dow has a chance to get down to 13,000 as early as Wednesday morning, and, as we mentioned above, there could be a bounce that would occur at that time. Calling for a bounce is not a trading idea just a guess as to what might happen in the morning. We don't even know if the futures can hold their negative positions all night, although we expect they will.

At any rate, we are in for an interesting trading day on Wednesday to start out the month of August. There should be some extreme price moves will be caused by some recognition of the bear market that is starting. Come back for the full Wednesday Update tomorrow, there should be much to discuss.

Monday, July 30, 2007

Just a Few Thoughts

As the market opened on Monday morning, there was a little skepticism among the players. The news prior to the open was that American Home Mortgage was going to have to put up more cash at the request, or maybe demand, of creditor banks. AHM traded down about 40% before the opening bell and then was not able to actually open for normal trading hours. The mortgage market seems to be popping up with bad news even now—no surprise to us.

In other news, probably also related to the mortgage market, a hedge fund announced that it was closing down and would be distributing what was left of its assets to investors. The firm of Sowood Capital Management announced that it had suffered losses over 50% THIS Month. Apparently, the firm had started the month with about $3 billion and is ending it with only $1.5 billion, ouch. That’s a bad month for anyone.

We are posting this evening due to the trading during the rest of the day on Monday with the Dow up about 90 points on the day. The bounce was a relief to many and gives more hope to the bulls. The market has dropped over 500 points in the two trading days prior to Monday and 90 points feels like a bounce. We will know soon enough whether the first leg of the decline is over and we are getting our corrective bounce. The bounce could be a strong one that will give even more hope to the bulls but we do Not believe it will carry to a new high in the Dow. There will be warning signs of that as any rally plays out.

The market is very oversold and will need a small rest before resuming its down hard path. The end of the month is upon us, a normally strong period of time. We have the jobs’ report coming out on Friday morning which would be a good point for any rally to aim for, meaning a rally could take place that would move the averages up into Friday morning. Our position remains that rallies should be sold.

There is one thing we have missed telling you about last Thursday's trading day. First of all, it was a large volume day and there was another "glitch" in the tape. If you didn't hear, there was an eleven or twelve minute period of time when the price reporting on the Dow was suspended. The obvious thought is that there was too much trading volume to report prices accurately. This is something that could be a bigger problem if the bear gets a hold of one of these trading days and trades are going too fast to keep track of them. Something to consider since this type of thing happened during the February downdraft in the market. That was the day that the Dow mysteriously dropped 200 points in about ten seconds.

Sunday, July 29, 2007

Late Friday Break

As the market was getting ready to close the trading week, there were a few who decided not to be long over the weekend. The Dow fell about 150 points in the final half hour of trading. The market ended a poor trading week with an uneasy feeling going into the weekend.

We thought a quick post would be good just to set us up for another trading week. With the drop late Friday there is a question as to just how the market will trade on Monday. After all, the late day break came very unexpectedly to most traders.

We here at the Update think the market is a bit oversold and may have some ability to stabilize for at least a few hours of trading. This market has become extremely dangerous and should be handled with care. Friday’s late action could be a fifth wave for those of you who are Elliott Wave enthusiasts like we are. This implies a minor rally to correct this extreme drop over the past few days. But, bear moves are sharp and corrective up moves in them can be very short lived. Due to the steep nature of this particular down move we suggest selling rallies, not trying to trade them.

The very nature of the market gives rise to most people still being bullish at this point. Oh yes, they may be willing to say that the market was a little ahead of itself and deserves a pullback but they certainly don’t believe this is the resumption of the bear market. That will happen soon enough as prices continue to fall but for right now, we will be happy to sell to those people who think this is a great buying opportunity.

We recommend cash for the near term and maybe we can venture into some longs later in the year when some bargains are out there. We are particularly interested in the possible bargains in the gold complex but that market should be ready to break down here very soon. We continue to watch it for opportunities but it seems that they are off in the distance at this time. We can wait for a good entry point.

Good article on page A1 of the WSJ, "Analysts Debate If Bull Market Has Peaked".

Thursday, July 26, 2007

An AAPL Today Did Not Keep the Bears Away

As it turns out, the market didn’t pay much attention to the AAPL news we mentioned in our last post. There were other things going on besides the AAPL story. When we finished last night’s post, the futures were up about 10 points and when we reviewed them before the market opened today they were down over 10 points. This being the case, we surmised that maybe something was going on besides AAPL.

We have been talking about the credit markets for some time now and in fact we have based our blog on the idea that the housing market (including the mortgage market) would ultimately drive the stock market down. What has happened along with the mortgage market is extreme credit type activity generally. The biggest culprit could be the LBO, leveraged buy-out.

This is the idea where a company is bought out by a group that has borrowed money, debt which the company being purchased carries on their books. The concept revolves around much the same idea as buying a house with a big mortgage. The interest is deductible and of course the “value” of the purchased item is going to go up so it can be sold for a profit. The plan for Private equity firms is to do the LBO’s and hold companies off the market for maybe five years and then bring them back to market and do an IPO, initial public offering. Then the whole thing starts over.

You can readily see some fallacies in the paragraph above especially as it relates to prices going up. This is the time when the financers of the LBO, banks or general investors, start to get a little nervous just like the investors in the subprime mortgage market got a little nervous when the defaults started pouring in. In this case, the LBO deals just can’t get done because there isn’t enough money being offered for the potential buyers. In other words, investors are getting risk averse and do not want to “invest” their money in LBO’s. In our last post, we indicated that the Chrysler buy-out was having trouble getting financing.

On Thursday, Tyco Electronics withdrew a $1.5 billion note citing “unfavorable conditions in the debt markets.” That’s another way of saying that they couldn’t get investors to commit to the deal or they would have had to raise the interest rate too much in order to get the deal done. The credit markets were suffering losses as more and more investors are getting, or trying to get, out of riskier bonds. In the Treasury market the water was fine and many investors jumped in, with the safety of Treasuries being very tempting.

This brings us to one of our favorite topics, the FED. Today, more people believe that the next interest rate change the FED will make will be down. The WSJ reported that the market has now priced a 100% probability that the FED will Lower rates to 5% by December. We can’t say we told you so tonight because it hasn’t happened but there are now more people speaking our language (which always makes us just a little nervous).

We don’t think you missed the news that the Dow was down over 300 points at the close after being down over 400 earlier in the day. You may have read in these pages that the 13,670 level would give some support to the market but when it broke we would know that the bear has returned. Well, the Dow made a brave stand both on Wednesday and then again on Thursday morning to try and hold that level but in the end, it gave way. That level was about a down 115 point move and when it broke the Dow went quickly to 200 points and more as the day wore on.

This market has many fans even now and we do have a bit of an oversold situation here tonight but that is not such a big problem in a down market. We could get a little more in the way of a bounce but we think the market will continue its journey south for a while. This afternoon near the low our esteemed Treasury Sec’y Henry Paulson reminded us that the subprime mortgage problem would not dramatically affect the economy. That seemed enough to bring buyers back late in the day. The Dow rallied from down about 435 points to the closing level of down 311 for a nice 130 point rally right at the end of the day. There may be some more upside on Friday but we do believe there is much more downside to come in the next few months.

By the way, AAPL was up over 6% on the day and as part of the NDX, NASDAQ 100, it helped contain the losses in that index to only 1.22% compared to over 2% in most other indexes. The “four horsemen” is a concept put forth by Jim Cramer who says these are the stocks that “take no prisoners”. One of them is AAPL and on Thursday it was up as all the world around it was collapsing. The other three, RIMM, AMZN and GOOG, were down but not by very much so the four horsemen did remarkably well together. We will monitor these four stocks to see how they do in the coming months. We expect that it will not be pretty.

Jim Cramer's "Four Horsemen" article

The other news today was the new home sales which were down 6.6% even though this news was almost ignored. The number from last month was revised from down 1.6% to down 2.2% and this month’s number was expected to be down 1.6%. Again, did anyone even hear this news?

Then there was the news on durable goods. The total number missed estimates only by a little, 1.4% compared to expectations of 1.5%; but, the number excluding transportation goods was down by 0.5% which did get some attention but not much.

Wednesday, July 25, 2007

Do the Bulls Believe Wednesday Was an Up Day?

As the market opened on Wednesday the buzz was AMZN hitting its numbers. AMZN was up around 25% on the day giving rise to the pervasive view that all stocks should go up with it. The Dow was up about 100 points right out of the gate and AMZN is not even in that index. Right after the opening surge, the market started to leak and after 90 minutes of trading the Dow was in negative territory very near to the 13,670 we mentioned in last night’s post. From there we began a see-saw day with the see-saw in the up position at the end of the regular session.

Then came the news the market was waiting for—AAPL announced exciting record breaking news and the market had another A stock to cheer about in the afterhours trading. AAPL’s stock jumped 13 points in late trading up almost 10%. With it, the futures are trading up strong this evening as well pointing to what should be a strong opening.

But, that’s where the market needs to be so that sellers can come in like they did on Wednesday. “Why did sellers come in on Wednesday?”, you might ask. Well, believe it or not, there is some trouble in LBO land where deals are having trouble finding financing.

Chrysler Financing Needs a Lift and there is our old friend the Snowman, former Secy Treasury John Snow

There are some other articles on this subject in the WSJ both in Wednesday's on page C1, Chrysler's Bankers May Take on Debt, and Thursday's on page A1, Banks Delay Sale of Chrysler Debt as Market Stalls. Good reading.

Then there was the news about existing home sales dropping 3.8% in June. The market is trying to ignore these types of facts but the numbers keep coming in lower. Of course today’s spin was that inventories are down. Let’s not forget that prices went up also. Does anyone think that maybe sellers are getting tired of not selling their house, or tired of lowering the offer price? Anecdotally, we know that a family in California had their house on the market for over a year before taking it off the market. The reason to take it off was because they had lowered the price to the price they had paid for it several years ago. They decided that they were not going to lower it any more. We don’t really think lower inventories bring buyers.
The last item is the Fed’s Beige Book which states that the economy is doing just fine thank you and the subprime woes are not drastically affecting the numbers. We have two comments, one is “wait” and the other is the actual reporting of the economy is down [editor's note, this was supposed to be "done"] by people who are running the economy???

As we get to the technical part of the post we want to say that the Dow did manage to bounce off the 13,670 level so there is some minor question whether or not the down move has been confirmed. Well, it has Not been. We need to see a serious breach of this level before we can actually declare victory for the bears.

The biggest confirmation for the bears is the continued poor breadth. On Wednesday the advance decline line was negative (more decliners than advancers). This is not a strong market and the technicals are weak. The 443 new lows on the NYSE was another telling sign that there may be some trouble in stock land.

The overnight futures being as strong as they are will give us an up opening but let’s see if that can give way to a selloff later. If we get some confirmation by breaking through that level we will definitely be here tomorrow evening to discuss it. Any day that has the Dow trading below that level will be cause for us to post so you know what to do…

Tuesday, July 24, 2007

Dow Down on Countrywide News

The news on Tuesday overwhelmed the bulls as the Dow ended down about 226 points. The biggest early news came from Countrywide, the nation’s largest home lender. The company said that losses on certain types of PRIME mortgage loans had been part of the cause for a one third drop in their quarterly income. Slashing their 2007 earnings forecast, Countrywide said the housing and mortgage markets are expected to be increasingly challenging.

Earlier in the year, the company had expected a rebound by next year but is now looking out to 2009 for that rebound. The company stated that loss provisions and write-downs of securities of prime home-equity loans caused much of the problem in their earnings. The so called “piggy-back” loans that have allowed borrowers to avoid paying for mortgage insurance are partly responsible.

Normally, 20% down is required to avoid the mortgage insurance. With creative financing, a borrower has been able to bring much less than 20% to closing by covering the missing part with a piggy-back home-equity type loan. There is a first mortgage covering the normal 80% and then a second mortgage/home-equity loan added to cover up to the rest of the purchase price. Falling home prices have squeezed even the best of borrowers, it seems.

A little later in the day, Bill Gross, manager of the world’s largest bond fund, said that the subprime mortgage problems are spreading to junk bonds. His comments are generally unique and simple and Tuesday’s comments are no exception. He wrote that borrowers and lenders may have bit off more than they can chew and even those who swallow their hot dogs whole are having a serious bout of indigestion. He emphasized that corporate lenders will feel a pinch from subprime housing defaults as well. One LBO, in the form of GM, was postponed, probably due to the higher cost of borrowing in the depressed junk bond market.

Our comments this evening are to point out the precarious nature of the aftermath of the housing bubble as it now exists. Prices have been dropping and all manner of credit is now being exposed. The stock market will have to pay attention to this news very soon if it hasn’t started already.

In other news, AAPL received a body blow from AT&T when it reported that not as many iPhones had signed up for service as Wall Street was expecting. AT&T said that in the first two days of launch about 146,000 iPhones buyers signed up for service but Goldman Sachs had projected sales of 700,000 iPhones in the first three days. AAPL dropped over 6% on that news as reality bites.

After the market closed on Tuesday, AMZN reported earnings had tripled which was better than estimates. In late trading, AMZN jumped about 20% on the news. This raises the question of how the company was able to deliver. The answer lies in the new promotion called Amazon Prime which charges “members” $79 a year to get free two day shipping with no minimum purchase required. There was some expectation that with the new Harry Potter book in release this month that AMZN will continue its success into the next quarter. [Skeptics, like we are, may wonder if everyone orders an $18 book,which is about half the cover price, with free shipping whether AMZN can really make any money but that’s just being so negative.]

As we write this the futures are up quite a bit, on the AMZN news most likely. The market has the right to bounce here but we need to see a drop that takes out some of last month’s support levels right around 13,670 in the Dow. At that time we will be more confident of our earlier call that the market is ready to go down. You did notice that the Dow had one close just above the 14K level and now it is struggling. More to come…

Wednesday, July 18, 2007

Head Fake?

The typical fake out move on news happened once again. Apparently the news isn’t quite bad enough for the real sellers to find their way to their computers. With INTC disappointing its shareholders in Tuesday evening’s session, the stage was set on Wednesday morning to open sharply down. The difference this day was that the relief rally didn’t occur until very late in the day.

The market spent the majority of the day down on what would be considered heavier than normal volume. The move down was holding but not really pushing down like it should have over the course of the day. As we approached the last hour it looked like there might be another selloff but it didn’t materialize so the bulls came back in and bought going into the close. The Dow did manage to recover quite a bit of its earlier losses but still closed down about 50 points when all was said and done.

Since the market needs to play catch up with the late day move, we should see a little more upside going into Thursday but this week is options expiration so there may not be much. Usually the Wednesday of options expiration week gives a reversal from the prior week’s trading and this late day move just confuses the issue. Then, after the close, IBM announced earnings and gave traders an opportunity to bid that stock up so the market has some added incentive to keep the rally alive on Thursday morning.

There has been much news the last couple of days and we can’t begin to present all of it here this evening. We do want to mention that the credit markets are where most of the action seems to be. The stock market needs to pay some attention to what’s going on over in the credit world but for now it seems content to disregard that news. The big item was the announcement by Bear Stearns that it would not provide any more funding for its two subprime mortgage hedge funds we talked about here a few posts back. The announcement included remarks such as there isn’t much value in the fund assets.

The second big item in credit is that Moody’s is said to have started to look at the mortgage category just above subprime called Alt-A. Alt-A has a slightly better risk profile than subprime but worse than prime mortgages. Moody’s must be starting to consider downgrades of these types of assets which starts to get pretty close to the prime market where there really shouldn’t be any problems, right? Well, we aren’t so sure about that. But, still, the stock market disregards the problems in mortgage credit because…

Well, because Bernanke the head of the Federal Reserve says it won’t cause much of a dent in the overall economy. Yes, the market was listening to Bernanke on Wednesday like good followers always do. He was more confident about mild economic growth which would naturally translate to stable interest rates. The Treasury bond market was pretty strong but that may have been due to a flight to “quality” caused by the leakage over in mortgage credit. Or, it could have been due to the housing report that showed building permits “plunged” 7.5%.

The last item we wish to discuss is the CPI number that we saw this morning. We are not so interested in the actual number but with some of the underlying components, like owners’ equivalent rent or OER. In Wednesday’s WSJ on Page A4 there is an article entitled “Is Slip in Homeowner Costs a Trend?” This article discusses OER and how it affects the CPI/PPI numbers. This is something we have mentioned before in the context of the housing slump. If the price of houses falls and rents fall, there is a huge effect on the CPI since the OER makes up about a quarter of the index. This makes sense because housing does represent a large part of most household expenses. The question really is how it should be included in CPI/PPI. Well, we can’t answer that in the time we have tonight but we wanted to point out the article for your review.

Our position tonight is that we think the market is very close to a high but that the players want to actually have a Dow close over 14,000 so they can then rest on their…uh, laurels. The Dow continues to show strength even though the broader market is having a very difficult time. This action leads us to the conclusion that the market is one epiphany away from a strong down move. There are so many choices for the market to notice but so far, it hasn’t. We don’t think there is long to wait.

Tuesday, July 17, 2007

INTC Reports

Tuesday evening INTC reported earnings that were mostly in line with estimates but the market seemed to focus on the lower profit margin. In any event, the stock took a bit of a tumble in the afterhours market which should fit in nicely with the other indicators that a top is being put into place...and we might add Finally.

With the Dow moving up seemingly all by itself, the internal structure of the market is just plain poor. The volume has been weak and the breadth has been weak. These are signs that the end is near for the bull.

We think a technical top is now in place with the Dow giving the world the taste of victory at the 14,000 level which is difficult for us to believe let alone swallow. It was just a nice bow tied on at the top of the market.

We will stay with our point of view that the market is now ready to go down. With the caveat that the market can do whatever it wants for a little while, it is telling us that the bull is tired and ready for a rest.

Much more in the real Wednesday Update tomorrow.

Monday, July 16, 2007

Technical Top in Place?

Did the Fat Lady sing or was she just eating at IHOP when she heard the news that Applebees was being bought out by IHOP. Maybe she was singing for joy at the prospect.

In any event, the stock market looks like it is sending another big technical signal with the Dow up to a new record high on what is really a down day. The Dow managed to stay positive on the day but both the NASDAQ and the SP500 were down. Then there was market breadth which was negative with advancers being eclipsed by decliners 1048 to 2226 (according to the WSJ). NYSE Volume was light at just over 1.3 billion shares and only 466 million in advancing stocks compared with 883 million in declining stocks.

The Dow was the strongest of the indexes in the early going as well as later in the day. Look specifically at the action right after 1 o'clock EDT. The stock market left a new high with some business on the downside.

With the full weight of the evidence going to either non-confirmations of the Dow’s new record high or in the light volume department, the technical evidence is tilted in the bearish direction this evening.

We have been wrong before so we are being a little cautious this evening but we are mostly convinced that Monday’s action warrants a more bearish stance. The pattern in the move is consistent with a top, probably a major one, but anything can happen and probably will. Tonight, our neutral position must move back to bearish in the stock market. If we are wrong, the market will immediately let us know. If we are right, the market will be showing us more technical and fundamental reasons to be bearish, with the greatest probability that the market will record some down prices.

Just as if we needed some fundamental news to test our position, in a coincidental matter of timing, the second calendar quarter has just ended and we are starting to see corporate earnings’ announcements. There are some big companies reporting and we see these news items as an opportunity for the market to react negatively if our position is correct. We would say that the market has priced in “perfection” and the actual reality is somewhat less than that. We usually say that it doesn’t matter if the news is good or bad, what matters is how stocks react to the news. We would say the time has come to react badly in terms of price. We never did believe in coincidence, did you?

Our intention is to wait until Wednesday evening to post again but if something dramatic happens on Tuesday we will be back tomorrow evening. We think anything is possible here with the stock market. Expecting a drop in the market doesn’t seem to be a past time of the public, especially with the Dow almost at 14,000. Round numbers are special and Friday the 13th is a special day; so far, it is the high for both the NASDAQ and the SP 500. Let’s see if that changes.

Thursday, July 12, 2007

Brand New Record Dow High

Just a short post this evening to tell you what you already know: the Dow hit a record high on July 12, 2007. We have been calling for new highs for a while now and this rally gives us something to watch for signs of termination--the market has now proceeded to move to new highs but they should be terminal.

The rally seems to be what we want to see, higher prices on modest volume. Buyers were there but sellers were holding back. 5 Day upside volume was not very high due to that large volume down day we saw just a couple of days ago. Plus, our momentum indicators didn't show much improvement which is not a bullish indication either.

This is a perfect situation for a top, technically and fundamentally, and we may, in fact, be just a day or so away. We will make a statement as soon as we feel the market is ready to go down. We may make it during the day so if you see a pop in the early going on one of the next few days or in the next few weeks, you may want to check in here to get your confirmation :-) (Then again, work might get in the way and we will have to wait until the normal post time.)

We wanted to alert you to the article that Erick mentioned in yesterday's comment section. We took a look at it and it is definitely worth a read so we are adding the site to the front page of the blog. Thanks, Erick.

"The greatest economic boom ever" from CNN Money.com FORTUNE Global 500

Wednesday, July 11, 2007

Last Big Bounce Coming

Market Action:
On Tuesday, major bad news swirled around Wall Street and the sellers managed to do very little in the way of damage to the major averages. True, some stocks were hurt, namely the home builders, but for the most part the damage was, well, contained.

Today, Wednesday, as in the Wednesday Update, the market sort of shrugged off Tuesday’s news related sell off and tried to mount a rally, which it did. We normally call this type of activity, “whistling past the graveyard”, you just distract yourself from looking at the headstones by whistling, much like the buyers are doing in the market. They can see the bad news should affect their stock positions but they keep on buying anyway.

In recent years, the bulls have managed to move the market up enough by their whistling, that others notice the pleasant sound of prices moving up and buy stocks just because stocks are now going up and who’s to argue with that?!? Ok, enough with the metaphor…

In after hours’ news this evening, MOT (Motorola) gave the market a bit of news that it has been waiting for a long time—it expects its mobile device business to post a loss for 2007. This news was preceded by a rumor that the Chief Executive would resign and the buyers flocked in to push MOT up 3% during the day before closing up about 2%. You all know that the market did and will disregard this news because it is specific to MOT. They said that cell phone sales in Europe and Asia were weak—that business wouldn’t affect other companies, would it? (oh, the sarcasm is thick)

Technical Indicators:
Since we spent some time on the news in yesterday’s post (see that below if you haven’t already), we will spend more time in this post on the technical indicators. The first is our main momentum indicator which barely dipped at all after yesterday’s action and then jumped on Wednesday’s action. This is typical in a thinly traded market that is nearing a turning point.

Our position is that the market, as measured by the Dow, will try to push strongly to new highs but then someone will turn out the lights and the buyers will be expended. When will this be? Well, that is for another day but the technicals indicate the date isn’t far off anymore. Does this sound familiar to anyone?

The tight trading action of the past month or so has given the market time to rest, getting ready for a small surge to end this pattern. With the news being so utterly pessimistic and the market rallying, the bulls have again decided “to boldly go where no one has ever gone”. Are you familiar with Star Trek? There’s a book, a satire, called the “Hitch Hiker’s Guide to the Universe”, the first in a four part trilogy (we can’t make this stuff up), which says, “to boldly split infinitives”. Do any of you remember your high school English teacher telling you that “to be” is an infinitive and really should be considered one word—and of course never to put something in between, such as “to always be”. That would be splitting infinitives…but of course we digress. Back to the bulls…who have decided to buy on this last leg of the rally.

They really don’t think this is the end of the rally because people don’t believe stock prices or real estate prices can actually go down. Maybe the bond market can go down but surely not the stock market.

Erick left us all a few comments in a prior post which we thought deserves a response here. First, he mentioned that it’s funny how $70 oil equates to higher stock prices. Well, this is a popular misconception in the current environment. For years, the hint of oil increasing was enough to send stock prices down, except, that only lasted a day or so. The world has seen massive excess liquidity and the extra money has been fueling increasing prices in commodities, bonds, and stocks alike. Where did the excess liquidity come from? Well, the simple answer is Credit, starting with the US Budget Deficits being financed by foreigners.

Next, he asked if underlying fundamentals have stabilized over the past few years when the stock market has been moving sideways and mentioned PE as a place to start. To us, the credit has been destabilizing and will continue to be that way. The market doesn’t really see it the way we do, at least, at the moment it doesn’t. Our position is that companies have improved their balance sheets by virtue of strong credit expansion in both the public sector and the private sector. As this debt needs to be paid down, expansion does not happen.

Erick’s last comment has to do with how the markets trade against each other. Our only real comment here is that the price of investment vehicles have gone up over the past 25 years and now the baby boomers want to retire and pull their “money” out.

Other than that, bonds really should move up with stocks because lower interest rates should drive stocks up. As rates get pushed up with a deteriorating bond market, stocks should be feeling some pressure. The bond market has not moved much one way or the other for a few years so what gives? Well, if the economy falters, it is most likely that the US Treasury market will be considered a flight to safety or “quality”. The corporate bond market will probably suffer greatly. Plus, the mortgage market is in the process of readjusting to correct prices—that has a long ways to go in our opinion.

One Last Item:
We saw a Wall Street blog this week that mentioned something curious with reference to last week’s employment report. It said that the US employment rate isn’t going down due to the housing slump because most of the workers being laid off are not American citizens. Their elimination from payrolls doesn’t affect the reported job numbers. We thought we should share.

Tuesday, July 10, 2007

Subprime Heats Up Again

With the Dow’s drop of 148 on Tuesday together with much news, we thought we should at least make a few comments this evening. First of all, 148 points doesn’t get us too excited about the bear returning. Secondly, we still think there needs to be a new high in the Dow before we see a downturn. Third, with so much news on Tuesday, the likelihood of a turn is pretty low.

The news list seems to be fairly long and it starts with early earnings returns. As the quarter is now complete, earnings have started to pour in. The early reports include AA (Alcoa) and they announced a little lower revenue than expected but turned in earnings that matched estimates. In the early going, AA didn’t seem to suffer much on price.

Home Depot (HD) cut its 2007 outlook saying that the continued weakness in housing was going to hurt its annual earnings. Their estimate dropped about 15% but the price of the stock was up on the day, ok not by much but the market was down 148 and HD was one of the excuses for the drop. Sears also slashed its estimates in half but the real news was over in the real estate world…

DR Horton said orders fell over 40% with the dollar value dropping 47% and that this would lead to their first fiscal quarterly loss since it listed on the NYSE back in 1995. Chairman Donald Horton said that “Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging.” The company indicated that California saw orders fall 62% and that it will take significant asset impairments in the next few quarters.

And, if that wasn’t enough, the news about the bond rating agency, S&P, was salt in the wound. We have reported here and you probably have read in other places about the subprime problems as it relates to the securities that back the mortgages. Today S&P announced that it would be looking at the debt instruments used for these risky loans. This is a big deal because they are the ones who can Downgrade those securities. According to an article in CNN Money, the rating service said it would put many securities backed by subprime mortgages on “credit watch negative” and that it expected most of them to be downgraded soon because of high delinquency and foreclosure rates. Moody’s, another rating service, made similar announcements. The news continues to deteriorate in the housing market, even though so many are calling for a bottom.

Probably the biggest item on Tuesday was the Fed chairman’s speech. Bernanke was speaking to the National Bureau of Economic Research and did mention inflation in his speech. He was basically defending the Fed’s position that relies mainly on “core” inflation rather than total inflation. He said, “Inflation is less responsive than it used to be to changes in oil prices and other supply shocks.” Ok, that might be if you look strictly at the numbers. Our question is, “Who is calculating the numbers?” Are the inflation numbers accurately reflecting inflation or not? [We do have some bias towards deflation over the coming years but for now we think the inflation picture is muddy due to the way the numbers are massaged.] At any rate, the market seemed not to like his comments and closed on the low of the day.

This report from Bernanke gave the dollar some cold shivers as it traded a record low against the Euro and oil and gold moved up on that news. The bond market, Treasuries only, liked the housing news and put in a big up day.

We still need to be patient as this decline on Tuesday does Not feel very strong, even though there were some ugly things going on in housing related issues. News related declines rarely will follow through. We do think that the next move will be up due to the fairly weak nature of the decline on Tuesday.

Our thanks to CZ for his birthday wish. We appreciate the kind words, my friend.

Thursday, July 05, 2007

Slow Week

Due to the July 4th holiday, trading has been subdued and we will not post this week. We will be back next week.