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and local governments, took the fund down from $27 billion in assets to $15 billion today after $3.5 billion had been withdrawn earlier today.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.