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.


Anonymous said...

The free access to Fleck's daily rap can be had by entering NSTK for a user name and password. His site is found at www.fleckensteincapital.com

His free weekly articles appear on moneycentral.msn.com under Contrarian Chronicles. The NSTK is Nastech Pharmaceutical's ticker which Fleck follows.


Anonymous said...

thanks - at 38 then