Thursday, January 31, 2008

Down Opening Brings Day Long Rally

Top Line: Well, the stock market certainly did Not go down on Thursday but the 12,750 resistance area is still intact. We still think this level has a good chance of halting any further rally. Friday's employment report may have some influence on the prices as GOOG had right after the close on Thursday.

GOOG announced their earnings which did not thrill the market and the stock dropped nearly 10% right after the news but ended the afterhours down only 6.5%. Initiallly, GOOG had a very negative effect on the general tone of the afterhours trading but soon enough traders thought it was nothing to be concerned with...

The Dow rallied from an opening deficit of 150 points to a final point gain of just over 200 points. The "bad" news from S&P on Wednesday evening along with the high jobless claims that normally come out every Thursday morning caused the market to open very badly. The "good" news was that the bond insurer MBIA said things were going to be fine and they would be able to maintain their ratings by being able to raise capital. This was right after they announced a $2.3 billion loss for the fourth quarter.

Back to the Employment story, ADP, the payroll company, announced its numbers and said that there were 130K jobs created in January. ADP has never really inspired anyone to act on the news they bring but people can get an Idea what is going on from their report. But, the real jobs report is due out in the morning and expectations are for 70K jobs to have been created after a dismal 18K last month.

There has been so much news this week, we haven't been able to provide it all to you but one thing that slipped through yesterday was the advance GDP number which showed a slow rate of growth of 0.6%. That means the economy "grew" at a 0.15% rate in the fourth quarter. The thing we always mention is the PCE (personal consumption expenditures) deflator which is an inflation guage used to level set the GDP number.

As we usually say, if prices go up and people pay more for goods, is there really growth? Well, it's the job of the PCE Deflator to take out the effect of inflation on the GDP number. The PCE deflator used was 2.7%,which seems fairly low but it still produced a very low GDP. We'll see how this number is adjusted when the final GDP comes out. The number, since it was so low, gave a lift to those who thought the Fed could lower rates again...

And, the speculation is that the Fed will lower rates another 50bps at their next FOMC meeting in March. This is a subject for Bill Gross of PIMCO. We don't have to agree with him but his thinking process is much the same as most of Wall Street. He's begging Congress to be aggressive with a program to get people buying houses again by somehow lowering mortgage rates on long term 30 year mortgages. How is Congress going to do this? Well, he really doesn't know that.

One last item before we leave you in peace for the weekend. Bristol Myers announced that it was going to be losing money on some investments in subprime mortgages, maybe as much as $400 million. That may not sound like much when compared to the large bank losses but $400 million is a lot of dough for a non-financial company.

FSI: 84.60 (with GOOG down tonight this number may be a little high)

Wednesday, January 30, 2008

Rally May Be Over

Top Line: On Wednesday the Fed ended its FOMC meeting with a 50 bps cut in the fed funds rate which the stock market was hoping to get. What the stock market wants, Ben gives. That got a blip on the screen but the market closed down on the day anyway. We may have seen the peak of this corrective up move on Wednesday afternoon.

There had been some doubt that the Fed would deliver. We were fairly confident about the 50 bps cut over the past few days. Anyway, the stock market had been down a little, the Dow was down about 30 points going into the announcement, but after the news took very little time to get up 200 points. That move put the Dow up to around 12,680 still 70 points below the 12,750 resistance point we have been mentioning.

At about that time, with an hour or so to trade, the market started leaking almost like someone had pulled the plug out of the bathtub. The market was up 200 points but fell to close down 37 points on the day the Fed lowered rates 50 bps.

We need to add that there was plenty of news on this day and one headline did say that "U.S. Stocks Decline as Bond-Insurer Concern Outweighs Rate Cut". MBIA and Ambac have been mentioned in these pages recently but there had been some thought that the banks had so much at stake that they would rescue these bond insurers. This whole argument is pretty circular...the bond insurer is covering the losses of the bank and the bank says it will cover the losses of the bond insurer. Pretty soon you get back to where you started???

Then there was the UBS announcement of a $11.4 billion loss after a $14 billion writedown in its subprime portfolio. That loss is a big one and it comes from the Biggest European bank by assets (we wonder if that is before or after the big writedown). In fact, Bloomberg says it is the biggest loss for a bank ever.

There were two more items after the close that didn't inspire the bulls. One was AMZN's earnings and their call. The earnings were up quite a bit but their margins were down, which came as a surprise to investors, funny. Let's see, they reported a good quarter a while back because they were offering a deal for free or reduced shipping rates with an upfront fee and they took the earnings right away. Now, they are shipping for free and margins are down, yes, it sounds plausible. The stock was down over 10% after the news dragging the market down with it helped by news from S&P...

They said that they might downgrade $534 billion worth of mortgage debt. This news just added insult to injury after all of the bad news of subprime sort of hung in the air following the closing bell.

The other item we wanted to mention was in reference to SBUX (Starbucks) that we saw. SBUX had been mentioned here as a company to watch along with McDonald's when measuring the consumers ability to spend. Well, today the news was that they had decided to reduce the number of new stores this year by 350.

From an hour prior to the close until now as we write, the market has fallen. It is possible that the move we saw on Wednesday afternoon is the final push to correct the recent slide. We won't know for sure until we see trading over the next few days. The way the market fell away from the late afternoon highs which occurred in conjunction with a 50 bps Fed rate cut is indicative that the market may just be ready to show us how much a bear can growl.

The market could face a non-linear move, as they say, which means a sharp selloff. (They would never call a big up move non-linear, because that is what is supposed to happen.) We would have more confidence in that call if it wasn't so close to the end of the month and the jobs' report due on Friday. We will have more to say on this matter over the next couple of posts. We wonder what the Fed is thinking as the market has basically trashed both rate cuts. Their ammo is being depleted quickly, especially at the rate of 1.25% every eight days or so.

FSI: 82.39

Tuesday, January 29, 2008

It's Wednesday so There Must Be a Fed Rate Cut

Top Line: The stock market struggled higher on Tuesday with the Dow managing almost a 100 point move. The NASDAQ indexes were up but not as strong as the Dow. The market did not look like a pillar of strength. This may be due in part to the notion that the Fed may not come to the party on Wednesday with very good news.

The futures did think there would be pretty good chance for a half point cut but the stock market may not have been so sure. We continue to think there is some room for the market to move up out of this oversold condition but the Fed news tomorrow may unsettle the market, if the lower or not.

If the market gets their precious 50 bps drop, it is possible they will look around and say one or both of the following: The Fed is scared and/or The Fed has little room to go down much from here. If the Fed doesn't lower, the market will probably cry so Ben can't let that happen. We see another 50 bps drop, which is almost hard to believe after last week's quick 75 bps drop. 125 bps in about a week in two moves...Unbelievable. Again, the Treasury market gives the Fed latitude to lower more than a point so we are confident in another 50 bps.

FSI: 82.27 (new low for the year)

Monday, January 28, 2008

New Home Sales Drop...Again

Top Line: The stock market wants to tread water for a while and especially as it waits for the Fed to move. The Fed will make their move on Wednesday, not Tuesday as we previously mentioned. We repeat that the Fed has ample room to decrease rates because the market rates have fallen faster than they have lowered. The stock market should have a lid on it near our retracement level of 12,750. It would seem that there will be some trading between our lows of last week and this 12,750 range (and, surprises to the downside).

The Bernanke Fed, particularly its fearful leader, Bennie, have taken some harsh criticism over the past week for their abrupt 75bps rate cut last week. The media is even saying that the Fed is being handled by the stock market, what it wants the Fed gives. What the stock market wants this week is a 50bps drop in rates so one would have to conclude from that, the Fed will deliver. This is well within reason from the interest rates in the short term Treasury's.

With the rates being cut last week, and probably again this week, the market is focusing its efforts on the financial stocks. On Monday, the banks and housing were the hot stocks with McDonald's getting punished for its earnings discussion. We should probably watch the likes of McDonald's and Starbucks to get an idea how the "little" guy is faring. Big MacDonald's was down almost 6%while Citigroup and Bank of America were both up about 4%.

The big number from the economic data perspective was the new home sales for 2007 and December in particular. We can only say dismal is the word, not surprising, but still dismal. Even November was revised down. The housing market is still in trouble, no surprise there. With only a few buyers out there and all kinds of sellers, there is a long way to go to clean this up. Maybe if the Fed can just lower rates one more time...Right.

After the market closed, American Express (AXP) announced earnings that were sort of in line with expectations, down 10%, but the reason was because of higher customer defaults on credit cards. Again, no surprise, but the news items of low home sales and poor earnings from AXP only provide bulls fuel to hope for that Fed rate cut being bigger. Bad news equals rate cuts equals good news so bad news equals good news. With our math skills that just doesn't add up.

We were going to summarize the points of the SOTU (State of the Union) address this evening but there really wasn't much to say except that the president wanted to let Congress know that they should pass the big rebate proposal and Fast. The idea is, you remember, that we aren't really in a recession but we want to make sure we don't have one. The president talked about growth slowing--no real contraction, you see. The stock market sees these things as normal, so therefore, also bullish.

FSI: 82.92 (the four horsemen are Not financials)

Sunday, January 27, 2008

A Bad Start to the Weekend

Top Line: We have been in a bear market since early 2000. What we have been seeing in the last four years is a long countertrend rally in the bear. Since October, we have started to see the real teeth of the bear showing again. Looking at recent trading, the market Looks oversold but this is a rather complicated condition. In bull markets the market can remain in an overbought position for a long time, this is normal. Now that we have moved to a bear market, the market can now be oversold for longer periods of time. After all there are more sellers generally.

Last week saw a wide variety of confusion by a great number of people. The Fed in its infinite wisdom has chosen the path of lower interest rates to try to prevent a stock market collapse. We see Jim Grant has written a great op-ed piece for the New York Times which we encourage you to read. The government has announced the large rebate program to spur spending and keep the economy going. Monday evening we will get the SOTU (State of the Union) address from the long time president who is in his last year.

The central theme of the powers that be seems to be that they don't think we're going into a recession but we need to take some steps to insure we don't. Why is it that they think the country is so ignorant? Maybe the people truly do think that what these people say is true and they will continue to spend. The problem has been that credit has been driving the economy and more credit will not solve the problem. That's what the Fed seems to think.

Well, we keep thinking that the Fed is primarily concerned with the banking system which drives their decisions. The credit crunch of the past year has been difficult for the banks but now that the problem has spilled over to the stock market, the Fed has to do something more visible to the public. For those who have saved some money, the rate cuts are going to push returns down. The whole idea is to get people to spend the money they saved.

The government is now trying to promise they will do all they can to help the economy. The presidential debates are now focusing on the economy with the Iraq war fading from view. The more we write about this situation the worse it seems. We said a long time ago that the economy's destiny has been set and very little can stop it. Government and the Fed have now joined forces to get the people spending.

We read an article in the Minneapolis Star Tribune that we felt we needed to share. It portrays what is going on in the country, people trying to tighten their belts, so to speak.

The stock market decided to drop on Friday in a very bearish way. The market opened up very strong getting a boost from the earnings news from MSFT. MSFT itself opened up nearly 2 full points. The open was probably the high for the day as the market leaked all day long with only short periods of time when flat trading occurred to stop the bleeding.

The Dow opened up 200 points and ended down 171 for over a 350 point reversal. This happened going into the weekend following the Fed's great mid-meeting 75 bps rate cut and preceeding the Fed's almost certain 50 bps more on Tuesday.

As we write, there is a selloff going on in Asia with the US futures taking their lead from Asia. The US futures are down about 1% with Asia down 3-5% right now. Of course, all of this could change by morning but a bad Friday can bring a poor Monday morning, especially in a bear market.

FSI: 84.00

Thursday, January 24, 2008

The Government's Plan to Save the Economy

Top Line: Continuing in the line of reasoning that the market has found a short term bottom, we think the bulls are now breathing a sigh of relief. How long will it last? Not very long, so hopefully they will enjoy it.

We, here at the Update, have enjoyed the down draft in stocks and now we need patience to wait out another rally. Any rally should be short lived but still could result in a pretty powerful move. Such is the nature of bear market rallies, sharp and confusing.

Thursday's news was the Big Rebate program sponsored by the government. This package is supposed to stimulate the economy by putting some extra money in the hands of the lower income households. And, there is an increase in the so called conforming mortgage loan.

Fannie Mae and Freddie Mac have been telling us that they could help the mortgage crisis by providing funds to "jumbo" type loans, so called Non-conforming loans. They say that this will put more liquidity back in the market for these types of loans. Why? Because the investors could then buy pools of mortgages with a pretty solid Fannie or Freddie guarantee on it. At least this part of the plan has the possibility of actually stimulating the economy but we don't think this part is enough.

As you know, the Update's position on the economy is that it will go into a recession Because of the housing market and all things related to it. Thursday's report on the existing home sales was pretty dismal with that number dropping 2.2% from November to December. The full drop from 2006 to 2007 was about 13% while the price drop December 2006 to December 2007 was 6%. Still no signs of recovery.

Two interesting items were in the news on Thursday. The first was an article by Greg Ip of the WSJ discussing the credibility of the Fed and how some are criticizing the Fed for being too easily swayed by the stock market. Greg Ip is known as a well informed Fed reporter and most articles in the WSJ about the Fed directly are written by him.

The second item is something you may have read about, that being the Société Générale trader who supposedly lost $7 billion in trading their account. The consideration is that the company was trading in the European Markets on Monday, a US stock market holiday so there would have been light trading around the world. The trading they were doing was to sell some assets to cover some of their losses. We don't like to speculate on these things but the story is interesting. Part of the news item mentioned that the Fed may have triggered a huge rate reduction on Tuesday morning After the price damage had been done by these trades.

We'll see if more info comes out over the next few days. Something for you to watch but just the fact that the article is out there tells you that the world is starting to discredit the Fed which is something we see happening this year in a big way. Their rate cuts will have no effect on the economy because the people have changed the way they do things, paying off debt or defaulting on it, and concentrating on setting up a new life without falling into debt troubles.

In our last post, we mentioned that we would take a stab at predicting a high in the market. We have a range based on normal retracement levels and that range is between 12,400 and 12,750. You see that the Dow is near 12,400 and that is why it had a little trouble on Thursday to push much higher. There is room to move up to 12,750 and we think that number is very close to where this rally will end.

After the close this evening, MSFT reported their earnings and the market interpreted them as good so we see the US futures markets are higher along with a big move in Asia again tonight.

FSI: 85.72 (down 19.4% on the year)

Wednesday, January 23, 2008

Rebound in Order

Top Line: The intraday reversal to the upside probably indicates we have seen a short term low with some month end strength. The market has been very oversold and Wednesday's action should lead to a sizable bounce.

We thought we should start with the answer to the question in the comment section, "where does all the money go if everyone is selling?" We have to add a second question, what happens to the value of the company if the price of the stock goes down?

Remember that whenever a stock is sold, someone actually buys it. As some say, there are just as many buyers as sellers. If you sell your stock to someone, you get their money and they get your stock. No money is lost, it just transfers from one person/entity to another. So, the real question is "if a stock is worth $20 one day and $15 the next, where did the 25% value go?" This is a tricky concept, one that may ellude us all a bit. But, let's start with a simple setup, that being one share of stock going for $100 today.

Why is the stock $100 today? Well, it's $100 today because that's what someone is willing to pay for it. When companies say their "capitalization" is so much, they take the price of the stock times the number of shares outstanding. The result is how much the company is worth, or its capitalization. In our little example, we have just one share of stock that we paid $100 to own. Tomorrow, when there are no buyers willing to pay $100 for the stock, it's not worth $100 anymore. If we choose to sell it, then we have to go find a buyer and that buyer may be willing to pay only $75 for the share we own.

What does this mean? This means you lost 25% of your money. The person that sold it to you for $100 is now pretty happy. If you can understand this concept, that the value has just vanished, you can see how tenuous the stock market can be at times. The value of stock is only as high as someone is willing to pay. If the owners of the stock are comfortable with their company's prospects and they don't sell all at once, then buyers will have to pay more in order to entice the owners into selling.

If, on the other hand, the owners are Not comfortable with the prospects, they will want to sell their holdings. And, if the owners want to sell, there are few, if any, willing buyers to take it off their hands unless they lower their offer price.

This brings us to the Fed and its panic attack on Tuesday morning. Why did the Fed lower rates just a week before their next meeting? Well, they didn't want owners of stock to sell their positions creating a situation where prices fall and continue falling. The entire stock market only functions well when the owners are comfortable. Any other time, the market drops and the powers that be start wanting to do something about it.

Thanks for the timely question.

Back to the market action. Wednesday was something to see. The market dropped at the open due mostly to the AAPL news, along with MOT (Motorola) who works with AAPL. AAPL's drop inspired a drop in the four horsemen, and in turn our FSI (For Speculation Index) dropped right along with it.

The market fell out of bed in the morning and our favorite index, NDX, was being trampled due to the four horsemen mainly. We saw a drop of nearly 6% at one time in that index as GOOG and AAPL were both getting double digit percentage losses.

From the lows in the Dow and other indexes, we saw a massive rally, to the tune of 600 points in the Dow, which is over 5% in a few hours. The NDX, which had been down 100 points or about 6% rallied back to nearly even by the end of the day. The stage is set for some more rallying in the next week or so. We'll keep you posted.

The Asian markets were bought on Tuesday evening, after the Fed's move, and again this evening on the back of the big reversal in the US stock market. That would be all except the Japanese market which, while it has come back up a little, it wasn't very much.

Our primary thought this evening is that the stock market has marked a low on Wednesday for the time being. If at any time it breaks those lows, we are going down more. For now, we need to expect a decent sized rally. The high volume of the past few trading sessions has exhausted some buying power and we need to respect the bear. That is why we look for other opportunities for the down move yet to come, and at the same time keep a lookout for a break in the established lows.

We will provide more guidance on where we see a rally going tomorrow after we see the kind of follow through buying we see on Thursday.

The reason cited for the bounce was the banks' efforts to get some capital to the bond insurers we mentioned here last week, MBI and Ambac (MBIA and ABK). The market must think that if the insurer can stay rated AAA, then the problems must be behind us. Right. We think the market was due for a bounce especially with the spike low we had on Wednesday. The media needed a good story.

FSI: 82.51 (ouch, on December 28th this index was 108.15, a 25% loss in a month)

Tuesday, January 22, 2008

Fed Panics

Top Line: The stock market didn't open the trading day with a bell, as in the opening bell; it opened with a cut, as in interest rates. Of course, you already know this fact but do you also know that the market doesn't turn on a dime like the Fed? The stock market is in a bear market and we don't think there is much that will stop it, least of all the Fed, even with all their efforts.

The Fed has cut rates in front of a stock market decline that it will be unable to stop. The Fed has a meeting next week and they couldn't wait until then to make a move. Why? Well, you know that a week can make a difference when it comes to lowering interest rates--for who? That would be the banks. Ok, the actual wording in their statement was more like, we don't want to let investors' fears of a recession become self-fulfilling, according to the WSJ.

Tuesday morning also brought us Bank of America's earnings statement of 5 cents a share. This represents an actual profit unlike several banks in the wake of the mortgage defaults over the past several months. Along with their earnings came a promise that, unlike when Citigroup promised not to cut its dividend and then did, the BofA would not cut its dividend. This news accompanied the strong statements from the Fed in the morning and gave the bank a panic start of down nearly 10% but by the end of the day was up 4%. So, while the Dow industrials didn't actually erase the full 500 point open, the bank stocks and housing stocks were up about 3% apiece.

We thought we would be reporting more negative news about prices but then there is always the Fed trying to stop big declines. We wonder what they'll do next time. We are reading that the market is fully expecting another half point cut from them next week at the conclusion of the FOMC meeting. That would take the rate down to 3% and down 2.25% from last year's high rate of 5.25%. Even we would be surprised by that, not so surprised by Tuesday morning's action but another cut in a week would definitely surprise us.

That is not to say that the Fed doesn't have room to move down, they do. (We look at the short term Treasury rates down around 2%.) It just seems so reckless to have the Fed panicking and making moves like that. The Fed has been doing huge things in the credit markets with their TAF funding. The banks have been gobbling up money from the Fed providing liquidity to continue lending.

The Fed is in the business of creating an opportunity for people to borrow more money and less reason to keep money in those tired old savings vehicles where you won't be earning much interest. They want everyone to borrow and spend to keep the party going. Just think, the cure is the same as the disease, only more.

With more and more people getting behind on their mortgages and other debt payments, not to mention their phone bills (AT&T disconnecting phones and cable internet for non-payment), how is it that they can continue borrowing? They sure would like to spend but it's that pesky debt servicing that gets in the way.

As we examine the after hours market, one thing stands out, AAPL. Yes, Apple Computer has sliced up some disappointing news for investors. Their guidance was taken as negative and has caused a little selloff in the overnight market. AAPL itself is down over 10% this evening and has dragged the likes of GOOG down with it as well as the US futures. Maybe the Fed should go buy an Apple, you know what they say, an AAPL a day...

Really, what is the Fed going to do if the market just keeps dropping? Well, we'll soon find out. You probably have seen this article but we wanted to keep it here for records. We don't agree with his dollar comments but with most everything else. Here is an excerpt: "The fact that the Federal Reserve Board announced an emergency cut of 0.75 percent in short-term rates shows that the Fed thinks the problem is a market panic rather than economic fundamentals. Normally, the Fed would have waited until mid-day next Tuesday - the second day of its scheduled two-day meeting - to announce a rate cut. Announcing an out-of-schedule cut today before the stock market opened shows that its motivation is to calm the markets rather than to reinvigorate the U.S. economy."

There could well have been a selling climax today but a 450 point rally in the Dow following the rate cut may have satisfied the need for a correction. (When we say correction, this is an up move in a down market.) And, with AAPL's news able to push the markets down so easily this evening, it is possible that we could go down from here.

In any event, the market is not done going down. As we mentioned in our last post, it may seem like the worst is over but you shouldn't believe it. Fed rate cuts are not bullish even though some traders think it means more money going into the market. The market is now dealing wth quite the opposite with money Leaving.

FSI: 88.23 (without the AAPL news)

Monday, January 21, 2008

Surprises are to the Downside

Top Line: There really is only one story this evening and that is the global meltdown in stocks. We have been calling for global markets to go down but now that they actually have, we know that can not be a good sign for the US market.

With the US markets closed on Monday we did not post on Sunday evening like we normally would. Our rule is to post the evening before a market day usually by midnight Central Time.

With the US markets closed, the rest of the world has taken a beating. For two nights in a row, Asia has been hit hard with the over extended markets there ripe for a massive sell off. The Hong Kong market, measured by the Heng Seng Index, is down 14% in these two trading days. From its highs in late October around 32,000, it is trading at 22,000 this evening for over a 30% loss in about three months.

Over in China, the Shanghai SSE Index has lost over 10% in the last two evenings. This index traded at 6125 in late October and is now trading around 4650 for a loss of nearly 1500 or just under 25%. Unbelievably, the SSE is still above its May and June highs from 2007.

In India, we don't know how to get quotes for trading taking place right now, but we can only assume it is down again this evening. Last night it dropped 7.5%.

Looking at the hapless Nikkei Dow in Japan, that index is down about 10% in the last two evenings as well. This index is trading at prices not seen since two and half years ago. We have talked about the parity of the Nikkei Dow and the Dow Industrials. When they came into close proximity, the Nikkei moved up quickly. Taking the Dow Industrials close from Friday to the current level of the Nikkei, there is still 500 points of room. But that's not why you're here, is it?

You're here because you want a read on the US market. Well, right now as we write the Dow futures are down 500 points or a little over 4% with the SP 500 and the NASDAQ100 futures down a similar percentage.

This foreshadows a dark day on Wall Street for Tuesday. As we have mentioned several times in the past, and it hasn't happened, the worst selloffs occur After stocks get oversold, which they definitely are now. As the market opens on Tuesday, there should be a loud thud. We're not sure how the market will open exactly but buyers will be scarce.

We have been warning in this blog about the dangers of the stock market and just last Thursday evening we titled our post, "The Break". That break was a technical breach of long established trendlines and support levels and signals a long term bear market in the making. Tuesday's trading will probably confirm a bear market to many. Of course, what it will feel like on Tuesday will be that the worst may just be over--don't believe it.

The stock market has a lot of room on the downside and it will be just getting a good start on Tuesday. We say that due to several reasons but they don't matter this evening. We've said most of them over the past several months anyway.

It seems pretty meaningless to go over last Friday's action, as we described it on Thursday evening, it would be "mere noise". Way back then, IBM had announced earnings and every bull was excited. The market opened on Friday with a large up move to the tune of almost 200 points but that didn't last too long. Both the Fed and the president were saying there would need to be some help for the economy if we were going to prevent a recession. As you can tell, the global markets didn't really think much of it either.

The January options were expiring on Friday and there was a lot of movement in the volume department. The volume was not very helpful in assessing what was going on under the surface because it was mostly just unwinding positions. Come back tomorrow for our take on Tuesday's trading. It should be something to see.

The market is about to collapse and we hope that you have taken your portfolios out of harms way. We have enjoyed a month's worth of falling markets and Tuesday will be a large break that will scare people so more selling will come. Some will sell tomorrow, some will buy but we think the course of the market is down for the time being.

FSI: 90.31 ( this number should be much lower after Tuesday's trading.

Thursday, January 17, 2008

The Break

[Late addition, Friday morning: Great minds think alike.]

Top Line: We call this market a bear market and we should be aware that the tendencies of a bear market are much like those of a bull market, with a little more power due to fear being exhibited versus greed. We here at the Update will promise to be more respectful of the bear market from here on out. Our week has been riddled with whipsaw even though our portfolio remains intact this evening.

More Top Line: Thursday's break of 12,500 in the Dow brings some real trouble to the bulls. The shelf of support revealed a hidden trap door. We need to revisit the numbers we shared in our last post due to the day's action and we are certain that whatever is going on in the after hours is mere noise.

Speaking of the after hours, IBM got to do double duty this week. They preannounced on Monday and tonight they delivered their news. The news was received positively in the thinly traded after hours market and the US futures are up strongly as we write. These are the types of things that are powerful in creating confusion for the participants.

The news of the day has been centered on our FearFul central banker Bernanke and his testimony in front of Congress in the morning. He told them that fiscal stimulus is needed and should be used very soon. If Congress could turn on the fiscal stimulus as the Fed is cranking down the interest rates, Bernanke thought that would be a good preventative dose of medicine to Avoid a recession. (You can only imagine how long it took the politicians to grab onto to that bit of advice.)

Does he seriously think we are Not going to have a recession? That was the question on the traders' minds as stock prices immediately started falling as he was speaking. These helpful hints to Congress to stimulate the economy are not really confidence builders for those who are buying stocks. The US Treasury bonds did do fairly well on the news, thank you very much.

The news on the day was just not very good. Merrill Lynch was the early news and it said they were writing down some more assets. Losses amount to around $10 billion or $12.57 a share. We ask what a company like that is really worth. If the P/E ratio is 10, that would be negative $125, but that's not how it works.

Then there was the Philly Fed's manufacturing report which showed contraction. The housing report that indicated the worst annual drop in 27 years when you now include December's dismal numbers. Washington Mutual, dubbed WaMu, said that it would lose about $1.9 billion.

Then there is the little problem over at the bond insurers, MBIA and AMBAC. These stocks dropped, respectively, 30% and 50% today. This news has brought more energy to the default talk which should appear on the front page of the WSJ on Friday. Inside the article are less than confidence inspiring statements about how the CDS world may have troubles.

CDS's are credit default swaps and the name suggests what they are, swapping the credit defaults of various credit securities. One company owns a bond or mortgage and would like to get "off the risk" so it tries to sell the asset. Some of these assets are so thinly traded that a buyer is difficult to find sometimes. But, in the world of derivatives, this is no problem. An arrangement is made with a speculator who is willing to provide insurance on the asset in the event of default. So, the owner of the asset now is protected from default, right? Not so fast.

This all worked nice and neat over the past several years when defaults were at minimal levels. With all of the losses piling up on various assets, there is a new risk. It is called counterparty risk meaning that the company that provided the insurance may not actually be able to pay for the credit default.

This is quite a predicament for Company A, who buys a security from XYZ but doesn't really like the credit risk of XYZ so it contracts with Company B to provide insurance. If XYZ has a default, Company B is supposed to pay Company A for any loss due to the default. What if the number is so big Company B can't pay Company A? Company A has now lost its "insurance premium" and has lost the value of the asset. Not a pretty picture at all.

Then, after the market closed the Russell 2000, RUT, managed to drop 20% from its 2007 highs. This represents an event known as a confirmed bear market and it will be reported as such in the press on Friday. It was truly a bearish, especially after the market broke through support, or as we call it, the trap door.

Right now it is important to step back and assess the fear of the chairman of the Fed. We think the market has been looking forward to the rate cut in a couple of weeks, and hoping for it early, but now the chairman is explaining why the cuts are necessary and the market does not like it. We think this will continue for a long while.

We received information from our subscription service with Elliott Wave International indicating the break in the market today. They are and have been bearish for a long time and tonight have basically gone red with their bearishness. The market is about to fall a long ways and they think well past the 11,000 we mentioned in our last few posts. Our number is the first in a series of downside targets we expect to hit over the next Five years or so. This will be a painful experience for all. We want to provide some roadmaps for you as we go down this path together. Take the first step slowly and gingerly because it's a doosy.

FSI: 90.20 (not too bad but a new low)

Wednesday, January 16, 2008

Something for Everyone

Top Line: The stock market as measured by the NASDAQ Comp index traded in a fairly wide range on Wednesday but managed to escape much damage. In fact, the foundation is now in place for a counter trend rally, if you can believe that after the INTC news on Tuesday. Since the market failed to make any progress on the downside on Wednesday after a perfect setup, we are going to go back to our thought that a bounce to the 13,000 level is in order. Then, after that, we will get our move down to the 11,000 area (more about that after we see a rally).

The stock market is difficult to read on a good day but when it wants to go down and so many want it to stay up there are crosscurrents that move it in unlikely directions. Over night last night the futures were significantly lower with the NASDAQ 100 futures down about 30 points at our last look before we put yesterday's post up. In the morning, the futures were down until we heard the news from JP Morgan.

Before the market opened, JPM declared that they had stayed in the black for the quarter and this brought a smile to the bulls as they started buying up the financials, with JPM in the lead. JPM ended the day up more than 5% along with several other financial stocks performing very well??? This group includes the housing sector which was strong on Wednesday.

This was going on even as the tech world was getting hammered (except for most semiconductors) with GOOG ending the day down over 3% to a 3 month low and INTC down over 12% to close under 20. INTC was nearly 28 in early December. Our opinion would be that INTC got off easy and should have been sold more, time will show this may happen. We have had a $12 target on this stock for a long time.

As all of this was going on, a rally in the dollar came in as gold and oil suffered setbacks. With oil down, the transports were doing pretty well today and have done better than the industrials over the past few days. This has created a bullish setup for the Dow industrials helping us to move the bullish scenario up a notch--remember this is counter trend and iffy to trade.

And, bonds did ok in the early going but ended down on the day. Bonds are getting pretty expensive and may take a rest if stocks manage to go up over the next few days. We do think bonds (US Treasury variety, TLT for example) will do fairly well this year even with a little setback here.

We sometimes see strong trends being interupted for options expiration week which this is and Wednesday is the typical turn day. We think there is ample opportunity for us on the downside during 2008, so we remain patient. It's not like we haven't had a solidly down January so far. We just think the next move will take us out of this oversold condition and allow us to drop once again.

Targets are now measured in bear market terms since we are probably not going to revisit the highs any time soon. We go back to our Elliott wave estimates both for the corrective move up now and then the next large move down. We should be correcting the move from 13,750 to this week's lows maybe today's 12,400. That's a 1350 point drop giving us an initial target of about half way or 675 points back up to just over 13,000. The Elliott wave estimates are about 40% (38.2%) or 60% (61.8%) or about 525 to 825 points up between 12,925 and 13,225 or our estimates of 13,000 to 13,200 which we have talked about for several days now.

After that, Elliott would say that we should have another move down that would be more than the 1350 point drop that we saw in the first run down. This proportion is not ever really knowable but at a minimum would be 160% of the first wave, or over 2100 points. That would take us down to about our 11,000 that we mentioned yesterday. Nothing seems to go perfect to plan but at least this is a roadmap we are going to be watching.

Reading Material:

Article on The Education of Ben Bernanke from the NY Times

FSI: 91.79 (a new low in this new index)

Tuesday, January 15, 2008

INTC Disappoints

Top Line: Our theory of a market rally may have been thwarted by INTC this evening as the market did not like what it heard. We will see if the market has any follow through in the morning. If there is follow through such that a noticeable downward gap occurs, then our thinking would be that the market will have dropped below the August lows. Right now, it seems to be sitting right on that low, especially in the Dow. Yes, technically the Dow traded below the August low but the break now needs to occur.

To continue that thought, there seems to be only one thing between a large drop and a bounce on Wednesday morning, that would be an "unexpected" Fed rate cut. Even then, the market sort of already "expects" it. On top of that the market, and probably the Fed, may think that a mid-meeting rate cut could be received poorly by the market. Why, wasn't it just a few weeks ago the Fed told us there was going to be no recession? Now, it seems the market is screaming for a rate cut, and a big one at that.

You undoubtedly have heard about the drop in the market on Tuesday so we won't bore you with the details of AAPL and C, you can read about that on your own. What happened after the market closed is what is of interest to us this evening--INTC.

Yes, INTC announced their earnings for the quarter and gave some forward looking statements which the market did not particularly like. This news has driven the futures market down this evening but as we write has come back up a little. The NASDAQ 100 futures were down over 40 points earlier (compared to about a 55 point loss during the day) and now they are only down about, well, 30 points. Still, a large point decline, which could lead to a very harsh opening in the morning.

Wednesday should be a day to remember in the US stock market. If we do get an rate cut from the Fed or we just fall out of bed, the market should provide much to talk about in our regular Update scheduled for Wednesday evening. In any event, it should prove to be important to the overall trend. In fact, if it goes down enough, it could actually be a selling climax and come back by the end of the day. Wednesday will give us a chance to see what the market wants to do.

As we have said, and we have to say again, the worst selloffs occur when the market is oversold. With the market down most days in 2008 and steeply sold on Tuesday, there is a tendency for people to think this is a buying opportunity. If disappointment in that thought happens, the market will fall out of bed, hard. We really can't say tonight, except that it will be something to see. Buyers have been disappointed all year so far and that could lead to a vicious selloff. Stay tuned.

We received an email from one of you, thanks CM, that references a page that talks about the volatility index (as well as a few other things), something we mention here from time to time. We have noticed that this index has hardly moved from where it's been in the recent weeks, even on Tuesday. This would seem to suggest that the market is Not done going down. Until we see a good spike in the fear factor, we won't have a meaningful bottom. This would mean the VIX would spike to 60 or more, at least up to 40 or 50.

FSI: 94.96 (not a new low for the move but after hours trading would be)

Monday, January 14, 2008

IBM Saves the Day

Top Line: In line with our thinking, the market did move up on Monday. While the news was IBM, the market was ready for a bit of a rally. Our current target for the Dow is still that range between 13,000 and 13,200. Until we get there, the rally remains the best direction for stocks. After that, and this is the reason we are not going to play the up move, there should be a good selloff that takes the Dow down quite a ways. How far? Well, if the August lows finally get taken out, there really isn't much support until we get down to 11,000. In down markets, support levels are no match for sellers.

As we mentioned, IBM took the spotlight on Monday with some relatively good earnings news. Good news from companies of almost any kind is in short supply so this little notion of a positive quarter was taken as the message buyers were waiting for. The tech world did manage a pretty healthy move on the back of the IBM news.

In the secondary spotlight continues to be the Fed. As you already know, they don't like to be in the second spot. The market would like to have a nice, big rate cut and they would like to have it Now, please. The problem is that the market should really wait for the cut rather than rally prior to the cut. If the market goes up, the Fed may not need to lower rates. Well, that may not be true because they just enjoy lowering rates so much. We'll just assume that the Fed is going to lower rates 50 bps right now. That's not what the market wants, it wants 75 or 100 bps.

Tonight's news is from C (Citigroup). The news is that the company is supposed to be laying off over 20,000 and slashing its dividend. This news is pushing the Asian markets down now and the US futures as well. Somehow, we figure the market will find some way to make this some bullish news and we'll find out on Tuesday, or Wednesday.

FSI: 98.26

Sunday, January 13, 2008

2008 Part Two

Top Line: The market made an attempt to go down on Friday but failed to break the lows from two days earlier. The most important point about Friday's trading is that the market held its lows and we expect another rally. This gives the Dow one more chance to get over 13,000. When we saw the market rally to 12,950 we thought that might be the chance we were thinking about, the one about the Dow getting some resistance in the 13,000 to 13,200 range. Right now we think the Dow has a bit of rally in it but the next rally will be a little move. There isn't much room for it to go up.

2008 Part Two

Stock market:
The stock market has shown us a high that should stay in place for a long time. In the October to early November period, aall the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index. There is one index that has another story, too.

The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.

Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.

The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signalling a downturn in the economy.

The Bank of America did rescue Counrtywide, or as some call it Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.

All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on the what is going on.

The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.

There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???

FSI: 95.72 (holding above its November lows)

Thursday, January 10, 2008

Fed to the Rescue and BOA Follows Suit

Top Line: The stock market staged another turn around on Thursday taking the Capital One (COF) news in one gulp to start the day lower but then up on the interest rate news from our local central bank chairman and the possible purchase of Countrywide Financial by previous investor Bank of America. What a day! The main ingredient seemed to be that there were no more sellers left after the morning hit and any news then was considered positive. We feel that the call for a rally to 13,200 is the best in the current situation. To fine tune that number a bit, we think the rally will run into trouble someplace between 13,000 and 13,200.

Just another note about the market. We know that the market is heavy with selling and are very concerned that the market will not hold. The big line in the sand is this week's low. If the Dow goes below our 12,500, the market will go down much more. This means that trading any of these rallies is not a good idea unless you are thinking of selling into them.

Here are tonight's headlines from CNN:

The Fed to the rescue: Bernanke says central bank ready to take 'substantive additional action' to cut interest rates in order to support lagging economy.
Countrywide shares soar on BofA takeover talk: Report: Mortgage lender in advanced talks to be acquired by banking leader.
Weakest holiday season in years: Many stores suffer big sales misses in December, but Wal-Mart and Costco benefit from cash-strapped consumers shopping for discounts.
AmEx expects lower profits in 2008: Credit card company forecasts housing slump and decaying credit quality will hurt its profit.
Capital One slashes profit outlook: Credit card issuer says it won't meet its 2007 forecast because of a rise in loan delinquencies and weakening economy.

What do all of these headlines have in common? The stock market went up with all of these. Most of the action followed the BOA takeover talks because the problem will be solved if a big bank takes over. For some reason the mortgage world is not well understood by the stock market. Some of the structured credit or securitized mortgages are collapsing because the home owners are Not paying their mortgages and the housing values are going down. We can't emphasize enough that money alone can Not fix this problem. The credit contraction is now underway and behind it is a serious recession brewing. We hope you have prepared as well as you can for this, like paying down your debt.

The same goes for the Fed. We don't believe The Fed can rescue anything except the banks, which is their main concern, with lower rates or more money. The market seems to believe it for now. If you take a look at an unemployed person who has to pay a mortgage payment on a house that is worth less than was paid, then you will see someone with no motivation or ability to pay that mortgage payment.

As we noted this past week, people aren't paying their phone bills or their mortgages. Countrywide announced that delinquencies and foreclosures were up. But, of course, it doesn't matter to the world because BOA will buy CFC and so don't worry about the actual home owner or the house sitting in the neighborhood.

Gold hit a another new high after the lower interest rate talk from our central bank chairman but we continue to believe that the rally in gold is about over. The next move should be significantly lower, maybe into the $600's. Check the True Contrarian's site to the left.

One other item comes from a reader, thanks CM. Here is the St. Louis Federal Reserve President William Poole's take on the world. It's a classic.

FSI: 98.05 (most of the horsemen were down on the day--not a good day for speculation)

Wednesday, January 09, 2008

At Last, A Rally

Top Line: At the moment, the market seems safe from further deterioration, for the moment. After the intraday reversal, US stocks are poised for further advance. The main question, of course, is how far can it go? Or, can it go? The market will let us know soon enough but our position will continue to be that any rally that exhibits itself will run into resistance at only slightly higher prices. Looking at the chart, the upside potential seems to have a spot that should present some problems for the rally. That level is right around 13,200.

Let's make sure to mention that the stock market does Not have to go up at all let alone back up to 13,200. What we are saying is that if the Dow goes up it should have trouble at this area. If it gets through that area, then we'll take another look. If on the other hand the market can't muster a rally and breaks down, there could immediately be a major selloff. We consider this a very low probability event.

The reason for the low probability is the market's continued faith in the Fed. We are considerably amazed that the market thinks the Fed can fix all ills by a rate cut, but it still lives. The market is now "begging" for 50 bps at the January meeting in a few weeks. Probably more to the point, the stock market thinks a lower rate will push stock prices up. That has not been what has happened with the rate cuts we have seen recently. Again, don't bother with facts.

Today's reversal was pretty impressive so now the market wants to prove itself with further gains in the next few days or a week. Our new short term target of 13,200 is not that far away and the market should run into sober sellers and significant resistance between here and there. This rally will fail and then we will see just how far the market can drop. Let's get back together tomorrow to see if there are legs on this rally.

After the close, Alcoa started the earnings parade with good news except on the transportation costs rising. We now are entering the earnings season which could be tough for most companies anywhere near the mortgage industry.

As we put the Update to bed, we notice there was some news on COF (Capital One Financial) the credit card company. The news from COF, according to the WSJ, is that their business is not producing the earnings that it said it would. Here we see the ooze from the mortgage business hitting other business.

Also, the Asian markets are down this evening which seems reasonable after the last few days that showed strong rallies. But, with the US markets showing some strength, we are surprised by the drop. As we have said, the selling pressures are strong, and that includes global markets.

We are keeping our eye on gold and the mining stocks. Gold has probably made an intermediate high just under $900. The complex is going to come under pressure now as the price of gold rolls over. We suggest that with this drop coming up, not to short the complex but to watch it with us to find a good entry point. Shorting the complex may be quite profitable but we will wait until a buying opportunity appears.

FSI: 98.70 (not exactly a big move)

Tuesday, January 08, 2008

Another Down Day

Top Line: Well, the stock market decided to head on down into the 12,500's on Tuesday with only a mild up move in the morning to follow through on Monday's late day bounce. Here is where it gets a little dicey. We have long said that sharp downturns come when stocks have been selling off for a while and buyers disappear. The stage is set, again, for a very sharp drop after Tuesday's unexpected down move. When stocks drop when there seems to be some notion that they should rally, that gives rise to additional fear.

There were several news items to drive the market down. Let's start with the one that Seems to be the biggie. This afternoon, the CEO of AT&T said that it had cut off service to subscribers in the fourth quarter. According to the WSJ he blamed the weak economy for customers not paying their bills. These words seemed to have some traction with the market as it went down right after that. It's almost like the market was worried that it might be true but when someone actually says it, then it must be true. We've added the WSJ's link and hope that you can view it.

There had been other news earlier in the day which caused little in the way of selling. The news was considered bullish because it may help the Fed to lower rates that nice 50 bps the market wants. Please. The first was the news from KB Homes, not very good. KBH posted a net loss of almost $10 per share about nine times more than analysts predicted. The stock put in a six year low as it dropped nearly 10% on the news. This stock has traded around 56 this year and today closed under 17. The company has been viewed as one that can withstand the current downturn. Oops, check that. The WSJ will have this news on Page One on Wednesday.

To continue, Countrywide Financial, a company that has been in these posts many times in the past year, got thumped hard today. Investors are leaving this stock in droves as CFC dropped nearly 30% on Tuesday. Yes, 30%. [We can't help but think about how well those 20 call options that we heard about on the bus last fall are doing.] The news was that they had fabricated documents to require someone coming out of bankruptcy to pay back payments. You gotta read this article. (The article is written by Gretchen Morgenson who is an author we think gets a lot of things right.) Read the first three paragraphs and see why investors are getting cold feet. Of course there was the rumor that CFC was going to file for bankruptcy itself which didn't instill confidence. The company halted trading for 15 minutes to announce that it had no plans to file--which stemmed the selling tide for about a half hour before really selling into the close.

One other news item hit the market early was the news on pending home sales index which was down, down 2.6% in November to a low below the September 2001 figure.

An opinion editorial in the Financial Times written by another one of our favorite writers, Stephen Roach, mentions the inflated assets in the US and how they must go down, including the word bubble in his comments.

Last but not least is another one of our favorite financial celebs, who has also tried his hand at writing, Bill Gross of PIMCO. Mr. Gross wasn't writing today, but was speaking on the danger of credit default swaps (CDS). We haven't discussed CDS's much here but given they are the place where the next round of this credit crisis may be, we may need to start talking about them. This is an important topic.

All in all, a very pessimistic day on the Street. With that you may think the over night futures would be down but that is just not the case this evening. We see buying coming in this evening and that indicates No Fear among the investors/speculators.

Right now all of the major indexes we follow are sitting right around the August lows or at least below their November lows. If the market is Not going to fall out of bed right now, then it needs to bounce right now. Even then, we don't see a bounce as more than a small move. Any bounce we have seen recently has been sold hard. Oversold or not, this selling is strong.

FSI: 95.87 (Our low for this index was back on November 12th at 93.75)

Monday, January 07, 2008

Another Volatile Day

Top Line: We predict a quick Update this evening. The stock market is now trying to figure out if it wants to drop into the 12,500 area or move up a bit first. The day's action indicates that a small rally may ensue. We are expecting to see a bit an up move early on Tuesday. The ramp job we saw late in the day on Monday did take up a lot of buying power but the market has probably gotten a bit oversold.

We apologize for the short Update this evening. For your reading pleasure we bring you the recession warning from Harvard University economist Martin Feldstein.

We will bring 2008 Part Two another evening. Let's hear your 2008 comments.

Sunday, January 06, 2008

2008 Part One

Top Line: After last week's poor performance, more analysts are talking about a decline in the market due to a recession. This is definitely new on the horizon. They are also hoping for a rate cut of 50 bps at this month's FOMC so that they can confidently declare the second half recovery. Haven't we seen that movie already? Since we are getting close to 12,500, we will need to be paying very close attention to what the market is saying.

The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.

The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.

2008 Preview Part One:

In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.

Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.

Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.

Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.

Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.

More during the rest of the week...

FSI: 99.94

Thursday, January 03, 2008

December Jobs' Report Due on Friday Morning

Top Line: You may have noticed that the Dow managed to stay afloat on Thursday, above 13,000. But, the market is definitely trading heavy even in this normally bullish period. There certainly seems to be no fear in trading even though prices are not bouncing off the natural round number support area. If the market decides to drop, the pattern allows for a large drop. We shouldn't get ahead of the market, though our target is at least a test of the 12,500 area in the Dow.

There are so many things going on over the last few days, we hope you have been able to keep up with them on your own. We are focused on the jobs' report due out on Friday morning, probably before most of you get a chance to read this post. On Thursday the ADP employment report revealed a lower number of jobs last month than the month before. ADP said that the nonfarm employment rose by 40K, which doesn't include government workers estimated at an additional 19K, for a total of 59K. The estimates for the Friday jobs' report is for 70K new jobs to have been created. The ADP report has not been widely accepted as a substitute or even a real predictor of the BLS number coming out on Friday morning. The BLS purports to cover all of the jobs while ADP can really only extrapolate from their actual payroll numbers. Anyway, last month the ADP number estimated about 189K new jobs the day before the BLS announced 94K. We aren't going to read anything into those numbers.

What we are going to do, however, is to talk about possible stock market reactions to the number. The market seems worried about the economy, especially when it saw the ISM manufacturing number on Wednesday, allayed by the Fed's minutes indicating lower rates were almost certain. If the jobs' number is weak, there could be a cheer from that same crowd but remember that the rally from Wednesday was not very strong and looking back now seems imperceptible. It is possible that a weak jobs' number will confirm the markets' jitters about the economy. A number that is also coming out on Friday is the ISM non-manufacturing number which could be a counterbalance.

If the jobs' number is strong the market could decide that it is a better thing than the possibility of the Fed lowering rates. We see that the articles being written over the past few weeks are being much less positive about the Fed's ability to rectify the mortgage issues. (The link is to a WSJ opinion from the Thursday edition. If you can't read it, you can find a copy of the Journal to read it.)

Our hope is to provide a little 2007 recap along with a 2008 preview from the Updates perspective over the weekend. We would appreciate any comments before that time about your thoughts on the upcoming year in the markets. As a preview we think there will be plenty of opportunities in 2008 but the timing will be tricky. See you then.

FSI: 105.68

Wednesday, January 02, 2008

A Down Day on the First Day of the Year?

Top Line: The stock market has now been down during the period of normal strength, that being the end of the month [year] and start of the month [year]. Wednesday's low in the Dow was 13,000 and the bounce off that round number was expected. What the market chooses to do now is going to be worth watching. As we have said, the Dow should be headed to 12,500.

The news on SBUX is that it hit a new low on an analyst downgrade (a little late) but it points to our premise that the consumer will lead this economy into recession--a consumer led recession is not a common event so few realize that it is happening. The world is not paying attention to the 2/3's of the economy that is now in pull back mode. SBUX numbers are telling us that the consumer is pulling its spending in a bit, that $5 cup of coffee is being skipped once in a while.

Here we are one day into 2008 and the Fed is already trying to pump the stock market. Wednesday's medicine came in the form of the Fed minutes from the last FOMC, held on December 11th. By now you've read the news that the Fed thinks it will need to lower rates substantially. Well, what do you know, they are finally realizing this. They are usually a little late to the party so we're not surprised.

The market was surprised by a few things on Wednesday. First, the fact that manufacturing indicated poor prospects in December inspiring selling and, second, the Fed's minutes were released prompting the response that the Fed would [try] to save the day and buying commenced. That rally happened late in the day but pretty much was erased by the end of the day as stocks fell hard on the first trading day of the year.

The US Treasury bonds were strong as was gold and oil, strange combo there. As we write, the Asian markets are trading lower in response to the US markets' decline, as usual. As we see it, Wednesday's market should have helped to create an oversold condition but our indicators don't show that tonight. This leaves the market open to go down more, even though the overnight futures are up a bit right now.

Tomorrow brings the first in a series of major political events, that being the Iowa caucus. We will only report on the politics as it relates to the stock market so we don't expect much.

FSI: 105.85 (not down much, AMZN was strong)

Tuesday, January 01, 2008

Happy New Year 2008

Top Line: The start of a new year should give all of us new opportunities to prosper both in the stock market and in our personal lives, including work. The stock market is the reason you have come and our position has not changed (much) since our last post. We think the Dow has a good chance to drop to 12,500. But, with the new year at hand, we think there is a good chance that new money will show up for a few days and send prices higher. That shouldn't last too long but we don't know how high it will take the Dow. As we get more info from the market we will share it.

Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.

The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.

In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.

We will have more in the next few days as the market reveals itself to us.

In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.

The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.

The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.

More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.

FSI: 106.39 (the past week's high was 108.91 on December 26th)