Top Line: The buyers were timid again on Monday with the Dow only ending up about 50 points when it seemed like it wanted to go up more. The market is heavy but still trying to go up. With the end of the month here, there could be some strength going into Friday's jobs' report.
Monday's media didn't spend too much time on the Paulson proposal and with good reason...there doesn't seem to be much punch to it. Our perspective is our post for the evening. We are watching the stock market with a great deal of...well, let's call it...patience. While we wait, let's discuss some of the fallout from the mortgage crisis.
Paulson's proposal is an effort to calm the credit markets which are still in a little bit of stress. We realize that this path is the one we were destined to be on when the real estate bubble started to get pumped up. There really was no other way to go. What are we refering to?
That would be the "new" idea that we close the barn door now that the horses are gone. Another way to put it is that the government will have another chance to beef up its regulatory might. So, where were the regulators when these problems first surface? Yes, a rhetorical question because we know they were asleep at the wheel or more to the point driving without a license.
We apologize for the sarcasm but as long as the housing prices were going up and interest rates were low, everyone was smiling. Now that the housing market is slowing or falling, the government thinks it needs to do something...regulate something. What we are going to get is an attempt to stop all of this from happening again. We shouldn't have to say this but This is not going to happen again in a long time. The mood of the people is changing to a less speculative attitude.
The world sees the Greenspan put transforming into the Bernanke put with a twist...this guy is serious about liquifying the system. The market is supposed to be a Free market with the ability to go up an down to reflect what is going on in the real world. Everyone is afraid of what might happen if the stock market would go down. They didn't seem to mind the real estate bubble getting bigger and bigger. Now, they think it is easy enough to put Humpty Dumpty back together again.
How do they think they're going to do this? Regulations. We're the government and we're here to regulate now that the problem is well out of hand.
Update readers' homework...Roger Lowenstein wrote an article for the NY Times which we thought would be a good read for you.
FSI: 74.53 (not a strong showing for the all powerful Horsemen, down about 30% on the year)
Monday, March 31, 2008
Sunday, March 30, 2008
Last Day of the Quarter
Top Line: Friday's action continued the stretch of down days but there wasn't much punch to the move. Our position remains that we will see some more upside. We are long term Bearish but are trying to get cute here with a bounce that will correct the down move from the highs back in October. It's earnings season coming up (along with its pre-announcements) and anything can happen.
The market has sagged in here and it shows how weak the underlying trading is. If we get a rally though, the strength could come back in for a little while anyway. If the selling happens to take us much lower, we will review our position but for now we will stay the course.
We are going to keep this brief this evening--more to come on Monday evening. The biggest news item for Monday is the announcement coming from the Secretary of the Treasury, with apparent buy-in from New York Senator Schummer, calling for a major change in the oversight roles for the Fed and other entities. Here is a preview for you to consider. This should generate much media attention over the next few days.
We leave you with another article (kind of long) from Gretchen Morgenson of the New York Times. This article is telling the story of who the "winners" are in this mortgage crisis...the law firms who are pushing foreclosure to make a buck. We are not surprised but it is sad to think of the kind of things that this real estate bubble has given us. It just keeps getting worse and worse.
And, just before we are ready to sign off, we noticed that the WSJ just broke a story about Lehman Brothers. The news seems to be that they may have been the victims of fraud with a Japanese firm. What else can go wrong for these brokers. LEH is already down from about 85 a year ago to under 40 now.
FSI: 74.40 (down just a little)
The market has sagged in here and it shows how weak the underlying trading is. If we get a rally though, the strength could come back in for a little while anyway. If the selling happens to take us much lower, we will review our position but for now we will stay the course.
We are going to keep this brief this evening--more to come on Monday evening. The biggest news item for Monday is the announcement coming from the Secretary of the Treasury, with apparent buy-in from New York Senator Schummer, calling for a major change in the oversight roles for the Fed and other entities. Here is a preview for you to consider. This should generate much media attention over the next few days.
We leave you with another article (kind of long) from Gretchen Morgenson of the New York Times. This article is telling the story of who the "winners" are in this mortgage crisis...the law firms who are pushing foreclosure to make a buck. We are not surprised but it is sad to think of the kind of things that this real estate bubble has given us. It just keeps getting worse and worse.
And, just before we are ready to sign off, we noticed that the WSJ just broke a story about Lehman Brothers. The news seems to be that they may have been the victims of fraud with a Japanese firm. What else can go wrong for these brokers. LEH is already down from about 85 a year ago to under 40 now.
FSI: 74.40 (down just a little)
Thursday, March 27, 2008
Social Security Takes the Stage
Top Line: The market dropped on Thursday but did not even get close to the lows of the last couple of weeks. We continue to expect a countertrend rally that defies the "bad" news. This theory can be challenged by the market if it does manage to drop back down to those lows.
ORCL managed to hold down the techs with a little help from GOOG. Together they dragged the NASDAQ 100 down about 2%. At the same time that was going on the Financials were getting beat up.
What we read about ORCL was that the company should have been able to move those magic mirrors around the smoke enough to handily beat the "number" but it failed to do so, expectations were just met not exceeded. While the revenue number missed and that's the primary headline you read, the failure to beat the number could have been more important in the selloff. Maybe ORCL's purchase of some rival firms didn't go quite as planned.
As for GOOG, they said that "clicks" were not what they seemed and Fleck brought us this commentary in his daily rap today:
"Fewer Clicks to Cluck About
Back to the bottom-up data, probably the most important one from last night is that searches at Google are continuing to slow down. They dropped 7.5% sequentially from December to January, and declined a further 3% from January to February, though February itself saw searches up about 3% year-over-year. But to put that in perspective: As recently as October, searches were up 37% year-over-year. "
GOOG makes its money by companies paying for advertising. If you click on an ad/sponsor, then they pay GOOG. If you don't, they don't. Part of the beauty of GOOG has always been that the revenue would continue to come in due to all the eyes and therefore clicks that were coming to GOOG. Imagine if these clicks went away 100%. Who would want to advertise on GOOG anyway? We're not suggesting this will happen but the reason they make money is due to more and more eyes and ad clicks. If that is not going up, what is going to happen to their revenue and earnings? Yes, those might go down...very good.
The interesting thing from our vantage point is that, yes, GOOG was down on the news, but it wasn't making new lows for the move. That says that the news may be Too late. If GOOG can't make another new low for this down move, then there could be more upside potential.
We wanted to spend just a few moments talking about the level of financial stress the current market is facing and couldn't really figure out a way to do it that made any sense until we saw this article tonight on CNN, where else? Here is the setup:
We have read that John Meriwether, the brainchild behind LTCM back in the 90s, is having trouble again. Ten years ago his fund was thought to be able to bring down the financial system with its highly leveraged portfolio, about 50 to 1. That problem was solved by a bunch of banks, who were owed money from LTCM, decided to take care of the problem. You might be asking how big that problem was and if you are that is why we're here. The number was $4 billion. This LTCM mess was only ten years ago but that $4 billion was a Big deal back then, thought to be able to take down the Entire banking system by itself.
Today, we are experiencing problems with the mortgage market that are up to $200 billion in write downs so far. Does no one think these are big numbers or did inflation from $4 billion to $200 billion happen that fast? Here's where Glenn Beck's article (above) comes into play. We added the LTCM for historical perspective but Mr. Beck has three other numbers of note, $200 billion, $14 trillion and $53 trillion, the asteroid he titles his article.
$4 billion is the LTCM mess
$200 billion is the current write downs from mortgages
$14 trillion is the US economy measured in GDP
$53 trillion is the present value of all of the promises made for Social Security and Medicare
The article is another good one from Mr. Beck, recommended Update readers reading material.
FSI: 74.51 (speculation didn't abate much, probably more upside to come)
ORCL managed to hold down the techs with a little help from GOOG. Together they dragged the NASDAQ 100 down about 2%. At the same time that was going on the Financials were getting beat up.
What we read about ORCL was that the company should have been able to move those magic mirrors around the smoke enough to handily beat the "number" but it failed to do so, expectations were just met not exceeded. While the revenue number missed and that's the primary headline you read, the failure to beat the number could have been more important in the selloff. Maybe ORCL's purchase of some rival firms didn't go quite as planned.
As for GOOG, they said that "clicks" were not what they seemed and Fleck brought us this commentary in his daily rap today:
"Fewer Clicks to Cluck About
Back to the bottom-up data, probably the most important one from last night is that searches at Google are continuing to slow down. They dropped 7.5% sequentially from December to January, and declined a further 3% from January to February, though February itself saw searches up about 3% year-over-year. But to put that in perspective: As recently as October, searches were up 37% year-over-year. "
GOOG makes its money by companies paying for advertising. If you click on an ad/sponsor, then they pay GOOG. If you don't, they don't. Part of the beauty of GOOG has always been that the revenue would continue to come in due to all the eyes and therefore clicks that were coming to GOOG. Imagine if these clicks went away 100%. Who would want to advertise on GOOG anyway? We're not suggesting this will happen but the reason they make money is due to more and more eyes and ad clicks. If that is not going up, what is going to happen to their revenue and earnings? Yes, those might go down...very good.
The interesting thing from our vantage point is that, yes, GOOG was down on the news, but it wasn't making new lows for the move. That says that the news may be Too late. If GOOG can't make another new low for this down move, then there could be more upside potential.
We wanted to spend just a few moments talking about the level of financial stress the current market is facing and couldn't really figure out a way to do it that made any sense until we saw this article tonight on CNN, where else? Here is the setup:
We have read that John Meriwether, the brainchild behind LTCM back in the 90s, is having trouble again. Ten years ago his fund was thought to be able to bring down the financial system with its highly leveraged portfolio, about 50 to 1. That problem was solved by a bunch of banks, who were owed money from LTCM, decided to take care of the problem. You might be asking how big that problem was and if you are that is why we're here. The number was $4 billion. This LTCM mess was only ten years ago but that $4 billion was a Big deal back then, thought to be able to take down the Entire banking system by itself.
Today, we are experiencing problems with the mortgage market that are up to $200 billion in write downs so far. Does no one think these are big numbers or did inflation from $4 billion to $200 billion happen that fast? Here's where Glenn Beck's article (above) comes into play. We added the LTCM for historical perspective but Mr. Beck has three other numbers of note, $200 billion, $14 trillion and $53 trillion, the asteroid he titles his article.
$4 billion is the LTCM mess
$200 billion is the current write downs from mortgages
$14 trillion is the US economy measured in GDP
$53 trillion is the present value of all of the promises made for Social Security and Medicare
The article is another good one from Mr. Beck, recommended Update readers reading material.
FSI: 74.51 (speculation didn't abate much, probably more upside to come)
Wednesday, March 26, 2008
ORCL Scares Market After the Close
Top Line: There seems to be a little fear left in the market, a concept that aligns well with our position that the general public is not understanding the turn in the market...at least not yet. When they do think the market has turned, the pros will be looking to sell some stock to them.
In the mean time, there is plenty to keep the fear going. In the news, we had durable goods orders that were far worse than expected but the lower housing numbers were "better" than expected. The news should continue to be less than encouraging but the market is behaving like the news doesn't matter right now--we say that happens all the time, at least on a day to day basis. The market is in confusion mode right now, so prepare to be confused...like this blog isn't confusing enough.
From a purely fundamental point of view, we think the economy is a thin ice and will continue to break through it until it's under water. That doesn't mean the market has to follow that line of reasoning. The market is going to do what it wants to do and we have to try to figure out what that is going to be.
After the market closed ORCL (Oracle) thought it was bringing great news to the market in the form of higher margins and profits. The market didn't think the "revenue" news was all that great and sold the stock off by nearly 10% (8.3% by the end of after hours trading). The news put fear into the tech sector such that the NASDAQ 100 futures are trading about 1% lower in overnight trading. This could lead to some selling in the morning but we know how that goes...
The Bear Stearns trading seems to bring additional confusion. Today the stock is trading up over 11 while JPM is down over 4%. The traders here seem to think that the stock would be worth more if JPM wouldn't be there to hold it up...unbelievable. In the afternoon, there was a news story that Senate Banking Committee Chairman Christopher Dodd was going to hold a hearing on the role of the Fed and other regulators in the JPM Bear deal. There was also a mention that there would be questions raised about..."the Fed's investment in illiquid mortgage securities."
Right after this story broke, Bear Stearns jumped more than a point in about five minutes but it did manage to come back to earth before the close. Still, BSC is trading well above the value that would normally seem to be applicable to it, the one based on JPM's price. Since each BSC share will fetch 0.21753 share of JPMorgan stock so at the 44.11 price JPM closed at, a BSC share would be worth rougly 9.60 and it closed at 11.21...in the words of Coach from Cheers, "Yeah, that makes sense."
FSI: 77.22 (the highest close since late February)
In the mean time, there is plenty to keep the fear going. In the news, we had durable goods orders that were far worse than expected but the lower housing numbers were "better" than expected. The news should continue to be less than encouraging but the market is behaving like the news doesn't matter right now--we say that happens all the time, at least on a day to day basis. The market is in confusion mode right now, so prepare to be confused...like this blog isn't confusing enough.
From a purely fundamental point of view, we think the economy is a thin ice and will continue to break through it until it's under water. That doesn't mean the market has to follow that line of reasoning. The market is going to do what it wants to do and we have to try to figure out what that is going to be.
After the market closed ORCL (Oracle) thought it was bringing great news to the market in the form of higher margins and profits. The market didn't think the "revenue" news was all that great and sold the stock off by nearly 10% (8.3% by the end of after hours trading). The news put fear into the tech sector such that the NASDAQ 100 futures are trading about 1% lower in overnight trading. This could lead to some selling in the morning but we know how that goes...
The Bear Stearns trading seems to bring additional confusion. Today the stock is trading up over 11 while JPM is down over 4%. The traders here seem to think that the stock would be worth more if JPM wouldn't be there to hold it up...unbelievable. In the afternoon, there was a news story that Senate Banking Committee Chairman Christopher Dodd was going to hold a hearing on the role of the Fed and other regulators in the JPM Bear deal. There was also a mention that there would be questions raised about..."the Fed's investment in illiquid mortgage securities."
Right after this story broke, Bear Stearns jumped more than a point in about five minutes but it did manage to come back to earth before the close. Still, BSC is trading well above the value that would normally seem to be applicable to it, the one based on JPM's price. Since each BSC share will fetch 0.21753 share of JPMorgan stock so at the 44.11 price JPM closed at, a BSC share would be worth rougly 9.60 and it closed at 11.21...in the words of Coach from Cheers, "Yeah, that makes sense."
FSI: 77.22 (the highest close since late February)
Tuesday, March 25, 2008
The Market Seems Dull
Top Line: We have to say that the current market seems a little dull. Yes, we have been in an upward correction of the runup of the past six months and it has just begun. Still, it shouldn't be very powerful and we wonder if good trading opportunities are available.
As mentioned in our last post, we think that the average American will be scratching their head and wondering why the stock market isn't going down. The news continues to be bad with Tuesday's news on both the declining price of housing and the drop in consumer confidence. The expecation portion of the index, the way consumers feel about the near future, dropped to a low not seen since 1973 during the time when the oil embargo and the Watergate scandal were the top news stories.
These news items don't do much for stock prices since most sellers have been getting out over the past few months and many have no further desire to sell. The real question is when are the people that bought from these early sellers going to get tired of holding. Yes, we know, that is a few weeks, if not months away. We have to get on board the idea of a correction here that may take stocks higher than we would like to think about. For the moment our position is that we should see a rally that gets to the 13,000 level and then we have to see what kind of strength we will get at that time.
One item that popped up this evening was the news on the Social Security/Medicare front. We find the timing to be a little inconvenient, to steal a word from another heated debate (pun intended). We see the Fed and the government acting to save Bear Stearns by bringing billions of dollars to the table and within a week the news is to increase taxes because these social programs are going to need additional funding in the near future.
Several years ago, they were telling us that the trust fund for Social Security would need to be tapped to keep up the payments. That year was 2017 and you might notice that is Less Than ten years away. What's more is that the government has been using the excess Social Security payments in the general fund and writing IOU's to the trust fund in the form of bonds. When 2017 rolls around, the government won't be able to draw funds from the excess payments because there will be No excess payments. At that time the fund will need to draw funds from the government. So, either way you look at it, taxes will probably need to go up to cover this program.
Our thought is that the American people look at the Problem and say, "It's the government's problem not ours. You took care of Bear Stearns last week so now figure out a way to take care of us."
In case you were wondering more about the Bear JPM deal, we were pointed at this NY Times article that questions the actions of the Fed in the deal. It's a pretty short article and deserves a read.
FSI: 76.02 (slightly lower than yesterday)
As mentioned in our last post, we think that the average American will be scratching their head and wondering why the stock market isn't going down. The news continues to be bad with Tuesday's news on both the declining price of housing and the drop in consumer confidence. The expecation portion of the index, the way consumers feel about the near future, dropped to a low not seen since 1973 during the time when the oil embargo and the Watergate scandal were the top news stories.
These news items don't do much for stock prices since most sellers have been getting out over the past few months and many have no further desire to sell. The real question is when are the people that bought from these early sellers going to get tired of holding. Yes, we know, that is a few weeks, if not months away. We have to get on board the idea of a correction here that may take stocks higher than we would like to think about. For the moment our position is that we should see a rally that gets to the 13,000 level and then we have to see what kind of strength we will get at that time.
One item that popped up this evening was the news on the Social Security/Medicare front. We find the timing to be a little inconvenient, to steal a word from another heated debate (pun intended). We see the Fed and the government acting to save Bear Stearns by bringing billions of dollars to the table and within a week the news is to increase taxes because these social programs are going to need additional funding in the near future.
Several years ago, they were telling us that the trust fund for Social Security would need to be tapped to keep up the payments. That year was 2017 and you might notice that is Less Than ten years away. What's more is that the government has been using the excess Social Security payments in the general fund and writing IOU's to the trust fund in the form of bonds. When 2017 rolls around, the government won't be able to draw funds from the excess payments because there will be No excess payments. At that time the fund will need to draw funds from the government. So, either way you look at it, taxes will probably need to go up to cover this program.
Our thought is that the American people look at the Problem and say, "It's the government's problem not ours. You took care of Bear Stearns last week so now figure out a way to take care of us."
In case you were wondering more about the Bear JPM deal, we were pointed at this NY Times article that questions the actions of the Fed in the deal. It's a pretty short article and deserves a read.
FSI: 76.02 (slightly lower than yesterday)
Monday, March 24, 2008
Cry Babies Get Their Way on Wall Street
Top Line: Ouch...The stock market has decided to jump out of its down trend with a major push supposedly based on the "new" and improved bid from JP Morgan of Bear Stearns. For what it's worth, we think the trend has changed even though...The move may very well be "corrective" meaning it will be difficult to predict or trade.
The current move seems to have its beginnings in the financial events of the past ten days or so. Our thought is that the traders think Wall Street has been "healed" even though the news on Main Street remains, and will continue to be, poor. This will confuse the traders on Main Street due to how much bad news will come out over the next few weeks.
We should not disregard such a move even though we didn't get what we thought would be a final drop into a low that challenged the January lows. Too many negatives in this sentence for you??? Ok, the market showed us it has the power to go up. Our thought that the market would drop to a new low did get pushed to the side with this up move.
With this change in direction, we think the market is correcting the move that started at the October highs. From high to low, we saw about 2500 points in the Dow so we expect a 1250 point move, give or take, which would put us back up to around 13,000 which is very near by so we feel like we have missed most of the move. We will revise our targets as this move develops.
We do have a comment on the JPM move this morning. We saw BSC trade near 14 this morning maybe hoping that JPM would raise its offer to 20 or maybe higher. Now that the new bid has been revealed, we wonder if this eventuality was planned from the start, but it really doesn't matter...the cry babies win on Wall Street and it's a Crying Shame.
Ok, one more thing...The Fed will be able to take a bit of a break now that the stock market has moved up and the short term Treasury bills did get a yield over 1% by the end of the day from about 0.30% last week. The market is noticably breathing easier. Your thoughts (thanks Erick) are always appreciated.
FSI: 76.51
The current move seems to have its beginnings in the financial events of the past ten days or so. Our thought is that the traders think Wall Street has been "healed" even though the news on Main Street remains, and will continue to be, poor. This will confuse the traders on Main Street due to how much bad news will come out over the next few weeks.
We should not disregard such a move even though we didn't get what we thought would be a final drop into a low that challenged the January lows. Too many negatives in this sentence for you??? Ok, the market showed us it has the power to go up. Our thought that the market would drop to a new low did get pushed to the side with this up move.
With this change in direction, we think the market is correcting the move that started at the October highs. From high to low, we saw about 2500 points in the Dow so we expect a 1250 point move, give or take, which would put us back up to around 13,000 which is very near by so we feel like we have missed most of the move. We will revise our targets as this move develops.
We do have a comment on the JPM move this morning. We saw BSC trade near 14 this morning maybe hoping that JPM would raise its offer to 20 or maybe higher. Now that the new bid has been revealed, we wonder if this eventuality was planned from the start, but it really doesn't matter...the cry babies win on Wall Street and it's a Crying Shame.
Ok, one more thing...The Fed will be able to take a bit of a break now that the stock market has moved up and the short term Treasury bills did get a yield over 1% by the end of the day from about 0.30% last week. The market is noticably breathing easier. Your thoughts (thanks Erick) are always appreciated.
FSI: 76.51
Sunday, March 23, 2008
Still Can't Believe the Events of Last Week
Top Line: This week has the potential for continued volatile trading. We still think the path to the January lows is the correct path. The fear on Main Street is building after the significant fear on Wall Street seems to be ebbing.
This evening, we still can't believe the events of the past ten days, with the crowning moment being the JPMorgan $2 buyout of Bear Stearns. If that calmed the troubled waters of liquidity in the banking world, we will be surprised. It may have tempered the stock market's fall, at least for the short run, but it certainly did little to calm the credit markets. We note that the three month T-bill traded down below 0.40% on Thursday.
The stock market breathed a collective sigh of relief as the events of the week seemed to bring a moment akin to a baby being held by its mother, the stock market being the baby curled up in the fetal position with the Fed as its metaphorical mother. We think this false sense of security will not last for very long and the week ahead will give another chance to scratch your head and wonder how the Fed will clear up the next problem.
Speaking of the Fed clearing up the problems...we noticed another great article from Gretchen Morgenson of the New York Times. We mention her and feature some of her articles here because she writes about things we are interested in following and she gives us a slightly different angle of view. This article is about the possible fallout from the JPM/BSC deal of the century and how there must be some losses out there somewhere that will surface, maybe the CDSs held by a number of different parties/counterparties. [If you sign up for online NY Times, this and many other great articles are available to you for free.]
As we mentioned, we are still stunned by last week's events. Even Friday, with the markets closed, probably by design, the S&P said that two other Wall Street firms, Goldman Sachs and Lehman, would have significant trouble in the year ahead with profits falling 20% to 30%. By now that news is Old news so it doesn't bother the stock market any...
Let's pay attention to the market this week. There is so much pessimism in the media, we are starting to think we are getting close to a trading low. No, we're not ready to go there just yet, but we have our eyes and ears open for the possibility. We still see too much optimism out there as people are looking over the valley of lower prices and seeing the future runup after that so they don't see any reason to sell. Even our copy of Barron's told us there was someone predicting 20,000 in the Dow.
FSI: 72.34
This evening, we still can't believe the events of the past ten days, with the crowning moment being the JPMorgan $2 buyout of Bear Stearns. If that calmed the troubled waters of liquidity in the banking world, we will be surprised. It may have tempered the stock market's fall, at least for the short run, but it certainly did little to calm the credit markets. We note that the three month T-bill traded down below 0.40% on Thursday.
The stock market breathed a collective sigh of relief as the events of the week seemed to bring a moment akin to a baby being held by its mother, the stock market being the baby curled up in the fetal position with the Fed as its metaphorical mother. We think this false sense of security will not last for very long and the week ahead will give another chance to scratch your head and wonder how the Fed will clear up the next problem.
Speaking of the Fed clearing up the problems...we noticed another great article from Gretchen Morgenson of the New York Times. We mention her and feature some of her articles here because she writes about things we are interested in following and she gives us a slightly different angle of view. This article is about the possible fallout from the JPM/BSC deal of the century and how there must be some losses out there somewhere that will surface, maybe the CDSs held by a number of different parties/counterparties. [If you sign up for online NY Times, this and many other great articles are available to you for free.]
As we mentioned, we are still stunned by last week's events. Even Friday, with the markets closed, probably by design, the S&P said that two other Wall Street firms, Goldman Sachs and Lehman, would have significant trouble in the year ahead with profits falling 20% to 30%. By now that news is Old news so it doesn't bother the stock market any...
Let's pay attention to the market this week. There is so much pessimism in the media, we are starting to think we are getting close to a trading low. No, we're not ready to go there just yet, but we have our eyes and ears open for the possibility. We still see too much optimism out there as people are looking over the valley of lower prices and seeing the future runup after that so they don't see any reason to sell. Even our copy of Barron's told us there was someone predicting 20,000 in the Dow.
FSI: 72.34
Wednesday, March 19, 2008
V For Ignorant
Top Line: The market has now given its first signal that it still wants to go down. Most would say that a pullback was in order on Wednesday after the big runup on Tuesday, but they wouldn't necessarily agree to a 75% retracement being in order. We are firmly in bearish territory especially since the Fed must be exhausted after its crazy week of actions.
What will you tell your descendants about this week's news? We are writing it and we still can't believe what we write. Our title describes our sentiments almost perfectly, with a stunned look on our face as we say it. We draw a distinction, if you can indulge us, between pure stupidity and genuine ignorance. To us, stupid is that you know better but you do it anyway. Ignorance just means you didn't know so how could you have done any different.
Let's make sure you all know what we are talking about when we say "V". Wednesday was the day that VISA came to market in the largest IPO ever. We want to review the points we have been making in this blog for a Long time now. The first is that the housing market would deteriorate enough to put the economy into a recession. The second is this ATM has now pretty much closed for new withdrawals which should intensify the recession. We are now in a credit contraction that should last a long time. Need we say any more???
So here we are two days after the demise of Bear Stearns due to credit market issues and V comes to market with an overbid IPO. V had anticipated that the price would go off at $42 or lower but lo and behold bids came in to push up the offer to $44 during the last few days--What? Now, the opening trade this morning was 65 nearly 50% higher. We are pretty sure that this price won't hold and that the price of V for Ignorance will trade 50% lower, around 32, sometime very soon.
While we are in disbelief at the events of the past ten days or so, we don't think the desired consequences were realized. Certainly, V was sort of a Bell ringing for all of us to know there is still plenty of bullish optimism in the stock market--meaning the lows have not been seen. We think the move down will break the January lows in the Dow and then keep going. Our targets should be based on the NASDAQ 100 which is our favorite index. You'll have to come back next week to find out what they are--since we don't know tonight. We are waiting for Triple/Quadruple Witching on Thursday to settle out before we try any figuring.
Two items left, one the Fed and the other the precious metals and other commodities. We read and agree with a commentator that the Fed has unleashed a lot of its ammo this past week. No, we're not talking about the rate cuts, we are talking about their assets which stand at around $900 billion. Just recently they have traded in a lot of those dollars, estimated at nearly $400 billion, to loan money/Treasuries to all kinds of entities, in hopes of restoring the credit markets.
Did there efforts pay off? Well, we will never really know what would have happened if Bear would actually have been allowed to fail over the weekend. But, there still may be an opportunity for more bombs going off. You don't have to go too far to find continuing problems in the credit market. What we have been mentioning to you is the difference between the three month T-bills rate and the fed funds rate. It's still at a very high 175 bps meaning it would allow the Fed to lower another 175 bps Thursday and they would just then get to where they need/want to be. What they have wanted is for the T-bill rate to go up meaning that the other short term funds were being purchased rather than the safety of T-bills.
Last, the last couple of days may have given us the first indication that the precious metals have now changed directions. This week has seen gold (basis the April futures contract) drop from a high of 1035 to about 915 tonight, over a ten percent move. Silver has been crushed even more from 21.40 down to 18 tonight, about a 15% move. These are moves This week. We should now see prices move down dramatically over the next several months. This move should involve many commodities including oil and Gas.
FSI: 71.18
What will you tell your descendants about this week's news? We are writing it and we still can't believe what we write. Our title describes our sentiments almost perfectly, with a stunned look on our face as we say it. We draw a distinction, if you can indulge us, between pure stupidity and genuine ignorance. To us, stupid is that you know better but you do it anyway. Ignorance just means you didn't know so how could you have done any different.
Let's make sure you all know what we are talking about when we say "V". Wednesday was the day that VISA came to market in the largest IPO ever. We want to review the points we have been making in this blog for a Long time now. The first is that the housing market would deteriorate enough to put the economy into a recession. The second is this ATM has now pretty much closed for new withdrawals which should intensify the recession. We are now in a credit contraction that should last a long time. Need we say any more???
So here we are two days after the demise of Bear Stearns due to credit market issues and V comes to market with an overbid IPO. V had anticipated that the price would go off at $42 or lower but lo and behold bids came in to push up the offer to $44 during the last few days--What? Now, the opening trade this morning was 65 nearly 50% higher. We are pretty sure that this price won't hold and that the price of V for Ignorance will trade 50% lower, around 32, sometime very soon.
While we are in disbelief at the events of the past ten days or so, we don't think the desired consequences were realized. Certainly, V was sort of a Bell ringing for all of us to know there is still plenty of bullish optimism in the stock market--meaning the lows have not been seen. We think the move down will break the January lows in the Dow and then keep going. Our targets should be based on the NASDAQ 100 which is our favorite index. You'll have to come back next week to find out what they are--since we don't know tonight. We are waiting for Triple/Quadruple Witching on Thursday to settle out before we try any figuring.
Two items left, one the Fed and the other the precious metals and other commodities. We read and agree with a commentator that the Fed has unleashed a lot of its ammo this past week. No, we're not talking about the rate cuts, we are talking about their assets which stand at around $900 billion. Just recently they have traded in a lot of those dollars, estimated at nearly $400 billion, to loan money/Treasuries to all kinds of entities, in hopes of restoring the credit markets.
Did there efforts pay off? Well, we will never really know what would have happened if Bear would actually have been allowed to fail over the weekend. But, there still may be an opportunity for more bombs going off. You don't have to go too far to find continuing problems in the credit market. What we have been mentioning to you is the difference between the three month T-bills rate and the fed funds rate. It's still at a very high 175 bps meaning it would allow the Fed to lower another 175 bps Thursday and they would just then get to where they need/want to be. What they have wanted is for the T-bill rate to go up meaning that the other short term funds were being purchased rather than the safety of T-bills.
Last, the last couple of days may have given us the first indication that the precious metals have now changed directions. This week has seen gold (basis the April futures contract) drop from a high of 1035 to about 915 tonight, over a ten percent move. Silver has been crushed even more from 21.40 down to 18 tonight, about a 15% move. These are moves This week. We should now see prices move down dramatically over the next several months. This move should involve many commodities including oil and Gas.
FSI: 71.18
Tuesday, March 18, 2008
Celebration Tuesday After Sunday Mourning
Top Line: The stock market wasted no time on Tuesday morning jumping a couple of percent right at the opening bell. This makes two Tuesday's in a row when the Dow jumped over 400 points. We still do Not think the market has finished its downside business and will hold out for one more down move--this could be wrong but we think the two 400 point moves do not amount to much when taken over the last couple of months.
The news is just remarkable, the scene difficult to describe. In the past week, we have seen some of the most dramatic moves from the Fed that have ever been seen. We had a very major brokerage firm go under in about three minutes Sunday evening. The very script could not be more vivid in fiction. [Fleck said tonight that the idea that the market can celebrate on Tuesday after the Bear funeral on Sunday evening is disgusting. It's all too hard to believe. You will be able to talk about this moment in time for a long time--we're glad you're here to share it with us.]
What is the most difficult to believe is the way people think. Bear Stearns has basically been declared bankrupt without JP Morgan's (well, and the Fed's) interventions. Still, people are angry with the $2 price and think Bear is worth more than that. Traders had bid up the price of Bear to over $8 on Tuesday morning and still closed right around $6. The owners are sort of refusing to sell at $2. They want a piece of the "bailout" pie, too.
When considering this, and remembering some of our prior losses, we think they are cry babies. The market has given them a difficult week, to be sure, but these are the risks of stock ownership. Of course, their point is that the rest of the world benefited from the Fed's bailout program so why did they have to pay. They were sacrificed and they don't like it one bit.
This evening we want to spend a few minutes on the direction of the market. We just have a few comments. The Dow is the main index with strength the last two days. Monday, with JP Morgan going up 10%, the Dow was able to show a positive number when all other indexes were down on the day. Tuesday, we again see the Fed cutting rates by 75 bps and we remind you who this is for, The Banks, well the banks and the other NDFIs (Non-Deposit-taking Financial Institutions) that the Fed has taken under its large wing. [We apologize for using NDFI a few posts ago without saying what they are.]
With all of this movement, the Dow has benefited and has "Bear"ly broken above our March 12th Ceiling of 12,300. All of this effort is supposed to now take hold and the confidence should be back in the market. We don't think the work that the Fed has done will actually work in the long run. In the short run the market can think whatever it wants but if it doesn't go up Now, then the Fed's efforts will likely be forgotten or bad mouthed.
Our thought is that the Dow has traced out a corrective pattern that should lead to further selling, which after all is the main trend. This will not take too long for us to find out. The market can finish its up move here in the next day or two but it can't go too far. How far is Too Far?--well, there frankly isn't much room. It is options expiration week and we have had such volatile trading the last few weeks already. So, a little more volatility should be expected.
If the market does decide to go down now, in the next few days, the path down may be what we have been expecting. If selling occurs, we are not sure exactly what the "Whac-a-Mole" Fed will have to hit this time but it may try to do something again. We know the market is capable of making this Fed look pretty incompetent, if not downright impotent. They started their interest rate cuts when the Dow was near record territory and now we are down about two thousand points. They have spent a lot of their currency trying to hold up the banking system. Now we'll see if it was well spent. We think it wasn't. The Fed can not stop this, even though the market may believe for one day that they can. We'll see how long their $900 billion of assets lasts.
One last comment for tonight--Be careful, these are dangerous times.
FSI: 72.70 (the highest level in March)
The news is just remarkable, the scene difficult to describe. In the past week, we have seen some of the most dramatic moves from the Fed that have ever been seen. We had a very major brokerage firm go under in about three minutes Sunday evening. The very script could not be more vivid in fiction. [Fleck said tonight that the idea that the market can celebrate on Tuesday after the Bear funeral on Sunday evening is disgusting. It's all too hard to believe. You will be able to talk about this moment in time for a long time--we're glad you're here to share it with us.]
What is the most difficult to believe is the way people think. Bear Stearns has basically been declared bankrupt without JP Morgan's (well, and the Fed's) interventions. Still, people are angry with the $2 price and think Bear is worth more than that. Traders had bid up the price of Bear to over $8 on Tuesday morning and still closed right around $6. The owners are sort of refusing to sell at $2. They want a piece of the "bailout" pie, too.
When considering this, and remembering some of our prior losses, we think they are cry babies. The market has given them a difficult week, to be sure, but these are the risks of stock ownership. Of course, their point is that the rest of the world benefited from the Fed's bailout program so why did they have to pay. They were sacrificed and they don't like it one bit.
This evening we want to spend a few minutes on the direction of the market. We just have a few comments. The Dow is the main index with strength the last two days. Monday, with JP Morgan going up 10%, the Dow was able to show a positive number when all other indexes were down on the day. Tuesday, we again see the Fed cutting rates by 75 bps and we remind you who this is for, The Banks, well the banks and the other NDFIs (Non-Deposit-taking Financial Institutions) that the Fed has taken under its large wing. [We apologize for using NDFI a few posts ago without saying what they are.]
With all of this movement, the Dow has benefited and has "Bear"ly broken above our March 12th Ceiling of 12,300. All of this effort is supposed to now take hold and the confidence should be back in the market. We don't think the work that the Fed has done will actually work in the long run. In the short run the market can think whatever it wants but if it doesn't go up Now, then the Fed's efforts will likely be forgotten or bad mouthed.
Our thought is that the Dow has traced out a corrective pattern that should lead to further selling, which after all is the main trend. This will not take too long for us to find out. The market can finish its up move here in the next day or two but it can't go too far. How far is Too Far?--well, there frankly isn't much room. It is options expiration week and we have had such volatile trading the last few weeks already. So, a little more volatility should be expected.
If the market does decide to go down now, in the next few days, the path down may be what we have been expecting. If selling occurs, we are not sure exactly what the "Whac-a-Mole" Fed will have to hit this time but it may try to do something again. We know the market is capable of making this Fed look pretty incompetent, if not downright impotent. They started their interest rate cuts when the Dow was near record territory and now we are down about two thousand points. They have spent a lot of their currency trying to hold up the banking system. Now we'll see if it was well spent. We think it wasn't. The Fed can not stop this, even though the market may believe for one day that they can. We'll see how long their $900 billion of assets lasts.
One last comment for tonight--Be careful, these are dangerous times.
FSI: 72.70 (the highest level in March)
Monday, March 17, 2008
Too Big to Fail?
Top Line: From the looks of it, the market avoided a major event on Monday even though many stocks were down on the day, that would be a 5-1 ratio of stocks down to up. The down pattern does not seem to have played out which means we think there should be more to go. The Dow has refused to penetrate the January lows while virtually every other index has. Today's uptick in the index is pretty much all about JP Morgan's 10% rally after bailing out Bear Stearns on Sunday evening. The Dow needs to confirm the down move here very soon.
We find it pretty easy to find articles that are saying things that we have been saying for months now so we start getting a little uncomfortable being the contrarians that we are. At the same time, the market is trying to find a bottom here even though we don't think that one exists at these prices. We think it exists somewhat lower, but maybe not too far away.
Monday was a down day for many stocks with over 700 new 52 week lows which is a dramatic number when compared to the total number of stocks traded. Let's do the real numbers...there were 759 new 52 week lows and 3258 stocks traded. That means that one in five stocks made new lows today. That would suggest that there are a number of stocks trading below their 200 day average which is a potential bullish sign. This is part of our studying to determine a possible interim low that we can trade.
Another indicator we use are the volatility indexes most notably the VIX. This index measures how expensive put options are so as fear grows and people buy puts this index goes up. Back in August this index spiked up to the high 30's and it did the same back at the January lows. This index had been trading below 20, near 10, for several years until we started seeing some volatility this past year. We think this index should spike again before we see a solid low in stock prices. Maybe the high 30's is all it can manage...we are watching it closely now.
Tomorrow brings another Fed day. Doesn't it seem that the Fed is doing something everyday? One article quoted a former Fed Governor saying that it seems the Fed is playing Whac-A-Mole. Whatever financial issue pops up, Bernanke is there with a mallet to Whack it down. Tuesday's rate cut seems too much for this week from the Fed.
But, cut rates they seem ready to do. The 3 month Treasury bill closed Monday at a rate of just over one percent while the fed funds rate is currently at 3% for a wide 2% point difference. The Fed is at liberty to lower rates 2 full points Tuesday even though they won't do that. The market expects a full point reduction based on trading this evening. We won't be surprised at that but we wonder what more the Fed has left. We think the rate cut will be at least 75 bps and no more than 1 full point.
No matter what they do, the market is about tired of the Fed for now. We don't really think the news will do much to trading at all. If they cut more than a point, that may draw some criticism or may spur some additional fear in the market. Liquidity drying up can not be stopped by lowering rates and looking back over the past six months the market has proved that.
Getting back to some analysis by the rest of the world, there were two good articles from two writers we consider to have a good understanding of the world markets. The first is an article by Gretchen Morgenson of the NY Times. Her article, "Rescue Me: A Fed Bailout Crosses a Line", explores the subject of Bear Stearns being "too big to fail". She quotes our favorite bearish hedge fund trader Fleck.
The other article is from James Grant and is in the Washington Post. Mr. Grant's article cuts to the heart of the same issue. Both of these articles are recommended reading.
As we finish this evening, we notice that the Asian markets are mostly red except for Japan with a mild half a percent rise. Looking back to the last 24 hours, we were remembering how far the overseas markets were down and the point of the storm, here in the US, seemed almost calm.
To give you an example of calm, Bear Strearns traded to close near $5. The traders seem to believe that $2 is worth $5. Do they think there may be another rescue partner out there? What could these people possibly think?!?
We think that sentiment is a huge indication of what will happen. Since there seem to be buyers to hold up the market, we think there is more downside. Simple as that. When the buyers go away, there will be a drop and then we can consider getting out of our shorts and possibly into some stocks. We don't think that time is here--although it is probably close by.
FSI: 69.07 (not a bad showing from the speculation team)
We find it pretty easy to find articles that are saying things that we have been saying for months now so we start getting a little uncomfortable being the contrarians that we are. At the same time, the market is trying to find a bottom here even though we don't think that one exists at these prices. We think it exists somewhat lower, but maybe not too far away.
Monday was a down day for many stocks with over 700 new 52 week lows which is a dramatic number when compared to the total number of stocks traded. Let's do the real numbers...there were 759 new 52 week lows and 3258 stocks traded. That means that one in five stocks made new lows today. That would suggest that there are a number of stocks trading below their 200 day average which is a potential bullish sign. This is part of our studying to determine a possible interim low that we can trade.
Another indicator we use are the volatility indexes most notably the VIX. This index measures how expensive put options are so as fear grows and people buy puts this index goes up. Back in August this index spiked up to the high 30's and it did the same back at the January lows. This index had been trading below 20, near 10, for several years until we started seeing some volatility this past year. We think this index should spike again before we see a solid low in stock prices. Maybe the high 30's is all it can manage...we are watching it closely now.
Tomorrow brings another Fed day. Doesn't it seem that the Fed is doing something everyday? One article quoted a former Fed Governor saying that it seems the Fed is playing Whac-A-Mole. Whatever financial issue pops up, Bernanke is there with a mallet to Whack it down. Tuesday's rate cut seems too much for this week from the Fed.
But, cut rates they seem ready to do. The 3 month Treasury bill closed Monday at a rate of just over one percent while the fed funds rate is currently at 3% for a wide 2% point difference. The Fed is at liberty to lower rates 2 full points Tuesday even though they won't do that. The market expects a full point reduction based on trading this evening. We won't be surprised at that but we wonder what more the Fed has left. We think the rate cut will be at least 75 bps and no more than 1 full point.
No matter what they do, the market is about tired of the Fed for now. We don't really think the news will do much to trading at all. If they cut more than a point, that may draw some criticism or may spur some additional fear in the market. Liquidity drying up can not be stopped by lowering rates and looking back over the past six months the market has proved that.
Getting back to some analysis by the rest of the world, there were two good articles from two writers we consider to have a good understanding of the world markets. The first is an article by Gretchen Morgenson of the NY Times. Her article, "Rescue Me: A Fed Bailout Crosses a Line", explores the subject of Bear Stearns being "too big to fail". She quotes our favorite bearish hedge fund trader Fleck.
The other article is from James Grant and is in the Washington Post. Mr. Grant's article cuts to the heart of the same issue. Both of these articles are recommended reading.
As we finish this evening, we notice that the Asian markets are mostly red except for Japan with a mild half a percent rise. Looking back to the last 24 hours, we were remembering how far the overseas markets were down and the point of the storm, here in the US, seemed almost calm.
To give you an example of calm, Bear Strearns traded to close near $5. The traders seem to believe that $2 is worth $5. Do they think there may be another rescue partner out there? What could these people possibly think?!?
We think that sentiment is a huge indication of what will happen. Since there seem to be buyers to hold up the market, we think there is more downside. Simple as that. When the buyers go away, there will be a drop and then we can consider getting out of our shorts and possibly into some stocks. We don't think that time is here--although it is probably close by.
FSI: 69.07 (not a bad showing from the speculation team)
Sunday, March 16, 2008
The Fed's House of Cards Is Crumbling
Top Line: This evening we enter a realm of surreal as the Fed colludes with JP Morgan to "reassure" the markets. The world markets are in disarray right now trying to figure out what is going on. The US Futures are down about 2.5% while the Asian markets are down about 4%-5% as we go to press.
Where do we start? You have no doubt heard the news that JP Morgan is buying an insolvent Bear Strearns for $2 a share. If that news wasn't enough for the market, the Fed has decided to add another wrinkle by lowering the discount rate nearly simultaneously. Both of these moves occurred late Sunday afternoon which gives an aire of panic to them which the markets have sensed this evening. Plus, the cut to the discount rate was a mere 25bps, not a larger number, maybe implying the Fed's unwillingness to lower as much as the market "wants" on Tuesday, the 75bps or 100bps we heard late last week.
The underlying theme seems to be the credit crisis is still prevailing. The questions still remain like, "What other players will be affected?" This thinking process is sending chills down the spines of the world stock markets this evening, with good reason. If a company like Bear Stearns, after being in business for 85 years, can be crushed inside of a week, what other bombs are going to go off before this is over? Bear Stearns (it used to be BSC) was $60 a share on Thursday afternoon and $30 on the close on Friday afternoon and tonight is being taken over for $2 a share. In January of 2007 the price was $170.
There you have the basics as we read them this evening. What does it all mean? As we mentioned above, the markets around the world are none to pleased with it so far. Maybe by morning the bulls can spin the news towards the buy side but tonight the bears are solidly in control of the futures market as well as the Asian markets.
We were a little surprised by the news, except we weren't because we know the Chairman of the Fed has his hands full with impending deflation and he is well aware of that. He told all of the world that the Fed could prevent deflation with all of the tools at its disposal so now he's got a chance to use them. We still think his efforts are futile. The tide has turned and while the Fed will try to show its "strength", the answer will remain the same because the reason for the problem has not changed.
The reason for the collapse of Bear Stearns and several hedge funds, some of which we have mentioned here over the past several months, is the sudden contraction of credit. Is the contraction due to interest rates being too high? No, it is due to the fact that less lending is being done. There are several reasons for this and we have mentioned many of them before.
Banks are less interested in loaning money to entities with poor credit. All of this talk, and some of the actions, about the mortgage problem can be used to learn part of the reason. Who wants to loan money (by buying mortgages) when home prices are dropping on top of the fact that the actions to keep homeowners in their homes by slashing their payments to these very investors.
Our position on the situation has been that the business cycle needs to be allowed to operate. By trying to stop recessions by allowing Asset Bubbles to form, the necessary risk management policies are thrown to the wind to be replaced by aggressive loans to subprime candidates as well as no doc loans to whoever wanted them.
So, even as the Fed is trying to loan more and more money to banks and now Non-Banks, these entities don't really want to be lending it out except to very credit worthy entities. We read a great analogy in the Wall Street Journal last week that we wanted to share. You have heard us or someone talk about the Fed pushing on a string. What that means is they have a much easier job when it comes to Stopping a surging economy or maybe we should say slowing the economy by increasing interest rates. But, when they are trying to stimulate the economy by lowering rates, there is no assurances that the necessary expansionary credit will actually happen because either no one wants to borrow or the banks don't want to lend.
Anyway, getting back to the analogy we read in the WSJ, it was in an op-ed piece entitled "Recession is Ineveitable". We reprint one paragraph for you to read. We include the link so those of you with access can read the entire article which we highly recommend since we concur with the author: "The Fed is like King Canute with a difference -- it is trying to halt an ebbing tide rather than a rising one. Its liquidity injection seems huge at $200 billion (with perhaps more to follow), but it is still only equivalent to one-third of the expected losses in the NDFI sector."
We title our post this evening to try to give the picture of the Chairman of the Fed trying to keep the house of cards from falling down. He has a difficult job, we would say impossible at this point, and the impotence of the Fed will soon become a vivid image as time after time, their efforts will not be at all effective. They may never run out of money but the house of cards needs more credit creation to stay up and that is just not going to happen even with a lot of Fed money.
Your comments would be appreciated by all who stop by.
FSI: 71.32 (Monday should be interesting in the Fo(u)r Speculaton Index)
Where do we start? You have no doubt heard the news that JP Morgan is buying an insolvent Bear Strearns for $2 a share. If that news wasn't enough for the market, the Fed has decided to add another wrinkle by lowering the discount rate nearly simultaneously. Both of these moves occurred late Sunday afternoon which gives an aire of panic to them which the markets have sensed this evening. Plus, the cut to the discount rate was a mere 25bps, not a larger number, maybe implying the Fed's unwillingness to lower as much as the market "wants" on Tuesday, the 75bps or 100bps we heard late last week.
The underlying theme seems to be the credit crisis is still prevailing. The questions still remain like, "What other players will be affected?" This thinking process is sending chills down the spines of the world stock markets this evening, with good reason. If a company like Bear Stearns, after being in business for 85 years, can be crushed inside of a week, what other bombs are going to go off before this is over? Bear Stearns (it used to be BSC) was $60 a share on Thursday afternoon and $30 on the close on Friday afternoon and tonight is being taken over for $2 a share. In January of 2007 the price was $170.
There you have the basics as we read them this evening. What does it all mean? As we mentioned above, the markets around the world are none to pleased with it so far. Maybe by morning the bulls can spin the news towards the buy side but tonight the bears are solidly in control of the futures market as well as the Asian markets.
We were a little surprised by the news, except we weren't because we know the Chairman of the Fed has his hands full with impending deflation and he is well aware of that. He told all of the world that the Fed could prevent deflation with all of the tools at its disposal so now he's got a chance to use them. We still think his efforts are futile. The tide has turned and while the Fed will try to show its "strength", the answer will remain the same because the reason for the problem has not changed.
The reason for the collapse of Bear Stearns and several hedge funds, some of which we have mentioned here over the past several months, is the sudden contraction of credit. Is the contraction due to interest rates being too high? No, it is due to the fact that less lending is being done. There are several reasons for this and we have mentioned many of them before.
Banks are less interested in loaning money to entities with poor credit. All of this talk, and some of the actions, about the mortgage problem can be used to learn part of the reason. Who wants to loan money (by buying mortgages) when home prices are dropping on top of the fact that the actions to keep homeowners in their homes by slashing their payments to these very investors.
Our position on the situation has been that the business cycle needs to be allowed to operate. By trying to stop recessions by allowing Asset Bubbles to form, the necessary risk management policies are thrown to the wind to be replaced by aggressive loans to subprime candidates as well as no doc loans to whoever wanted them.
So, even as the Fed is trying to loan more and more money to banks and now Non-Banks, these entities don't really want to be lending it out except to very credit worthy entities. We read a great analogy in the Wall Street Journal last week that we wanted to share. You have heard us or someone talk about the Fed pushing on a string. What that means is they have a much easier job when it comes to Stopping a surging economy or maybe we should say slowing the economy by increasing interest rates. But, when they are trying to stimulate the economy by lowering rates, there is no assurances that the necessary expansionary credit will actually happen because either no one wants to borrow or the banks don't want to lend.
Anyway, getting back to the analogy we read in the WSJ, it was in an op-ed piece entitled "Recession is Ineveitable". We reprint one paragraph for you to read. We include the link so those of you with access can read the entire article which we highly recommend since we concur with the author: "The Fed is like King Canute with a difference -- it is trying to halt an ebbing tide rather than a rising one. Its liquidity injection seems huge at $200 billion (with perhaps more to follow), but it is still only equivalent to one-third of the expected losses in the NDFI sector."
We title our post this evening to try to give the picture of the Chairman of the Fed trying to keep the house of cards from falling down. He has a difficult job, we would say impossible at this point, and the impotence of the Fed will soon become a vivid image as time after time, their efforts will not be at all effective. They may never run out of money but the house of cards needs more credit creation to stay up and that is just not going to happen even with a lot of Fed money.
Your comments would be appreciated by all who stop by.
FSI: 71.32 (Monday should be interesting in the Fo(u)r Speculaton Index)
Thursday, March 13, 2008
S&P Lives to Rate Again
Top Line: Here's another day that gave us ambiguous information so it's another wait and see day. We are still waiting for the market to tip its hand but in the mean time we are giving the benefit of the doubt to the Down trend. The rally needs to prove itself before we can get too excited about it.
The big dive on Thursday morning left nothing for traders to do except buy and buy they did. This day showed a large move down to open the session due to some bad news from a large hedge fund in the Carlyle Group's family. This fund had been "levered up" about 30 times its capital. Put another way, it had only 3% capital so a small move could virtually wipe it out and, guess what, there was a "small" move.
Before the market opened, retail sales were announced showing a dismal month of February. The expectations were for a slight improvement in this number but auto sales dragged down the number into the minus category.
These two "events" seemed to lead the market lower when it opened and it continued to slide until it was down about 2% across the board. Then, an amazing thing happened. The mortgage crisis lifted and the market no longer has to worry about it. (Does that smack of sarcasm to you? Well, if not, we thought we'd remind you that we do that sometimes.)
What really happened was the S&P declared there was a light at the end of the subprime tunnel. The market couldn't believe its ears. We started hearing the Munchkins singing "Ding Dong, The Wicked Witch is Dead". (Ok you may not want to try this link at work as you may be web-sensed out but it is good and perfect for this occasion--ending with the Lollipop Guild.) Which Witch is Dead? The wicked witch, of course, or in our case the Subprime Witch.
Ok, that was fun, let's get back to the S&P. Really. So, the S&P is the group that gave us Triple A (AAA) ratings on subprime mortgages that are now imploding but let's not dwell on that little fact, let's dwell on what they said Now.
Today S&P declared that the subprime problem will only cost about $285 billion, up slightly from their earlier estimate of $265 billion. The market thought that was great news and was supposedly the reason the market went from the Dow being down well over 200 points to trading nearly 100 points up on the day. That must have been some good news. (We just can't seem to shake this sarcasm.)
There was another piece of news out there from our good Secretary of the Treasury, Paulson, who told us that maybe we should do something about the mortgage problem. We should make tougher standards for realtors, create watch dogs on the mortgage industry in general, and do a few other things that may have prevented the current crisis. Congratulations on that. Here's where we use the phrase, "the horses are already out of the barn" on this one. But, there's more...
The good Sec'y said that the government might like to buy up some of the troubled mortgages, but only if there was a homeowner that was living there. So, now we have the Fed buying mortgage securities and the government thinking about buying mortgages that are underwater. What do you think??? What country are we living in???
Getting back to the market, there is only one thought that matters, what is the market doing? If the market decided to go up on the S&P news or the Paulson news, that isn't the news driving the rally, it's the underlying theme. In this case, there is some ambiguity in the move.
As we mentioned in our last post, the 12,300 level in the Dow is critical to the bullish case. If the Dow can't get to that level, there will be no chance for it to get any higher--are you able to follow this logic (sarcasm, don't take it personally)? The Dow has created this high in the last few weeks so if it can hold it, then we're going down. We thought that maybe the move down this morning was a good start to the down move. But, it wasn't to be.
We have given the market down trend the benefit of the doubt and we continue to do that unless the Dow manages to get over 12,300. Then we may have to adjust.
FSI: 72.34 (a good up move in Speculation)
The big dive on Thursday morning left nothing for traders to do except buy and buy they did. This day showed a large move down to open the session due to some bad news from a large hedge fund in the Carlyle Group's family. This fund had been "levered up" about 30 times its capital. Put another way, it had only 3% capital so a small move could virtually wipe it out and, guess what, there was a "small" move.
Before the market opened, retail sales were announced showing a dismal month of February. The expectations were for a slight improvement in this number but auto sales dragged down the number into the minus category.
These two "events" seemed to lead the market lower when it opened and it continued to slide until it was down about 2% across the board. Then, an amazing thing happened. The mortgage crisis lifted and the market no longer has to worry about it. (Does that smack of sarcasm to you? Well, if not, we thought we'd remind you that we do that sometimes.)
What really happened was the S&P declared there was a light at the end of the subprime tunnel. The market couldn't believe its ears. We started hearing the Munchkins singing "Ding Dong, The Wicked Witch is Dead". (Ok you may not want to try this link at work as you may be web-sensed out but it is good and perfect for this occasion--ending with the Lollipop Guild.) Which Witch is Dead? The wicked witch, of course, or in our case the Subprime Witch.
Ok, that was fun, let's get back to the S&P. Really. So, the S&P is the group that gave us Triple A (AAA) ratings on subprime mortgages that are now imploding but let's not dwell on that little fact, let's dwell on what they said Now.
Today S&P declared that the subprime problem will only cost about $285 billion, up slightly from their earlier estimate of $265 billion. The market thought that was great news and was supposedly the reason the market went from the Dow being down well over 200 points to trading nearly 100 points up on the day. That must have been some good news. (We just can't seem to shake this sarcasm.)
There was another piece of news out there from our good Secretary of the Treasury, Paulson, who told us that maybe we should do something about the mortgage problem. We should make tougher standards for realtors, create watch dogs on the mortgage industry in general, and do a few other things that may have prevented the current crisis. Congratulations on that. Here's where we use the phrase, "the horses are already out of the barn" on this one. But, there's more...
The good Sec'y said that the government might like to buy up some of the troubled mortgages, but only if there was a homeowner that was living there. So, now we have the Fed buying mortgage securities and the government thinking about buying mortgages that are underwater. What do you think??? What country are we living in???
Getting back to the market, there is only one thought that matters, what is the market doing? If the market decided to go up on the S&P news or the Paulson news, that isn't the news driving the rally, it's the underlying theme. In this case, there is some ambiguity in the move.
As we mentioned in our last post, the 12,300 level in the Dow is critical to the bullish case. If the Dow can't get to that level, there will be no chance for it to get any higher--are you able to follow this logic (sarcasm, don't take it personally)? The Dow has created this high in the last few weeks so if it can hold it, then we're going down. We thought that maybe the move down this morning was a good start to the down move. But, it wasn't to be.
We have given the market down trend the benefit of the doubt and we continue to do that unless the Dow manages to get over 12,300. Then we may have to adjust.
FSI: 72.34 (a good up move in Speculation)
Wednesday, March 12, 2008
What Now?
Top Line: The stock market never makes it easy on the participants. Tuesday's big rally was followed by a lackluster day on Wednesday. The important thing is that the market did give us a couple of good boundaries to watch. You want details so...
We have seen a big drop in the Dow since its October all time high of around 14,150 to its January lows near 11,600, a drop of about 1,550 points. [Editor's note, Thursday morning: so we can't subtract--we really meant 2,550 points.] We thought the recent downtrend was going to take out the January lows but the Dow did not actually manage that task. Some of the other indexes did go below their January lows so we have more complications...thanks to the market for that.
Since the January lows, we have considered that the market has been in a corrective pattern which ended in late February. That should have led us to a very strong drop, and we may actually be in that drop right now, Tuesday's little rally notwithstanding. If, and we do mean if, the market is heading south, we should not see it rally above Wednesday's high around 12,300. If it does, the market will have given us an initial bullish signal.
If the market decides to go down to "finish" its sojourn to new lows, it should stay under that 12,300 level. Of course, this is our preferred track. We don't want to argue with the market so we are paying serious attention to these levels.
Our basic idea is that there will be a final drop in this move down which will bring a lot of angst to the bulls and they may just decide to give it up during this phase. From there we expect a rally of enough power to trade. The timing of these things is the big question.
As it sits tonight, the futures have decided to be weak overnight as Asia responded to the US rollover with a strong down move of its own. Could it be that the world is maybe wondering what we are wondering, Is that Fed out of bullets?
The actual trading on Thursday will take us to a little more understanding of what the market might want to do.
FSI: 71.29 (not much change)
Sorry, no baby pics tonight.
We have seen a big drop in the Dow since its October all time high of around 14,150 to its January lows near 11,600, a drop of about 1,550 points. [Editor's note, Thursday morning: so we can't subtract--we really meant 2,550 points.] We thought the recent downtrend was going to take out the January lows but the Dow did not actually manage that task. Some of the other indexes did go below their January lows so we have more complications...thanks to the market for that.
Since the January lows, we have considered that the market has been in a corrective pattern which ended in late February. That should have led us to a very strong drop, and we may actually be in that drop right now, Tuesday's little rally notwithstanding. If, and we do mean if, the market is heading south, we should not see it rally above Wednesday's high around 12,300. If it does, the market will have given us an initial bullish signal.
If the market decides to go down to "finish" its sojourn to new lows, it should stay under that 12,300 level. Of course, this is our preferred track. We don't want to argue with the market so we are paying serious attention to these levels.
Our basic idea is that there will be a final drop in this move down which will bring a lot of angst to the bulls and they may just decide to give it up during this phase. From there we expect a rally of enough power to trade. The timing of these things is the big question.
As it sits tonight, the futures have decided to be weak overnight as Asia responded to the US rollover with a strong down move of its own. Could it be that the world is maybe wondering what we are wondering, Is that Fed out of bullets?
The actual trading on Thursday will take us to a little more understanding of what the market might want to do.
FSI: 71.29 (not much change)
Sorry, no baby pics tonight.
Tuesday, March 11, 2008
Helicopter Ben Is At It Again
Top Line: Only one direction on Tuesday and that was up. After the news from the Fed, the market decided that the world is a better place to be.
This evening's post will focus only on the Fed and its move on Tuesday. Any market direction talk needs to wait until we see at least another day of trading. We do think that the move up will be short lived but bullish optimism is difficult to predict.
We have mentioned recently that the Fed would probably Not take action between meetings to lower rates but Tuesday's action is an equivalent move. The Fed coordinated a massive central bank effort designed to "shock and awe" the markets into getting over this little credit crisis.
You have most certainly heard about it, over the roar about Spitzer, so we thought we'd give you a few highlights. This move is the most precarious the Fed has ever done, in our opinion. They decided it would be ok to accept some less than perfect assets, like non-agency mortgage backed securities, in exchange for Treasury securities which they will be able to sell in the market much easier to gain liquidity. (As someone said, the Fed has now entered the mortgage business.)
Yes, we know that is a mouthful so let's break it up and look at it again. The Fed is not the government and does not enter this financial game as the government even though the name Fed may indicate otherwise. It has assets that are used to enter the markets to protect its member banks and of course tries to make money on its ventures.
Normally, the Fed will offer to buy the safest debt securities for a short period of time to provide short term liquidity. Banks in need of reserves normally can sell Treasury securities to the Fed in exchange for Cash to cover those reserve requirements. In recent weeks and months, the banks have been offered a lot of different liquidity methods. The big one was the TAF, Term Auction Facility, which the Fed offered for a longer period of settlement than normal.
Today's announcement brought another facility, called the Term Security Lending Facility. This facility allows the banks to do some barter with the Fed in the form of trading bad debt for good. The banks offer mortgage backed securities for Treasuries. We read that the Fed may be taking a cut on these trades just because of the "risk" it is taking, so instead of giving a dollar for dollar exchange, they will be taking a dollar and maybe giving 90 cents in return.
Here is the thing: The Fed is concerned, deeply we're sure, that the banks are spinning out of control with tight credit conditions and they need to do something to preserve the banking system. The problem is that we are having a Contraction in Credit or as we like to say Debt. When debt contracts, it's a lot like Humpty Dumpty, you can't easily put it back together again.
The banks are experiencing problems due to the huge losses being taken on mortgage backed securities, subprime, yes, but Alt-A and prime, too. What the Fed is trying to do is fill the void left by billions of dollars of debt contraction. The market likes to call this De-Leveraging, meaning people and hedge funds and banks and corporations are not putting on more debt and some are actually trying to pay their debt down.
An economy like ours that seems to thrive on the expansion of credit/debt is destined to shrivel under the Contraction of debt. So, the Fed can provide liquidity to the banks or whoever needs it but what needs to happen is someone needs to actually borrow that money, create more debt, in order for the Fed's efforts to succeed.
This is deflation at its core, the destruction of money--loans that have now gone sour will never be repaid and even if the house backing that mortgage is sold there may not be enough money for the debt to be fully paid.
This part of the story is being ignored on days when the Fed opens up its doors but the facts are still out there. The Fed can not contain convince entities to borrow money.
FSI: 71.38 (a good sized jump)
Jackson was watching the ticker on Tuesday and was wondering just what the Fed was thinking:
This evening's post will focus only on the Fed and its move on Tuesday. Any market direction talk needs to wait until we see at least another day of trading. We do think that the move up will be short lived but bullish optimism is difficult to predict.
We have mentioned recently that the Fed would probably Not take action between meetings to lower rates but Tuesday's action is an equivalent move. The Fed coordinated a massive central bank effort designed to "shock and awe" the markets into getting over this little credit crisis.
You have most certainly heard about it, over the roar about Spitzer, so we thought we'd give you a few highlights. This move is the most precarious the Fed has ever done, in our opinion. They decided it would be ok to accept some less than perfect assets, like non-agency mortgage backed securities, in exchange for Treasury securities which they will be able to sell in the market much easier to gain liquidity. (As someone said, the Fed has now entered the mortgage business.)
Yes, we know that is a mouthful so let's break it up and look at it again. The Fed is not the government and does not enter this financial game as the government even though the name Fed may indicate otherwise. It has assets that are used to enter the markets to protect its member banks and of course tries to make money on its ventures.
Normally, the Fed will offer to buy the safest debt securities for a short period of time to provide short term liquidity. Banks in need of reserves normally can sell Treasury securities to the Fed in exchange for Cash to cover those reserve requirements. In recent weeks and months, the banks have been offered a lot of different liquidity methods. The big one was the TAF, Term Auction Facility, which the Fed offered for a longer period of settlement than normal.
Today's announcement brought another facility, called the Term Security Lending Facility. This facility allows the banks to do some barter with the Fed in the form of trading bad debt for good. The banks offer mortgage backed securities for Treasuries. We read that the Fed may be taking a cut on these trades just because of the "risk" it is taking, so instead of giving a dollar for dollar exchange, they will be taking a dollar and maybe giving 90 cents in return.
Here is the thing: The Fed is concerned, deeply we're sure, that the banks are spinning out of control with tight credit conditions and they need to do something to preserve the banking system. The problem is that we are having a Contraction in Credit or as we like to say Debt. When debt contracts, it's a lot like Humpty Dumpty, you can't easily put it back together again.
The banks are experiencing problems due to the huge losses being taken on mortgage backed securities, subprime, yes, but Alt-A and prime, too. What the Fed is trying to do is fill the void left by billions of dollars of debt contraction. The market likes to call this De-Leveraging, meaning people and hedge funds and banks and corporations are not putting on more debt and some are actually trying to pay their debt down.
An economy like ours that seems to thrive on the expansion of credit/debt is destined to shrivel under the Contraction of debt. So, the Fed can provide liquidity to the banks or whoever needs it but what needs to happen is someone needs to actually borrow that money, create more debt, in order for the Fed's efforts to succeed.
This is deflation at its core, the destruction of money--loans that have now gone sour will never be repaid and even if the house backing that mortgage is sold there may not be enough money for the debt to be fully paid.
This part of the story is being ignored on days when the Fed opens up its doors but the facts are still out there. The Fed can not contain convince entities to borrow money.
FSI: 71.38 (a good sized jump)
Jackson was watching the ticker on Tuesday and was wondering just what the Fed was thinking:
Monday, March 10, 2008
Fannie and Freddie Are Club-ied
Top Line: Some follow-thru to the downside produced a negative day but the overnight futures are still singing a bullish tune. As long as we continue to see dip buyers come in, we won't be at a good intermediate term low. The real trading low will be here in short order but not until the buyers go away, at least at the opening.
The stock market had a number of issues to deal with on Monday. While the real news is the credit market generally, the piece of news that seems most important tonight is the news from Fannie Mae and Freddie Mac. These companies are GSEs, which stands for Government Sponsored Enterprises. How do they compare to Ginnie Mae? This is the news today.
GNMA, called Ginnie Mae, refers to investments or securities that are backed by the "full faith and credit of the US government". These securities have very little risk due to their backing by the government. Fannie and Freddie present a different picture, securities that are Not directly backed by the government. So, GSE is not the same as GNMA, at all, or is it?
Fannie Mae (FNM) and Freddie Mac (FRE) are publicly traded companies and make their money in the mortgage market by "speculating" on some mortgages and by charging fees to others for pooling the mortgages in their name.
Both of these companies, FNM and FRE, are in the center of the mortgage storm with some additional bad press that indicated further losses for them today. Both of them were down about 12% today on that news, down to lows not seen since the mid-90's. These stocks are down 75% plus in the last year alone.
The temporary increase in the "jumbo" loan limit allow these companies to help with any liquidity problems that may be constraining the mortgage market. The companies have had trouble actually calculating their capital, which is small in comparison to their loan portfolios. The idea is that an increase in the limit would allow more, shall we say, convenient loans for this size mortgage.
The real question is if the GSEs get into some trouble that is over their heads, will the government step in to rescue them or bail them out. Maybe that's a question for another day but we are trying to see if the government is willing to start taking over private companies.
We have seen a lot of things happen in these markets but we keep our eyes open to what could be a drain on taxpayers. This may not happen but the threat is now there. We continue to be amazed at how all these things are coming to light in the wake of the "contained" subprime situation.
FSI: 67.04 (ouch, the horsemen were down hard on Monday)
Jackson is here:
Sunday, March 09, 2008
More Downside Ahead
Top Line: Friday's action managed to be a solid break that should mean the down move will continue for at least a while. The final tally was not as bad as it had been during the afternoon but the position in still in good shape for a drop.
The jobs' report was poor and generated several pronouncements that the US economy is in a recession. Of course, the Official deciders have to wait to Confirm it with live numbers. The point is that the world is coming to realize the poor state of affairs here in the US.
The other big news on Friday morning was the Fed's latest plan, that of increasing the Term Auction Facility from $30 billion a week to $50 billion. While we don't think the Fed will engineer another interest rate move Between meetings, we do think they will have no choice but to lower rates at their next meeting which is only about a week off, March 18th.
On Monday when the market opens, there will be many that will expect a rally. With all the bad news out there, the world is expecting the stock market to find a "bottom". Every time we see a drop, there are buyers willing and able to step in.
Our post is brief again this evening because we want to focus on the decline that we are in. Our last post suggested that the NDX (NASDAQ 100) had about 100 points to go for the next move down. Since it only dropped 5 points on Friday, there should still be about 100 points to go. We remind you that this should be the smallest amount and it could move more. It's just that there is a pattern here and the market likes to trade it.
As we go down on this move, we think there will be ample opportunity to find places to trade from. We just don't want to get in front of this train. There are plenty of ways to lose money in the stock market and we want to avoid the one where the market drops about 10% and takes our stocks down 15% or more.
As the market gives us more information, we will try to interpret it for you to get an idea where the trading low might exist. For now, it's too difficult to predict the depth of the decline.
The speculation index was up on Friday:
FSI: 69.70
One more picture:
The jobs' report was poor and generated several pronouncements that the US economy is in a recession. Of course, the Official deciders have to wait to Confirm it with live numbers. The point is that the world is coming to realize the poor state of affairs here in the US.
The other big news on Friday morning was the Fed's latest plan, that of increasing the Term Auction Facility from $30 billion a week to $50 billion. While we don't think the Fed will engineer another interest rate move Between meetings, we do think they will have no choice but to lower rates at their next meeting which is only about a week off, March 18th.
On Monday when the market opens, there will be many that will expect a rally. With all the bad news out there, the world is expecting the stock market to find a "bottom". Every time we see a drop, there are buyers willing and able to step in.
Our post is brief again this evening because we want to focus on the decline that we are in. Our last post suggested that the NDX (NASDAQ 100) had about 100 points to go for the next move down. Since it only dropped 5 points on Friday, there should still be about 100 points to go. We remind you that this should be the smallest amount and it could move more. It's just that there is a pattern here and the market likes to trade it.
As we go down on this move, we think there will be ample opportunity to find places to trade from. We just don't want to get in front of this train. There are plenty of ways to lose money in the stock market and we want to avoid the one where the market drops about 10% and takes our stocks down 15% or more.
As the market gives us more information, we will try to interpret it for you to get an idea where the trading low might exist. For now, it's too difficult to predict the depth of the decline.
The speculation index was up on Friday:
FSI: 69.70
One more picture:
Thursday, March 06, 2008
The Plan
Top Line: The market closed right on top of the support line created a couple of days ago. That is the beauty of the market, it never really wants to tell you what it wants to do. On Friday morning we get the Real jobs' report for our review. This will not have much of an effect on the market, although it may appear to be doing so.
As we were writing our post last night (Wednesday evening) we had mentioned the strength in the overnight futures. But, before the market opened there were several news items, all credit market related, that managed to change all of that. We aren't going to go into all that news this evening as we try to keep this brief again.
We want you to concentrate on the positioning of the market this evening and over the weekend. After the jobs' report on Friday, the market is free to go where it wants to go. We normally say that the jobs' report is the key report of the month and represents the end/beginning of the month, even though it always comes out on Friday morning.
The stock market has a tough road from here. As we look at the pattern, we see a hard drop coming very soon. We talked about the possibility of a modest rally to 12,400. With the move down to this week's low near 12,000, we have more reason to believe that the market is ready for a fall. It seems the world is thinking that the 12,000 level is a floor due to its "round number" support. We think the market can break through this time.
Our favorite index, the NASDAQ 100 (NDX), has a pattern that looks very much like a possible strong move. The first move down from the highs from last Friday has been about 100 points and then there was a bit of a rally of about 60 points (for those of you that are paying attention, the Fibonacci ratio for a normal retracement is 61.8%, not bad).
These moves suggest that the next move should be at least 160 points which would put the index down another 100 points from here, about 5%. Remember that's the projected minimum move and it could happen extremely fast.
FSI: 69.36 (new low)
As we were writing our post last night (Wednesday evening) we had mentioned the strength in the overnight futures. But, before the market opened there were several news items, all credit market related, that managed to change all of that. We aren't going to go into all that news this evening as we try to keep this brief again.
We want you to concentrate on the positioning of the market this evening and over the weekend. After the jobs' report on Friday, the market is free to go where it wants to go. We normally say that the jobs' report is the key report of the month and represents the end/beginning of the month, even though it always comes out on Friday morning.
The stock market has a tough road from here. As we look at the pattern, we see a hard drop coming very soon. We talked about the possibility of a modest rally to 12,400. With the move down to this week's low near 12,000, we have more reason to believe that the market is ready for a fall. It seems the world is thinking that the 12,000 level is a floor due to its "round number" support. We think the market can break through this time.
Our favorite index, the NASDAQ 100 (NDX), has a pattern that looks very much like a possible strong move. The first move down from the highs from last Friday has been about 100 points and then there was a bit of a rally of about 60 points (for those of you that are paying attention, the Fibonacci ratio for a normal retracement is 61.8%, not bad).
These moves suggest that the next move should be at least 160 points which would put the index down another 100 points from here, about 5%. Remember that's the projected minimum move and it could happen extremely fast.
FSI: 69.36 (new low)
Wednesday, March 05, 2008
Strong Opening Fades
Top Line: The stock market enjoyed a little relief rally on Wednesday. There seems to be a little more upside left, maybe to 12,400. The futures are up a little this evening indicating a strong opening on Thursday.
Jobs: ADP reported that in the private sector, nonfarm employment declined by 23,000 jobs for the month of February. This report precedes the Real jobs' report due out on Friday morning and the consensus estimate is for an increase of about 25K jobs. This estimate follows a loss of 17K jobs in January so we'll see if there are any revisions to these numbers.
Ambac: The market has anticipated the "good" news from Ambac (ABK) for two days so Wednesday's news was a little disappointing. ABK announced that they would be raising capital by selling more stock, thus diluting the current stock. This news took the stock down about 20% on the day and dented the strong stock market rally. The stock dropping would mean that for the same dollar amount raised more shares would need to be sold. Don't forget that ABK has dropped right around 90% over the past year.
Fed: About the same time as ABK was delivering its news, the Fed released its beige book which added to the stock market's confusion. The Fed reported that inflation at the wholesale level had ticked up but companies were having trouble pushing those costs through to the end buyers. The cause for concern is the possible hit to the continued interest rate reductions. As the Fed is considered to be lowering rates at least 50 bps at its meeting two weeks from now, this news should have drawn more selling but it didn't.
The stock market managed to rebound from the shock of both of those two news bulletins and closed higher, although not that much higher. The Fed will have no difficulty in lowering rates at its meeting and everyone knows it. There are really only a couple of questions outstanding on that issue. Will the Fed lower 50 bps or 75 bps? and Will the Fed lower rates before their next meeting like they did last time? We will watch this with you over the next two weeks and report on what we think.
FSI: 71.75 (another new low, slightly)
Jobs: ADP reported that in the private sector, nonfarm employment declined by 23,000 jobs for the month of February. This report precedes the Real jobs' report due out on Friday morning and the consensus estimate is for an increase of about 25K jobs. This estimate follows a loss of 17K jobs in January so we'll see if there are any revisions to these numbers.
Ambac: The market has anticipated the "good" news from Ambac (ABK) for two days so Wednesday's news was a little disappointing. ABK announced that they would be raising capital by selling more stock, thus diluting the current stock. This news took the stock down about 20% on the day and dented the strong stock market rally. The stock dropping would mean that for the same dollar amount raised more shares would need to be sold. Don't forget that ABK has dropped right around 90% over the past year.
Fed: About the same time as ABK was delivering its news, the Fed released its beige book which added to the stock market's confusion. The Fed reported that inflation at the wholesale level had ticked up but companies were having trouble pushing those costs through to the end buyers. The cause for concern is the possible hit to the continued interest rate reductions. As the Fed is considered to be lowering rates at least 50 bps at its meeting two weeks from now, this news should have drawn more selling but it didn't.
The stock market managed to rebound from the shock of both of those two news bulletins and closed higher, although not that much higher. The Fed will have no difficulty in lowering rates at its meeting and everyone knows it. There are really only a couple of questions outstanding on that issue. Will the Fed lower 50 bps or 75 bps? and Will the Fed lower rates before their next meeting like they did last time? We will watch this with you over the next two weeks and report on what we think.
FSI: 71.75 (another new low, slightly)
Tuesday, March 04, 2008
Is It Really This Bad?
Top Line: Tuesday saw a large reversal in the final hour of trading, that would be in the up direction. We argue that any rally should be sold. The next big move will be down.
In the late day trading, Ambac was rumored to have yet another bail out program in place driving the price of it and the general market up from the depths of dispair. The Dow had been down over 200 points just before the rumor hit and ended the day down a mere 45 points. We can't disregard the reversal but we don't think it is meaningful in the larger sense.
Let's get to the post for this evening...
We received an email from one of our readers, thanks CM, asking if we thought things were as bad as an article that he referenced. This article describes 12 events, or 12 acts in a tragedy, and we would like to recount them here along with our opinion.
1. Home prices will fall 20% to 30% from the peak
Since this blog has this as a tenet, yes, we would agree with this one.
2. Prime and near-prime mortgages losses
Again, we believe the mortgage problem will extend to the prime sector.
3. Consumer debt defaults will increase sharply
We think the consumer has and will continue to retrench and spend less. The reason is due to problems with servicing their debt.
4. The credit insurers rescue package is insufficient
We agree--it is insufficient due to the nature of the problem. There isn't enough "insurance" to cover these losses.
5. Commercial real estate loan market will deteriorate
Yes, commercial real estate has already deteriorated somewhat and with the state of the consumer, the commercial world has fewer and fewer reasons to set up shop.
6. Some large banks with heavy mortgage exposure will fail
Ok, here is where the Fed is trying its hardest to avert trouble. Large banks are their domain and they will fight to keep them solvent. But, again, the problem is that there have been too many poorly underwriten loans causing the problem. We foresee bank failures, we don't know how large the banks will be. We would say smaller banks have the initial problems and then we will see how far up the size band the troubles go.
7. Banks' losses grow as asset values drop further
Yes, we think the banks assets (their loans to consumers and corporations) will go down in value, more than they have already.
8. Once the recession gains speed, expect corporate defaults
This is where the real surprise is happening. Most investors, and we're talking about professionals, thought that corporations had tightened up their balance sheets over the past five years so they would be able to withstand a consumer retrenchment. But, the consumer represents two thirds of the economy and with their own problems, consumers have pulled back and will continue to do so.
9. Unregulated 'shadow banking system' facing huge problems
We have described the problems in the SIVs but not much about the hedge funds that rely on the banks for financing. In these entities there are many potential land mines which we have started to hear about recently.
10. As recession spirals out-of-control, stock markets drop again
Since this has not happened to date, we think this item is not worthy of mention. It is more like a conclusion to the argument. We would still agree with the basic idea.
11. Credit crunch will dry up liquidity in many financial markets
This has already begun to happen and will continue.
12. Massive global recession spreading, spiraling down
This resembles number 10 and is a conclusion.
Our take on this list is that the creator has not seen the future so much as is recounting what has already happened. If you have been reading our blog for a while, we have been talking about these things for a while now. Still, there is no big "problem" or accident going on in the stock market.
So, while we agree that at least 10 of these items have already begun, the last act, so to speak, has not been written. The trouble is that we don't really know what is going to happen but we do know this, it is not a good path to be on. We speak in the general sense of living in this world, not being bearish on the stock market specifically.
We are pretty confident that the financial world does not appreciate the full impact of the troubles that we are facing in the real economy. But, this recognition is about to be felt and that will drive the price of stocks down.
With all of these known problems described in this article, the stock market still has not dropped enough to account for them. Our thought is that the stock market has a long ways to go down.
FSI: 71.77 ( another new low based on GOOG's 12 point drop on the day)
Trish, we did get out at a good price, didn't we :-) And, just for you, here is another pic:
In the late day trading, Ambac was rumored to have yet another bail out program in place driving the price of it and the general market up from the depths of dispair. The Dow had been down over 200 points just before the rumor hit and ended the day down a mere 45 points. We can't disregard the reversal but we don't think it is meaningful in the larger sense.
Let's get to the post for this evening...
We received an email from one of our readers, thanks CM, asking if we thought things were as bad as an article that he referenced. This article describes 12 events, or 12 acts in a tragedy, and we would like to recount them here along with our opinion.
1. Home prices will fall 20% to 30% from the peak
Since this blog has this as a tenet, yes, we would agree with this one.
2. Prime and near-prime mortgages losses
Again, we believe the mortgage problem will extend to the prime sector.
3. Consumer debt defaults will increase sharply
We think the consumer has and will continue to retrench and spend less. The reason is due to problems with servicing their debt.
4. The credit insurers rescue package is insufficient
We agree--it is insufficient due to the nature of the problem. There isn't enough "insurance" to cover these losses.
5. Commercial real estate loan market will deteriorate
Yes, commercial real estate has already deteriorated somewhat and with the state of the consumer, the commercial world has fewer and fewer reasons to set up shop.
6. Some large banks with heavy mortgage exposure will fail
Ok, here is where the Fed is trying its hardest to avert trouble. Large banks are their domain and they will fight to keep them solvent. But, again, the problem is that there have been too many poorly underwriten loans causing the problem. We foresee bank failures, we don't know how large the banks will be. We would say smaller banks have the initial problems and then we will see how far up the size band the troubles go.
7. Banks' losses grow as asset values drop further
Yes, we think the banks assets (their loans to consumers and corporations) will go down in value, more than they have already.
8. Once the recession gains speed, expect corporate defaults
This is where the real surprise is happening. Most investors, and we're talking about professionals, thought that corporations had tightened up their balance sheets over the past five years so they would be able to withstand a consumer retrenchment. But, the consumer represents two thirds of the economy and with their own problems, consumers have pulled back and will continue to do so.
9. Unregulated 'shadow banking system' facing huge problems
We have described the problems in the SIVs but not much about the hedge funds that rely on the banks for financing. In these entities there are many potential land mines which we have started to hear about recently.
10. As recession spirals out-of-control, stock markets drop again
Since this has not happened to date, we think this item is not worthy of mention. It is more like a conclusion to the argument. We would still agree with the basic idea.
11. Credit crunch will dry up liquidity in many financial markets
This has already begun to happen and will continue.
12. Massive global recession spreading, spiraling down
This resembles number 10 and is a conclusion.
Our take on this list is that the creator has not seen the future so much as is recounting what has already happened. If you have been reading our blog for a while, we have been talking about these things for a while now. Still, there is no big "problem" or accident going on in the stock market.
So, while we agree that at least 10 of these items have already begun, the last act, so to speak, has not been written. The trouble is that we don't really know what is going to happen but we do know this, it is not a good path to be on. We speak in the general sense of living in this world, not being bearish on the stock market specifically.
We are pretty confident that the financial world does not appreciate the full impact of the troubles that we are facing in the real economy. But, this recognition is about to be felt and that will drive the price of stocks down.
With all of these known problems described in this article, the stock market still has not dropped enough to account for them. Our thought is that the stock market has a long ways to go down.
FSI: 71.77 ( another new low based on GOOG's 12 point drop on the day)
Trish, we did get out at a good price, didn't we :-) And, just for you, here is another pic:
Monday, March 03, 2008
We Are Bearish
Top Line: Here we are, the first trading day of the month, and the stock market had some trouble. Looking back to last week's "successful" test of 12,750 we have gone down about 600 points, near 5% before the final hour's 100 point rally into the close. With a little more rally on Tuesday, or not, we think the next move down should be decisive.
There was news on Monday but we are going to focus this brief post on one item, the near term downtrend that we see.
For those who follow the stock market, there is a tendency to feel good when your positions are moving in the right direction. As stocks rally, you seem to follow your Wealth more closely. Then when the market turns against you, the tendency is to start avoiding the daily check on your stocks.
This reaction is very common and results in poor performance in the market due to lack of action. If there was some way to actually pull the trigger, many dollars would be saved. We have always been quick to sell our profitable trades and usually before they have gone their distance, gold would be a primary example. We were in at $275 an ounce and out around $400 for a nice profit but today gold closed just under $1,000. We were right on the going in price and pulled the trigger early and then never got back in. No, we are not advising that right now, either.
What happens to most people is they don't really like to sell, ever. When their stocks are going up, they are happy and content to watch them going up. Then when they go down, they stop watching them hoping someday they will come back up to where they Were.
The main problem is that very few can actually sell at the Top. For the rest of us, selling into strength is just wrong because, you know prices are going to the moon. This is greed whispering in your ear, don't sell, we can make even more.
We are entering into a time when the other emotion, that being, fear, starts to get into the minds of the "investors". This emotion is driven by a lower selling price than one would like to take but as prices continue to march lower, people get scared that they're going into the abyss.
Fear is the emotion that allows a crash to occur. We are not saying that a crash is near, just that when fear shows up, it is possible. We don't really see a lot of fear right now. What we see is confidence that the next big move is up. We don't really believe that is true and we say that because bull markets do not wait for people to get on board before they go, they just go.
The current situation is one of confidence that the Fed can prevent the market from going down with rate cuts and the market has gone down enough already anyway. So, we had our opportunity to sell but now we have to hold because prices are about to rally.
These things are not true. The Fed can not stop the market from going down and the market can go down as much as it wants to. But, for most, the thinking process is not to sell at the top because there are further gains to be had. Instead of taking a nice profit, the stock they own turns around and creates fear in them when it goes down. Since there is no place to go but down, it must be time to sell. Human nature never changes.
But, back in reality, we think the current state is that the market is just now entering a long down trend that should last quite a while. There will be rallies like we have seen from the January lows but remember we are still down 2000 points from the October highs.
Trish--you have provided the perfect recipe for the stimulus package to be a Non-Stimulus package. We think the current thinking of the recipients of these rebate checks is to pay their utilities and rent. Some will have a little extra money to spend and they will, like you say. For the most part, we think people have Already purchased things and now need to pay the bill. And, along comes the rebate check and provides the funds to pay off the debt.
The only way the stimulus package will work is if a large majority of the recipients go and spend it on new items. Even then, it is only a short term blip in the spending habits and providers of these new items will not plan for this to continue so can not and will not build their employee base or anything else. It will fail to bring the desired results.
Speaking of failing there is One article of interest. This one could write our post tonight.
We had so many subtitles for this one with the favorite being... Olé
There was news on Monday but we are going to focus this brief post on one item, the near term downtrend that we see.
For those who follow the stock market, there is a tendency to feel good when your positions are moving in the right direction. As stocks rally, you seem to follow your Wealth more closely. Then when the market turns against you, the tendency is to start avoiding the daily check on your stocks.
This reaction is very common and results in poor performance in the market due to lack of action. If there was some way to actually pull the trigger, many dollars would be saved. We have always been quick to sell our profitable trades and usually before they have gone their distance, gold would be a primary example. We were in at $275 an ounce and out around $400 for a nice profit but today gold closed just under $1,000. We were right on the going in price and pulled the trigger early and then never got back in. No, we are not advising that right now, either.
What happens to most people is they don't really like to sell, ever. When their stocks are going up, they are happy and content to watch them going up. Then when they go down, they stop watching them hoping someday they will come back up to where they Were.
The main problem is that very few can actually sell at the Top. For the rest of us, selling into strength is just wrong because, you know prices are going to the moon. This is greed whispering in your ear, don't sell, we can make even more.
We are entering into a time when the other emotion, that being, fear, starts to get into the minds of the "investors". This emotion is driven by a lower selling price than one would like to take but as prices continue to march lower, people get scared that they're going into the abyss.
Fear is the emotion that allows a crash to occur. We are not saying that a crash is near, just that when fear shows up, it is possible. We don't really see a lot of fear right now. What we see is confidence that the next big move is up. We don't really believe that is true and we say that because bull markets do not wait for people to get on board before they go, they just go.
The current situation is one of confidence that the Fed can prevent the market from going down with rate cuts and the market has gone down enough already anyway. So, we had our opportunity to sell but now we have to hold because prices are about to rally.
These things are not true. The Fed can not stop the market from going down and the market can go down as much as it wants to. But, for most, the thinking process is not to sell at the top because there are further gains to be had. Instead of taking a nice profit, the stock they own turns around and creates fear in them when it goes down. Since there is no place to go but down, it must be time to sell. Human nature never changes.
But, back in reality, we think the current state is that the market is just now entering a long down trend that should last quite a while. There will be rallies like we have seen from the January lows but remember we are still down 2000 points from the October highs.
Trish--you have provided the perfect recipe for the stimulus package to be a Non-Stimulus package. We think the current thinking of the recipients of these rebate checks is to pay their utilities and rent. Some will have a little extra money to spend and they will, like you say. For the most part, we think people have Already purchased things and now need to pay the bill. And, along comes the rebate check and provides the funds to pay off the debt.
The only way the stimulus package will work is if a large majority of the recipients go and spend it on new items. Even then, it is only a short term blip in the spending habits and providers of these new items will not plan for this to continue so can not and will not build their employee base or anything else. It will fail to bring the desired results.
Speaking of failing there is One article of interest. This one could write our post tonight.
FSI: 71.99 (new low as the Horsemen were down on Monday)
Also, here is the Pic of the Day:
We had so many subtitles for this one with the favorite being... Olé
Sunday, March 02, 2008
Start of a New Month, New Down Move
Top Line: The stock market did seem to indicate that it wants to start the spike down that we discussed here on Thursday evening. The next few weeks should be the process to get us down quite a ways down in the Dow, initial target would be the January lows near 11,500. These lows are, in Wall Street's mind, a large area of support so if these are taken out, there will be another wave down. We'll deal with that when the time is right. For now, we concentrate on the immediate decline that seems to have started on Friday.
Looking back to the last few days, we again see many articles directed toward the mortgage world, starting with this one from San Francisco, published in the UK. We had never heard the term "ninja" loans before but thought it clever if nothing else. Ninja is an acronym that stands for No Income, No Job, no Assets.
And then there's our favorite NY Times journalist, Gretchen Morgenson, reporting about a new index called the Consumer Spendables Indicator developed by TrimTabs Investment Research, a proprietary research firm in Santa Rosa, Calif. This indicator represents the amount of money consumers have for spending including non-wage sources, like home equity extraction. We recommend reading this great article. It estimates the jobs' data for later in the week at a loss of 77K versus an estimate of between 30K and 40K increase from surveys of economists.
Here's a short article, again from the NY Times, about the rate of foreclosures versus home sales in various states. There is a nice graphic embeded in the article that shows the states with the highest foreclosure rates but also has a chart in it that shows the rate of foreclosure in the four large regions of the US. This chart shows the foreclosure rate in the West is over 80% of home sales.
One last article of interest is the one about Peloton, showing the ups and downs of a mortgage investing hedge fund. Beware of the rough spots in the housing market. Unfortunately, we have no time to discuss this tonight but it is an important part of what is going on in the markets at this time--troubled hedge funds selling assets to meet margin calls.
The last item we have this evening should be required reading for investors everywhere. Actually we have two things and both of them are Buffet related. First is his annual letter to shareholders and the second is a nice article that summarizes his comments.
We think the market is ready for a hard slide and that it has started. Surprises to the Downside at this time. Bull market tactics will not work here, such as buying the dips. The Asian markets are down 3% to 4% this evening as we write--no doubt responding to last Friday's drubbing in the US market. The US futures are down a little right now but not much. Let's see what our market can do on Monday the first trading day of the new month.
FSI: 74.24 (not a new low for the move)
Trish, thanks for the note--don't really know how to respond to that except, the people in charge need to do whatever they can to indicate their confidence in the system and that includes the rate cuts from the Fed and the economic stimulus from the government and bullish economic rhetoric. But, since you are here for pictures here is another one sitting on Grampa's lap:
Looking back to the last few days, we again see many articles directed toward the mortgage world, starting with this one from San Francisco, published in the UK. We had never heard the term "ninja" loans before but thought it clever if nothing else. Ninja is an acronym that stands for No Income, No Job, no Assets.
And then there's our favorite NY Times journalist, Gretchen Morgenson, reporting about a new index called the Consumer Spendables Indicator developed by TrimTabs Investment Research, a proprietary research firm in Santa Rosa, Calif. This indicator represents the amount of money consumers have for spending including non-wage sources, like home equity extraction. We recommend reading this great article. It estimates the jobs' data for later in the week at a loss of 77K versus an estimate of between 30K and 40K increase from surveys of economists.
Here's a short article, again from the NY Times, about the rate of foreclosures versus home sales in various states. There is a nice graphic embeded in the article that shows the states with the highest foreclosure rates but also has a chart in it that shows the rate of foreclosure in the four large regions of the US. This chart shows the foreclosure rate in the West is over 80% of home sales.
One last article of interest is the one about Peloton, showing the ups and downs of a mortgage investing hedge fund. Beware of the rough spots in the housing market. Unfortunately, we have no time to discuss this tonight but it is an important part of what is going on in the markets at this time--troubled hedge funds selling assets to meet margin calls.
The last item we have this evening should be required reading for investors everywhere. Actually we have two things and both of them are Buffet related. First is his annual letter to shareholders and the second is a nice article that summarizes his comments.
We think the market is ready for a hard slide and that it has started. Surprises to the Downside at this time. Bull market tactics will not work here, such as buying the dips. The Asian markets are down 3% to 4% this evening as we write--no doubt responding to last Friday's drubbing in the US market. The US futures are down a little right now but not much. Let's see what our market can do on Monday the first trading day of the new month.
FSI: 74.24 (not a new low for the move)
Trish, thanks for the note--don't really know how to respond to that except, the people in charge need to do whatever they can to indicate their confidence in the system and that includes the rate cuts from the Fed and the economic stimulus from the government and bullish economic rhetoric. But, since you are here for pictures here is another one sitting on Grampa's lap:
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