The stock market continues in the non-volatile mode for another day. This is reasonable given the violence of last week and the oversold nature of the market. Today’s volume was bad to anemic levels so there is much resting going on. We still recommend selling any rallies like the one we had in tech today.
The big news continues to be reactions to the mortgage “bailout” by the Fed with COF (Capital One Financial) announcing some more bad news on their Alt-A company. With the full range of non-conforming mortgages going through some credit contraction, COF said it must close down their GreenPoint mortgage unit. According to the WSJ, GreenPoint had been “valued at $6.3 billion just three years ago”. COF will be coughing up a fur ball when it reports earnings this year with GreenPoint dragging its annual earnings down about 30%. The stock market was “happy” with the news as the stock moved up on the news today with their low on this move (so far anyway) coming over the past week.
More chatter being heard from Washington as one of the Presidential candidates assures the world that the Fed chief is going to do “absolutely” everything he can to stabilize the markets. Somehow, that doesn’t seem to have translated properly but Bernanke did not correct the statement. We are sure that the Fed will make sure to bail out the banks but we don’t really know how “millions of Americans” won’t lose their houses without some federal government involvement, that sort of thing is outside the Fed’s jurisdiction.
Most of the news we hear is that the mortgage situation can be contained but that is what has been said for several months now and we just don’t think it is true. The mortgage situation is a result of one more bailout from the Fed. They think that by lowering interest rates, credit will expand. We’re not so sure this time. This is what is known as “pushing on a string” in some circles.
When the Fed lowers interest rates this time, there needs to be someone out there who can and will borrow money. Of course, they would also need to spend it in order for it to keep the economy going. With the population starting to default on their mortgages, we think it will be difficult for them to get a loan under the new standards. This is the place where the Fed finds itself and they have not really accepted it. The Chairman got his helicopter title when he said he could drop money from helicopters to jumpstart the economy. Well, that may be what he does. We just hope we are near the drop point.
Tuesday, August 21, 2007
Monday, August 20, 2007
More on the Fed
Today’s market gave us very little information on the current state of affairs. The market is still trying to figure out how it wants to go down but it will try to convince all players that the bottom is in. The thing is that the bottom won’t be in until most everyone is out.
In our last post we mentioned that the Fed’s move was purely to bail out the banks and we didn’t seem to get much questions on that statement. Tonight we thought someone should challenge us so we will. The stock market fully anticipated a rate cut as early as the afternoon of Thursday. We discussed the huge 300 point rally that came late in the day on Thursday. This was the result, most likely, of the participants expecting the rate cut news as being a buy sign. Well, Friday morning after the announcement, the market opened up another 300 points for around 600 points in an hour of trading.
For some, there was another reason for the move, options expiration. We normally talk about the turn around that characterizes the week of options expiration. Normally, there is a move into Wednesday sometime and then a reversal into Friday. This doesn’t always happen but we kind of expected it last week. When the rally didn’t occur, there were some who suspected that the Fed took the opportunity to Make it happen. The Fed decided for some reason to wait until Friday morning to act and we just have to wonder ourselves if the options expiration was part of their thinking. Volume was very high most of last week so maybe they actually panicked as the market was dropping on Thursday without thinking of options but it does seem too coincidental. Thoughts?
Subsequently, the market is expecting a Real rate cut in the form of a funds rate cut at the next FOMC meeting, in September. The last we heard, there was a 100% probability of a 25 bps cut built into the futures market with an 86% chance of a half point cut. It wasn’t too long ago that the Fed was “fully committed to fighting inflation”, yeah right. We have been saying all year long that the Fed’s next rate move would be down and it would happen before the end of the year…but we digress.
The other thing we have said is that the Fed is Always behind the market and only moves when the market says it’s ok to do so. In that regard, today we saw a huge flight to quality, meaning that money moved to the Treasury market. You can see a front page article on Tuesday’s WSJ that talks about how the Fed didn’t quite do enough to alleviate the “flight to quality”. People are trying to avoid risk by moving money from more risky assets to T-bills which causes Prices on T-bills to rise thereby lowering the rate available. That rate dropped over one percent during today’s trading such that the T-bills were yielding 2.5% at one time. That is quite a bit below the Fed funds rate of 5.25%. We will see if these rates can get back to “normal” over the next few days.
One other topic on interest rates is the Bull market. The stock market thinks that if the Fed lowers rates that the stock market will go up. We have history to look at here and you all know what has happened to the market as the Fed moved rates up from 1% to the current 5.25%, it has gone up. Now, they market wants lower rates because there will be higher stock prices. We say, maybe there will be a temporary rally (witness the Thursday and Friday rally) so there will be an opportunity for someone to Sell.
There will be periodic rallies that should be sold, but for the most part stocks should not be purchased, in our opinion. One problem is that the market remains oversold so maybe we trade sideways for a few days to alleviate this issue. Once that occurs, expect further declines.
In our last post we mentioned that the Fed’s move was purely to bail out the banks and we didn’t seem to get much questions on that statement. Tonight we thought someone should challenge us so we will. The stock market fully anticipated a rate cut as early as the afternoon of Thursday. We discussed the huge 300 point rally that came late in the day on Thursday. This was the result, most likely, of the participants expecting the rate cut news as being a buy sign. Well, Friday morning after the announcement, the market opened up another 300 points for around 600 points in an hour of trading.
For some, there was another reason for the move, options expiration. We normally talk about the turn around that characterizes the week of options expiration. Normally, there is a move into Wednesday sometime and then a reversal into Friday. This doesn’t always happen but we kind of expected it last week. When the rally didn’t occur, there were some who suspected that the Fed took the opportunity to Make it happen. The Fed decided for some reason to wait until Friday morning to act and we just have to wonder ourselves if the options expiration was part of their thinking. Volume was very high most of last week so maybe they actually panicked as the market was dropping on Thursday without thinking of options but it does seem too coincidental. Thoughts?
Subsequently, the market is expecting a Real rate cut in the form of a funds rate cut at the next FOMC meeting, in September. The last we heard, there was a 100% probability of a 25 bps cut built into the futures market with an 86% chance of a half point cut. It wasn’t too long ago that the Fed was “fully committed to fighting inflation”, yeah right. We have been saying all year long that the Fed’s next rate move would be down and it would happen before the end of the year…but we digress.
The other thing we have said is that the Fed is Always behind the market and only moves when the market says it’s ok to do so. In that regard, today we saw a huge flight to quality, meaning that money moved to the Treasury market. You can see a front page article on Tuesday’s WSJ that talks about how the Fed didn’t quite do enough to alleviate the “flight to quality”. People are trying to avoid risk by moving money from more risky assets to T-bills which causes Prices on T-bills to rise thereby lowering the rate available. That rate dropped over one percent during today’s trading such that the T-bills were yielding 2.5% at one time. That is quite a bit below the Fed funds rate of 5.25%. We will see if these rates can get back to “normal” over the next few days.
One other topic on interest rates is the Bull market. The stock market thinks that if the Fed lowers rates that the stock market will go up. We have history to look at here and you all know what has happened to the market as the Fed moved rates up from 1% to the current 5.25%, it has gone up. Now, they market wants lower rates because there will be higher stock prices. We say, maybe there will be a temporary rally (witness the Thursday and Friday rally) so there will be an opportunity for someone to Sell.
There will be periodic rallies that should be sold, but for the most part stocks should not be purchased, in our opinion. One problem is that the market remains oversold so maybe we trade sideways for a few days to alleviate this issue. Once that occurs, expect further declines.
Sunday, August 19, 2007
Fed Acts to Bail Out Banks
Welcome back to us, thank you. We had a good week off and could only watch the market from our vantage point near the TV, oh well. It was a wild week of volatility which the Fed capped with a loud clang on the bell. Apparently, the Billions of dollars of Repo’s weren’t enough. The Fed decided to act more publicly visible, a discount on the discount rate. What does this all mean?
The early Repo action was a little surprising but the discount rate move was almost a panic move on the part of the Fed. We believe the Fed has acted too soon but that doesn’t mean they will be successful at stopping what’s going on with the real estate market.
As you look at the Fed, many people figure they are part of the Federal Government but the fact is that they are Not part of the government. The Federal Reserve is the name of the Central Bank who seems to have the ability to control the money supply of the economy. If you think of the entire economy as being a board game like monopoly, then let’s put the Fed in charge of the money, as in the bank. As the game progresses, the bank is allowed to provide some money for passing Go or for various additional money distributions from drawing “Chance” or “Community Chest”. In the real economy, the Fed can buy property, too. When they buy “bonds” or “MBS’s”, they put money in the system. You might be asking, “So what?”
Well, with the power to put extra money in the system, the Fed can instantly change the situation for the banks. You see, it is the banks that the Fed is concerned about. Their job is to keep federal banks solvent but not tell them what to do, like what kind of credit risk to take on. Now, the world sees the Fed as the knight in shining armor riding in at the right time to save the day. Well, they may have saved Friday and part of Thursday afternoon with their rate cut but will it be enough to save all of the mortgage problems out there?
Of course, this discussion on the Fed is not why you came to the Update. You came here to find out what the market is going to do in the next few days, right? Well, as we write this evening, there is a large rally going on over in the Asian markets celebrating the Fed’s move on Friday so there is still some remnants of positive thinking in the world. You may recall that the Asian markets were closed before the Fed cut the discount rate so they are rallying now.
We here at the Wednesday Update consider the market has rallied 600 points from last Thursday afternoon to Friday so a huge amount of energy was spent to the upside already. Plus, last Friday happened to be options expiration and would normally be a high volume day with some price surprises. The market is Not done going down and no matter what happened last week there is much more downside to come. The timing of the downside may be sooner or later but it will probably not be denied even by the Fed’s actions. The Fed still seems to have some sway over the market but at some point, their power will diminish as they try and fail to stem the tide of selling.
We are somewhat cautious in our criticism of the Fed because they can be seen as just helping out the banks at this point. The change in the discount rate is a pure bank saving play. The Fed wants the banks to borrow money from them so more money can be “created” to provide more liquidity. This is supposed to be followed by more credit being built up. This is where the problem comes in, “Can the Fed create demand for credit with lower rates?” We will be discussing this topic over the next few days because this is real issue. The Fed thinks it can create inflation at will by lowering rates or providing liquidity. We are not so sure.
In other markets, the precious metals took a major dive on Thursday as the HUI index lost about 13% that day. As we have said, this index should go down even more before we get interested in it. Currently it is just over 300 so we need to see about another 10% drop before we start looking for bargains there. Likewise, the Treasury bonds got a big rally as the flight to quality grew last week. Friday was a rest day for the T-bonds due to the Fed Saving the day but there may still be some upside in the T-bond market.
The early Repo action was a little surprising but the discount rate move was almost a panic move on the part of the Fed. We believe the Fed has acted too soon but that doesn’t mean they will be successful at stopping what’s going on with the real estate market.
As you look at the Fed, many people figure they are part of the Federal Government but the fact is that they are Not part of the government. The Federal Reserve is the name of the Central Bank who seems to have the ability to control the money supply of the economy. If you think of the entire economy as being a board game like monopoly, then let’s put the Fed in charge of the money, as in the bank. As the game progresses, the bank is allowed to provide some money for passing Go or for various additional money distributions from drawing “Chance” or “Community Chest”. In the real economy, the Fed can buy property, too. When they buy “bonds” or “MBS’s”, they put money in the system. You might be asking, “So what?”
Well, with the power to put extra money in the system, the Fed can instantly change the situation for the banks. You see, it is the banks that the Fed is concerned about. Their job is to keep federal banks solvent but not tell them what to do, like what kind of credit risk to take on. Now, the world sees the Fed as the knight in shining armor riding in at the right time to save the day. Well, they may have saved Friday and part of Thursday afternoon with their rate cut but will it be enough to save all of the mortgage problems out there?
Of course, this discussion on the Fed is not why you came to the Update. You came here to find out what the market is going to do in the next few days, right? Well, as we write this evening, there is a large rally going on over in the Asian markets celebrating the Fed’s move on Friday so there is still some remnants of positive thinking in the world. You may recall that the Asian markets were closed before the Fed cut the discount rate so they are rallying now.
We here at the Wednesday Update consider the market has rallied 600 points from last Thursday afternoon to Friday so a huge amount of energy was spent to the upside already. Plus, last Friday happened to be options expiration and would normally be a high volume day with some price surprises. The market is Not done going down and no matter what happened last week there is much more downside to come. The timing of the downside may be sooner or later but it will probably not be denied even by the Fed’s actions. The Fed still seems to have some sway over the market but at some point, their power will diminish as they try and fail to stem the tide of selling.
We are somewhat cautious in our criticism of the Fed because they can be seen as just helping out the banks at this point. The change in the discount rate is a pure bank saving play. The Fed wants the banks to borrow money from them so more money can be “created” to provide more liquidity. This is supposed to be followed by more credit being built up. This is where the problem comes in, “Can the Fed create demand for credit with lower rates?” We will be discussing this topic over the next few days because this is real issue. The Fed thinks it can create inflation at will by lowering rates or providing liquidity. We are not so sure.
In other markets, the precious metals took a major dive on Thursday as the HUI index lost about 13% that day. As we have said, this index should go down even more before we get interested in it. Currently it is just over 300 so we need to see about another 10% drop before we start looking for bargains there. Likewise, the Treasury bonds got a big rally as the flight to quality grew last week. Friday was a rest day for the T-bonds due to the Fed Saving the day but there may still be some upside in the T-bond market.
Saturday, August 11, 2007
Unusual Saturday Post
This evening we are getting ready to go out of town and, we think, out of range so there will most likely be no updates all week. This vacation has unfortunate timing written all over it, at least for the stock market. There should be continued volatility in the stock market. The week ahead includes options expiration so there could even be additional volatility, if you can believe that.
We do want to make a few comments while we're here. Friday's action would have been a little different if not for the action of several central banks, notably the ECB, European Central Bank, and our own Fed. We are particularly surprised by the Fed's intervention at this early stage. Perhaps they really think they can "fix" any problems by nipping them in the bud.
Well, we need to remind the Fed that they are responsible for most of the problems that they are now trying to fix. This is Not the bud of the problem. The problem is just now showing the ugly side that we have been talking about for about two years.
The Fed bought Mortgage Backed Securities (MBS's) on Friday giving some hedge funds and others a place to actually sell their, should we say, junk. Normally, the Fed will buy Treasury bonds which have a pretty good reputation of actually paying off their commitments. MBS's in the current world may not. This is almost a crime, but the Fed doesn't have police.
The Fed sometimes do operate in the open market in order to keep the interest rate on interbank loans at their target rate. They always print a statement such as they are doing repo's. On Friday, they made a public statement that "The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets".
It was just Tuesday when the Fed was optimistic about the economy and was most concerned about inflation. Friday they spent $38 billion which is definitely an inflationary move. And, now the market is hoping the Fed will lower interest rates between meetings.
What can we say, except it doesn't really matter what the Fed does? They are in a difficult spot due to the limited ability for debt creation as the mortgage market is tightening up. Good credit can still get loans but subprime is drying up. We recommend looking at Countrywide's statement about how they are having to keep their mortgage paper because no one wants to buy it. Of course, their stock was up 11% this past week.
The bottom line on all of this is that even with the huge well publicized Fed intervention, the stock market could barely get even. That's not to say that it can't really move up from here, just that it couldn't do it with all the visible central banks' help. We continue to be bearish for the near term even though some rallies may pop up now and then. The only ones that matter would be ones that challenge the July highs.
Have a great week and if we can publish we will but, again, we don't think we can so we won't, got it? Good.
We do want to make a few comments while we're here. Friday's action would have been a little different if not for the action of several central banks, notably the ECB, European Central Bank, and our own Fed. We are particularly surprised by the Fed's intervention at this early stage. Perhaps they really think they can "fix" any problems by nipping them in the bud.
Well, we need to remind the Fed that they are responsible for most of the problems that they are now trying to fix. This is Not the bud of the problem. The problem is just now showing the ugly side that we have been talking about for about two years.
The Fed bought Mortgage Backed Securities (MBS's) on Friday giving some hedge funds and others a place to actually sell their, should we say, junk. Normally, the Fed will buy Treasury bonds which have a pretty good reputation of actually paying off their commitments. MBS's in the current world may not. This is almost a crime, but the Fed doesn't have police.
The Fed sometimes do operate in the open market in order to keep the interest rate on interbank loans at their target rate. They always print a statement such as they are doing repo's. On Friday, they made a public statement that "The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets".
It was just Tuesday when the Fed was optimistic about the economy and was most concerned about inflation. Friday they spent $38 billion which is definitely an inflationary move. And, now the market is hoping the Fed will lower interest rates between meetings.
What can we say, except it doesn't really matter what the Fed does? They are in a difficult spot due to the limited ability for debt creation as the mortgage market is tightening up. Good credit can still get loans but subprime is drying up. We recommend looking at Countrywide's statement about how they are having to keep their mortgage paper because no one wants to buy it. Of course, their stock was up 11% this past week.
The bottom line on all of this is that even with the huge well publicized Fed intervention, the stock market could barely get even. That's not to say that it can't really move up from here, just that it couldn't do it with all the visible central banks' help. We continue to be bearish for the near term even though some rallies may pop up now and then. The only ones that matter would be ones that challenge the July highs.
Have a great week and if we can publish we will but, again, we don't think we can so we won't, got it? Good.
Thursday, August 09, 2007
Thursday Means Down
[Editor's note: The market was down hard on Thursday with the Dow down nearly 400 points so we should have more to say but we apologize in advance for tonight's post. The market can speak for itself today, there is not much left to say.]
Just as we were sitting down to write a post we happened to take a fresh look at the overnight futures trading where there has been a little more selling this evening. We have to think that the reason for the decline is the Asian markets opening but we can’t be sure. With the very tough day Wall Street endured there would naturally be some that would think that the “worst” is behind us…Again. There should be some recognition that the market is in a downturn after the big selloff on Thursday; but, we know there are those who think this is just another buying opportunity.
At the opening bell the futures were suggesting a large selloff for the early going and that’s exactly what we got. Immediately, the Dow was down well over 200 points. So, the big rally we saw in the indexes in the final few minutes of trade on Wednesday was mostly erased at the open, but, guess what, you guessed it, buyers came in and bought what they could. At least they bought as long as they could. To demonstrate the strength of buying efforts, take a look at one of our favorite indexes, the NDX, NASDAQ 100. At the open, the NDX was down 25 points but went green within an hour. We consider this evening how those buyers are feeling about their purchase this evening with the index closing down 50.
The stock market is now paying attention to the credit market where the carnage continues unabated. The mess does not just affect US players, it is an international phenomenon. We direct your attention to the Friday edition of the WSJ, again on the front page, How Subprime Mess Ensnared German Bank; IKB Gets a Bailout.
Back to the stock market, we think the market is now in position to show us what it can do on the downside. Thursday’s break was very important to the pattern giving us much more information about what it wants to do. The important pieces to remember are that the rallies will be sharp but most likely will fail to better prior rallies, just like Wednesday’s which didn’t even come close to 14K in the Dow.
The primary direction of the market is now down and we have no way of communicating this to anyone who has bullish thoughts. These will be the people that will help push the market to the lows of this fall. Right now, they are convinced that the market can only go up and when it goes down it is a buying opportunity. Unfortunately, just the opposite is true, rallies should be sold.
Just as we were sitting down to write a post we happened to take a fresh look at the overnight futures trading where there has been a little more selling this evening. We have to think that the reason for the decline is the Asian markets opening but we can’t be sure. With the very tough day Wall Street endured there would naturally be some that would think that the “worst” is behind us…Again. There should be some recognition that the market is in a downturn after the big selloff on Thursday; but, we know there are those who think this is just another buying opportunity.
At the opening bell the futures were suggesting a large selloff for the early going and that’s exactly what we got. Immediately, the Dow was down well over 200 points. So, the big rally we saw in the indexes in the final few minutes of trade on Wednesday was mostly erased at the open, but, guess what, you guessed it, buyers came in and bought what they could. At least they bought as long as they could. To demonstrate the strength of buying efforts, take a look at one of our favorite indexes, the NDX, NASDAQ 100. At the open, the NDX was down 25 points but went green within an hour. We consider this evening how those buyers are feeling about their purchase this evening with the index closing down 50.
The stock market is now paying attention to the credit market where the carnage continues unabated. The mess does not just affect US players, it is an international phenomenon. We direct your attention to the Friday edition of the WSJ, again on the front page, How Subprime Mess Ensnared German Bank; IKB Gets a Bailout.
Back to the stock market, we think the market is now in position to show us what it can do on the downside. Thursday’s break was very important to the pattern giving us much more information about what it wants to do. The important pieces to remember are that the rallies will be sharp but most likely will fail to better prior rallies, just like Wednesday’s which didn’t even come close to 14K in the Dow.
The primary direction of the market is now down and we have no way of communicating this to anyone who has bullish thoughts. These will be the people that will help push the market to the lows of this fall. Right now, they are convinced that the market can only go up and when it goes down it is a buying opportunity. Unfortunately, just the opposite is true, rallies should be sold.
Wednesday, August 08, 2007
Able to Leap Tall Buildings in a Single Bound
The stock market did its impression of Superman, and, on Wednesday, it did it twice. As the market opened, the NASDAQ Comp was on the move with a 2% up move in the first ninety minutes of trading. The Dow wasn’t quite so frisky but it too was up strongly by over 100 points in the same time. By late afternoon, the Dow sported a gain of nearly 200 points trading just shy of 13,700 with ninety minutes to go in the session.
For the next forty five minutes, the Dow fell into Negative territory briefly stunning many traders. Then, as if from nowhere, the market found a footing and the Dow moved back up about fifty points with about ten minutes left in the trading day. From there the Dow blasted up in the final minutes of trading to end up over 150 points on the day, 100 points up in the last ten minutes. So, at least it’s not dull out there in stock land.
Over in the bond market, there was mostly a drop going on in the Treasuries. This week is the quarterly refunding when bond dealers need to “buy” the debt the government wants to sell. The lead story on Wednesday was that China was on the verge of selling many of the Treasuries it holds in reserve which of course sent prices down and down hard. The ten year note, the one we watch with interest (yes, we know, it’s lame, but it’s the best we have this evening), got shelled for over 2 points pushing up the yield 11 bps for the day. That’s like a 1/8 point increase in mortgage rates, a big move for one day.
The credit markets are still in disarray, no matter what the soothing talk is on CNBC. Bonds of all kinds are having a bit of trouble in this market. The main “problem” from the US leaders is that pesky subprime issue but that should be “contained”. Well, we wonder if Alt-A, jumbo loans, count in their world. The reports are that rates on jumbo loans have Jumped to near 8% due to a re-evaluation of the creditors on this type of loan.
We don’t know what to say about the market’s movements late this afternoon because it all happened so fast. The reminder would be that these types of rallies are usually sharp but fail to have lasting benefit. Where the market is this evening is a dangerous place. We believe that the next few days will be equally treacherous for traders.
The Dow has come to our original target, 13,675, and has now traded around it, closing just below it. Wednesday’s action Feels like something to stay away from but we need to mention a few things. For those of you who think the market is now ready to move higher after “taking care of the problems” the economy faces, we say maybe but be very careful. There are now some of our indicators showing overbought, not very many but some. Most of them are just now getting out of oversold conditions, meaning the market may be ready to go back down. We can only recommend caution.
In the news today, TOL, the Toll Brothers housing concern, announced that its earnings were a tad better than expected even though revenues were down 21%. This rallied the stock 6% in the early going also providing some support to the overall tone in the market on Wednesday. This was in spite of the company saying that higher mortgage rates may slow their sales even more. According to the WSJ, the company says it has only “a very small number of subprime buyers, 43% of its buyers use so-called Alt-A loans, a category between prime and subprime. Lenders have severely tightened standards on such loans in recent weeks.” Where have we heard that before—well, not very many places since the “problem” is contained in the subprime market? Remember?
The market needs some close attention again and we are now going to see if our base assumption is correct, that being the bear has returned. The rally out of the utter oversold nature of the market has been pretty predictable. Now, we need to see when it will end. So many are saying that we are done with the sell off and we are now headed for new highs. Let’s just see about that. We think the market has topped as of mid-July so if prices move above those, we will reassess. For now, we think the market is pretty close to where it’s going on this rally phase, with the next major move being down.
For the next forty five minutes, the Dow fell into Negative territory briefly stunning many traders. Then, as if from nowhere, the market found a footing and the Dow moved back up about fifty points with about ten minutes left in the trading day. From there the Dow blasted up in the final minutes of trading to end up over 150 points on the day, 100 points up in the last ten minutes. So, at least it’s not dull out there in stock land.
Over in the bond market, there was mostly a drop going on in the Treasuries. This week is the quarterly refunding when bond dealers need to “buy” the debt the government wants to sell. The lead story on Wednesday was that China was on the verge of selling many of the Treasuries it holds in reserve which of course sent prices down and down hard. The ten year note, the one we watch with interest (yes, we know, it’s lame, but it’s the best we have this evening), got shelled for over 2 points pushing up the yield 11 bps for the day. That’s like a 1/8 point increase in mortgage rates, a big move for one day.
The credit markets are still in disarray, no matter what the soothing talk is on CNBC. Bonds of all kinds are having a bit of trouble in this market. The main “problem” from the US leaders is that pesky subprime issue but that should be “contained”. Well, we wonder if Alt-A, jumbo loans, count in their world. The reports are that rates on jumbo loans have Jumped to near 8% due to a re-evaluation of the creditors on this type of loan.
We don’t know what to say about the market’s movements late this afternoon because it all happened so fast. The reminder would be that these types of rallies are usually sharp but fail to have lasting benefit. Where the market is this evening is a dangerous place. We believe that the next few days will be equally treacherous for traders.
The Dow has come to our original target, 13,675, and has now traded around it, closing just below it. Wednesday’s action Feels like something to stay away from but we need to mention a few things. For those of you who think the market is now ready to move higher after “taking care of the problems” the economy faces, we say maybe but be very careful. There are now some of our indicators showing overbought, not very many but some. Most of them are just now getting out of oversold conditions, meaning the market may be ready to go back down. We can only recommend caution.
In the news today, TOL, the Toll Brothers housing concern, announced that its earnings were a tad better than expected even though revenues were down 21%. This rallied the stock 6% in the early going also providing some support to the overall tone in the market on Wednesday. This was in spite of the company saying that higher mortgage rates may slow their sales even more. According to the WSJ, the company says it has only “a very small number of subprime buyers, 43% of its buyers use so-called Alt-A loans, a category between prime and subprime. Lenders have severely tightened standards on such loans in recent weeks.” Where have we heard that before—well, not very many places since the “problem” is contained in the subprime market? Remember?
The market needs some close attention again and we are now going to see if our base assumption is correct, that being the bear has returned. The rally out of the utter oversold nature of the market has been pretty predictable. Now, we need to see when it will end. So many are saying that we are done with the sell off and we are now headed for new highs. Let’s just see about that. We think the market has topped as of mid-July so if prices move above those, we will reassess. For now, we think the market is pretty close to where it’s going on this rally phase, with the next major move being down.
Tuesday, August 07, 2007
The Fed Gets Some Action
Just a few words to describe the action right after the Fed announcement. As we thought, the Fed decided not to change much even in their statement. The market immediately fell out of bed and the Dow dropped about 170 points in 20 minutes and then found a bottom. From there, the Dow rallied 270 points to the high of the day just over 13,600. Going into the close, the Dow couldn't hold onto that high, which at the time was up 140 points on the day, and sold off into the close, ending up about 35 points. What a wild ride and not really unexpected after the Fed's news.
After the close, the market got a little shot in the arm from CSCO. We haven't had an opportunity to comment on CSCO for a long time. Tonight's earnings news was surprisingly strong and may be enough to drive the market higher in the morning, since the over night futures are up since the news. As for CSCO, it was up nearly 6%.
So, from our perspective, the market has actually gone to the highs that we have been talking about for a few days. That doesn't mean to say the rally is over. There may be another little push to our 13,675 level but, if so, this would probably be a good spot for selling.
We think the market has topped in the mid-July period with the Dow peaking its head above the 14K level for one close. If that is the case, this push should fail and we should then see some selling pressure. The question now is, when? Let's talk about that in the Real Wednesday Update tomorrow.
After the close, the market got a little shot in the arm from CSCO. We haven't had an opportunity to comment on CSCO for a long time. Tonight's earnings news was surprisingly strong and may be enough to drive the market higher in the morning, since the over night futures are up since the news. As for CSCO, it was up nearly 6%.
So, from our perspective, the market has actually gone to the highs that we have been talking about for a few days. That doesn't mean to say the rally is over. There may be another little push to our 13,675 level but, if so, this would probably be a good spot for selling.
We think the market has topped in the mid-July period with the Dow peaking its head above the 14K level for one close. If that is the case, this push should fail and we should then see some selling pressure. The question now is, when? Let's talk about that in the Real Wednesday Update tomorrow.
Monday, August 06, 2007
It's Fed Day
There are only a few key points to mention this evening as we look at this week's trading. The first seems to have something to do with the FOMC meeting this week. At this meeting, the Fed will try hard to decide what to do with interest rates. We don't think this is too tough a decision based on their prior resolve to hold the line on inflation.
More to the point is the stock market's optimism on what it perceives as almost a direct order from Jim Cramer that the Fed lower rates this week and as we used to say in the favorite board game Monopoly, do not pass "Go" but proceed directly to "a rate cut". Sorry to say, but the Fed does not take the advice of One guy, even if he happens to be Jim Cramer. They do tend to follow the market mostly (at least recently) and the market does not seem to believe a rate cut is quite right at this moment in time.
Ok, maybe we should clarify the last paragraph. The market wants a rate cut, so what else is new, but the actual belief in the prices is not there. Right now there is just talk and that talk is coming mostly from one guy. But, the stock market seems content to go higher on the back of a phantom rate cut that they think is possible as early as Tuesday.
It has been our position that the Fed's next move will be a rate cut, but we do not envision it on Tuesday. The market does not seem to be in too bad of shape above 13K and all and there is that inflationary pressure the Fed sees. They need to look tough in the world of currencies and the dollar has definitely been struggling as of late. We keep thinking it will turn around and move higher but it keeps on leaking. Can a Non-decision by the Fed on Tuesday give us some additional strength in the dollar? Just in case you don't remember, our position is that the Fed will cut rates this fall when the stock market drops to "unacceptable levels". And, we do expect a good rally at that time--we think that's quite a few weeks from now and also quite a few Dow points from here.
There is a more specific reason for the Fed to lower rates and that is to protect the banks from problems. This is a current issue with those banks that have invested poorly in structured credit. Now, those valuations may be hurting them but it seems that the Fed will let it go for a while. If the banks lead the stock market decline over the next few months, they will lower rates sooner rather than later.
The other item is the clear oversold nature of the market. You may not think so because the market rallied hard on Monday but the underlying technical conditions of the market do not confirm the market's advance on Monday. According to the WSJ there were well over 600 new lows on Monday and breadth was barely positive with advancers above decliners by about 200 issues, not the power of a bull move.
We have been expecting a rally from the lows and it looks like this may be it. As we mentioned in a prior post, we are looking for about 13,675 on this run and that may happen as early as tomorrow (especially if the Fed cuts...dream on).
More to the point is the stock market's optimism on what it perceives as almost a direct order from Jim Cramer that the Fed lower rates this week and as we used to say in the favorite board game Monopoly, do not pass "Go" but proceed directly to "a rate cut". Sorry to say, but the Fed does not take the advice of One guy, even if he happens to be Jim Cramer. They do tend to follow the market mostly (at least recently) and the market does not seem to believe a rate cut is quite right at this moment in time.
Ok, maybe we should clarify the last paragraph. The market wants a rate cut, so what else is new, but the actual belief in the prices is not there. Right now there is just talk and that talk is coming mostly from one guy. But, the stock market seems content to go higher on the back of a phantom rate cut that they think is possible as early as Tuesday.
It has been our position that the Fed's next move will be a rate cut, but we do not envision it on Tuesday. The market does not seem to be in too bad of shape above 13K and all and there is that inflationary pressure the Fed sees. They need to look tough in the world of currencies and the dollar has definitely been struggling as of late. We keep thinking it will turn around and move higher but it keeps on leaking. Can a Non-decision by the Fed on Tuesday give us some additional strength in the dollar? Just in case you don't remember, our position is that the Fed will cut rates this fall when the stock market drops to "unacceptable levels". And, we do expect a good rally at that time--we think that's quite a few weeks from now and also quite a few Dow points from here.
There is a more specific reason for the Fed to lower rates and that is to protect the banks from problems. This is a current issue with those banks that have invested poorly in structured credit. Now, those valuations may be hurting them but it seems that the Fed will let it go for a while. If the banks lead the stock market decline over the next few months, they will lower rates sooner rather than later.
The other item is the clear oversold nature of the market. You may not think so because the market rallied hard on Monday but the underlying technical conditions of the market do not confirm the market's advance on Monday. According to the WSJ there were well over 600 new lows on Monday and breadth was barely positive with advancers above decliners by about 200 issues, not the power of a bull move.
We have been expecting a rally from the lows and it looks like this may be it. As we mentioned in a prior post, we are looking for about 13,675 on this run and that may happen as early as tomorrow (especially if the Fed cuts...dream on).
Sunday, August 05, 2007
Big Friday Afternoon Selloff
Late Friday saw a dramatic market decline in the last two hours of trading. The Dow was essentially even on the day with two hours to go and then we saw a 280 point selloff going into the close. You probably already know this but the question is, "What now?"
Before that, let's get into what caused the decline. The big issue is the interaction of the rating agencies and,particularly, Bear Stearns, but holders of structured credit in general. S&P lowered Bear Stearns from "stable" to "negative" indicating a possible downgrade in the near future. Bear Stearns made an announcement Friday afternoon as reported on CNN Money(Reuters): "These times are pretty significant in the fixed-income market," CFO Sam Molinaro said on a conference call with analysts. "It's been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."
In concert with that remark is Jim Cramer's ranting late Friday calling for the Fed to step in and lower interest rates. You may find his comments at least entertaining, as we did, and you can find the video out on YouTube. Cramer's comments, maybe we should call them shouting, do make some sense when you see what is going on out in the credit world. Liquidity is drying up and Cramer is hollering for the Fed to loosen right now.
Well, the Fed does have a meeting this week and we will see if Cramer's rantings are addressed at the meeting. Here we are, with the world coming back to our view that the next Fed move will be a decrease in rates. Wasn't it about a month ago that all were predicting a rate increase very soon???
So, while the jobs' number was lower than expected, the market barely noticed. Late in the trading day the attention turned to the credit markets where "Armageddon" is occurring according to Cramer. The stock market participants hardly notice things like liquidity problems or credit market meltdowns but late Friday there seemed to be some recognition.
As the weekend has passed and "calmer heads" take over, the market looks like it might trade calmly, too, at least for a little while. We are in the late stages of the first wave down which may not have happened just yet. We mentioned our thought that there would be a move back up to around 13,675 and without a deeper selloff, that number may be fairly close from this point. We will continue to update that rebound amount as we get closer.
For now, the market should try to find some footing here just above 13,000 but after the next bounce we should see a fall off which will scare the bulls into selling. For this reason we don't believe this rally should be played due to the extremely dangerous position of the market. THe market is ready to sell off any time and Friday is a great example. It came from nowhere and took out 280 points in two hours. This happens to be the lowest close for the Dow on this move since the mid-July record high.
Before that, let's get into what caused the decline. The big issue is the interaction of the rating agencies and,particularly, Bear Stearns, but holders of structured credit in general. S&P lowered Bear Stearns from "stable" to "negative" indicating a possible downgrade in the near future. Bear Stearns made an announcement Friday afternoon as reported on CNN Money(Reuters): "These times are pretty significant in the fixed-income market," CFO Sam Molinaro said on a conference call with analysts. "It's been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."
In concert with that remark is Jim Cramer's ranting late Friday calling for the Fed to step in and lower interest rates. You may find his comments at least entertaining, as we did, and you can find the video out on YouTube. Cramer's comments, maybe we should call them shouting, do make some sense when you see what is going on out in the credit world. Liquidity is drying up and Cramer is hollering for the Fed to loosen right now.
Well, the Fed does have a meeting this week and we will see if Cramer's rantings are addressed at the meeting. Here we are, with the world coming back to our view that the next Fed move will be a decrease in rates. Wasn't it about a month ago that all were predicting a rate increase very soon???
So, while the jobs' number was lower than expected, the market barely noticed. Late in the trading day the attention turned to the credit markets where "Armageddon" is occurring according to Cramer. The stock market participants hardly notice things like liquidity problems or credit market meltdowns but late Friday there seemed to be some recognition.
As the weekend has passed and "calmer heads" take over, the market looks like it might trade calmly, too, at least for a little while. We are in the late stages of the first wave down which may not have happened just yet. We mentioned our thought that there would be a move back up to around 13,675 and without a deeper selloff, that number may be fairly close from this point. We will continue to update that rebound amount as we get closer.
For now, the market should try to find some footing here just above 13,000 but after the next bounce we should see a fall off which will scare the bulls into selling. For this reason we don't believe this rally should be played due to the extremely dangerous position of the market. THe market is ready to sell off any time and Friday is a great example. It came from nowhere and took out 280 points in two hours. This happens to be the lowest close for the Dow on this move since the mid-July record high.
Thursday, August 02, 2007
Volatile Market
We would like to say that the market makes some sense this evening but all we can say is that the market is suddenly a treacherous place to be. Just looking at Thursday’s trading you can see 50 and 100 point prices swings in the Dow in very short periods of time, up and down.
Looking over the past five days the major highs and lows are 13,500 last Friday going down to a low around 13,250 on Monday morning, then rallying to 13,500 on Tuesday morning with another pullback, this time down to 13,150 on Wednesday. Then there was a quick rally taking the Dow up to 13,300 and another fall to 13,150 before a major rally to end the day on Wednesday, up to 13,350. Then on Thursday, the Dow was up and down 50 to 100 points a crack all day long until the end of the day when it popped up to 13,500 again before closing just over 13,450. What a ride! All that craziness and after five days the market is about the same place it was when it started.
In case you are wondering, this type of action usually means the market is trying to change directions, at least temporarily. But, we can’t recommend long positions in this volatility. Well, we probably can’t really recommend short positions either for the same reason but for the next few weeks the market should be trying to recover some of the ground it lost over the past few weeks. Normal retracement levels are, according to Fibonacci, about 61.8% so let’s take a look at where that would put us.
By just taking a general point of reference we can make some pretty good assumptions about the next move up based on the partial retracement of the down move. That move started with the Dow right around 14,000 back on July 19th and found a low around 13,150 over the past few days for a total move of about 850 points. A natural level to move up to would be 61.8% of 850, or 525 points, taking us back up to right around 13,675. This seems like a reasonable place for us to look for a near term high.
While that analysis is ok, it only gets at a couple of issues and leaves several unanswered questions. Was the low the 13,150 number we have already seen or will there be a new lower low in the coming few days? Does the retracement have to be 61.8% or is 50% more likely? When is a good time to be looking for this high? As this is the first leg of the down move, is it likely that the second wave will move higher than the 61.8% level? Are other indicators showing different signs or confirming that a second wave is starting?
All of these questions have merit but we must take the time to set our boundaries for trading. So, tonight, we begin with the premise that the market is in a “corrective” up move that should take us up not too far from where we are tonight. While specifics are far and few between at the moment, we at least have the groundwork for possibilities. We think the fall off from the next move up will be dramatic as most third waves usually are. A small third wave looks like Tuesday’s trading when the Dow lost over 300 points in one day. The next third wave will last more than a few days and probably give the traders a mighty shock of reality.
A couple of our favorite indicators are giving us headaches. The first is the five day volume indicator which is now showing nearly 1 billion shares traded which normally would be an overbought signal; but, with the volume on the NYSE so high, this number is remarkably large which can be a bad signal. The other is our momentum indicator which can’t seem to get out of the negative. These two indicators are definitely Different.
We do not believe this move should be played and we will advise you when we think the third wave is going to get underway. Right now, we can only speculate and it’s too early to guess anyway.
In the news, our main monthly event occurs on Friday morning when the jobs’ report is released. We thought it might have carried more weight but tonight we don’t think there will be much action based on the number.
In other news, we are not shocked by the American Home Mortgage (AHM) that announced that it would be closing its doors on Friday. The stock lost about half of its remaining value in afterhours trading. This news should be a harsh reminder that the mortgage industry is in serious trouble but the world is telling us that the subprime issue is contained. Well, guess what, AHM does do subprime, it does Alt-A. Alt-A is mostly the jumbo loan market, those loans too large to qualify for most Mortgage Insurance. One of the problems for AHM was the undocumented loan apps but don’t forget this is Not subprime. Prime is going to be next.
We want to conclude this Update by mentioning all the people who were concerned about our family. We appreciate your thoughts of us last night after the incredible disaster that occurred here. The problem is that there are so few ways to get this thing out of your head especially as we look out the office window and see the collapsed bridge. Continue to pray for the families who have lost loved ones or who have loved ones in the hospital. And, again, thank you for your concern for us.
Looking over the past five days the major highs and lows are 13,500 last Friday going down to a low around 13,250 on Monday morning, then rallying to 13,500 on Tuesday morning with another pullback, this time down to 13,150 on Wednesday. Then there was a quick rally taking the Dow up to 13,300 and another fall to 13,150 before a major rally to end the day on Wednesday, up to 13,350. Then on Thursday, the Dow was up and down 50 to 100 points a crack all day long until the end of the day when it popped up to 13,500 again before closing just over 13,450. What a ride! All that craziness and after five days the market is about the same place it was when it started.
In case you are wondering, this type of action usually means the market is trying to change directions, at least temporarily. But, we can’t recommend long positions in this volatility. Well, we probably can’t really recommend short positions either for the same reason but for the next few weeks the market should be trying to recover some of the ground it lost over the past few weeks. Normal retracement levels are, according to Fibonacci, about 61.8% so let’s take a look at where that would put us.
By just taking a general point of reference we can make some pretty good assumptions about the next move up based on the partial retracement of the down move. That move started with the Dow right around 14,000 back on July 19th and found a low around 13,150 over the past few days for a total move of about 850 points. A natural level to move up to would be 61.8% of 850, or 525 points, taking us back up to right around 13,675. This seems like a reasonable place for us to look for a near term high.
While that analysis is ok, it only gets at a couple of issues and leaves several unanswered questions. Was the low the 13,150 number we have already seen or will there be a new lower low in the coming few days? Does the retracement have to be 61.8% or is 50% more likely? When is a good time to be looking for this high? As this is the first leg of the down move, is it likely that the second wave will move higher than the 61.8% level? Are other indicators showing different signs or confirming that a second wave is starting?
All of these questions have merit but we must take the time to set our boundaries for trading. So, tonight, we begin with the premise that the market is in a “corrective” up move that should take us up not too far from where we are tonight. While specifics are far and few between at the moment, we at least have the groundwork for possibilities. We think the fall off from the next move up will be dramatic as most third waves usually are. A small third wave looks like Tuesday’s trading when the Dow lost over 300 points in one day. The next third wave will last more than a few days and probably give the traders a mighty shock of reality.
A couple of our favorite indicators are giving us headaches. The first is the five day volume indicator which is now showing nearly 1 billion shares traded which normally would be an overbought signal; but, with the volume on the NYSE so high, this number is remarkably large which can be a bad signal. The other is our momentum indicator which can’t seem to get out of the negative. These two indicators are definitely Different.
We do not believe this move should be played and we will advise you when we think the third wave is going to get underway. Right now, we can only speculate and it’s too early to guess anyway.
In the news, our main monthly event occurs on Friday morning when the jobs’ report is released. We thought it might have carried more weight but tonight we don’t think there will be much action based on the number.
In other news, we are not shocked by the American Home Mortgage (AHM) that announced that it would be closing its doors on Friday. The stock lost about half of its remaining value in afterhours trading. This news should be a harsh reminder that the mortgage industry is in serious trouble but the world is telling us that the subprime issue is contained. Well, guess what, AHM does do subprime, it does Alt-A. Alt-A is mostly the jumbo loan market, those loans too large to qualify for most Mortgage Insurance. One of the problems for AHM was the undocumented loan apps but don’t forget this is Not subprime. Prime is going to be next.
We want to conclude this Update by mentioning all the people who were concerned about our family. We appreciate your thoughts of us last night after the incredible disaster that occurred here. The problem is that there are so few ways to get this thing out of your head especially as we look out the office window and see the collapsed bridge. Continue to pray for the families who have lost loved ones or who have loved ones in the hospital. And, again, thank you for your concern for us.
Wednesday, August 01, 2007
Wednesday Update Postponed
Please understand that we are not posting this evening due to the bridge collapse event here in Minneapolis this evening. Our family is safe but we are still deeply concerned for the well being of all of our friends. We trust they are all fine and that we will find out more tomorrow. Our thoughts and prayers are with anyone affected by this trajedy.
There will be a Full Update on Thursday evening for your viewing at least by midnight CDT. Thanks for your understanding.
There will be a Full Update on Thursday evening for your viewing at least by midnight CDT. Thanks for your understanding.
Tuesday, July 31, 2007
A Nasty Down Turn
Tuesday's action in the stock market can only be described as bearish with the Dow collapsing at the end of the day after being up strongly in the early going. As the market opened on Tuesday, the Dow jumped about 140 points in the first hour or so. When we read about the day there was some talk about AHM, American Home Mortgage, the company we discussed here last night and higher oil as the two leading "causes" for the decline. Well, we can't really understand that as well as that there really was no real "reason" for the decline, which should be very scary to the bulls.
Markets like to be able to explain why things happen and today's explanations just don't hold water. Yes, it is true that AMH did have a bad day on Tuesday, down 90%, but we knew about that a day earlier so the market had to know about it sooner than that. And, normally the Dow and oil have made new highs for the move together looking back on the past several years of trading.
Our caution to you is that in a bear market the rules can get a little bent or broken especially if you are looking at the rules that "work" in a bull run. Tuesday showed up early and fade to Black late which is what happens in bear markets. This is just opposite of what happens in bull runs where markets will get scared in the early going and sell off but manage to rally the rest of the day.
Bear markets are especially treacherous for traders and Tuesday is a great example of that. The market has made everyone who buys dips look like a genius for so long that now buying dips seems almost automatic. Except, today for the first time in this Bear move, the market did not reward the, pardon the expression, "dipsters".
Most of what happened late on Tuesday should help convince some that a change has occurred. As these people are now convinced, we rather expect a bounce off Wednesday morning's lows. Oh, we haven't had a chance to mention the futures market this evening. We should probably do that first. As the evening has worn on, the overnight futures markets are falling. This seems so out of the ordinary because it has been a very long time since we saw the futures show these extreme numbers. There doesn't really seem to be much news to explain it at least as far as we can find but the market is down hard this night.
We think the Dow has a chance to get down to 13,000 as early as Wednesday morning, and, as we mentioned above, there could be a bounce that would occur at that time. Calling for a bounce is not a trading idea just a guess as to what might happen in the morning. We don't even know if the futures can hold their negative positions all night, although we expect they will.
At any rate, we are in for an interesting trading day on Wednesday to start out the month of August. There should be some extreme price moves will be caused by some recognition of the bear market that is starting. Come back for the full Wednesday Update tomorrow, there should be much to discuss.
Markets like to be able to explain why things happen and today's explanations just don't hold water. Yes, it is true that AMH did have a bad day on Tuesday, down 90%, but we knew about that a day earlier so the market had to know about it sooner than that. And, normally the Dow and oil have made new highs for the move together looking back on the past several years of trading.
Our caution to you is that in a bear market the rules can get a little bent or broken especially if you are looking at the rules that "work" in a bull run. Tuesday showed up early and fade to Black late which is what happens in bear markets. This is just opposite of what happens in bull runs where markets will get scared in the early going and sell off but manage to rally the rest of the day.
Bear markets are especially treacherous for traders and Tuesday is a great example of that. The market has made everyone who buys dips look like a genius for so long that now buying dips seems almost automatic. Except, today for the first time in this Bear move, the market did not reward the, pardon the expression, "dipsters".
Most of what happened late on Tuesday should help convince some that a change has occurred. As these people are now convinced, we rather expect a bounce off Wednesday morning's lows. Oh, we haven't had a chance to mention the futures market this evening. We should probably do that first. As the evening has worn on, the overnight futures markets are falling. This seems so out of the ordinary because it has been a very long time since we saw the futures show these extreme numbers. There doesn't really seem to be much news to explain it at least as far as we can find but the market is down hard this night.
We think the Dow has a chance to get down to 13,000 as early as Wednesday morning, and, as we mentioned above, there could be a bounce that would occur at that time. Calling for a bounce is not a trading idea just a guess as to what might happen in the morning. We don't even know if the futures can hold their negative positions all night, although we expect they will.
At any rate, we are in for an interesting trading day on Wednesday to start out the month of August. There should be some extreme price moves will be caused by some recognition of the bear market that is starting. Come back for the full Wednesday Update tomorrow, there should be much to discuss.
Monday, July 30, 2007
Just a Few Thoughts
As the market opened on Monday morning, there was a little skepticism among the players. The news prior to the open was that American Home Mortgage was going to have to put up more cash at the request, or maybe demand, of creditor banks. AHM traded down about 40% before the opening bell and then was not able to actually open for normal trading hours. The mortgage market seems to be popping up with bad news even now—no surprise to us.
In other news, probably also related to the mortgage market, a hedge fund announced that it was closing down and would be distributing what was left of its assets to investors. The firm of Sowood Capital Management announced that it had suffered losses over 50% THIS Month. Apparently, the firm had started the month with about $3 billion and is ending it with only $1.5 billion, ouch. That’s a bad month for anyone.
We are posting this evening due to the trading during the rest of the day on Monday with the Dow up about 90 points on the day. The bounce was a relief to many and gives more hope to the bulls. The market has dropped over 500 points in the two trading days prior to Monday and 90 points feels like a bounce. We will know soon enough whether the first leg of the decline is over and we are getting our corrective bounce. The bounce could be a strong one that will give even more hope to the bulls but we do Not believe it will carry to a new high in the Dow. There will be warning signs of that as any rally plays out.
The market is very oversold and will need a small rest before resuming its down hard path. The end of the month is upon us, a normally strong period of time. We have the jobs’ report coming out on Friday morning which would be a good point for any rally to aim for, meaning a rally could take place that would move the averages up into Friday morning. Our position remains that rallies should be sold.
There is one thing we have missed telling you about last Thursday's trading day. First of all, it was a large volume day and there was another "glitch" in the tape. If you didn't hear, there was an eleven or twelve minute period of time when the price reporting on the Dow was suspended. The obvious thought is that there was too much trading volume to report prices accurately. This is something that could be a bigger problem if the bear gets a hold of one of these trading days and trades are going too fast to keep track of them. Something to consider since this type of thing happened during the February downdraft in the market. That was the day that the Dow mysteriously dropped 200 points in about ten seconds.
In other news, probably also related to the mortgage market, a hedge fund announced that it was closing down and would be distributing what was left of its assets to investors. The firm of Sowood Capital Management announced that it had suffered losses over 50% THIS Month. Apparently, the firm had started the month with about $3 billion and is ending it with only $1.5 billion, ouch. That’s a bad month for anyone.
We are posting this evening due to the trading during the rest of the day on Monday with the Dow up about 90 points on the day. The bounce was a relief to many and gives more hope to the bulls. The market has dropped over 500 points in the two trading days prior to Monday and 90 points feels like a bounce. We will know soon enough whether the first leg of the decline is over and we are getting our corrective bounce. The bounce could be a strong one that will give even more hope to the bulls but we do Not believe it will carry to a new high in the Dow. There will be warning signs of that as any rally plays out.
The market is very oversold and will need a small rest before resuming its down hard path. The end of the month is upon us, a normally strong period of time. We have the jobs’ report coming out on Friday morning which would be a good point for any rally to aim for, meaning a rally could take place that would move the averages up into Friday morning. Our position remains that rallies should be sold.
There is one thing we have missed telling you about last Thursday's trading day. First of all, it was a large volume day and there was another "glitch" in the tape. If you didn't hear, there was an eleven or twelve minute period of time when the price reporting on the Dow was suspended. The obvious thought is that there was too much trading volume to report prices accurately. This is something that could be a bigger problem if the bear gets a hold of one of these trading days and trades are going too fast to keep track of them. Something to consider since this type of thing happened during the February downdraft in the market. That was the day that the Dow mysteriously dropped 200 points in about ten seconds.
Sunday, July 29, 2007
Late Friday Break
As the market was getting ready to close the trading week, there were a few who decided not to be long over the weekend. The Dow fell about 150 points in the final half hour of trading. The market ended a poor trading week with an uneasy feeling going into the weekend.
We thought a quick post would be good just to set us up for another trading week. With the drop late Friday there is a question as to just how the market will trade on Monday. After all, the late day break came very unexpectedly to most traders.
We here at the Update think the market is a bit oversold and may have some ability to stabilize for at least a few hours of trading. This market has become extremely dangerous and should be handled with care. Friday’s late action could be a fifth wave for those of you who are Elliott Wave enthusiasts like we are. This implies a minor rally to correct this extreme drop over the past few days. But, bear moves are sharp and corrective up moves in them can be very short lived. Due to the steep nature of this particular down move we suggest selling rallies, not trying to trade them.
The very nature of the market gives rise to most people still being bullish at this point. Oh yes, they may be willing to say that the market was a little ahead of itself and deserves a pullback but they certainly don’t believe this is the resumption of the bear market. That will happen soon enough as prices continue to fall but for right now, we will be happy to sell to those people who think this is a great buying opportunity.
We recommend cash for the near term and maybe we can venture into some longs later in the year when some bargains are out there. We are particularly interested in the possible bargains in the gold complex but that market should be ready to break down here very soon. We continue to watch it for opportunities but it seems that they are off in the distance at this time. We can wait for a good entry point.
Good article on page A1 of the WSJ, "Analysts Debate If Bull Market Has Peaked".
We thought a quick post would be good just to set us up for another trading week. With the drop late Friday there is a question as to just how the market will trade on Monday. After all, the late day break came very unexpectedly to most traders.
We here at the Update think the market is a bit oversold and may have some ability to stabilize for at least a few hours of trading. This market has become extremely dangerous and should be handled with care. Friday’s late action could be a fifth wave for those of you who are Elliott Wave enthusiasts like we are. This implies a minor rally to correct this extreme drop over the past few days. But, bear moves are sharp and corrective up moves in them can be very short lived. Due to the steep nature of this particular down move we suggest selling rallies, not trying to trade them.
The very nature of the market gives rise to most people still being bullish at this point. Oh yes, they may be willing to say that the market was a little ahead of itself and deserves a pullback but they certainly don’t believe this is the resumption of the bear market. That will happen soon enough as prices continue to fall but for right now, we will be happy to sell to those people who think this is a great buying opportunity.
We recommend cash for the near term and maybe we can venture into some longs later in the year when some bargains are out there. We are particularly interested in the possible bargains in the gold complex but that market should be ready to break down here very soon. We continue to watch it for opportunities but it seems that they are off in the distance at this time. We can wait for a good entry point.
Good article on page A1 of the WSJ, "Analysts Debate If Bull Market Has Peaked".
Thursday, July 26, 2007
An AAPL Today Did Not Keep the Bears Away
As it turns out, the market didn’t pay much attention to the AAPL news we mentioned in our last post. There were other things going on besides the AAPL story. When we finished last night’s post, the futures were up about 10 points and when we reviewed them before the market opened today they were down over 10 points. This being the case, we surmised that maybe something was going on besides AAPL.
We have been talking about the credit markets for some time now and in fact we have based our blog on the idea that the housing market (including the mortgage market) would ultimately drive the stock market down. What has happened along with the mortgage market is extreme credit type activity generally. The biggest culprit could be the LBO, leveraged buy-out.
This is the idea where a company is bought out by a group that has borrowed money, debt which the company being purchased carries on their books. The concept revolves around much the same idea as buying a house with a big mortgage. The interest is deductible and of course the “value” of the purchased item is going to go up so it can be sold for a profit. The plan for Private equity firms is to do the LBO’s and hold companies off the market for maybe five years and then bring them back to market and do an IPO, initial public offering. Then the whole thing starts over.
You can readily see some fallacies in the paragraph above especially as it relates to prices going up. This is the time when the financers of the LBO, banks or general investors, start to get a little nervous just like the investors in the subprime mortgage market got a little nervous when the defaults started pouring in. In this case, the LBO deals just can’t get done because there isn’t enough money being offered for the potential buyers. In other words, investors are getting risk averse and do not want to “invest” their money in LBO’s. In our last post, we indicated that the Chrysler buy-out was having trouble getting financing.
On Thursday, Tyco Electronics withdrew a $1.5 billion note citing “unfavorable conditions in the debt markets.” That’s another way of saying that they couldn’t get investors to commit to the deal or they would have had to raise the interest rate too much in order to get the deal done. The credit markets were suffering losses as more and more investors are getting, or trying to get, out of riskier bonds. In the Treasury market the water was fine and many investors jumped in, with the safety of Treasuries being very tempting.
This brings us to one of our favorite topics, the FED. Today, more people believe that the next interest rate change the FED will make will be down. The WSJ reported that the market has now priced a 100% probability that the FED will Lower rates to 5% by December. We can’t say we told you so tonight because it hasn’t happened but there are now more people speaking our language (which always makes us just a little nervous).
We don’t think you missed the news that the Dow was down over 300 points at the close after being down over 400 earlier in the day. You may have read in these pages that the 13,670 level would give some support to the market but when it broke we would know that the bear has returned. Well, the Dow made a brave stand both on Wednesday and then again on Thursday morning to try and hold that level but in the end, it gave way. That level was about a down 115 point move and when it broke the Dow went quickly to 200 points and more as the day wore on.
This market has many fans even now and we do have a bit of an oversold situation here tonight but that is not such a big problem in a down market. We could get a little more in the way of a bounce but we think the market will continue its journey south for a while. This afternoon near the low our esteemed Treasury Sec’y Henry Paulson reminded us that the subprime mortgage problem would not dramatically affect the economy. That seemed enough to bring buyers back late in the day. The Dow rallied from down about 435 points to the closing level of down 311 for a nice 130 point rally right at the end of the day. There may be some more upside on Friday but we do believe there is much more downside to come in the next few months.
By the way, AAPL was up over 6% on the day and as part of the NDX, NASDAQ 100, it helped contain the losses in that index to only 1.22% compared to over 2% in most other indexes. The “four horsemen” is a concept put forth by Jim Cramer who says these are the stocks that “take no prisoners”. One of them is AAPL and on Thursday it was up as all the world around it was collapsing. The other three, RIMM, AMZN and GOOG, were down but not by very much so the four horsemen did remarkably well together. We will monitor these four stocks to see how they do in the coming months. We expect that it will not be pretty.
Jim Cramer's "Four Horsemen" article
The other news today was the new home sales which were down 6.6% even though this news was almost ignored. The number from last month was revised from down 1.6% to down 2.2% and this month’s number was expected to be down 1.6%. Again, did anyone even hear this news?
Then there was the news on durable goods. The total number missed estimates only by a little, 1.4% compared to expectations of 1.5%; but, the number excluding transportation goods was down by 0.5% which did get some attention but not much.
We have been talking about the credit markets for some time now and in fact we have based our blog on the idea that the housing market (including the mortgage market) would ultimately drive the stock market down. What has happened along with the mortgage market is extreme credit type activity generally. The biggest culprit could be the LBO, leveraged buy-out.
This is the idea where a company is bought out by a group that has borrowed money, debt which the company being purchased carries on their books. The concept revolves around much the same idea as buying a house with a big mortgage. The interest is deductible and of course the “value” of the purchased item is going to go up so it can be sold for a profit. The plan for Private equity firms is to do the LBO’s and hold companies off the market for maybe five years and then bring them back to market and do an IPO, initial public offering. Then the whole thing starts over.
You can readily see some fallacies in the paragraph above especially as it relates to prices going up. This is the time when the financers of the LBO, banks or general investors, start to get a little nervous just like the investors in the subprime mortgage market got a little nervous when the defaults started pouring in. In this case, the LBO deals just can’t get done because there isn’t enough money being offered for the potential buyers. In other words, investors are getting risk averse and do not want to “invest” their money in LBO’s. In our last post, we indicated that the Chrysler buy-out was having trouble getting financing.
On Thursday, Tyco Electronics withdrew a $1.5 billion note citing “unfavorable conditions in the debt markets.” That’s another way of saying that they couldn’t get investors to commit to the deal or they would have had to raise the interest rate too much in order to get the deal done. The credit markets were suffering losses as more and more investors are getting, or trying to get, out of riskier bonds. In the Treasury market the water was fine and many investors jumped in, with the safety of Treasuries being very tempting.
This brings us to one of our favorite topics, the FED. Today, more people believe that the next interest rate change the FED will make will be down. The WSJ reported that the market has now priced a 100% probability that the FED will Lower rates to 5% by December. We can’t say we told you so tonight because it hasn’t happened but there are now more people speaking our language (which always makes us just a little nervous).
We don’t think you missed the news that the Dow was down over 300 points at the close after being down over 400 earlier in the day. You may have read in these pages that the 13,670 level would give some support to the market but when it broke we would know that the bear has returned. Well, the Dow made a brave stand both on Wednesday and then again on Thursday morning to try and hold that level but in the end, it gave way. That level was about a down 115 point move and when it broke the Dow went quickly to 200 points and more as the day wore on.
This market has many fans even now and we do have a bit of an oversold situation here tonight but that is not such a big problem in a down market. We could get a little more in the way of a bounce but we think the market will continue its journey south for a while. This afternoon near the low our esteemed Treasury Sec’y Henry Paulson reminded us that the subprime mortgage problem would not dramatically affect the economy. That seemed enough to bring buyers back late in the day. The Dow rallied from down about 435 points to the closing level of down 311 for a nice 130 point rally right at the end of the day. There may be some more upside on Friday but we do believe there is much more downside to come in the next few months.
By the way, AAPL was up over 6% on the day and as part of the NDX, NASDAQ 100, it helped contain the losses in that index to only 1.22% compared to over 2% in most other indexes. The “four horsemen” is a concept put forth by Jim Cramer who says these are the stocks that “take no prisoners”. One of them is AAPL and on Thursday it was up as all the world around it was collapsing. The other three, RIMM, AMZN and GOOG, were down but not by very much so the four horsemen did remarkably well together. We will monitor these four stocks to see how they do in the coming months. We expect that it will not be pretty.
Jim Cramer's "Four Horsemen" article
The other news today was the new home sales which were down 6.6% even though this news was almost ignored. The number from last month was revised from down 1.6% to down 2.2% and this month’s number was expected to be down 1.6%. Again, did anyone even hear this news?
Then there was the news on durable goods. The total number missed estimates only by a little, 1.4% compared to expectations of 1.5%; but, the number excluding transportation goods was down by 0.5% which did get some attention but not much.
Wednesday, July 25, 2007
Do the Bulls Believe Wednesday Was an Up Day?
As the market opened on Wednesday the buzz was AMZN hitting its numbers. AMZN was up around 25% on the day giving rise to the pervasive view that all stocks should go up with it. The Dow was up about 100 points right out of the gate and AMZN is not even in that index. Right after the opening surge, the market started to leak and after 90 minutes of trading the Dow was in negative territory very near to the 13,670 we mentioned in last night’s post. From there we began a see-saw day with the see-saw in the up position at the end of the regular session.
Then came the news the market was waiting for—AAPL announced exciting record breaking news and the market had another A stock to cheer about in the afterhours trading. AAPL’s stock jumped 13 points in late trading up almost 10%. With it, the futures are trading up strong this evening as well pointing to what should be a strong opening.
But, that’s where the market needs to be so that sellers can come in like they did on Wednesday. “Why did sellers come in on Wednesday?”, you might ask. Well, believe it or not, there is some trouble in LBO land where deals are having trouble finding financing.
Chrysler Financing Needs a Lift and there is our old friend the Snowman, former Secy Treasury John Snow
There are some other articles on this subject in the WSJ both in Wednesday's on page C1, Chrysler's Bankers May Take on Debt, and Thursday's on page A1, Banks Delay Sale of Chrysler Debt as Market Stalls. Good reading.
Then there was the news about existing home sales dropping 3.8% in June. The market is trying to ignore these types of facts but the numbers keep coming in lower. Of course today’s spin was that inventories are down. Let’s not forget that prices went up also. Does anyone think that maybe sellers are getting tired of not selling their house, or tired of lowering the offer price? Anecdotally, we know that a family in California had their house on the market for over a year before taking it off the market. The reason to take it off was because they had lowered the price to the price they had paid for it several years ago. They decided that they were not going to lower it any more. We don’t really think lower inventories bring buyers.
The last item is the Fed’s Beige Book which states that the economy is doing just fine thank you and the subprime woes are not drastically affecting the numbers. We have two comments, one is “wait” and the other is the actual reporting of the economy is down [editor's note, this was supposed to be "done"] by people who are running the economy???
As we get to the technical part of the post we want to say that the Dow did manage to bounce off the 13,670 level so there is some minor question whether or not the down move has been confirmed. Well, it has Not been. We need to see a serious breach of this level before we can actually declare victory for the bears.
The biggest confirmation for the bears is the continued poor breadth. On Wednesday the advance decline line was negative (more decliners than advancers). This is not a strong market and the technicals are weak. The 443 new lows on the NYSE was another telling sign that there may be some trouble in stock land.
The overnight futures being as strong as they are will give us an up opening but let’s see if that can give way to a selloff later. If we get some confirmation by breaking through that level we will definitely be here tomorrow evening to discuss it. Any day that has the Dow trading below that level will be cause for us to post so you know what to do…
Then came the news the market was waiting for—AAPL announced exciting record breaking news and the market had another A stock to cheer about in the afterhours trading. AAPL’s stock jumped 13 points in late trading up almost 10%. With it, the futures are trading up strong this evening as well pointing to what should be a strong opening.
But, that’s where the market needs to be so that sellers can come in like they did on Wednesday. “Why did sellers come in on Wednesday?”, you might ask. Well, believe it or not, there is some trouble in LBO land where deals are having trouble finding financing.
Chrysler Financing Needs a Lift and there is our old friend the Snowman, former Secy Treasury John Snow
There are some other articles on this subject in the WSJ both in Wednesday's on page C1, Chrysler's Bankers May Take on Debt, and Thursday's on page A1, Banks Delay Sale of Chrysler Debt as Market Stalls. Good reading.
Then there was the news about existing home sales dropping 3.8% in June. The market is trying to ignore these types of facts but the numbers keep coming in lower. Of course today’s spin was that inventories are down. Let’s not forget that prices went up also. Does anyone think that maybe sellers are getting tired of not selling their house, or tired of lowering the offer price? Anecdotally, we know that a family in California had their house on the market for over a year before taking it off the market. The reason to take it off was because they had lowered the price to the price they had paid for it several years ago. They decided that they were not going to lower it any more. We don’t really think lower inventories bring buyers.
The last item is the Fed’s Beige Book which states that the economy is doing just fine thank you and the subprime woes are not drastically affecting the numbers. We have two comments, one is “wait” and the other is the actual reporting of the economy is down [editor's note, this was supposed to be "done"] by people who are running the economy???
As we get to the technical part of the post we want to say that the Dow did manage to bounce off the 13,670 level so there is some minor question whether or not the down move has been confirmed. Well, it has Not been. We need to see a serious breach of this level before we can actually declare victory for the bears.
The biggest confirmation for the bears is the continued poor breadth. On Wednesday the advance decline line was negative (more decliners than advancers). This is not a strong market and the technicals are weak. The 443 new lows on the NYSE was another telling sign that there may be some trouble in stock land.
The overnight futures being as strong as they are will give us an up opening but let’s see if that can give way to a selloff later. If we get some confirmation by breaking through that level we will definitely be here tomorrow evening to discuss it. Any day that has the Dow trading below that level will be cause for us to post so you know what to do…
Tuesday, July 24, 2007
Dow Down on Countrywide News
The news on Tuesday overwhelmed the bulls as the Dow ended down about 226 points. The biggest early news came from Countrywide, the nation’s largest home lender. The company said that losses on certain types of PRIME mortgage loans had been part of the cause for a one third drop in their quarterly income. Slashing their 2007 earnings forecast, Countrywide said the housing and mortgage markets are expected to be increasingly challenging.
Earlier in the year, the company had expected a rebound by next year but is now looking out to 2009 for that rebound. The company stated that loss provisions and write-downs of securities of prime home-equity loans caused much of the problem in their earnings. The so called “piggy-back” loans that have allowed borrowers to avoid paying for mortgage insurance are partly responsible.
Normally, 20% down is required to avoid the mortgage insurance. With creative financing, a borrower has been able to bring much less than 20% to closing by covering the missing part with a piggy-back home-equity type loan. There is a first mortgage covering the normal 80% and then a second mortgage/home-equity loan added to cover up to the rest of the purchase price. Falling home prices have squeezed even the best of borrowers, it seems.
A little later in the day, Bill Gross, manager of the world’s largest bond fund, said that the subprime mortgage problems are spreading to junk bonds. His comments are generally unique and simple and Tuesday’s comments are no exception. He wrote that borrowers and lenders may have bit off more than they can chew and even those who swallow their hot dogs whole are having a serious bout of indigestion. He emphasized that corporate lenders will feel a pinch from subprime housing defaults as well. One LBO, in the form of GM, was postponed, probably due to the higher cost of borrowing in the depressed junk bond market.
Our comments this evening are to point out the precarious nature of the aftermath of the housing bubble as it now exists. Prices have been dropping and all manner of credit is now being exposed. The stock market will have to pay attention to this news very soon if it hasn’t started already.
In other news, AAPL received a body blow from AT&T when it reported that not as many iPhones had signed up for service as Wall Street was expecting. AT&T said that in the first two days of launch about 146,000 iPhones buyers signed up for service but Goldman Sachs had projected sales of 700,000 iPhones in the first three days. AAPL dropped over 6% on that news as reality bites.
After the market closed on Tuesday, AMZN reported earnings had tripled which was better than estimates. In late trading, AMZN jumped about 20% on the news. This raises the question of how the company was able to deliver. The answer lies in the new promotion called Amazon Prime which charges “members” $79 a year to get free two day shipping with no minimum purchase required. There was some expectation that with the new Harry Potter book in release this month that AMZN will continue its success into the next quarter. [Skeptics, like we are, may wonder if everyone orders an $18 book,which is about half the cover price, with free shipping whether AMZN can really make any money but that’s just being so negative.]
As we write this the futures are up quite a bit, on the AMZN news most likely. The market has the right to bounce here but we need to see a drop that takes out some of last month’s support levels right around 13,670 in the Dow. At that time we will be more confident of our earlier call that the market is ready to go down. You did notice that the Dow had one close just above the 14K level and now it is struggling. More to come…
Earlier in the year, the company had expected a rebound by next year but is now looking out to 2009 for that rebound. The company stated that loss provisions and write-downs of securities of prime home-equity loans caused much of the problem in their earnings. The so called “piggy-back” loans that have allowed borrowers to avoid paying for mortgage insurance are partly responsible.
Normally, 20% down is required to avoid the mortgage insurance. With creative financing, a borrower has been able to bring much less than 20% to closing by covering the missing part with a piggy-back home-equity type loan. There is a first mortgage covering the normal 80% and then a second mortgage/home-equity loan added to cover up to the rest of the purchase price. Falling home prices have squeezed even the best of borrowers, it seems.
A little later in the day, Bill Gross, manager of the world’s largest bond fund, said that the subprime mortgage problems are spreading to junk bonds. His comments are generally unique and simple and Tuesday’s comments are no exception. He wrote that borrowers and lenders may have bit off more than they can chew and even those who swallow their hot dogs whole are having a serious bout of indigestion. He emphasized that corporate lenders will feel a pinch from subprime housing defaults as well. One LBO, in the form of GM, was postponed, probably due to the higher cost of borrowing in the depressed junk bond market.
Our comments this evening are to point out the precarious nature of the aftermath of the housing bubble as it now exists. Prices have been dropping and all manner of credit is now being exposed. The stock market will have to pay attention to this news very soon if it hasn’t started already.
In other news, AAPL received a body blow from AT&T when it reported that not as many iPhones had signed up for service as Wall Street was expecting. AT&T said that in the first two days of launch about 146,000 iPhones buyers signed up for service but Goldman Sachs had projected sales of 700,000 iPhones in the first three days. AAPL dropped over 6% on that news as reality bites.
After the market closed on Tuesday, AMZN reported earnings had tripled which was better than estimates. In late trading, AMZN jumped about 20% on the news. This raises the question of how the company was able to deliver. The answer lies in the new promotion called Amazon Prime which charges “members” $79 a year to get free two day shipping with no minimum purchase required. There was some expectation that with the new Harry Potter book in release this month that AMZN will continue its success into the next quarter. [Skeptics, like we are, may wonder if everyone orders an $18 book,which is about half the cover price, with free shipping whether AMZN can really make any money but that’s just being so negative.]
As we write this the futures are up quite a bit, on the AMZN news most likely. The market has the right to bounce here but we need to see a drop that takes out some of last month’s support levels right around 13,670 in the Dow. At that time we will be more confident of our earlier call that the market is ready to go down. You did notice that the Dow had one close just above the 14K level and now it is struggling. More to come…
Wednesday, July 18, 2007
Head Fake?
The typical fake out move on news happened once again. Apparently the news isn’t quite bad enough for the real sellers to find their way to their computers. With INTC disappointing its shareholders in Tuesday evening’s session, the stage was set on Wednesday morning to open sharply down. The difference this day was that the relief rally didn’t occur until very late in the day.
The market spent the majority of the day down on what would be considered heavier than normal volume. The move down was holding but not really pushing down like it should have over the course of the day. As we approached the last hour it looked like there might be another selloff but it didn’t materialize so the bulls came back in and bought going into the close. The Dow did manage to recover quite a bit of its earlier losses but still closed down about 50 points when all was said and done.
Since the market needs to play catch up with the late day move, we should see a little more upside going into Thursday but this week is options expiration so there may not be much. Usually the Wednesday of options expiration week gives a reversal from the prior week’s trading and this late day move just confuses the issue. Then, after the close, IBM announced earnings and gave traders an opportunity to bid that stock up so the market has some added incentive to keep the rally alive on Thursday morning.
There has been much news the last couple of days and we can’t begin to present all of it here this evening. We do want to mention that the credit markets are where most of the action seems to be. The stock market needs to pay some attention to what’s going on over in the credit world but for now it seems content to disregard that news. The big item was the announcement by Bear Stearns that it would not provide any more funding for its two subprime mortgage hedge funds we talked about here a few posts back. The announcement included remarks such as there isn’t much value in the fund assets.
The second big item in credit is that Moody’s is said to have started to look at the mortgage category just above subprime called Alt-A. Alt-A has a slightly better risk profile than subprime but worse than prime mortgages. Moody’s must be starting to consider downgrades of these types of assets which starts to get pretty close to the prime market where there really shouldn’t be any problems, right? Well, we aren’t so sure about that. But, still, the stock market disregards the problems in mortgage credit because…
Well, because Bernanke the head of the Federal Reserve says it won’t cause much of a dent in the overall economy. Yes, the market was listening to Bernanke on Wednesday like good followers always do. He was more confident about mild economic growth which would naturally translate to stable interest rates. The Treasury bond market was pretty strong but that may have been due to a flight to “quality” caused by the leakage over in mortgage credit. Or, it could have been due to the housing report that showed building permits “plunged” 7.5%.
The last item we wish to discuss is the CPI number that we saw this morning. We are not so interested in the actual number but with some of the underlying components, like owners’ equivalent rent or OER. In Wednesday’s WSJ on Page A4 there is an article entitled “Is Slip in Homeowner Costs a Trend?” This article discusses OER and how it affects the CPI/PPI numbers. This is something we have mentioned before in the context of the housing slump. If the price of houses falls and rents fall, there is a huge effect on the CPI since the OER makes up about a quarter of the index. This makes sense because housing does represent a large part of most household expenses. The question really is how it should be included in CPI/PPI. Well, we can’t answer that in the time we have tonight but we wanted to point out the article for your review.
Our position tonight is that we think the market is very close to a high but that the players want to actually have a Dow close over 14,000 so they can then rest on their…uh, laurels. The Dow continues to show strength even though the broader market is having a very difficult time. This action leads us to the conclusion that the market is one epiphany away from a strong down move. There are so many choices for the market to notice but so far, it hasn’t. We don’t think there is long to wait.
The market spent the majority of the day down on what would be considered heavier than normal volume. The move down was holding but not really pushing down like it should have over the course of the day. As we approached the last hour it looked like there might be another selloff but it didn’t materialize so the bulls came back in and bought going into the close. The Dow did manage to recover quite a bit of its earlier losses but still closed down about 50 points when all was said and done.
Since the market needs to play catch up with the late day move, we should see a little more upside going into Thursday but this week is options expiration so there may not be much. Usually the Wednesday of options expiration week gives a reversal from the prior week’s trading and this late day move just confuses the issue. Then, after the close, IBM announced earnings and gave traders an opportunity to bid that stock up so the market has some added incentive to keep the rally alive on Thursday morning.
There has been much news the last couple of days and we can’t begin to present all of it here this evening. We do want to mention that the credit markets are where most of the action seems to be. The stock market needs to pay some attention to what’s going on over in the credit world but for now it seems content to disregard that news. The big item was the announcement by Bear Stearns that it would not provide any more funding for its two subprime mortgage hedge funds we talked about here a few posts back. The announcement included remarks such as there isn’t much value in the fund assets.
The second big item in credit is that Moody’s is said to have started to look at the mortgage category just above subprime called Alt-A. Alt-A has a slightly better risk profile than subprime but worse than prime mortgages. Moody’s must be starting to consider downgrades of these types of assets which starts to get pretty close to the prime market where there really shouldn’t be any problems, right? Well, we aren’t so sure about that. But, still, the stock market disregards the problems in mortgage credit because…
Well, because Bernanke the head of the Federal Reserve says it won’t cause much of a dent in the overall economy. Yes, the market was listening to Bernanke on Wednesday like good followers always do. He was more confident about mild economic growth which would naturally translate to stable interest rates. The Treasury bond market was pretty strong but that may have been due to a flight to “quality” caused by the leakage over in mortgage credit. Or, it could have been due to the housing report that showed building permits “plunged” 7.5%.
The last item we wish to discuss is the CPI number that we saw this morning. We are not so interested in the actual number but with some of the underlying components, like owners’ equivalent rent or OER. In Wednesday’s WSJ on Page A4 there is an article entitled “Is Slip in Homeowner Costs a Trend?” This article discusses OER and how it affects the CPI/PPI numbers. This is something we have mentioned before in the context of the housing slump. If the price of houses falls and rents fall, there is a huge effect on the CPI since the OER makes up about a quarter of the index. This makes sense because housing does represent a large part of most household expenses. The question really is how it should be included in CPI/PPI. Well, we can’t answer that in the time we have tonight but we wanted to point out the article for your review.
Our position tonight is that we think the market is very close to a high but that the players want to actually have a Dow close over 14,000 so they can then rest on their…uh, laurels. The Dow continues to show strength even though the broader market is having a very difficult time. This action leads us to the conclusion that the market is one epiphany away from a strong down move. There are so many choices for the market to notice but so far, it hasn’t. We don’t think there is long to wait.
Tuesday, July 17, 2007
INTC Reports
Tuesday evening INTC reported earnings that were mostly in line with estimates but the market seemed to focus on the lower profit margin. In any event, the stock took a bit of a tumble in the afterhours market which should fit in nicely with the other indicators that a top is being put into place...and we might add Finally.
With the Dow moving up seemingly all by itself, the internal structure of the market is just plain poor. The volume has been weak and the breadth has been weak. These are signs that the end is near for the bull.
We think a technical top is now in place with the Dow giving the world the taste of victory at the 14,000 level which is difficult for us to believe let alone swallow. It was just a nice bow tied on at the top of the market.
We will stay with our point of view that the market is now ready to go down. With the caveat that the market can do whatever it wants for a little while, it is telling us that the bull is tired and ready for a rest.
Much more in the real Wednesday Update tomorrow.
With the Dow moving up seemingly all by itself, the internal structure of the market is just plain poor. The volume has been weak and the breadth has been weak. These are signs that the end is near for the bull.
We think a technical top is now in place with the Dow giving the world the taste of victory at the 14,000 level which is difficult for us to believe let alone swallow. It was just a nice bow tied on at the top of the market.
We will stay with our point of view that the market is now ready to go down. With the caveat that the market can do whatever it wants for a little while, it is telling us that the bull is tired and ready for a rest.
Much more in the real Wednesday Update tomorrow.
Monday, July 16, 2007
Technical Top in Place?
Did the Fat Lady sing or was she just eating at IHOP when she heard the news that Applebees was being bought out by IHOP. Maybe she was singing for joy at the prospect.
In any event, the stock market looks like it is sending another big technical signal with the Dow up to a new record high on what is really a down day. The Dow managed to stay positive on the day but both the NASDAQ and the SP500 were down. Then there was market breadth which was negative with advancers being eclipsed by decliners 1048 to 2226 (according to the WSJ). NYSE Volume was light at just over 1.3 billion shares and only 466 million in advancing stocks compared with 883 million in declining stocks.
The Dow was the strongest of the indexes in the early going as well as later in the day. Look specifically at the action right after 1 o'clock EDT. The stock market left a new high with some business on the downside.
With the full weight of the evidence going to either non-confirmations of the Dow’s new record high or in the light volume department, the technical evidence is tilted in the bearish direction this evening.
We have been wrong before so we are being a little cautious this evening but we are mostly convinced that Monday’s action warrants a more bearish stance. The pattern in the move is consistent with a top, probably a major one, but anything can happen and probably will. Tonight, our neutral position must move back to bearish in the stock market. If we are wrong, the market will immediately let us know. If we are right, the market will be showing us more technical and fundamental reasons to be bearish, with the greatest probability that the market will record some down prices.
Just as if we needed some fundamental news to test our position, in a coincidental matter of timing, the second calendar quarter has just ended and we are starting to see corporate earnings’ announcements. There are some big companies reporting and we see these news items as an opportunity for the market to react negatively if our position is correct. We would say that the market has priced in “perfection” and the actual reality is somewhat less than that. We usually say that it doesn’t matter if the news is good or bad, what matters is how stocks react to the news. We would say the time has come to react badly in terms of price. We never did believe in coincidence, did you?
Our intention is to wait until Wednesday evening to post again but if something dramatic happens on Tuesday we will be back tomorrow evening. We think anything is possible here with the stock market. Expecting a drop in the market doesn’t seem to be a past time of the public, especially with the Dow almost at 14,000. Round numbers are special and Friday the 13th is a special day; so far, it is the high for both the NASDAQ and the SP 500. Let’s see if that changes.
In any event, the stock market looks like it is sending another big technical signal with the Dow up to a new record high on what is really a down day. The Dow managed to stay positive on the day but both the NASDAQ and the SP500 were down. Then there was market breadth which was negative with advancers being eclipsed by decliners 1048 to 2226 (according to the WSJ). NYSE Volume was light at just over 1.3 billion shares and only 466 million in advancing stocks compared with 883 million in declining stocks.
The Dow was the strongest of the indexes in the early going as well as later in the day. Look specifically at the action right after 1 o'clock EDT. The stock market left a new high with some business on the downside.
With the full weight of the evidence going to either non-confirmations of the Dow’s new record high or in the light volume department, the technical evidence is tilted in the bearish direction this evening.
We have been wrong before so we are being a little cautious this evening but we are mostly convinced that Monday’s action warrants a more bearish stance. The pattern in the move is consistent with a top, probably a major one, but anything can happen and probably will. Tonight, our neutral position must move back to bearish in the stock market. If we are wrong, the market will immediately let us know. If we are right, the market will be showing us more technical and fundamental reasons to be bearish, with the greatest probability that the market will record some down prices.
Just as if we needed some fundamental news to test our position, in a coincidental matter of timing, the second calendar quarter has just ended and we are starting to see corporate earnings’ announcements. There are some big companies reporting and we see these news items as an opportunity for the market to react negatively if our position is correct. We would say that the market has priced in “perfection” and the actual reality is somewhat less than that. We usually say that it doesn’t matter if the news is good or bad, what matters is how stocks react to the news. We would say the time has come to react badly in terms of price. We never did believe in coincidence, did you?
Our intention is to wait until Wednesday evening to post again but if something dramatic happens on Tuesday we will be back tomorrow evening. We think anything is possible here with the stock market. Expecting a drop in the market doesn’t seem to be a past time of the public, especially with the Dow almost at 14,000. Round numbers are special and Friday the 13th is a special day; so far, it is the high for both the NASDAQ and the SP 500. Let’s see if that changes.
Thursday, July 12, 2007
Brand New Record Dow High
Just a short post this evening to tell you what you already know: the Dow hit a record high on July 12, 2007. We have been calling for new highs for a while now and this rally gives us something to watch for signs of termination--the market has now proceeded to move to new highs but they should be terminal.
The rally seems to be what we want to see, higher prices on modest volume. Buyers were there but sellers were holding back. 5 Day upside volume was not very high due to that large volume down day we saw just a couple of days ago. Plus, our momentum indicators didn't show much improvement which is not a bullish indication either.
This is a perfect situation for a top, technically and fundamentally, and we may, in fact, be just a day or so away. We will make a statement as soon as we feel the market is ready to go down. We may make it during the day so if you see a pop in the early going on one of the next few days or in the next few weeks, you may want to check in here to get your confirmation :-) (Then again, work might get in the way and we will have to wait until the normal post time.)
We wanted to alert you to the article that Erick mentioned in yesterday's comment section. We took a look at it and it is definitely worth a read so we are adding the site to the front page of the blog. Thanks, Erick.
"The greatest economic boom ever" from CNN Money.com FORTUNE Global 500
The rally seems to be what we want to see, higher prices on modest volume. Buyers were there but sellers were holding back. 5 Day upside volume was not very high due to that large volume down day we saw just a couple of days ago. Plus, our momentum indicators didn't show much improvement which is not a bullish indication either.
This is a perfect situation for a top, technically and fundamentally, and we may, in fact, be just a day or so away. We will make a statement as soon as we feel the market is ready to go down. We may make it during the day so if you see a pop in the early going on one of the next few days or in the next few weeks, you may want to check in here to get your confirmation :-) (Then again, work might get in the way and we will have to wait until the normal post time.)
We wanted to alert you to the article that Erick mentioned in yesterday's comment section. We took a look at it and it is definitely worth a read so we are adding the site to the front page of the blog. Thanks, Erick.
"The greatest economic boom ever" from CNN Money.com FORTUNE Global 500
Wednesday, July 11, 2007
Last Big Bounce Coming
Market Action:
On Tuesday, major bad news swirled around Wall Street and the sellers managed to do very little in the way of damage to the major averages. True, some stocks were hurt, namely the home builders, but for the most part the damage was, well, contained.
Today, Wednesday, as in the Wednesday Update, the market sort of shrugged off Tuesday’s news related sell off and tried to mount a rally, which it did. We normally call this type of activity, “whistling past the graveyard”, you just distract yourself from looking at the headstones by whistling, much like the buyers are doing in the market. They can see the bad news should affect their stock positions but they keep on buying anyway.
In recent years, the bulls have managed to move the market up enough by their whistling, that others notice the pleasant sound of prices moving up and buy stocks just because stocks are now going up and who’s to argue with that?!? Ok, enough with the metaphor…
In after hours’ news this evening, MOT (Motorola) gave the market a bit of news that it has been waiting for a long time—it expects its mobile device business to post a loss for 2007. This news was preceded by a rumor that the Chief Executive would resign and the buyers flocked in to push MOT up 3% during the day before closing up about 2%. You all know that the market did and will disregard this news because it is specific to MOT. They said that cell phone sales in Europe and Asia were weak—that business wouldn’t affect other companies, would it? (oh, the sarcasm is thick)
Technical Indicators:
Since we spent some time on the news in yesterday’s post (see that below if you haven’t already), we will spend more time in this post on the technical indicators. The first is our main momentum indicator which barely dipped at all after yesterday’s action and then jumped on Wednesday’s action. This is typical in a thinly traded market that is nearing a turning point.
Our position is that the market, as measured by the Dow, will try to push strongly to new highs but then someone will turn out the lights and the buyers will be expended. When will this be? Well, that is for another day but the technicals indicate the date isn’t far off anymore. Does this sound familiar to anyone?
The tight trading action of the past month or so has given the market time to rest, getting ready for a small surge to end this pattern. With the news being so utterly pessimistic and the market rallying, the bulls have again decided “to boldly go where no one has ever gone”. Are you familiar with Star Trek? There’s a book, a satire, called the “Hitch Hiker’s Guide to the Universe”, the first in a four part trilogy (we can’t make this stuff up), which says, “to boldly split infinitives”. Do any of you remember your high school English teacher telling you that “to be” is an infinitive and really should be considered one word—and of course never to put something in between, such as “to always be”. That would be splitting infinitives…but of course we digress. Back to the bulls…who have decided to buy on this last leg of the rally.
They really don’t think this is the end of the rally because people don’t believe stock prices or real estate prices can actually go down. Maybe the bond market can go down but surely not the stock market.
Answers:
Erick left us all a few comments in a prior post which we thought deserves a response here. First, he mentioned that it’s funny how $70 oil equates to higher stock prices. Well, this is a popular misconception in the current environment. For years, the hint of oil increasing was enough to send stock prices down, except, that only lasted a day or so. The world has seen massive excess liquidity and the extra money has been fueling increasing prices in commodities, bonds, and stocks alike. Where did the excess liquidity come from? Well, the simple answer is Credit, starting with the US Budget Deficits being financed by foreigners.
Next, he asked if underlying fundamentals have stabilized over the past few years when the stock market has been moving sideways and mentioned PE as a place to start. To us, the credit has been destabilizing and will continue to be that way. The market doesn’t really see it the way we do, at least, at the moment it doesn’t. Our position is that companies have improved their balance sheets by virtue of strong credit expansion in both the public sector and the private sector. As this debt needs to be paid down, expansion does not happen.
Erick’s last comment has to do with how the markets trade against each other. Our only real comment here is that the price of investment vehicles have gone up over the past 25 years and now the baby boomers want to retire and pull their “money” out.
Other than that, bonds really should move up with stocks because lower interest rates should drive stocks up. As rates get pushed up with a deteriorating bond market, stocks should be feeling some pressure. The bond market has not moved much one way or the other for a few years so what gives? Well, if the economy falters, it is most likely that the US Treasury market will be considered a flight to safety or “quality”. The corporate bond market will probably suffer greatly. Plus, the mortgage market is in the process of readjusting to correct prices—that has a long ways to go in our opinion.
One Last Item:
We saw a Wall Street blog this week that mentioned something curious with reference to last week’s employment report. It said that the US employment rate isn’t going down due to the housing slump because most of the workers being laid off are not American citizens. Their elimination from payrolls doesn’t affect the reported job numbers. We thought we should share.
On Tuesday, major bad news swirled around Wall Street and the sellers managed to do very little in the way of damage to the major averages. True, some stocks were hurt, namely the home builders, but for the most part the damage was, well, contained.
Today, Wednesday, as in the Wednesday Update, the market sort of shrugged off Tuesday’s news related sell off and tried to mount a rally, which it did. We normally call this type of activity, “whistling past the graveyard”, you just distract yourself from looking at the headstones by whistling, much like the buyers are doing in the market. They can see the bad news should affect their stock positions but they keep on buying anyway.
In recent years, the bulls have managed to move the market up enough by their whistling, that others notice the pleasant sound of prices moving up and buy stocks just because stocks are now going up and who’s to argue with that?!? Ok, enough with the metaphor…
In after hours’ news this evening, MOT (Motorola) gave the market a bit of news that it has been waiting for a long time—it expects its mobile device business to post a loss for 2007. This news was preceded by a rumor that the Chief Executive would resign and the buyers flocked in to push MOT up 3% during the day before closing up about 2%. You all know that the market did and will disregard this news because it is specific to MOT. They said that cell phone sales in Europe and Asia were weak—that business wouldn’t affect other companies, would it? (oh, the sarcasm is thick)
Technical Indicators:
Since we spent some time on the news in yesterday’s post (see that below if you haven’t already), we will spend more time in this post on the technical indicators. The first is our main momentum indicator which barely dipped at all after yesterday’s action and then jumped on Wednesday’s action. This is typical in a thinly traded market that is nearing a turning point.
Our position is that the market, as measured by the Dow, will try to push strongly to new highs but then someone will turn out the lights and the buyers will be expended. When will this be? Well, that is for another day but the technicals indicate the date isn’t far off anymore. Does this sound familiar to anyone?
The tight trading action of the past month or so has given the market time to rest, getting ready for a small surge to end this pattern. With the news being so utterly pessimistic and the market rallying, the bulls have again decided “to boldly go where no one has ever gone”. Are you familiar with Star Trek? There’s a book, a satire, called the “Hitch Hiker’s Guide to the Universe”, the first in a four part trilogy (we can’t make this stuff up), which says, “to boldly split infinitives”. Do any of you remember your high school English teacher telling you that “to be” is an infinitive and really should be considered one word—and of course never to put something in between, such as “to always be”. That would be splitting infinitives…but of course we digress. Back to the bulls…who have decided to buy on this last leg of the rally.
They really don’t think this is the end of the rally because people don’t believe stock prices or real estate prices can actually go down. Maybe the bond market can go down but surely not the stock market.
Answers:
Erick left us all a few comments in a prior post which we thought deserves a response here. First, he mentioned that it’s funny how $70 oil equates to higher stock prices. Well, this is a popular misconception in the current environment. For years, the hint of oil increasing was enough to send stock prices down, except, that only lasted a day or so. The world has seen massive excess liquidity and the extra money has been fueling increasing prices in commodities, bonds, and stocks alike. Where did the excess liquidity come from? Well, the simple answer is Credit, starting with the US Budget Deficits being financed by foreigners.
Next, he asked if underlying fundamentals have stabilized over the past few years when the stock market has been moving sideways and mentioned PE as a place to start. To us, the credit has been destabilizing and will continue to be that way. The market doesn’t really see it the way we do, at least, at the moment it doesn’t. Our position is that companies have improved their balance sheets by virtue of strong credit expansion in both the public sector and the private sector. As this debt needs to be paid down, expansion does not happen.
Erick’s last comment has to do with how the markets trade against each other. Our only real comment here is that the price of investment vehicles have gone up over the past 25 years and now the baby boomers want to retire and pull their “money” out.
Other than that, bonds really should move up with stocks because lower interest rates should drive stocks up. As rates get pushed up with a deteriorating bond market, stocks should be feeling some pressure. The bond market has not moved much one way or the other for a few years so what gives? Well, if the economy falters, it is most likely that the US Treasury market will be considered a flight to safety or “quality”. The corporate bond market will probably suffer greatly. Plus, the mortgage market is in the process of readjusting to correct prices—that has a long ways to go in our opinion.
One Last Item:
We saw a Wall Street blog this week that mentioned something curious with reference to last week’s employment report. It said that the US employment rate isn’t going down due to the housing slump because most of the workers being laid off are not American citizens. Their elimination from payrolls doesn’t affect the reported job numbers. We thought we should share.
Tuesday, July 10, 2007
Subprime Heats Up Again
With the Dow’s drop of 148 on Tuesday together with much news, we thought we should at least make a few comments this evening. First of all, 148 points doesn’t get us too excited about the bear returning. Secondly, we still think there needs to be a new high in the Dow before we see a downturn. Third, with so much news on Tuesday, the likelihood of a turn is pretty low.
The news list seems to be fairly long and it starts with early earnings returns. As the quarter is now complete, earnings have started to pour in. The early reports include AA (Alcoa) and they announced a little lower revenue than expected but turned in earnings that matched estimates. In the early going, AA didn’t seem to suffer much on price.
Home Depot (HD) cut its 2007 outlook saying that the continued weakness in housing was going to hurt its annual earnings. Their estimate dropped about 15% but the price of the stock was up on the day, ok not by much but the market was down 148 and HD was one of the excuses for the drop. Sears also slashed its estimates in half but the real news was over in the real estate world…
DR Horton said orders fell over 40% with the dollar value dropping 47% and that this would lead to their first fiscal quarterly loss since it listed on the NYSE back in 1995. Chairman Donald Horton said that “Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging.” The company indicated that California saw orders fall 62% and that it will take significant asset impairments in the next few quarters.
And, if that wasn’t enough, the news about the bond rating agency, S&P, was salt in the wound. We have reported here and you probably have read in other places about the subprime problems as it relates to the securities that back the mortgages. Today S&P announced that it would be looking at the debt instruments used for these risky loans. This is a big deal because they are the ones who can Downgrade those securities. According to an article in CNN Money, the rating service said it would put many securities backed by subprime mortgages on “credit watch negative” and that it expected most of them to be downgraded soon because of high delinquency and foreclosure rates. Moody’s, another rating service, made similar announcements. The news continues to deteriorate in the housing market, even though so many are calling for a bottom.
Probably the biggest item on Tuesday was the Fed chairman’s speech. Bernanke was speaking to the National Bureau of Economic Research and did mention inflation in his speech. He was basically defending the Fed’s position that relies mainly on “core” inflation rather than total inflation. He said, “Inflation is less responsive than it used to be to changes in oil prices and other supply shocks.” Ok, that might be if you look strictly at the numbers. Our question is, “Who is calculating the numbers?” Are the inflation numbers accurately reflecting inflation or not? [We do have some bias towards deflation over the coming years but for now we think the inflation picture is muddy due to the way the numbers are massaged.] At any rate, the market seemed not to like his comments and closed on the low of the day.
This report from Bernanke gave the dollar some cold shivers as it traded a record low against the Euro and oil and gold moved up on that news. The bond market, Treasuries only, liked the housing news and put in a big up day.
We still need to be patient as this decline on Tuesday does Not feel very strong, even though there were some ugly things going on in housing related issues. News related declines rarely will follow through. We do think that the next move will be up due to the fairly weak nature of the decline on Tuesday.
Our thanks to CZ for his birthday wish. We appreciate the kind words, my friend.
The news list seems to be fairly long and it starts with early earnings returns. As the quarter is now complete, earnings have started to pour in. The early reports include AA (Alcoa) and they announced a little lower revenue than expected but turned in earnings that matched estimates. In the early going, AA didn’t seem to suffer much on price.
Home Depot (HD) cut its 2007 outlook saying that the continued weakness in housing was going to hurt its annual earnings. Their estimate dropped about 15% but the price of the stock was up on the day, ok not by much but the market was down 148 and HD was one of the excuses for the drop. Sears also slashed its estimates in half but the real news was over in the real estate world…
DR Horton said orders fell over 40% with the dollar value dropping 47% and that this would lead to their first fiscal quarterly loss since it listed on the NYSE back in 1995. Chairman Donald Horton said that “Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging.” The company indicated that California saw orders fall 62% and that it will take significant asset impairments in the next few quarters.
And, if that wasn’t enough, the news about the bond rating agency, S&P, was salt in the wound. We have reported here and you probably have read in other places about the subprime problems as it relates to the securities that back the mortgages. Today S&P announced that it would be looking at the debt instruments used for these risky loans. This is a big deal because they are the ones who can Downgrade those securities. According to an article in CNN Money, the rating service said it would put many securities backed by subprime mortgages on “credit watch negative” and that it expected most of them to be downgraded soon because of high delinquency and foreclosure rates. Moody’s, another rating service, made similar announcements. The news continues to deteriorate in the housing market, even though so many are calling for a bottom.
Probably the biggest item on Tuesday was the Fed chairman’s speech. Bernanke was speaking to the National Bureau of Economic Research and did mention inflation in his speech. He was basically defending the Fed’s position that relies mainly on “core” inflation rather than total inflation. He said, “Inflation is less responsive than it used to be to changes in oil prices and other supply shocks.” Ok, that might be if you look strictly at the numbers. Our question is, “Who is calculating the numbers?” Are the inflation numbers accurately reflecting inflation or not? [We do have some bias towards deflation over the coming years but for now we think the inflation picture is muddy due to the way the numbers are massaged.] At any rate, the market seemed not to like his comments and closed on the low of the day.
This report from Bernanke gave the dollar some cold shivers as it traded a record low against the Euro and oil and gold moved up on that news. The bond market, Treasuries only, liked the housing news and put in a big up day.
We still need to be patient as this decline on Tuesday does Not feel very strong, even though there were some ugly things going on in housing related issues. News related declines rarely will follow through. We do think that the next move will be up due to the fairly weak nature of the decline on Tuesday.
Our thanks to CZ for his birthday wish. We appreciate the kind words, my friend.
Thursday, July 05, 2007
Slow Week
Due to the July 4th holiday, trading has been subdued and we will not post this week. We will be back next week.
Wednesday, June 27, 2007
Economy Showing Signs of Fatigue
Top Line:
The stock market showed some strength on Wednesday and should now be starting a pretty good up run into the early part of July. After we see some new highs in the Dow, we will be looking for a clear entry for getting short or getting out.
Market Action:
Since Friday morning, coinciding with the Blackstone IPO, the market has shown signs of bearishness. The Dow traded right at 13,550 on Friday morning and Wednesday morning (this morning) it traded down to near 13,250 which would be significant support. Monday and Tuesday had to shake the bulls’ confidence as the market was strong going into the lunch hour but gave way to selling going into the close. Bottom line is that 300 points isn’t really enough to scare any bull.
Economy:
The economy has shown no signs that the stock market is correct in its quest for higher prices. Wednesday morning, the durable goods orders, down 2.8%, were “surprisingly weak” according to one article we read on the subject. The durable goods orders are a fairly volatile reading but they can go down.
The housing sales were not pretty (our words) this last month either with new home sales down1.6% in May and prices were down some, too. You may recall that the April numbers were up about 12.5%, with April being the lone strength this year. Mortgage rates have risen about a half a point which is hampering sales a bit, too. Existing home sales were down as well with an annual rate of less than 6 million units and prices down year over year.
Consumer confidence, developed to measure the mode of shoppers, took a small dip last month to the lowest level since last August. This number still seems high but we don’t think it will be long before this number moves down strongly.
All in all, the economy is putting in a weak performance, not that you could tell by looking at the stock market.
The Fed:
On Wednesday, the Fed began yet another FOMC meeting to discuss the economy and the future course of interest rates. Do you remember the position of the Update? Well, let us remind you.
We have maintained a stance for some time that the Fed will no longer raise rates and will actually start lowering rates probably later this year. We say this due to the signals given by the economy but more fundamentally from the subprime mortgage situation. We see the Fed saying they are going to be tough on inflation tomorrow (Thursday) but that strong rhetoric will get a drastic change when the consumer decides to pack it in.
We believe that the consumer led recession is just now being felt across the economy. The ATM’s that people live in have gone through a metamorphosis (should we say they have morphed, that would certainly be easier) from the ATM to the debt repayment plan and people are not very happy about it.
Bill Gross published an article that is fully in line with our thinking, that being the subprime situation is still not contained. Mr. Gross presents his points in an entertaining fashion which you should enjoy. Please see Bill Gross’s July Investment Outlook at this site:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm
Opinion/Analysis:
As we come to the end of the quarter/month, we should finally be seeing a rally that will extend through the Fourth of July, maybe even a little longer. This move should be the last such move that the market can muster. As this up move matures, we will offer our analysis and if it ever gets to a tipping point we may just have to go back to daily posts.
The stock market showed some strength on Wednesday and should now be starting a pretty good up run into the early part of July. After we see some new highs in the Dow, we will be looking for a clear entry for getting short or getting out.
Market Action:
Since Friday morning, coinciding with the Blackstone IPO, the market has shown signs of bearishness. The Dow traded right at 13,550 on Friday morning and Wednesday morning (this morning) it traded down to near 13,250 which would be significant support. Monday and Tuesday had to shake the bulls’ confidence as the market was strong going into the lunch hour but gave way to selling going into the close. Bottom line is that 300 points isn’t really enough to scare any bull.
Economy:
The economy has shown no signs that the stock market is correct in its quest for higher prices. Wednesday morning, the durable goods orders, down 2.8%, were “surprisingly weak” according to one article we read on the subject. The durable goods orders are a fairly volatile reading but they can go down.
The housing sales were not pretty (our words) this last month either with new home sales down1.6% in May and prices were down some, too. You may recall that the April numbers were up about 12.5%, with April being the lone strength this year. Mortgage rates have risen about a half a point which is hampering sales a bit, too. Existing home sales were down as well with an annual rate of less than 6 million units and prices down year over year.
Consumer confidence, developed to measure the mode of shoppers, took a small dip last month to the lowest level since last August. This number still seems high but we don’t think it will be long before this number moves down strongly.
All in all, the economy is putting in a weak performance, not that you could tell by looking at the stock market.
The Fed:
On Wednesday, the Fed began yet another FOMC meeting to discuss the economy and the future course of interest rates. Do you remember the position of the Update? Well, let us remind you.
We have maintained a stance for some time that the Fed will no longer raise rates and will actually start lowering rates probably later this year. We say this due to the signals given by the economy but more fundamentally from the subprime mortgage situation. We see the Fed saying they are going to be tough on inflation tomorrow (Thursday) but that strong rhetoric will get a drastic change when the consumer decides to pack it in.
We believe that the consumer led recession is just now being felt across the economy. The ATM’s that people live in have gone through a metamorphosis (should we say they have morphed, that would certainly be easier) from the ATM to the debt repayment plan and people are not very happy about it.
Bill Gross published an article that is fully in line with our thinking, that being the subprime situation is still not contained. Mr. Gross presents his points in an entertaining fashion which you should enjoy. Please see Bill Gross’s July Investment Outlook at this site:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm
Opinion/Analysis:
As we come to the end of the quarter/month, we should finally be seeing a rally that will extend through the Fourth of July, maybe even a little longer. This move should be the last such move that the market can muster. As this up move matures, we will offer our analysis and if it ever gets to a tipping point we may just have to go back to daily posts.
Sunday, June 24, 2007
A Rare Down Friday
Just a quick post this evening due to the 185 point loss the Dow suffered last Friday. Over the last 13 weeks, Fridays have seen up days so just a down day would have brought some questions with it; but, down 185 starts to give you a sense of unease. The market has enjoyed these up Fridays in the past because Mondays have generally brought some form of buyout news.
With this type of down move, it is the Update’s responsibility to let you know if there is anything more sinister going on. Well, we don’t think so at the present time. As we write this evening, the futures are making a powerful recovery and the Asian markets are not down much.
As we have been saying, we think the Dow will eventually break the June 4th high created right after the May jobs’ report was released. As we said then, there is a slight chance that the June 4th high is the top but we don’t think that is possible given the strength seen in the NASDAQ indexes after that date.
One thing about the stock market, the big Blackstone IPO generated much enthusiasm, at least for that company. We are no less than shocked that this IPO garnered such a huge amount of cash. These are the types of things that cause markets to end their up moves.
Our position continues to be that we are close to a top but not quite there. If we see the Dow make a new high above June 4th we will start to consider the possibility of a top. That event should be related to a weak move in the broader markets but it is not necessarily required. As always, if anything significant happens we will report on it here, otherwise we will be here every Wednesday evening until something the bear really comes back. That means Thursday mornings will bring you something to read other than your emails.
There are some big news events this week, not the least of which is the FOMC meeting taking place on Wednesday and Thursday. We do not expect any interest changes from them this week but we guarantee much hype over the possibilities. Yeah. The real news continues to be the mortgage market with more and more fear about the Bear Stearns funds that are trying to actually sell these illiquid assets.
Meanwhile, this week brings us the monthly home sales, existing home sales on Monday and new home sales on Tuesday. These are the items we will be paying close attention to.
With this type of down move, it is the Update’s responsibility to let you know if there is anything more sinister going on. Well, we don’t think so at the present time. As we write this evening, the futures are making a powerful recovery and the Asian markets are not down much.
As we have been saying, we think the Dow will eventually break the June 4th high created right after the May jobs’ report was released. As we said then, there is a slight chance that the June 4th high is the top but we don’t think that is possible given the strength seen in the NASDAQ indexes after that date.
One thing about the stock market, the big Blackstone IPO generated much enthusiasm, at least for that company. We are no less than shocked that this IPO garnered such a huge amount of cash. These are the types of things that cause markets to end their up moves.
Our position continues to be that we are close to a top but not quite there. If we see the Dow make a new high above June 4th we will start to consider the possibility of a top. That event should be related to a weak move in the broader markets but it is not necessarily required. As always, if anything significant happens we will report on it here, otherwise we will be here every Wednesday evening until something the bear really comes back. That means Thursday mornings will bring you something to read other than your emails.
There are some big news events this week, not the least of which is the FOMC meeting taking place on Wednesday and Thursday. We do not expect any interest changes from them this week but we guarantee much hype over the possibilities. Yeah. The real news continues to be the mortgage market with more and more fear about the Bear Stearns funds that are trying to actually sell these illiquid assets.
Meanwhile, this week brings us the monthly home sales, existing home sales on Monday and new home sales on Tuesday. These are the items we will be paying close attention to.
Wednesday, June 20, 2007
Subprime Problems Return
Market Action:
Here we are, with the Dow down almost 150 on Wednesday. This follows a couple of days that could have been substituted by a hibernating bear; sorry for the confusing metaphor but…the market has been very dull until Wednesday’s afternoon trading. After last week Friday’s CPI news, the market did jump out of the blocks and traded a bunch of shares, partly due to options expiration (quad witch again).
Bear Stearns Auction:
Probably the biggest news of the week, in our opinion, is the blow up of two of Bear Stearns’ real estate hedge funds. Not that we are surprised that a real estate fund might be having trouble, it’s just the Way it’s trouble is being handled. We feel the need to spend some time on this topic this evening due to the significance both to the economy and to our position on the subject.
Apparently, Merrill Lynch has seized some of the funds’ assets and is trying to sell them to get themselves off the risk. According to a WSJ article, Merrill Lynch circulated “a list of about $850 million of the mostly highly-rated complex securities used as collateral for the” funds.
In Wednesday’s WSJ, a front page article on the subject (highly recommended reading) noted that the funds had $9 billion in loans which the funds’ managers were trying to get others (Goldman Sachs and Bank of America) to take over those loans. The article says that a few weeks ago, these two funds had assets of $20 billion, “most in complex securities made up of bonds backed by subprime mortgages”.
According to the article, “In recent weeks, however, the firm’s [funds] have been besieged by investors and lenders trying to recover their money as the value of the funds’ underlying bonds fell sharply.” This was after one of the funds “reported that its value fell 6.75% in April after the fund’s bets on the mortgage market went wrong. Two weeks later, it put the loss at 18%, spooking already-nervous investors and creditors and sending many of them running for the exits.”
Now, here is where the story gets interesting, and scary we might add.
The article continues, “Unlike stocks and Treasury bonds, whose prices are continually quoted and easily obtained, many of these derivative instruments trade infrequently and don’t have clear market prices. To come up with market values for these investments—a process known as ‘marking’ to market—investment funds often rely on their own valuation models.”
And, “As of March 31, the Enhanced Leverage fund had $638 million in investor capital and at least $6 billion in borrowings. It used the money to make $11.5 billion in bullish bets and $4.5 billion in bearish bets…Its sister fund had $925 million in investor money, and made $9.7 billion in bullish bets and $4 billion in bearish bets.”
Did you read that right? So, the two funds had roughly $1.5 billion in capital and nearly $30 billion in assets. That’s a 5% capital ratio, borrowing $20 for every $1 it had. These assets are valued based on their own valuation models, not what the market might have considered the value of the assets.
Near the end of the article is a quote from Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago, “No one in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates.”
Enter Merrill Lynch, trying to sell $850 million of their assets. Merrill said that anyone could bid on these assets at an auction that was to take place after the close on Wednesday.
We don’t need to go into the types of assets that were on the block, like CDO’s squareds, but suffice it to say that these securities are fairly complicated. A quote from Mark Adelson, who is a managing director of fixed income research at Nomura Securities, in the online WSJ this evening says that, “ CDO squareds are complicated things, and even the smartest guys can’t figure out what to bid on them in one day.”
These are clear problems in the finance world but the reason for their problems goes back to the original mortgages granted to people who Should Not have been loaned this money. Real people are getting hurt because of these exotic mortgages and underwriting practices.
Opinion/Analysis:
Wednesday’s decline in the stock market seemed like enough to declare a small victory for the bears but we certainly don’t see it that way. There continues to be the smallest possibility that the June 4th Dow highs can hold but we don’t have much confidence in that at the moment, especially since the NASDAQ indexes have made new highs since then. The several indexes we follow are not tracking with each other at the moment and for the time being we think it would be best to stand aside.
If we notice something that contradicts this position over the coming weeks we will immediately identify it here but, in the mean time, we plan to post only on Wednesday evenings and at other times of interest.
You may want to check out the True Contrarian at the link to the left. He seems to be posting once a week again.
As always, your comments are welcome. We know that the market is close to turning over but until it does, we need to stay to this weekly format.
Here we are, with the Dow down almost 150 on Wednesday. This follows a couple of days that could have been substituted by a hibernating bear; sorry for the confusing metaphor but…the market has been very dull until Wednesday’s afternoon trading. After last week Friday’s CPI news, the market did jump out of the blocks and traded a bunch of shares, partly due to options expiration (quad witch again).
Bear Stearns Auction:
Probably the biggest news of the week, in our opinion, is the blow up of two of Bear Stearns’ real estate hedge funds. Not that we are surprised that a real estate fund might be having trouble, it’s just the Way it’s trouble is being handled. We feel the need to spend some time on this topic this evening due to the significance both to the economy and to our position on the subject.
Apparently, Merrill Lynch has seized some of the funds’ assets and is trying to sell them to get themselves off the risk. According to a WSJ article, Merrill Lynch circulated “a list of about $850 million of the mostly highly-rated complex securities used as collateral for the” funds.
In Wednesday’s WSJ, a front page article on the subject (highly recommended reading) noted that the funds had $9 billion in loans which the funds’ managers were trying to get others (Goldman Sachs and Bank of America) to take over those loans. The article says that a few weeks ago, these two funds had assets of $20 billion, “most in complex securities made up of bonds backed by subprime mortgages”.
According to the article, “In recent weeks, however, the firm’s [funds] have been besieged by investors and lenders trying to recover their money as the value of the funds’ underlying bonds fell sharply.” This was after one of the funds “reported that its value fell 6.75% in April after the fund’s bets on the mortgage market went wrong. Two weeks later, it put the loss at 18%, spooking already-nervous investors and creditors and sending many of them running for the exits.”
Now, here is where the story gets interesting, and scary we might add.
The article continues, “Unlike stocks and Treasury bonds, whose prices are continually quoted and easily obtained, many of these derivative instruments trade infrequently and don’t have clear market prices. To come up with market values for these investments—a process known as ‘marking’ to market—investment funds often rely on their own valuation models.”
And, “As of March 31, the Enhanced Leverage fund had $638 million in investor capital and at least $6 billion in borrowings. It used the money to make $11.5 billion in bullish bets and $4.5 billion in bearish bets…Its sister fund had $925 million in investor money, and made $9.7 billion in bullish bets and $4 billion in bearish bets.”
Did you read that right? So, the two funds had roughly $1.5 billion in capital and nearly $30 billion in assets. That’s a 5% capital ratio, borrowing $20 for every $1 it had. These assets are valued based on their own valuation models, not what the market might have considered the value of the assets.
Near the end of the article is a quote from Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago, “No one in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates.”
Enter Merrill Lynch, trying to sell $850 million of their assets. Merrill said that anyone could bid on these assets at an auction that was to take place after the close on Wednesday.
We don’t need to go into the types of assets that were on the block, like CDO’s squareds, but suffice it to say that these securities are fairly complicated. A quote from Mark Adelson, who is a managing director of fixed income research at Nomura Securities, in the online WSJ this evening says that, “ CDO squareds are complicated things, and even the smartest guys can’t figure out what to bid on them in one day.”
These are clear problems in the finance world but the reason for their problems goes back to the original mortgages granted to people who Should Not have been loaned this money. Real people are getting hurt because of these exotic mortgages and underwriting practices.
Opinion/Analysis:
Wednesday’s decline in the stock market seemed like enough to declare a small victory for the bears but we certainly don’t see it that way. There continues to be the smallest possibility that the June 4th Dow highs can hold but we don’t have much confidence in that at the moment, especially since the NASDAQ indexes have made new highs since then. The several indexes we follow are not tracking with each other at the moment and for the time being we think it would be best to stand aside.
If we notice something that contradicts this position over the coming weeks we will immediately identify it here but, in the mean time, we plan to post only on Wednesday evenings and at other times of interest.
You may want to check out the True Contrarian at the link to the left. He seems to be posting once a week again.
As always, your comments are welcome. We know that the market is close to turning over but until it does, we need to stay to this weekly format.
Wednesday, June 13, 2007
Wave C?
Market Action:
Looking back over the past few weeks of trading, the market has made some effort on the downside. The strong day on Wednesday feels like a culminating countertrend rally. With all of the downside we saw last week, this rally so far has not generated much momentum. The late afternoon move was news based so it doesn’t have as much potential as it would if it had been uninitiated.
The news in the afternoon that put the power thrusters on under stocks was the Fed’s beige book. The beige book indicated that the economy had some moderate growth in the April May period with virtually no upward pressure on inflation. With this news, there was quite a bit of interest in buying stocks. Do the players really think the market is interested in the April May period? We would say, yes, if the year was 2008 but it wasn’t.
Housing:
The bond market did manage a little bounce on Wednesday but the stock market has forgotten some of the reasons it sold off as close as Tuesday??? The rate on mortgages will push the housing market down even more but the world doesn’t seem to think this matters. The financial sector has not recognized that many mortgage backed securities have not been properly repriced. One article we read today indicated that a group of hedge funds had requested that the SEC not allow price manipulation of bond prices backed by subprime mortgages. (Bloomberg reference)
That article says that “Bondholders stand to lose as much as $75 billion on securities made of mortgages to people with poor or limited credit histories because of a rise in defaults”. And, according to Credit Suisse Group in Zurich, there are ”More than $800 billion of bonds are backed by subprime mortgages”. Does that sound like a lot of money to you? That doesn’t even count the next level up which is also in danger.
Retail Sales:
Announced on Wednesday morning, the retail sales for May were up 1.4%. We are not sure how this number can be correct except that gas prices were a bit higher in May (gas purchases are considered retail sales). Many retailers reported slowing sales after Easter so we’re a little skeptical of this number. The market didn’t really pay much attention to this number.
Upcoming News:
Thursday the PPI will be released and expectations are for an increase of 0.6%, with CPI coming on Friday on expectations for 0.2%. The PPI is a cost item to producers (name is Producer Price Index) so can they pass any increases on or not? Still the Fed doesn’t see any upward pressure on inflation.
Inflation:
As you know, we don’t see any upward pressure on inflation either. In fact, we still think the Fed will lower the Fed funds rate this year (We agree with Bill Gross of Pimco on this.) The inflation pressures are definitely not upward. Take a look at the price of Gold and also the dollar. Gold has dropped while the dollar has rallied. These two items suggest inflation is not much of a problem.
Opinion/Analysis:
The stock market showed some significant power on Wednesday afternoon but we are not impressed with the volume about the same as Tuesday. The advance/decline numbers were nearly identical in the opposite direction so the two days cancel each other out, mostly.
Normally, we would look at Wednesday’s trading and automatically suggest it is a little c wave which means that it is a culminating move and with power. Many people call this a “fill”. That means that there was a first leg (a wave) and then a deep selloff (b wave) and now we are seeing a completed move or a fill of all of the buy orders.
We are reading others who say that Wednesday was more powerful than just a c wave would indicate. Well, our opinion is that this really felt like a c wave, strong and confident with nowhere else to go. The market will tell us what it thinks in due time. The next move could be stronger than we think but we still have a finishing c wave corrective up move on our minds. This move should be over some time tomorrow with the next leg down starting directly after that.
If our interpretation is correct, we would be looking for a Dow around 13,525 for a top. This would be the 0.618 retracement of the drop from last week’s high to this week’s low. We should see that tomorrow. If the Dow gets much above that, we may have to concede in another answer. (seems to be our destiny)
Looking back over the past few weeks of trading, the market has made some effort on the downside. The strong day on Wednesday feels like a culminating countertrend rally. With all of the downside we saw last week, this rally so far has not generated much momentum. The late afternoon move was news based so it doesn’t have as much potential as it would if it had been uninitiated.
The news in the afternoon that put the power thrusters on under stocks was the Fed’s beige book. The beige book indicated that the economy had some moderate growth in the April May period with virtually no upward pressure on inflation. With this news, there was quite a bit of interest in buying stocks. Do the players really think the market is interested in the April May period? We would say, yes, if the year was 2008 but it wasn’t.
Housing:
The bond market did manage a little bounce on Wednesday but the stock market has forgotten some of the reasons it sold off as close as Tuesday??? The rate on mortgages will push the housing market down even more but the world doesn’t seem to think this matters. The financial sector has not recognized that many mortgage backed securities have not been properly repriced. One article we read today indicated that a group of hedge funds had requested that the SEC not allow price manipulation of bond prices backed by subprime mortgages. (Bloomberg reference)
That article says that “Bondholders stand to lose as much as $75 billion on securities made of mortgages to people with poor or limited credit histories because of a rise in defaults”. And, according to Credit Suisse Group in Zurich, there are ”More than $800 billion of bonds are backed by subprime mortgages”. Does that sound like a lot of money to you? That doesn’t even count the next level up which is also in danger.
Retail Sales:
Announced on Wednesday morning, the retail sales for May were up 1.4%. We are not sure how this number can be correct except that gas prices were a bit higher in May (gas purchases are considered retail sales). Many retailers reported slowing sales after Easter so we’re a little skeptical of this number. The market didn’t really pay much attention to this number.
Upcoming News:
Thursday the PPI will be released and expectations are for an increase of 0.6%, with CPI coming on Friday on expectations for 0.2%. The PPI is a cost item to producers (name is Producer Price Index) so can they pass any increases on or not? Still the Fed doesn’t see any upward pressure on inflation.
Inflation:
As you know, we don’t see any upward pressure on inflation either. In fact, we still think the Fed will lower the Fed funds rate this year (We agree with Bill Gross of Pimco on this.) The inflation pressures are definitely not upward. Take a look at the price of Gold and also the dollar. Gold has dropped while the dollar has rallied. These two items suggest inflation is not much of a problem.
Opinion/Analysis:
The stock market showed some significant power on Wednesday afternoon but we are not impressed with the volume about the same as Tuesday. The advance/decline numbers were nearly identical in the opposite direction so the two days cancel each other out, mostly.
Normally, we would look at Wednesday’s trading and automatically suggest it is a little c wave which means that it is a culminating move and with power. Many people call this a “fill”. That means that there was a first leg (a wave) and then a deep selloff (b wave) and now we are seeing a completed move or a fill of all of the buy orders.
We are reading others who say that Wednesday was more powerful than just a c wave would indicate. Well, our opinion is that this really felt like a c wave, strong and confident with nowhere else to go. The market will tell us what it thinks in due time. The next move could be stronger than we think but we still have a finishing c wave corrective up move on our minds. This move should be over some time tomorrow with the next leg down starting directly after that.
If our interpretation is correct, we would be looking for a Dow around 13,525 for a top. This would be the 0.618 retracement of the drop from last week’s high to this week’s low. We should see that tomorrow. If the Dow gets much above that, we may have to concede in another answer. (seems to be our destiny)
Tuesday, June 12, 2007
Bonds Rule
Special Edition due to the late day sell off in stocks (and bonds). Tomorrow we will post our full edition.
Market Action:
Tuesday showed some remarkable volatility and, in the end, the market lost some ground, for the Dow that was about 130 points. The market opened down slightly with the Dow losing about 60 points in a few minutes. Those losses widened to about 100 points a couple hours into the session.
From those lows, the Dow rallied back from that down 100 to up about 25 with two hours to go. From there we saw selling into the bell with the market falling on pretty high volume. Overall, the total volume on the day was not spectacular but much better than Monday’s by some 300 million shares on the NYSE.
Housing:
One news item caught our eye as foreclosures were announced to be up 90% yoy (year over year) from May to May and 19% above April. What do you think, is the housing problem bottoming out? Our opinion remains the same, more trouble in the American Dream for many.
Bonds:
In what is surely to be more bad news for housing, bonds continued their slide with 10 year Treasuries yielding nearly 5.3% (five year highs) after the quarterly refunding on Tuesday. In March this rate was just above 4.4%. The mortgage rates are closely correlated to 10 year Treasuries so you can imagine that mortgage rates are almost a percent higher than in March. This rate increase will put more pressure on an already troubled housing market.
Opinion/Analysis:
As the title says, we think that this past week, “Bonds Rule”. Higher interest rates seem to be putting the brakes on the stock market rally that we have seen for over four years. Tuesday’s momentum seems to be down with our momentum indicators near oversold levels for the first time since the February stock swoon.
This down day did have some February feel to it as the midday rally lost its footing and sellers came in going into the close. Bonds are forcing leveraged players into some tough corners, selling is the result.
Market Action:
Tuesday showed some remarkable volatility and, in the end, the market lost some ground, for the Dow that was about 130 points. The market opened down slightly with the Dow losing about 60 points in a few minutes. Those losses widened to about 100 points a couple hours into the session.
From those lows, the Dow rallied back from that down 100 to up about 25 with two hours to go. From there we saw selling into the bell with the market falling on pretty high volume. Overall, the total volume on the day was not spectacular but much better than Monday’s by some 300 million shares on the NYSE.
Housing:
One news item caught our eye as foreclosures were announced to be up 90% yoy (year over year) from May to May and 19% above April. What do you think, is the housing problem bottoming out? Our opinion remains the same, more trouble in the American Dream for many.
Bonds:
In what is surely to be more bad news for housing, bonds continued their slide with 10 year Treasuries yielding nearly 5.3% (five year highs) after the quarterly refunding on Tuesday. In March this rate was just above 4.4%. The mortgage rates are closely correlated to 10 year Treasuries so you can imagine that mortgage rates are almost a percent higher than in March. This rate increase will put more pressure on an already troubled housing market.
Opinion/Analysis:
As the title says, we think that this past week, “Bonds Rule”. Higher interest rates seem to be putting the brakes on the stock market rally that we have seen for over four years. Tuesday’s momentum seems to be down with our momentum indicators near oversold levels for the first time since the February stock swoon.
This down day did have some February feel to it as the midday rally lost its footing and sellers came in going into the close. Bonds are forcing leveraged players into some tough corners, selling is the result.
Thursday, June 07, 2007
Dow Breaks Down on Interest Rates
Market Action:
We couldn’t resist writing another post this evening due to the massive sell off in the stock market on Thursday which drove the Dow down nearly 200 points. Some of the action in the stock market was a reflection of the action in the bond market where bonds were punished as the 10 year bond moved above 5% for the first time since last July. Going back to March, the 10 year Treasury yielded 4.5% and after Thursday’s jump now yields 5.13%.
Late in the afternoon, stocks were rallying from the Dow being down 180 points to the Dow being down less than 100 points. Then the bond king, Bill Gross of PIMCO, affirmed his position that the bond market was in a bearish phase and rates may go up to 6.5%. The stock market did not like this news and promptly sold off into the close going out at the lows of the day down nearly 200 points.
Opinion/Analysis:
Other than that, not much happened on Thursday. The bond market seems to have taken the upper hand here and is now starting to dictate the stock market more. The complacency in the stock market has been aided and abetted by the low interest rates available in the market. All of the LBO’s (leveraged buyouts using borrowed money) have taken place in the idyllic interest rate environment with 10 year Treasuries under 5%, not any more. Now, they will be paying more for those deals.
Alas, higher interest rates will affect the mortgage market and should help to increase mortgage rates by a similar 60 basis points and possibly more if rates continue to move up in a bond sell off. Higher mortgage rates will squeeze even more buyers out of the housing market which will cause some additional headaches for those sellers/flippers out there. With the bond market large and in charge, stocks decided to take the opportunity to sell off.
In yesterday’s post, we mentioned a possible low being formed that might lead to another high before the whole thing fell apart. Today’s sell off confirms (again) that the market wants to go down and this was confirmed by price, breadth and volume. The volume on the NYSE was over 1.9 billion shares with breadth a whopping 280-3081 advances to declines. That’s the largest number of decliners in a day since May, 2004 when the Dow was trading right near 10K. This day was significantly bearish and brings the three day decline to over 400 points in the Dow.
Comments:
Erick asked us to compare and contrast this market with earlier markets. We will make some comments about that in future posts. Thanks for the suggestion, good idea. Any more out there?
We couldn’t resist writing another post this evening due to the massive sell off in the stock market on Thursday which drove the Dow down nearly 200 points. Some of the action in the stock market was a reflection of the action in the bond market where bonds were punished as the 10 year bond moved above 5% for the first time since last July. Going back to March, the 10 year Treasury yielded 4.5% and after Thursday’s jump now yields 5.13%.
Late in the afternoon, stocks were rallying from the Dow being down 180 points to the Dow being down less than 100 points. Then the bond king, Bill Gross of PIMCO, affirmed his position that the bond market was in a bearish phase and rates may go up to 6.5%. The stock market did not like this news and promptly sold off into the close going out at the lows of the day down nearly 200 points.
Opinion/Analysis:
Other than that, not much happened on Thursday. The bond market seems to have taken the upper hand here and is now starting to dictate the stock market more. The complacency in the stock market has been aided and abetted by the low interest rates available in the market. All of the LBO’s (leveraged buyouts using borrowed money) have taken place in the idyllic interest rate environment with 10 year Treasuries under 5%, not any more. Now, they will be paying more for those deals.
Alas, higher interest rates will affect the mortgage market and should help to increase mortgage rates by a similar 60 basis points and possibly more if rates continue to move up in a bond sell off. Higher mortgage rates will squeeze even more buyers out of the housing market which will cause some additional headaches for those sellers/flippers out there. With the bond market large and in charge, stocks decided to take the opportunity to sell off.
In yesterday’s post, we mentioned a possible low being formed that might lead to another high before the whole thing fell apart. Today’s sell off confirms (again) that the market wants to go down and this was confirmed by price, breadth and volume. The volume on the NYSE was over 1.9 billion shares with breadth a whopping 280-3081 advances to declines. That’s the largest number of decliners in a day since May, 2004 when the Dow was trading right near 10K. This day was significantly bearish and brings the three day decline to over 400 points in the Dow.
Comments:
Erick asked us to compare and contrast this market with earlier markets. We will make some comments about that in future posts. Thanks for the suggestion, good idea. Any more out there?
Wednesday, June 06, 2007
Stock Market Shows Some Weakness
Welcome to the weekly post for the Update. We have been going through withdrawal here and do miss the daily version. With the market having difficulty around these prices, daily posts may be back soon. There should be no surprise to those of you who are contrarians, like us, any wavering from that bearish position might result in a pretty solid top—oh, well. But, admit it; you missed the Update, too.
Jobs’ Report:
The May jobs’ report coincided with a new high in the Dow at 13,690.62. On Monday this high was challenged by a high trade of 13,690.21 but failed to improve on the Friday number. From Monday’s high, the Dow fell about 250 points to Wednesday’s low around 13,437.
As you may recall, we think the jobs’ report is the key report for the month for the stock market and maybe the bond market as well. The report came out last Friday after a month long difference of opinion of the bond market and the stock market. The stock market had rallied for most of the month while the bond market fell most of them month.
After the jobs’ report indicated about 157K new jobs, CNN Money proclaimed that “Solid gains in jobs, manufacturing, consumer spending offset weakness in housing; Fed seen on hold” under the title of “Economy hits the sweet spot”. The job gains are “solid” compared with some that have been under 100K but this is not “solid gains in jobs”. But, let’s look at the rest of the headline in light of this week’s news.
Tuesday’s CNN Money late day headline was “Fed rate cuts gone—a hike may be coming”. This headline doesn’t really contradict Friday’s headline but the spin is just a little different. Last Friday the market was doing ok but Tuesday started to leak a little so someone had to come up with a good reason for it.
ECB’s Rate Hike:
On Wednesday morning, in a “widely anticipated” move, the European Central Bank (ECB) raised interest rates a massive quarter point. (Clearly, we still have some sarcasm here at the Update; you missed that, too, didn’t you?) This move was not widely anticipated by market participants as many of the European bourses fell over 1%, some more than 2%. This move prompted players in the US to step back and think (well, ok, maybe they didn’t know what to think about) that maybe the Fed might raise rates, too.
In case you don’t remember, we still stand on the theory that the Fed will Not raise rates anytime soon and will in fact lower them sometime later this year due to the economy being soft ( read that, the stock market is going down to understand the Fed’s motives a little better).
Housing:
The housing market continues to disappoint those that thought maybe the turn was here already but, not to worry, the new forecast is for housing to pick up next year sometime. We wonder if those that decided to buy two or three houses to flip, can wait around for almost another year to see if that recovery happens. From our view of the housing pond, there are no quick fixes that will bring housing out of its downward spiral.
Today’s report from the National Association of Realtors indicated that the US housing market remains “soft” and they would once again lower their forecast for 2007. Meanwhile, they continued their position that prices for existing homes will fall in 2007 for the first time since they have kept records (in the late 1960’s). This group has a stake in a growing home market and is usually upbeat, as sales people need to be. So, they follow up their decline projection with a rise in 2008. There you go, no worries, mate.
Opinion/Analysis:
With the stock market having two significantly down days in a row, we thought this would be a good time to reassess the situation. We suggest that there really was no reason for the decline the last two days and offer that these are the worst kind of days for the bulls. Yes, there was sort of a cool breeze blowing over the hot market, the threat of possibly higher interest rates. But, that has been no threat for this over heated Invincible market.
The stock market may want to bounce of these lows so we are not declaring a bear victory just yet but the seeds have been planted (again). Our indicators fell off a cliff the last two days, not that they all went negative but the change was noticeable. What would be ideal would be if the market told us that it was over by rallying a bit and not getting our indicators back to where they were on Monday. Of course, we still believe in Santa Claus, but he’s not going to be here for another six months.
The market could very easily drop right now and no one would really be surprised. In fact most market analysts would announce that the market was due for a correction and it was healthy and now is a buying opportunity. We would say that you should be extremely careful in this dicey situation. In any event, there isn’t much upside left. The global markets are beginning to get some selling pressure, finally, and they could all go down together which would be a very scary event.
Numbers:
We have decided that while we are writing weekly posts, that the numbers are not going to be reported. As we looked back on the posts to contemplate a new format, the items in our list were not very well known and we didn’t mention them much in the text so you could follow along. There are a few that we do really like and one of them is the VIX, which is the volatility index. The VIX jumped a little on Wednesday to a two month high, showing a little fear among the option players.
Your Input:
If you’re so inclined, please post a comment or check out one of the links to the left. We would be happy to give our opinion or discuss topics of interest to you. All you need to do is mention it in the comments and we will make sure we mention it. You don’t even need to sign your name although you certainly can, if you like.
Take care and we will be back at least by next Wednesday, sooner if conditions in the stock market deteriorate much further.
Jobs’ Report:
The May jobs’ report coincided with a new high in the Dow at 13,690.62. On Monday this high was challenged by a high trade of 13,690.21 but failed to improve on the Friday number. From Monday’s high, the Dow fell about 250 points to Wednesday’s low around 13,437.
As you may recall, we think the jobs’ report is the key report for the month for the stock market and maybe the bond market as well. The report came out last Friday after a month long difference of opinion of the bond market and the stock market. The stock market had rallied for most of the month while the bond market fell most of them month.
After the jobs’ report indicated about 157K new jobs, CNN Money proclaimed that “Solid gains in jobs, manufacturing, consumer spending offset weakness in housing; Fed seen on hold” under the title of “Economy hits the sweet spot”. The job gains are “solid” compared with some that have been under 100K but this is not “solid gains in jobs”. But, let’s look at the rest of the headline in light of this week’s news.
Tuesday’s CNN Money late day headline was “Fed rate cuts gone—a hike may be coming”. This headline doesn’t really contradict Friday’s headline but the spin is just a little different. Last Friday the market was doing ok but Tuesday started to leak a little so someone had to come up with a good reason for it.
ECB’s Rate Hike:
On Wednesday morning, in a “widely anticipated” move, the European Central Bank (ECB) raised interest rates a massive quarter point. (Clearly, we still have some sarcasm here at the Update; you missed that, too, didn’t you?) This move was not widely anticipated by market participants as many of the European bourses fell over 1%, some more than 2%. This move prompted players in the US to step back and think (well, ok, maybe they didn’t know what to think about) that maybe the Fed might raise rates, too.
In case you don’t remember, we still stand on the theory that the Fed will Not raise rates anytime soon and will in fact lower them sometime later this year due to the economy being soft ( read that, the stock market is going down to understand the Fed’s motives a little better).
Housing:
The housing market continues to disappoint those that thought maybe the turn was here already but, not to worry, the new forecast is for housing to pick up next year sometime. We wonder if those that decided to buy two or three houses to flip, can wait around for almost another year to see if that recovery happens. From our view of the housing pond, there are no quick fixes that will bring housing out of its downward spiral.
Today’s report from the National Association of Realtors indicated that the US housing market remains “soft” and they would once again lower their forecast for 2007. Meanwhile, they continued their position that prices for existing homes will fall in 2007 for the first time since they have kept records (in the late 1960’s). This group has a stake in a growing home market and is usually upbeat, as sales people need to be. So, they follow up their decline projection with a rise in 2008. There you go, no worries, mate.
Opinion/Analysis:
With the stock market having two significantly down days in a row, we thought this would be a good time to reassess the situation. We suggest that there really was no reason for the decline the last two days and offer that these are the worst kind of days for the bulls. Yes, there was sort of a cool breeze blowing over the hot market, the threat of possibly higher interest rates. But, that has been no threat for this over heated Invincible market.
The stock market may want to bounce of these lows so we are not declaring a bear victory just yet but the seeds have been planted (again). Our indicators fell off a cliff the last two days, not that they all went negative but the change was noticeable. What would be ideal would be if the market told us that it was over by rallying a bit and not getting our indicators back to where they were on Monday. Of course, we still believe in Santa Claus, but he’s not going to be here for another six months.
The market could very easily drop right now and no one would really be surprised. In fact most market analysts would announce that the market was due for a correction and it was healthy and now is a buying opportunity. We would say that you should be extremely careful in this dicey situation. In any event, there isn’t much upside left. The global markets are beginning to get some selling pressure, finally, and they could all go down together which would be a very scary event.
Numbers:
We have decided that while we are writing weekly posts, that the numbers are not going to be reported. As we looked back on the posts to contemplate a new format, the items in our list were not very well known and we didn’t mention them much in the text so you could follow along. There are a few that we do really like and one of them is the VIX, which is the volatility index. The VIX jumped a little on Wednesday to a two month high, showing a little fear among the option players.
Your Input:
If you’re so inclined, please post a comment or check out one of the links to the left. We would be happy to give our opinion or discuss topics of interest to you. All you need to do is mention it in the comments and we will make sure we mention it. You don’t even need to sign your name although you certainly can, if you like.
Take care and we will be back at least by next Wednesday, sooner if conditions in the stock market deteriorate much further.
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