It's Party Time Thanks to the Fed's Cut

Buckle up, this is a long one.

We were going to rant and rave about the Fed’s action this week as well as get into the long term implications but we have decided to forego all of that in favor of a night off or two. Besides you can read all about it on the internet for yourself.

Did you notice that the CPI fell 0.1% last month according to the report out Wednesday morning? What was glaringly missing was the ever present reference to the "core" inflation rate. Like we have been saying, as soon as the real rate was lower than the "core" rate, they would report the real number. It's such a game.

Anyway, we were fairly convinced that the market had shown us that it wanted to go down starting in July and that wave took us to the August lows. As we watched the market move up from the rate cut news on Tuesday, we are convinced that the Fed was watching the same things we were and that they wanted to stop this train from going any further South.

With that said, the possibility of the Fed being able to prop up the market much more is growing weaker by the minute. We are of the opinion that what is coming from the consumer side is very poor retail sales going into the holidays. Lower short term interest rates either are justified or they are not so if the Fed is justified then is seeing the appropriate items and wants to stem the tide of deflation as soon as possible. Unfortunately, this overly aggressive 50 bps move can only mean that the Fed is scared.

The stock market interpreted the Fed’s statement this week as further rate cuts are coming which is something we believe, too. For the moment, the stock market thinks it’s party time but they don’t realize that the Fed sees some bad things down the road just a little ways. Of course, the only thing the Fed can do is pump money and lower short term rates. At least, that’s all it can do on the surface.

So, we have the Dow now up 11% on the year and the Fed feels that a rate cut is necessary. Does this means that the stock market is not the discounting mechanism it used to be and the Fed is out in front of the market??? We can’t even type those words without wondering if that is even possible. Conclusion is that the Fed is very worried about the effects of deflation and would rather worry about the ramifications of the dollar dropping and inflation coming back because of it. They said as much last week as we have noted here on two occasions.

The Fed must have weighed the risks that the stock market would go up a lot in the aftermath of their 50 bps drop against the bigger evil of deflation coming calling. We still think deflation is stronger than the Fed and will have a powerful (negative) effect as it rolls through the economy. We saw a mini-version of it over the past couple of months in the mortgage market and we think that is just the beginning, with a little timeout to watch some Fed incited stock market gains.

The value of many mortgage backed assets declined rapidly over the last couple of months as losses mounted in some heavily leveraged hedge funds. This caused everyone to look around and say maybe we priced these assets inadequately. So, we ask the question, “Why are these assets going down in value?” Well, that’s because the underlying payments are not coming in like they were supposed to in the agreement. As more and more homeowners start to miss payments on their mortgages or defaults occur, the mortgage holders will not get as much money back as they thought. Then these houses will need to be sold as defaults happen. This causes the real estate market to spiral downward as more and more inventory comes on the market with less and less buyers.

The situation involves many parties but it is very simple:

I own a home that I’ve owned for, say 17 years. I get a call from someone who says I can lower my payments and take some money out of the house for other expenses such as a vacation or a new car/SUV. Plus, the best thing is that my payments don’t have to go up at all with this new fangled option ARM loan. I say, ok, let’s do this thing. Now, my fixed rate mortgage that only had 13 years to go on it is refinanced to go back to 30 years of payments. This does not consider the price appreciation on my house. Let’s say that when I bought my house, I paid about $200K for it and now it is worth, well, $425K. So, my mortgage broker says hey great let’s take out a $425K loan and you can pay off that loan you had left of maybe $125K and you can actually take out an additional $300K.

With that money burning a hole in my pocket, I decide to invest in more real estate since by golly it’s going up right. I get hooked up with a broker down in Florida who says there’s a great deal that I need to take advantage of right away or I will lose it. That doesn’t make me slow down; I want that property before it goes to someone else so offer a little more than they are asking for it. We sure wouldn’t want to miss out on it.

So, I buy the property without actually going to look at it and start making monthly payments on it. I didn’t intend to keep it just to keep it long enough to make a little money on it. Now, the market for that condo I bought across the highway from a graveyard can’t be sold due to there being no buyers for it. Yes, good real estate in good areas is doing ok but I didn’t buy one of those so mine will have to sit on the market for a while, or maybe more.

Then my mortgage company sends me a letter telling me that it’s been 2 years that I’ve had the loan on the condo and that they are now going to reset my mortgage payment to a slightly higher rate. (They said it was one of those 2/28 plans that resets after 2 years.) My payments will only go up about $500 a month. The property tax statement comes in the mail and that too suggests that I might have to kick in a little more in the way of helping the governor. Oh, and by the way, the association fees are going to have to go up a little on the condo because we have a lot of empty units that haven’t sold so we need to do an assessment on the current owners.

Two years ago, I had a nice simple life with only 13 years left on my first mortgage, which would have been only 11 years, now that I think about it. Today, I have a mortgage payment, association fees, and other costs for managing my Florida condo and I have 30 years, ok only 28 years, to go on the mortgage on my residence. What should I do?


Ok, well, certainly this scenario could be adjusted to take other events into account like doing the cash out thing more than a couple of times and maybe buying a few pieces of real estate that actually worked out, but you get the general idea. The people in these types of situations are strapped for cash and holiday shopping will be done on credit cards if they can swing it but we say that they did that last year and this year will be much tougher.

But, multiply this scenario by the many people who did this and you can start to see that a 50 bps drop in the short rates will not help the situation. What will happen is that the condo will most likely be abandoned and the person may actually lose their first residence due to this situation. As you know you read about many people who have defaulted on their mortgages and have lost their homes to foreclosure. This is a major deflationary event by itself. Taken as the millions of times it happens is a catastrophe across Middle America. But, the Fed is there to lower rates and provide liquidity for the investors on Wall Street who made these types of loans available.

This is the definition of moral hazard…and it results in deflation with a capital D.

Fed Does a Big Number

As we watched the market at 1:15 CDT, we saw the prices jump hard and knew that the Fed had lowered the full 50bps. Then the news hit and we weren't surprised one bit, the market had already told us.

As we look back, we should have known they were going to go the full amount. Looking back at the 50 bps drop in the discount rate, with encouragement from the Fed for the banks to borrow at the discount window, a few weeks back to the Fed's heavy repo activity and then all the way to last week when Helicopter Ben was talking about how the dollar could go down a little to help the trade situation. So, now we know that the new Chairman of the Federal Reserve is living up to his nickname, Helicopter.

Needless to say, the Fed has so far done the bulls a magnificent favor by lowering rates 50 bps, or so they think on Tuesday. Bill Gross now is saying that the fed funds rate will come down another full percent to 3.75%. While we agree with his assessment that the rates need to come down due to economic weakness, the market still thinks it is party time.

We were very surprised by the big move the stock market had. We are similarly surprised at the Fed's lowering these rates even before the stock market went down very much. No one in the stock market has been burned by a drop in prices. The most we saw in terms of downside was 10% and that was during one day and then prices rallied the same day. These participants are fully behind the new found money that the Fed is willing to dish out. We were not so surprised at the big up move the precious metals had.

In any event, we did not have a good day at all. And, with that, we are going to wait until tomorrow to see if there is anyone out there who thinks that selling is a good idea. With the Fed out to make sure the stock market goes up, we are questioning short positions this evening. More tomorrow…after the world is done celebrating the Big Number.

Tuesday is Fed Day

Monday’s trading didn’t give us much more to go on and probably with good reason, the pending, or should we say impending, rate decision due on Tuesday. As the world waits for Bernanke and company to present their case, there isn’t much going on in the way of trading. Tuesday should bring some of the traders back to the market.

We find the news all over the place but the media seems to want to keep the public in a state of confusion. What we mean is they are trying to say different things: that the market won’t react much to the interest rate moves or the market will go down unless the Fed lowers 50 bps or that the 25 bps move won’t do anything to help the economy for some time.

While we hold that the Fed is there to protect the banks, if the Fed lowers 50 bps the market will believe it’s party time; and, more important, the Fed knows this and will hesitate to oblige such market wants. The market doesn’t believe that the economy counts when it comes to trading. All that matters is that the Fed provides lower rates in order that the market goes up.

All things being equal, the Fed dropping rates 50 bps is akin to saying that the banks are in some difficulty and the economy is suffering. We think the Fed has to lower rates by 25 bps. The reason is that the credit market already has moved to this new level. The Fed never acts unless this is the case. Well, in this case they have been doing their best to make that happen by providing liquidity to the dry market. At the same time, the mere cutting of rates means that the central bank wants to stop a slide that is going on in credit. That is the way you can tell that the market is going to have trouble, the Fed is trying to encourage more borrowing by lowering rates. What they truly want is for a graceful bubble pop because they know the credit contraction has begun and a major contraction would take down the banks as well as the economy.

As we are seeing with Northern Rock in England, the central banks of the world are doing whatever they can to avert an out and out run on the banks. The central banks are all a little nervous with the global situation as it has been requiring their attention recently. They want the problems to go away and one way to do that is to step up and provide the liquidity.

But, we need to get back to market analysis: We think the market will find any rate cut worthy of buying at least for a few minutes but that may not be very much. If the Fed is foolish enough to give the market what it thinks it wants, a 50 bps cut, the market will party for more than a few minutes but not more than a few days. If only a 25 bps cut comes, then the market will pout a little but will dutifully trade up for a few minutes and then realize that there is no upside and will sell off. With no rate cut, is that possible?, there will be an immediate drop in the market with a big rally after that lasting long enough for the Dow to move up around 13,550 or so. Just for reference, the Dow closed today at 13,403.

Let’s discuss this tomorrow evening after the Fed is done with their business…

Waiting for the Fed

In the news over the past several days is the Northern Rock bank having a little run on the bank as well as the GM strike. In England, the depositors of Northern Rock withdrew about £1 billion, or $2 billion, on Friday and over the weekend either at the branches or online, representing about 4% of total deposits. Reports indicated that the online portion of Northern Rock’s business seemed to be “freezing up” all day long presumably due to heavy volume. On Friday morning, Northern Rock solicited the help of the Bank of England as it is feeling some financial stress due to its, yes, you guessed it, mortgage portfolio. We are particularly intrigued by the Name of the company, Northern Rock, as in, solid as a Rock. The news this evening has the bank facing more dramatic withdrawals over the next few days. This is something that we should be paying attention to.

In the housing sector, the CEO of Hovnanian, a home builder, announced that the housing market is very near a bottom. We seem to hear this every week or so but the traders in those homebuilders like the news and bought those stocks. This doesn’t seem like the best of advice.

We just wanted to comment on GM. The company says that it doesn’t need to increase the rebate program because there seems to be strong underlying strength in demand for cars. We question their timing as they are dealing with the unions over the past few days to iron out some contracts. We just find the news to be contradictory and therefore maybe less than correct. No, we don’t really know what’s going on there. If we hear more, we’ll make more comments here.

One of the most off the wall pieces of news this past week was the Greenspan admission that he didn't really see the subprime problem. Is this the type of thing you say when you're trying to sell a lot of books? We don't think so but we saw the genuine look of wonderment on the face of the great Maestro. Would you say his reputation is starting to get a little tarnished?

The stock market seems content to just wait until Tuesday’s Fed news. The pattern is still the same with another stretched top forming. Presumably the traders will wait until Tuesday afternoon to trade one way or the other. So, we will continue to be patient because there is a large distance to travel in the southerly direction and one or two days of waiting isn’t too bad.

This week brings some key broker earnings reports as well as some other company’s reports so there are several potential landmines this week. The market probably does need something to sell for even if it has to be the Fed’s announcement or some earnings news. We think this week holds some possibly very negative price movement. This is also options week.

Only Another $12 Billion

CFC (Countrywide Financial) was in the news in a big way, $12 billion. Apparently, the banks are willing to loan even more money to this company in order to keep it afloat. Bank of America probably is feeling better after this latest move because the stock price surged over 12% after the news and above the B of A's 18. The market thinks that just because CFC lined up some more financing, there are no more problems in credit. While many problems have surfaced, that doesn’t mean they are solved or will be solved in an easy manner. But, on Thursday, the market was happy to trade up starting early in the day.

The next few days seem to be important to the pattern we have been discussing. We are looking back to the high of last week and notice that it seems to be getting closer. We have been fairly confident that we wouldn’t see it again for a long time but here we are back close again. We need to remind ourselves that the market has come off its highs of July and August and this move is not exactly strong. The way the market ended the day on Thursday seems to be the story. The early birds are buying this market and the late traders are selling it and this runs counter to bullish trading. The light volume is another key ingredient that pushes us into the hugely bearish camp.

Next week should prove interesting. We will see if the market thinks so. Tonight, we are just amazed how so much money can be injected into the banking system in such a short time. The Fed seems to want to avert any crisis by pushing money by buying hand over fist. Obviously they have deep pockets and can provide some confidence for some time. We think they continue their bet that they can prevent a collapse simply by adding money to the system. We obviously do not believe their injections will help the economy; but it will help the banks which in turn will keep their depositors happy or liquid if they have any cash at the bank.

We were referred to a very timely article by a Bank of England governor which we would like you to have access to here. For a bit of a easier read, this article should provide the highlights although the previous article is readable and talks about the bank conduits we have mentioned here with too little space to explain them very well. This article does a pretty good job describing how they work and the way the banks will probably need to bail them out. Fleck pointed this out in his Daily Rap today and we thought you might enjoy it, too.

We did say we would make a determination on the Fed move for next week but we think the market action of the tomorrow and Monday will somewhat determine what they do. We would like to defer our educated guess until Sunday evening with another shot at it on Monday night. In the mean time, we think the Fed is doing all it can to avoid lowering rates next week. Their constant reserve injections and the banks constant and heavy borrowing at the discount window are all designed to prevent the rate cut next week. From all the readings we do as well as how the market trades, it seems that a 25 bps cut is a foregone conclusion. We’re not sure that is the case but if you pushed us hard tonight we would probably agree with a 25 bps cut. We still lean toward none at this meeting. You can weigh in on this topic in the comments—we all look forward to it.

Just Another Day

[Editor's note: You may have noticed the new format of the Update. We wanted to add the Kitco.com website to the links on the left and had to upgrade to this new look in order to do that.]

The stock market had its ups and downs on Wednesday but mostly ended with little change in the major indexes. While we know it's Wednesday, this post will be necessarily brief. Maybe the market can get in gear to the downside soon. The pattern is still very negative and we are patiently, or not, waiting for some downside strength to develop.

We have previously noted the Dow and the price of oil moving up together and today, with oil at record levels (even though OPEC promises to pump 500K more barrels a day), you might expect the Dow to be at record levels. Well, that just isn't the case now. Gold has moved higher along with oil but no longer has the stock market been in this group. This seems to be a significant change.

CFC (Countrywide Financial) was in the news again on two counts the last two days. The latest news is that some employees have sued the company along the lines of Enron. The employees are saying that the company failed to tell them just how bad things are??? and they kept their money in the company stock.

The other piece of news is that CFC is looking to put together yet another multibillion dollar cash infusion, this time with JP Morgan and/of Citicorp. Meanwhile, what does B of A think of this or that the stock just keeps sliding...one blog had the title CountrySLIDE. Wish we would have thought of that.

Back to the market, today's trading was pretty quiet but the undertow was negative. The breadth was leaning toward decliners and decliners' volume. There were even more new lows than new highs. The market is not showing its strong side but we still haven't seen any serious sellers. There are still things going on in the credit markets that warrant attention but the stock market believes in the almighty Fed and their powers to bail out the stock market. This, even though, the stock market is up on the year???

Tomorrow, we will make our best guess as to what the Fed will do next week. This is kind of exciting, we haven't had a move opportunity in a long time. What will they do?

The Fed is in a Box

Well, apparently Tuesday wasn’t the day the stock market decided to go down so how about Wednesday? The market has been assuming the Fed will lower rates on Tuesday next week no matter what the Fed heads are saying. The bulls seem to be trading with abandon on days like Tuesday. The pattern we see is still the same even though the market always seems to want to trade higher.

Thanks for the comment, Erick. Your thoughts lined up nicely with what our post topic is this evening, the Fed’s box. As a start, Mr. Bernanke let us know on Tuesday that the global trade imbalances need to be ah…balanced in order to stabilize the world economy. According to a CNN Money article the trade imbalance occurs when countries like the US buy more internationally than they sell or like China sell more than they buy. Oh, really, this is fascinating stuff…

Of course, this leads us into our thought process this evening. We have been a proponent of a turnaround in the dollar over the past couple of months. The True Contrarian, at the link to the left, suggests that the US dollar has fallen to its natural “bottom” and should now bounce. This is in conjunction with his thoughts on gold and silver going in the opposite direction for a short time.

When Mr. Bernanke started to discuss the need to reduce trade imbalances, all we could think about was the US trade deficit. The one way to help fix this deficit is to weaken the dollar. This would encourage foreigners to purchase our goods and services while at the same time making it more difficult to purchase foreign goods with US dollars. In theory this should work but as you know the trade deficit has seemed to gradually expand further and further just like our waistline. Of course, our solution is to buy bigger belts and pants rather than go on a diet, somewhat similar to the US hunger for foreign goods. We just keep buying no matter what the cost since we want it and we will have it. Just how old are we???

The point here is that the Fed can lower interest rates and this should directly affect the value of the dollar in the negative direction. When Mr. Bernanke actually said that we need to work on fixing trade imbalances and we focused on the US trade Deficit, we thought he was signaling that he was willing to lower rates in order to do that. It seems that the Fed Chairman is about ready to trash the dollar. Could this actually be??? We certainly hope he is not rationalizing the rate cut with global trade balancing efforts. Please.

There are reasons for the Fed to lower rates due to the credit disaster that is happening all around us but there is one reason Not to lower rates and that is the US stock market is ever so close to a top. If a large rate cut is instituted, the Fed could actually be pouring gas on this fire and certainly at the wrong time. The Fed heads know that a rate cut will bring even more speculation into the stock market and we don’t really think they want to do that. All of us know that any rate cut is not a long term stock market enhancer but is sure is for the short run.

There you have it; the Fed is in a box. They seem like they have to lower rates next week but now they are trying to rationalize it with global trade balance even though they don’t want to raise rates because it will make the stock market go up. They want to save those types of bullets when they really need them, like when the market is really going down.
The market action was pretty much nonstop up on Tuesday and we can only take comfort in the fact that the volume was pretty anemic. Well, there was a stock that was down today and that was CFC (Countrywide Financial) and on heavy volume. CFC was the volume leader for stocks on the NYSE with only the Russell 2000 iShares trading more volume. CFC closed at 16.88 down a couple of percent on the day. That 18 price seems to be getting further away every day but B of A is not worried, or are they? And, the guy on the bus, who had bought some CFC calls probably the 20’s is not very happy today either.

US Stock Market Ready to Fall

Before the opening on Monday, the tech stocks got an infusion from INTC who said that their revenue would be up 3% to 4% for the quarter. Huh? Are they serious? 3% is enough to call up the world and try to get the markets going. We like the timing of certain announcements like we mentioned in our last post, CFC (Countrywide Financial) announced some bad news about laying off 12,000 employees after the market closed on Friday hoping it would go unnoticed on Monday morning. Then INTC makes their announcement and the world is a happy place for a few minutes anyway. Let’s not forget the Congressional “promise” for Fannie and Freddie that we mentioned in our last post. That got a little play going into the opening, too. All in all it was an aggressively bought opening.

But, wouldn’t you know it? Right after the open the market had nowhere to go but down, so that’s what it did. The Dow opened up about 85 points and spent the next two hours dropping to test the lows of last week right around 13,050. From there, since of course the test was passed, for now, the Dow rallied until the final hour and managed to get higher than the open but just barely. The last 45 minutes pulled the Dow from being about nearly 100 points to close up just 14. The other indexes performed similarly but the action in the NASDAQ Comp was noteworthy. The Comp opened up 25 points or about 1% and then fell from the high near 2590 to below 2540, about a 50 point drop, over the next two hours.

The bulls may feel that they have won this day because there were several Fed officials talking about how next week’s FOMC meeting may not cut rates. The market didn’t pay much attention to these people as the fed funds do not even consider rates will stay at 5.25% next week. Yes, there is a 100% assumption built into rates today that the Fed will cut at least 25 bps. Plus, the market has given even more weight or probability to a 50 bps cut than a 25 bps cut. These numbers come from the credit world but the stock market is keenly interested in them. So, the stock market is pricing in at least a 25 bps cut and no Fed official could deny a rate cut on Monday with enough authority to make it seem reasonable.

For our part, this is the first time we have said that there is a possibility of a cut. We don’t have a 100% iron clad decision on this tonight but we will try to come up with one over the course of the next few days. In our last post we talked about the rate cut being determined by the traded fed funds rate. We apologize for the confusion—we meant to say that the Fed has to watch the Treasury bill rates to see what to do. That rate has been trading in the 4.6% to 5.25% range for the last year and in the last few weeks has now traded down to below 4% today. A couple of weeks ago amidst all of the subprime turmoil, it traded below 2.3% but has now been trading a range of 3.8% to 4.6% over the past week or two. This allows the Fed to drop their funds rate by 50 bps. We are going to watch this rate very closely over the next few days to get an idea what the Fed might do.

The overnight markets are fairly calm this evening and Asia is trading with a positive bias as we write this. We do think the world is about to see the US stock market get hit pretty hard. The pattern that is now developing is something we have been expecting but now it is upon us. Today’s market showed strength early and some positive buying over the course of the afternoon but looking at the breadth, it was poor. There were more decliners than advancers and the number of shares traded in up stocks was less than that of down stocks.

This is only one day but the actual pattern of trading is distinctive as well. You have seen the Dow move or we should say try to move up over the course of the last few weeks. Friday’s market shows us just what strength the Dow has, not much. Today’s early strength was greeted with selling and the midday rally was met with a late day selloff. These two items are strong indications of what is going on underneath the covers. There is weakness and we are going to see it manifested in Prices very soon if not Tuesday, then Wednesday. Let’s watch very carefully.

A Brand New Week

The jobs’ report from Friday was a major disappointment for the market. Here they had thought the Fed might actually be right that the “subprime” problem would not affect the broader market and what do they have to believe now? Well, the jobs’ report was very ugly. As reported by the Labor Department, nonfarm payrolls declined by 4,000 in August for the first decline since August of 2003, four years ago. Not only that, they also revised lower the previous two months of data with large reductions. The July number dropped from 92K down to 68K and June from 126K to 69K. That’s 24K lower for July and a whopping 57K for June.

These numbers were just too much for the market to handle and the opening was down about a percent in the major indexes we follow. What’s more, the familiar bounce we generally see after a weak opening did not appear. We did see buyers attempt to hold the market after the initial drop but that failed and the market dropped again. The rest of the day was spent trading sideways to down with the Dow closing very close to its low of the day and the week while flirting with the previous week’s low near 13,050.

After the market closed on Friday (don’t you just love this timing?), Countrywide Financial (CFC) announced that it plans to slash about 12,000 workers, 20% of its workforce, over the coming months. We wonder what papa B of A has to say about that. For most of the morning, CFC traded below the magic 18 number, the one that B of A is able to buy its stock at. After the news hit the tape after the close, buyers came in to bid up the stock in afterhours. Let’s see how it trades during real trading on Monday.

But, there is the new legislation proposed by the senior senator from New York, Schumer (D). You can see the WSJ article for yourself (they’re saying page A3). The plan is to allow Fannie Mae and Freddie Mac to buy more mortgages. Right now they can buy mortgages up to $417,000 which is what we call conforming. Mortgages above that amount are nonconforming or jumbo loans. We have said they are Alt-A here in past posts. Anyway, Schumer would like Fannie and Freddie to be able to buy mortgages up to $625,000. This would provide much more liquidity in those higher priced markets. We will let you draw your own conclusions as to whether this is a good idea or not.

Part of the proposal will allow Fannie and Freddie to raise their portfolio caps by 10% and require them to use half of that (about $73 billion) to help “borrowers with certain high-risk adjustable-rate mortgages refinance into more affordable products” according to the WSJ article. We again wonder what people think that don’t have adjustable rate mortgages. Do they think this is a good idea or not?

So, housing continues to make the news. One other group that is now suffering is the mortgage insurance companies. Apparently, claims are up significantly this year. The WSJ has the article on page C1.

The market had some trouble on Friday and this week it will need to trade on its own. The Fed meeting is next week so we don’t think there is any chance the Fed will make any moves this week unless of course the market has a very bad day. Even then, the Fed needs to be careful when it decides to make a cut. They can’t really be watching the stock market to make their decision. They have to convince themselves that the economy is going to suffer unless they cut rates.

We want to be clear on this point. The Fed does not decide what rates are going to be. They simply watch what is going on in the fed funds rates as banks need funds as to what level the rate should be set at. Right now, Treasury securities all along the curve are trading with rates below 5%. The fed funds target rate at 5.25% makes no sense. The fed funds rate itself is near 5.05% so that would indicate a target of 5% is about right. The main problem with this thinking is something we mentioned here last week and that is Libor. This rate has risen over the past several weeks from 5.32% to around 5.80%. This causes some issues for the Fed to lower rates next week. Oh, the problems they have at the moment. The stock market knows it, too.

Finally, the Jobs' Report

In an article that should be in the WSJ on Friday, September 7th, titled Treasurys Fall as Fed Warns on Rate-Cut Optimism, we find that there were no less than six Fed officials that spoke on Thursday. All of them indicated that there was undo optimism in the markets that the Fed would cut rates any time soon. The first section of the article makes it clear that the markets reacted to the news appropriately, the bonds sold off and the stock market came off its highs of the day.

In the morning a rumor hit the markets that the jobs’ report was going to give the Fed the opportunity to lower rates in a surprise move on Friday. Well, after the rumor it would hardly be a rumor but we’ll let that go for now. You can look at a chart of trading activity for the market and kind of see when the rumor gained support. This is certainly true on the gold chart if you have the ability to see one. (kitco.com is a good site for gold prices—we should probably add it to our links) Anyway, as more and more Fed officials trotted out to say the same thing, the markets kind of cooled.

To get back to the WSJ article, we see that the second section of the article talks about the Fed’s open market moves. Apparently, on Thursday the Fed felt the need to inject some liquidity into the market as they supplied $31.25 billion in three separate moves. According to the article, three moves in one day is fairly uncommon, the last one occurring back on August 10th “following a spike in short-term rates”.

We fail to see how these two sections fit together. On the one hand, the Fed says they are not committed to lowering rates at their meeting in a couple of weeks but on the other hand they are pushing liquidity into the banking system at quite a furious rate it seems. The article mentions that the European Central Bank (ECB) added about $130 billion on Wednesday. What?

Let’s get down to the real business—the stock market. Well, Friday is the big day, Fed moves or not. We finally get to see the jobs’ report and what it might have to do with the stock market. The market is, how can this be, hoping for a disastrous number so the Fed will have the ability to lower rates. Apparently, the traders are not so worried about the jobs so much as the market, but that’s another topic. The question is how will the market react to the news?

Ideally, we will see truth in the number which should mean that there will be a poor number being put up. The consensus we see this evening is for 110K new nonfarm jobs to have been created in August. With a number less than that, we would expect the stock market, and bonds, to have a good start to the day. This assumes the market still believes that the Fed will lower rates and very soon. Ideally, from our perspective, this opening trade would be the stock market high for the next several months. We could just see a normal number around 110K and the market would just trade like it did on Thursday, very dull trading indeed.

With this number finally behind us, the market can be free to trade on its own and we are so waiting for this. September should still be a down month and with this Friday morning thing out of the way, we can get on with it.

We would like to make a comment on the Fed. We have been in the camp that expects a rate cut this fall and we’ve been in that camp for a long time. We never wavered when the rumors were that the next move of the Fed would be to hike rates. We said, no way.

So, here we are and fall is in the air; not to mention mortgage problems are in the air. We don’t see the news or the market really showing us a great deal of reason for a rate cut right here this day but the Fed will decide to pull the trigger on rates within a couple of months. This will most likely be driven by a stock market drop that occurs here in September. At that time we will be interested to see where the market is and whether we should be positioning to take some long positions. There is a lot of ground to cover before that happens but this is the situation at hand in our humble opinion.

Media Scratches Their Heads, Day Two

Market participants were being pummeled from many directions on Wednesday. First there was the news from Costco on Tuesday after the close that sales in August were up just 2%. This news drove the retail stocks down along with COST. Do we need to remind you that August should be a big back to school month for retailers in general?

Then there was the news that pending home sales had dropped 12% from last month to the lowest level since the month that included 9-11. This news should have brought visions of rate cuts into the minds of the bulls; but, there were some worry warts out there who just didn’t think that was all that good of news. Needless to say, the media just had no idea what to make of the day.

Next came the ADP employment data, an advance notice of the real jobs’ number coming on Friday. These numbers suggest a weak month for job growth, seemingly another feather in the bulls cap for a Fed interest rate cut. (ADP is the payroll company that administers checks for many companies. Their report is not as sought after as the jobs’ report but their numbers should be fairly credible due to the very nature of their company’s business.)

The big news came when the Fed’s beige book was released in the afternoon. The beige book didn’t lay out a direct plan to cut interest rates and in fact suggested that the mortgage mess didn’t seem to be affecting the real economy. Is that so? Well, we recommend the Fed starts to look at the latest numbers that, to be fair, were not available to them at the time the beige book was put together.

The evening’s news goes back to Countrywide, a company that has been in the news and in our blog quite a bit lately. The company is going to have to lay off some more workers this month; apparently that $13.5 billion of capital isn’t enough for them to keep all those people on staff.

In the overnight markets, there is a sense that Thursday's early morning will be a gift from Europe with no rate hike. The world is anxiously awaiting this news this evening with the US futures market bouncing as we write this.

Turning to one more item, more direct stock market link, is the news from AAPL. They announced a $200 reduction in the price of the iPhone. This is curious in its timing if nothing else. When the iPhone came out it was supposed to be the hottest new gadget in history. The price didn’t seem to be an object to the buyers. That price was on top of the monthly phone charges from AT&T. The main reason for this third off sale has to be that sales weren’t quite up to expectations and they have too many sitting around gathering dust.

We look at this in consideration of the price of AAPL which happens to be one of the four horseman, as we have mentioned here before. On Wednesday, AAPL dropped about 5% even though we don’t have any concern about the 5% just the point where it occurred. Back in late July, AAPL put in a strong performance moving up to nearly 150. Then it dropped nearly to 110 leading the market down into the lows of August. Now it’s back up in the 140’s this week, leading the market up on Tuesday. We wanted to point out that it has so far failed to get back to its late July price. This is a big deal for a stock like this that has such a big following. AAPL’s customers who had bought the iPhone earlier were complaining about the price drop because they had no way of getting their money back; but, when AAPL goes down this time, the shareholders will be complaining about a price drop, too. (Just one more sign that the credit crunch is affecting sales.)

The market is at a critical point here. The pattern is right for a down turn; the momentum indicators are overbought and turning over; the volume in this latest advance has been low by recent standards; and, the Dow has failed to achieve any milestone on this rally…so we think the time has come for the market to go down. The prices are the big thing. When people look at their stocks or the Dow and say it isn’t even back to 14K, much the same as AAPL above, they start to question the market. Of course, they won’t sell until prices drop which will by definition push prices lower, faster.

Media Doesn't Know What Moves Market

September started with a win for the bulls. We wish them well and would like to take the wins back starting on Wednesday. The month is very young and the market is still overbought.

We find the analysis to be a bit flawed on a day like Tuesday. As the market jumped this morning, the talk was all about how the Fed would need to lower rates. Then later, when Ford announced low sales figures, the continued chant of the media was that the Fed had more ammunition to lower rates as the market continued higher. Later GM announced positive sales for the period and the media was silenced as the market kept going up.

There are a couple of concepts here on this day. The media has been expecting a down September (and we are surprisingly in that camp, too) so they were modestly upbeat as the market opened the month with a strong positive day. The media will now tell us that the smart money is buying even as the public is selling—well, that may be true but will that result in higher or lower prices. Sure, the first day of the month was up.
The other issue that we have a difficult time with is this notion that the Fed needs to cut rates and that is good for the stock market…all the time. We think that the mere idea that the Fed would lower rates would be cause for concern about the future of the economy but since the Fed can fix anything with a rate cut, the economy is easy.

The problem with all of reasoning is that the market is up. Why do participants think the Fed will lower rates even as the market goes up??? These two things would seem to be mutually exclusive, or, at the very least, the rate cut doesn’t follow the market going up. Supposedly, the market could go up after a rate cut due to more liquidity being spread around but even that is a dangerous assumption in this market.

We have trouble thinking about the near term logic of the market. Yes, the B’s were out last Friday giving us their versions of the panacea for the future. And, today the market believed something positive about the promises. The market is now overbought and we need to focus on the next move which should be down hard. Still, the Dow remains below the 13,675 level.

As we write this evening the Asian markets are not trading like the Dow busted out for 100 points today. Japan opened strong but is now in the red. We’ll see how Europe trades in the morning.

The news this evening on the WSJ site is the Citigroup SIV (Structured Investment Vehicle). We haven’t mentioned these before and don’t have time to explain them this evening. Please pick up a paper edition of the WSJ and read the Heard on the Street column. It explains how C is denying any problems with Centauri, its largest SIV. This SIV is off C’s balance sheet so it operates pretty independently.

The other news is the short term interest rates, in the form of Libor (London interbank offered rate). This rate has moved higher due to the “credit-market turmoil”, according to another article on page C1 of the WSJ. We don’t have time this evening to go into the details but the WSJ gives a clear understanding…comments for discussion.

Bush and Bernanke, One Two Punch

This evening starts the beginning of trading in the month of September. The world markets were mostly open on our holiday and most were up probably in celebration of Monday or something. We would like to step back to Friday and remember what was going on back then.

As we opened for trading, there was quite a buzz going on about the big announcements from Bush and Bernanke. Bernanke was in Jackson Hole, WY giving a speech on the history of the housing market. The market had its ears glued to the news on what he might say about possible interest rate moves or some other “bullish” comments. Meanwhile, Bush was talking about what the Federal government might do to help the poor homeowners who might be losing their homes.

As we see it, the words they spoke are important to the world but we are here to talk about how the market took the news. The anticipation was pretty high and the buyers couldn’t wait until the market opened to express their dollars on the market. The Dow opened up about 125 points and, while it traded higher and lower than that, it went out at about the same level up 119. The other major indexes also ended the day near where they started, all up of course but not to a large degree.

In fact, the White House and the Fed combined their two shots at the market on the same day and managed only 119 Dow points. We find this fascinating because the market is now in an overbought state and can’t rally even on these terms. We think the fact that the market is overbought has more sway then the directives from these two high profile individuals. Now, can the market move higher from this overbought position? We look for a very trouble market in September.

Switching gears, we received our Barron’s this weekend with the front page headline that says “Introducing the Barron’s 400 Index”. We looked over the article discussing this New index and have another smile. This index, taken in retrospect, would have outstripped the major averages handily…Would have, if it would have been in existence.

We see a golden opportunity for us to challenge the theory that this index wants us to believe. The index could very well do better than the major averages in a downturn but we don’t think that’s what Barron’s had in mind. Even on the cover, they say “In essence, it picks AMERICA’S MOST PROMISING COMPANIES.” Their MarketGrader.com website within the online Barron’s website will be used to keep promising stocks coming into the index. We give them high marks for trying but we will wait for them to prove themselves in the upcoming market. Maybe when we are ready to buy stocks we could turn to their 400 stocks for picks. We’ll see.

So, from last Friday we see that the “Fed is ready to act” and the “Government will act”. That gives all of us great peace of mind for trading in September. Good luck to you.

Happy New Year

Thursday’s market was a rollercoaster ride for stocks with a down opening that led to a big rally right from the bell. The Dow opened about 100 points lower but we all seem to know what that means for stocks, let’s buy ‘em. The Dow ran up for a couple of hours and got into positive territory by around 25 points. The rest of the market was about the same with underlying weakness in the early part of the day giving way to a pretty good sized rally for most of the morning. From there we saw basically a see-saw action with the Dow trading in a 100 point range.

By the end of the day the Dow couldn’t hold onto gains but the NASDAQ did squeak out a small gain. The NASDAQ 100 (NDX) had a much better go of it in the first two hours as it rallied from an early 12 point loss to a gain of nearly 30 points two hours into the day. That rally faded and the NDX dropped into negative territory with about an hour to go. From that low of down about 2 points, the NDX rallied into the close and managed a 9 point advance for the day.

The underlying technical situation for the market was weak. The volume was low with downside volume higher than upside and breadth was negative, meaning there were more declining stocks than advancing. Along with that our momentum indicator is now in overbought territory. Not that these things mean too much by themselves. We just think that when we see the technicals the way they are, caution is warranted.

After hours, DELL announced their earnings which seemed to beat the estimates but we don’t feel confident in these numbers, since DELL doesn’t seem confident either. They reported the figures are preliminary due to the recent restating of some prior earnings periods that just were cleaned up this past month. The company has laid off many workers and cut costs in order to increase profits and for this quarter at least it seems to have paid off, if the afterhours market is any indication (yes, up)…

For some reason, as we are writing this, the overnight futures have exploded to the upside. We’re not exactly sure what has caused this but the SP500 and NDX futures are showing a gain of 1% after jumping in the last ten minutes or so. The news of the trading day was that the market was treading water waiting for Bernanke’s speak on Friday so maybe the text has been released and the Fed will be doing cartwheels for the market in the coming days.

Some comments: The way the market has traded the last couple of days, and maybe tomorrow based on the futures noted in the prior paragraph, corresponds well with our general thought that the market would rally this week. We generally think the long holiday weekends and the end of the month bring out fewer sellers so the buyers tend to have their way. This week is especially noted for this type of action because it’s the last week of summer and the “big boys” are vacationing in the Hamptons. This partially accounts for the lighter volume we have seen the last few days. We think it prudent to get prepared for the events that may occur next week after the Labor Day weekend.

Erick left us a comment that we thought we should note here. He mentioned two articles that may be of interest to all and we include links to them here:

Panic on Wall Street: A brief history of fear

Fed may not rush to the rescue


[Editor's note (Friday morning): Apparently the big push on the futures last night was inspired by Bush talk about "saving" the poor homeowners who might lose their houses. Frankly, this dismays us because now we have governmentalized, if that's a word, the subprime mess. This is probably what needed to happen but we were hopeful it wouldn't. These steps to circumvent the housing calamity we're now finding ourselves in will ultimately fail. In fact for those who have either already lost their homes or have been prudent, this "bailout" is not the right thing, we better stop this talk right here. Anyway, one other article of interest is from Elliott Wave International that you can read part of for free. The rest of it will cost you a few dollars but this is a great article (we are subscribers so we have read the full text):

Elliott Wave International's Robert Prechter's Elliott Wave Theorist from August 26th. It was titled Fasten Your Seat Belt. Enjoy.]

With the holiday weekend ahead of us, we wish you a very Happy New Year, as we always do over Labor Day weekend and we will see you on the flip side. Next week should prove most interesting.

Never Mind

The stock market did its best impression of forgetting what happened on Tuesday as they rallied them to pretty much wipe out the losses. The title implies that the two days of trading have cancelled each other out. What does this mean? We think it means that if you didn’t sell on Monday and buy on Tuesday just before the close, you are in pretty much the same position you were in on Monday.

Seriously, the stock market is showing some strength but the pattern is showing an end. Our momentum indicators are close to overbought now with the market having managed only a modest recovery effort from the lows of two weeks ago. Here we are at the end of the month just in front of a holiday weekend and volume is light. These conditions combine to make for a questionable bullish period of time.

The main event is just around the corner as we head into the long holiday weekend. Our position remains that the market will head down in September even into October with a very violent drop. According to our readings, there is a lot of bullishness and heavy reliance on the Fed to take care of all of the problems.

The week’s events include some communication between Senator Schumer and the great Chairman of the Fed, Ben Bernanke. The Senator contacted the Chairman because he just wanted to make sure he was doing his job of caretaker of the economy, we should clarify that the words were actually markets from the Senator. The Chairman’s reply basically said that the Fed was doing their job and would step in if events threatened the economy, which we would say means that the Chairman will do something if the stock market drops.

As we have indicated for some time now, there is incredible pressure being applied to the Fed by the politicians and the Fed does what it has to do in these situations, say it is doing its job.

On Wednesday, the market traded as if nothing was going on in credit, or more accurately, there was nothing to worry about in credit because the Fed could take care of any problems that might occur. Sadly, that is not even possible. Yes, a rate cut would help the market for a while but we say that the only thing that can really help the economy is for credit to expand at a rate that is fast enough to keep the global economy going. We don’t have any idea what that is but we are pretty sure it is not possible this time around.

As expected the Asian markets are celebrating the US good news—you know, the fact that the market was up—by following suit and rallying, too. We are wondering about the staying power of this rally overseas. With the start coming overnight last night (Tuesday to Wednesday) in the US futures, probably just because the market had been down on Tuesday, we think that a full trip around the globe from last night to tomorrow is not going to be that easy. It could happen but we think the highs in all of these markets are being put in or are already in.

In our reading materials, we hear nothing about any problems and we think that means that people again believe in the Fed put, meaning they can buy stocks without worry. On the bus last night, the conversation was about buying call options on Countrywide Financial just because “They” won’t let anything bad happen. Those kinds of comments are just exactly what we mean when we talk about “complacency”.

The pattern in the US market is trying to shake the confidence of bulls and bears alike. The more bulls that lose confidence, the faster the market will fall. If the bears lose confidence, they can only drive the market up so much. Then the already invested bulls must continue buying. We think the bulls are pretty much still “loaded up” with stocks. The only thing left is for them to sell into the coming decline.

Terrible Tuesday

The stock market decided to trade down on Tuesday, even after a down Monday. The early “reason” for the decline in the market was the lower consumer confidence number. The Conference Board reported that consumer confidence fell to 105.0 for August after being 111.9 in July. To put this “drag” on the market in perspective, we note that the expectation for consumer confidence was for it to go down to 104.0 so the real number was even better than expectations. So, how is it again that the consumer confidence number was the reason for the early decline in stocks???

The market did struggle all day long with the worst coming right after the release of the Fed’s minutes from its early August meeting. These minutes said that the Fed was going to be ready to act should anything pop up in the economy. The market jumped around a bit right after that news but after a few minutes started to push lower and basically went out on the lows for the day.

The message here is that the market is vulnerable to more declines. This one came out of nowhere and left many market participants scratching their heads and selling. We didn’t expect this decline to carry as far as it did. We thought the market would hold up this week and then drop next week after everyone is back from vacations. So, Wednesday’s action will be important to the down move we expect.

After moving up out of the 12,500 range a couple of weeks ago, the market is now making a move to go lower. In Elliott wave speak, the market had an undeniable five wave down move since Monday’s highs so that portends more on the downside. The nonconfirmation in the major indexes on Monday is another clue for us to consider. Today’s volume was not very high but the overwhelming majority of it was on the downside. We call these 90% negative days with more than 90% of the total volume is down. There are some sellers out there, that’s for sure.

This evening the futures are not making any bets on Wednesday’s trading either. Normally, after a big down day, the nibblers are out there trying to “buy the dip” but not this evening.

Fear Will Be the Name of the Game

Our position on the market remains the same, bearish. We should probably say extremely bearish for those of you who read us often. The stock market has shown some ability to get out from the cloud of being oversold and is now in neutral ground. This rally phase has moved the Dow up about 800 points from its low and that advance is now starting to show signs of slowing.

The light volume of the past two trading days is one of the strongest indications that the rally has lost some participation. The bulls are now waiting for someone else to come along and buy stocks higher.

As we write this evening, the world believes that the central bankers have saved the day and their precious stock holdings will be safe from harm. The major players are whining about how the Fed should support the stock market and now these players are basking in the warmth of the Fed's cash. Well, the Fed's cash is going to be removed from the playground fairly soon as they take their proverbial ball and go home. The Fed has stayed long enough at the party and they will be wanting their loans to be paid back.

As the market continues to drop over the next few months, what will be the recourse of the banking system or the Fed. The Fed has taken a huge gamble that it would be stronger to prevent a major crisis. Now, we wait to see if the world will believe what they say and do on the next time down.

We believe the confidence of the players will be shaken hard by any decline in the stock market and this will precipitate more selling. The hard truth of the stock market is that it can create an avalanche of fear in a hurry. On the move down that occurred a couple of weeks ago, the Fed seemed to ride to the rescue. With a failure by the Fed, there will be no rumors that the Fed can do anything. This will create a whole lot of fear.

Reconsider your portfolios this week and see what you can do. Next week will probably be troublesome. We say next week optimistically due to the position the market has created over the past couple of trading sessions. The weak volume doesn't give much credibility to the rally continuation so we are on high alert for a big decline in the stock market. Be prepared.

And, check out the new True Contrarian post in the links to the left.

One Sunday Evening

Just a short comment this evening with more to come on Monday evening: The market has shown that it can rally when it thinks the Fed is "supporting" it. We look at the relatively low volume and know this rally is mostly without substance or staying power. When the market was declining two weeks ago, conviction for the decline could be measured in the very high volume.

We would like to make one comment about the Fed in our short post this evening. The Fed has "loaned" money to the banking system by purchasing very secure assets from member banks. This action has allowed some liquidity to be floating around the system but its time is short as the Fed has promised to sell them back in 30 days or less. These actions by the Fed are called "repo's" and they will be resold over the next few days or weeks.

The Fed has given the banks some time to sell some of their own assets so that they can repay the loan given to them by the Fed. This will necessary Drain liquidity from the marketplace. More tomorrow but for this evening just know the Fed has entered the market on a very temporary basis.

Bill, Bill, Bill

The stock market again marked time on Thursday even though the world has again seen that the great mortgage disaster is behind us. In our post last night, we talked extensively about the Bank of America “rescue” attempt for Countrywide Financial, the largest mortgage originator in the country. As the stock opened on Thursday morning, there was a lot of fanfare as the price jumped about 2 ½ points or about 10% (Funny how last night it was trading up about four points). From the opening, CFC drifted lower most of the day to close up just fractionally for the day. This was quite a ride for the stock.

Bank of America seems to have made one sweet deal, given that CFC survives. The company bought preferred stock which is convertible to common stock at $18 a share compared to today’s close of about $22. On top of that, B of A gets 7.5% on its money while it waits. There were rumors that B of A was a large contributor to the $11.5 billion credit line we mentioned yesterday and which you have no doubt heard about over the past few days. The rumor we heard was that it was $10 billion—no confirmation to that but with that much at stake, B of A probably wanted to “protect its investment”.

On to what we consider the big news of the day: In what appears to be Bill Gross’s lowest moment, we heard today that the bond king has asked the government to bail out the homeowners who are having difficulty keeping their houses. First we have a Presidential candidate pushing for the Fed and the Treasury to step in to stabilize the markets and now we have the bond king asking the government to step in to save the day. Almost against our better judgment we are providing a link to Mr. Gross’s latest statement of opinion, this time on the housing bailout.

We cannot believe his nonchalance as he portrays the situation we have gotten ourselves into. After Senator Dodd suggested that the Fed/Treasury stabilize the markets, we imagined that stable meant “not going down” rather than stable. We then began to imagine a world where the market was manipulated to only go up. That sounds nice but is Impossible, sorry. Now we have the leap to government intervention on the housing by a seasoned professional bond trader. Mr. Gross says that since we bailed out Chrysler and the S&L’s that we should now take care of the current round of troubles: “This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.”

So many people have already lost their houses. There are many reasons why homeowners are losing their homes and all of them are based on the last round of credit expansion by the Fed, ok maybe we can’t say all, but certainly most of them. The Fed, under Greenspan, wanted to “protect” the world from a recession so it lowered rates and created the real estate bubble and all of its attendant hazards. We are seeing all of these unintended consequences take shape in front of our eyes over the past few weeks. Now, there are cries for a bailout.

Our opinion doesn’t count for much in this world but we believe that the government will try to bail out the homeowners and the Fed will do its part, too. That has been our premise in these pages from the beginning. It looks as though it is just a matter of time now. One problem that will fall out of this solution will be that the stock market will not be happy, no matter what Senator Dodd says or does.

Before we close this evening and week out, we received a comment that we should respond to here. The comment asked a couple of questions, one was why the market ends higher every day. First answer is to make Senator Dodd happy maybe??? Ok, maybe not but we are confused about the market ending higher every day. We want to know which one this is so we can invest in it. If the question is about the US markets, we look at two indexes, the Dow and the RUT. From the highs of July, the Dow is down from 14,000 to today's close of 13,235 so you can't be asking about that one. The Russell 2000 (RUT) had a high of around 855 back in July and closed today at 788 so you can't be talking about that one either. Let's get to the other part of your question, the one about the Asian markets.

You asked why the Asian markets have completely recovered. Well, the only one that has fully recovered is China and that is not all of Asia by any means. Japan is still down 10% from its highs and so is South Korea and Hong Kong. So, if you are trading China, then you are up a little over the past few weeks, otherwise, you are probably down about 10% so far.

Your final question is the relationship between Asian markets and we presume the US market. Over the past several years, the global equities have all swelled up together with some basis in the US due to extraordinary demand created by low interest rates here. This is the reason for the huge economic expansion in China and Asia in general. With current stock prices in China going to the moon, the foundations for those prices should be justified by continued economic growth. We anticipate that the current credit contraction in the US will slow economic growth in the rest of the world.

Thanks for the comment and let's continue the dialogue. Any other comments? Other readers are welcome to join the discussion.

B of A, Another Superman?

This, being Wednesday, would normally be a full report but there is only one thing on the schedule this evening and that is Bank of America’s “rescue” of Countrywide Financial (CFC) announced in after hours trading this evening. In a bold move, even for Superman, B of A has decided to invest $2 billion in CFC, even though B of A decided many years ago not to get involved with subprime loans. For reference, please refer to the front page of the WSJ on Thursday morning to see the article we are reading this evening.

There are so many problems in the mortgage world that we just can’t mention them all here. CFC’s problems have become more noticeable over the past few weeks due to the fact that it was near bankruptcy. Why would a company be on the verge of bankruptcy? Well, CFC’s financing is mainly done in the Commercial paper market which is the basis for quite a few money market fund assets. Over the past few days, as we have mentioned here, there has been a major left turn moving assets from risky assets to much safer Treasury securities. When this happened, the primary funding source for CFC dried up.

One thing we would like to mention is the falloff in CFC’s stock price. Take a look (over at the big charts link to the left) at the stock price performance over the past year. You will see that it has been falling from the 45 range early this year. CFC did drop with the general mortgage woes back in late February but managed to recoup most of those losses by May when it was trading at a high of 42. Since then the stock has been drifting lower until hitting a low last week at 15—this does look like some fear and panic selling late last week.

Then, enter the Fed: The rumor of a rate cut on Thursday afternoon last week causes a rebound in financial stocks, particularly CFC. This bounce moves the stock from 15 Thursday afternoon to nearly 24 on Friday morning, a 60% move up in about two trading hours. The move by the Fed did cause some investors to chase the Treasury market shifting funds away from the likes of CFC. Now, the Fed needs to beg the banks to start borrowing money from the Fed’s discount window, and several do. Still, there is some trepidation among market participants that the mortgage industry needs some help (No Kidding).

Enter Bank of America: As CFC was being downgraded by many, there was another game going on behind closed doors to seek a way to calm markets. Tonight, the big announcement came; B of A was stepping in to provide some funding for CFC. The market now feels much better and is rallying as we write this. Apparently, $2 billion from B of A is enough to help CFC even after the mortgage company took advantage of $11.5 billion in funding over the past week from a consortium of 40 banks, according to the WSJ.

Also, according to the WSJ article, CFC was a “big promoter of pay-option…ARMs. These give borrowers several choices each month, including paying no principal and less than the full amount of interest normally due. If they take that route, their loan balances grow, setting them up for much higher payments later on. CFC’s banking arm holds $27.8 billion of option ARMs on its books. Payments were 30 days or more overdue on 5.7% of these loans as of June 30, compared with 1.6% a year earlier.”

Earlier this afternoon, Lehman Brothers announced they were shutting down their subprime mortgage unit BNC Mortgage Corp., saying that credit market conditions prompted it to slash its subprime resources and capacity. Earlier this week, COF (Capital One) said it was closing its GreenPoint mortgage operation, as mentioned here yesterday. Now, tonight, B of A is bolding going where no man has gone before…wait a minute, the quote is to boldly split infinitives, remember—to boldly go where no man has gone before. There that feels better.

We have centered this blog on the collapse of the housing market including the silly mortgages that were invented to get as many people into homes. Tonight, we can only say that B of A is going to have its hands full with CFC. This problem cannot be fixed with $2 billion from B of A. The problem is that people cannot afford to continue on the path of borrowing money to continue their lifestyles.

The credit expansion period is OVER and now we will have contraction. This will be a very painful process for everyone. We hope you have taken precautions to reduce your debt. This new round of “reflation” will not work like the bubbles that were created in the past decade. This will be the Fed pushing on a string because the borrowing will not keep the markets from going down.

Just a Day of Rest

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.