Top Line: The intraday reversal to the upside probably indicates we have seen a short term low with some month end strength. The market has been very oversold and Wednesday's action should lead to a sizable bounce.
We thought we should start with the answer to the question in the comment section, "where does all the money go if everyone is selling?" We have to add a second question, what happens to the value of the company if the price of the stock goes down?
Remember that whenever a stock is sold, someone actually buys it. As some say, there are just as many buyers as sellers. If you sell your stock to someone, you get their money and they get your stock. No money is lost, it just transfers from one person/entity to another. So, the real question is "if a stock is worth $20 one day and $15 the next, where did the 25% value go?" This is a tricky concept, one that may ellude us all a bit. But, let's start with a simple setup, that being one share of stock going for $100 today.
Why is the stock $100 today? Well, it's $100 today because that's what someone is willing to pay for it. When companies say their "capitalization" is so much, they take the price of the stock times the number of shares outstanding. The result is how much the company is worth, or its capitalization. In our little example, we have just one share of stock that we paid $100 to own. Tomorrow, when there are no buyers willing to pay $100 for the stock, it's not worth $100 anymore. If we choose to sell it, then we have to go find a buyer and that buyer may be willing to pay only $75 for the share we own.
What does this mean? This means you lost 25% of your money. The person that sold it to you for $100 is now pretty happy. If you can understand this concept, that the value has just vanished, you can see how tenuous the stock market can be at times. The value of stock is only as high as someone is willing to pay. If the owners of the stock are comfortable with their company's prospects and they don't sell all at once, then buyers will have to pay more in order to entice the owners into selling.
If, on the other hand, the owners are Not comfortable with the prospects, they will want to sell their holdings. And, if the owners want to sell, there are few, if any, willing buyers to take it off their hands unless they lower their offer price.
This brings us to the Fed and its panic attack on Tuesday morning. Why did the Fed lower rates just a week before their next meeting? Well, they didn't want owners of stock to sell their positions creating a situation where prices fall and continue falling. The entire stock market only functions well when the owners are comfortable. Any other time, the market drops and the powers that be start wanting to do something about it.
Thanks for the timely question.
Back to the market action. Wednesday was something to see. The market dropped at the open due mostly to the AAPL news, along with MOT (Motorola) who works with AAPL. AAPL's drop inspired a drop in the four horsemen, and in turn our FSI (For Speculation Index) dropped right along with it.
The market fell out of bed in the morning and our favorite index, NDX, was being trampled due to the four horsemen mainly. We saw a drop of nearly 6% at one time in that index as GOOG and AAPL were both getting double digit percentage losses.
From the lows in the Dow and other indexes, we saw a massive rally, to the tune of 600 points in the Dow, which is over 5% in a few hours. The NDX, which had been down 100 points or about 6% rallied back to nearly even by the end of the day. The stage is set for some more rallying in the next week or so. We'll keep you posted.
The Asian markets were bought on Tuesday evening, after the Fed's move, and again this evening on the back of the big reversal in the US stock market. That would be all except the Japanese market which, while it has come back up a little, it wasn't very much.
Our primary thought this evening is that the stock market has marked a low on Wednesday for the time being. If at any time it breaks those lows, we are going down more. For now, we need to expect a decent sized rally. The high volume of the past few trading sessions has exhausted some buying power and we need to respect the bear. That is why we look for other opportunities for the down move yet to come, and at the same time keep a lookout for a break in the established lows.
We will provide more guidance on where we see a rally going tomorrow after we see the kind of follow through buying we see on Thursday.
The reason cited for the bounce was the banks' efforts to get some capital to the bond insurers we mentioned here last week, MBI and Ambac (MBIA and ABK). The market must think that if the insurer can stay rated AAA, then the problems must be behind us. Right. We think the market was due for a bounce especially with the spike low we had on Wednesday. The media needed a good story.
FSI: 82.51 (ouch, on December 28th this index was 108.15, a 25% loss in a month)
Wednesday, January 23, 2008
Tuesday, January 22, 2008
Fed Panics
Top Line: The stock market didn't open the trading day with a bell, as in the opening bell; it opened with a cut, as in interest rates. Of course, you already know this fact but do you also know that the market doesn't turn on a dime like the Fed? The stock market is in a bear market and we don't think there is much that will stop it, least of all the Fed, even with all their efforts.
The Fed has cut rates in front of a stock market decline that it will be unable to stop. The Fed has a meeting next week and they couldn't wait until then to make a move. Why? Well, you know that a week can make a difference when it comes to lowering interest rates--for who? That would be the banks. Ok, the actual wording in their statement was more like, we don't want to let investors' fears of a recession become self-fulfilling, according to the WSJ.
Tuesday morning also brought us Bank of America's earnings statement of 5 cents a share. This represents an actual profit unlike several banks in the wake of the mortgage defaults over the past several months. Along with their earnings came a promise that, unlike when Citigroup promised not to cut its dividend and then did, the BofA would not cut its dividend. This news accompanied the strong statements from the Fed in the morning and gave the bank a panic start of down nearly 10% but by the end of the day was up 4%. So, while the Dow industrials didn't actually erase the full 500 point open, the bank stocks and housing stocks were up about 3% apiece.
We thought we would be reporting more negative news about prices but then there is always the Fed trying to stop big declines. We wonder what they'll do next time. We are reading that the market is fully expecting another half point cut from them next week at the conclusion of the FOMC meeting. That would take the rate down to 3% and down 2.25% from last year's high rate of 5.25%. Even we would be surprised by that, not so surprised by Tuesday morning's action but another cut in a week would definitely surprise us.
That is not to say that the Fed doesn't have room to move down, they do. (We look at the short term Treasury rates down around 2%.) It just seems so reckless to have the Fed panicking and making moves like that. The Fed has been doing huge things in the credit markets with their TAF funding. The banks have been gobbling up money from the Fed providing liquidity to continue lending.
The Fed is in the business of creating an opportunity for people to borrow more money and less reason to keep money in those tired old savings vehicles where you won't be earning much interest. They want everyone to borrow and spend to keep the party going. Just think, the cure is the same as the disease, only more.
With more and more people getting behind on their mortgages and other debt payments, not to mention their phone bills (AT&T disconnecting phones and cable internet for non-payment), how is it that they can continue borrowing? They sure would like to spend but it's that pesky debt servicing that gets in the way.
As we examine the after hours market, one thing stands out, AAPL. Yes, Apple Computer has sliced up some disappointing news for investors. Their guidance was taken as negative and has caused a little selloff in the overnight market. AAPL itself is down over 10% this evening and has dragged the likes of GOOG down with it as well as the US futures. Maybe the Fed should go buy an Apple, you know what they say, an AAPL a day...
Really, what is the Fed going to do if the market just keeps dropping? Well, we'll soon find out. You probably have seen this article but we wanted to keep it here for records. We don't agree with his dollar comments but with most everything else. Here is an excerpt: "The fact that the Federal Reserve Board announced an emergency cut of 0.75 percent in short-term rates shows that the Fed thinks the problem is a market panic rather than economic fundamentals. Normally, the Fed would have waited until mid-day next Tuesday - the second day of its scheduled two-day meeting - to announce a rate cut. Announcing an out-of-schedule cut today before the stock market opened shows that its motivation is to calm the markets rather than to reinvigorate the U.S. economy."
There could well have been a selling climax today but a 450 point rally in the Dow following the rate cut may have satisfied the need for a correction. (When we say correction, this is an up move in a down market.) And, with AAPL's news able to push the markets down so easily this evening, it is possible that we could go down from here.
In any event, the market is not done going down. As we mentioned in our last post, it may seem like the worst is over but you shouldn't believe it. Fed rate cuts are not bullish even though some traders think it means more money going into the market. The market is now dealing wth quite the opposite with money Leaving.
FSI: 88.23 (without the AAPL news)
The Fed has cut rates in front of a stock market decline that it will be unable to stop. The Fed has a meeting next week and they couldn't wait until then to make a move. Why? Well, you know that a week can make a difference when it comes to lowering interest rates--for who? That would be the banks. Ok, the actual wording in their statement was more like, we don't want to let investors' fears of a recession become self-fulfilling, according to the WSJ.
Tuesday morning also brought us Bank of America's earnings statement of 5 cents a share. This represents an actual profit unlike several banks in the wake of the mortgage defaults over the past several months. Along with their earnings came a promise that, unlike when Citigroup promised not to cut its dividend and then did, the BofA would not cut its dividend. This news accompanied the strong statements from the Fed in the morning and gave the bank a panic start of down nearly 10% but by the end of the day was up 4%. So, while the Dow industrials didn't actually erase the full 500 point open, the bank stocks and housing stocks were up about 3% apiece.
We thought we would be reporting more negative news about prices but then there is always the Fed trying to stop big declines. We wonder what they'll do next time. We are reading that the market is fully expecting another half point cut from them next week at the conclusion of the FOMC meeting. That would take the rate down to 3% and down 2.25% from last year's high rate of 5.25%. Even we would be surprised by that, not so surprised by Tuesday morning's action but another cut in a week would definitely surprise us.
That is not to say that the Fed doesn't have room to move down, they do. (We look at the short term Treasury rates down around 2%.) It just seems so reckless to have the Fed panicking and making moves like that. The Fed has been doing huge things in the credit markets with their TAF funding. The banks have been gobbling up money from the Fed providing liquidity to continue lending.
The Fed is in the business of creating an opportunity for people to borrow more money and less reason to keep money in those tired old savings vehicles where you won't be earning much interest. They want everyone to borrow and spend to keep the party going. Just think, the cure is the same as the disease, only more.
With more and more people getting behind on their mortgages and other debt payments, not to mention their phone bills (AT&T disconnecting phones and cable internet for non-payment), how is it that they can continue borrowing? They sure would like to spend but it's that pesky debt servicing that gets in the way.
As we examine the after hours market, one thing stands out, AAPL. Yes, Apple Computer has sliced up some disappointing news for investors. Their guidance was taken as negative and has caused a little selloff in the overnight market. AAPL itself is down over 10% this evening and has dragged the likes of GOOG down with it as well as the US futures. Maybe the Fed should go buy an Apple, you know what they say, an AAPL a day...
Really, what is the Fed going to do if the market just keeps dropping? Well, we'll soon find out. You probably have seen this article but we wanted to keep it here for records. We don't agree with his dollar comments but with most everything else. Here is an excerpt: "The fact that the Federal Reserve Board announced an emergency cut of 0.75 percent in short-term rates shows that the Fed thinks the problem is a market panic rather than economic fundamentals. Normally, the Fed would have waited until mid-day next Tuesday - the second day of its scheduled two-day meeting - to announce a rate cut. Announcing an out-of-schedule cut today before the stock market opened shows that its motivation is to calm the markets rather than to reinvigorate the U.S. economy."
There could well have been a selling climax today but a 450 point rally in the Dow following the rate cut may have satisfied the need for a correction. (When we say correction, this is an up move in a down market.) And, with AAPL's news able to push the markets down so easily this evening, it is possible that we could go down from here.
In any event, the market is not done going down. As we mentioned in our last post, it may seem like the worst is over but you shouldn't believe it. Fed rate cuts are not bullish even though some traders think it means more money going into the market. The market is now dealing wth quite the opposite with money Leaving.
FSI: 88.23 (without the AAPL news)
Monday, January 21, 2008
Surprises are to the Downside
Top Line: There really is only one story this evening and that is the global meltdown in stocks. We have been calling for global markets to go down but now that they actually have, we know that can not be a good sign for the US market.
With the US markets closed on Monday we did not post on Sunday evening like we normally would. Our rule is to post the evening before a market day usually by midnight Central Time.
With the US markets closed, the rest of the world has taken a beating. For two nights in a row, Asia has been hit hard with the over extended markets there ripe for a massive sell off. The Hong Kong market, measured by the Heng Seng Index, is down 14% in these two trading days. From its highs in late October around 32,000, it is trading at 22,000 this evening for over a 30% loss in about three months.
Over in China, the Shanghai SSE Index has lost over 10% in the last two evenings. This index traded at 6125 in late October and is now trading around 4650 for a loss of nearly 1500 or just under 25%. Unbelievably, the SSE is still above its May and June highs from 2007.
In India, we don't know how to get quotes for trading taking place right now, but we can only assume it is down again this evening. Last night it dropped 7.5%.
Looking at the hapless Nikkei Dow in Japan, that index is down about 10% in the last two evenings as well. This index is trading at prices not seen since two and half years ago. We have talked about the parity of the Nikkei Dow and the Dow Industrials. When they came into close proximity, the Nikkei moved up quickly. Taking the Dow Industrials close from Friday to the current level of the Nikkei, there is still 500 points of room. But that's not why you're here, is it?
You're here because you want a read on the US market. Well, right now as we write the Dow futures are down 500 points or a little over 4% with the SP 500 and the NASDAQ100 futures down a similar percentage.
This foreshadows a dark day on Wall Street for Tuesday. As we have mentioned several times in the past, and it hasn't happened, the worst selloffs occur After stocks get oversold, which they definitely are now. As the market opens on Tuesday, there should be a loud thud. We're not sure how the market will open exactly but buyers will be scarce.
We have been warning in this blog about the dangers of the stock market and just last Thursday evening we titled our post, "The Break". That break was a technical breach of long established trendlines and support levels and signals a long term bear market in the making. Tuesday's trading will probably confirm a bear market to many. Of course, what it will feel like on Tuesday will be that the worst may just be over--don't believe it.
The stock market has a lot of room on the downside and it will be just getting a good start on Tuesday. We say that due to several reasons but they don't matter this evening. We've said most of them over the past several months anyway.
It seems pretty meaningless to go over last Friday's action, as we described it on Thursday evening, it would be "mere noise". Way back then, IBM had announced earnings and every bull was excited. The market opened on Friday with a large up move to the tune of almost 200 points but that didn't last too long. Both the Fed and the president were saying there would need to be some help for the economy if we were going to prevent a recession. As you can tell, the global markets didn't really think much of it either.
The January options were expiring on Friday and there was a lot of movement in the volume department. The volume was not very helpful in assessing what was going on under the surface because it was mostly just unwinding positions. Come back tomorrow for our take on Tuesday's trading. It should be something to see.
The market is about to collapse and we hope that you have taken your portfolios out of harms way. We have enjoyed a month's worth of falling markets and Tuesday will be a large break that will scare people so more selling will come. Some will sell tomorrow, some will buy but we think the course of the market is down for the time being.
FSI: 90.31 ( this number should be much lower after Tuesday's trading.
With the US markets closed on Monday we did not post on Sunday evening like we normally would. Our rule is to post the evening before a market day usually by midnight Central Time.
With the US markets closed, the rest of the world has taken a beating. For two nights in a row, Asia has been hit hard with the over extended markets there ripe for a massive sell off. The Hong Kong market, measured by the Heng Seng Index, is down 14% in these two trading days. From its highs in late October around 32,000, it is trading at 22,000 this evening for over a 30% loss in about three months.
Over in China, the Shanghai SSE Index has lost over 10% in the last two evenings. This index traded at 6125 in late October and is now trading around 4650 for a loss of nearly 1500 or just under 25%. Unbelievably, the SSE is still above its May and June highs from 2007.
In India, we don't know how to get quotes for trading taking place right now, but we can only assume it is down again this evening. Last night it dropped 7.5%.
Looking at the hapless Nikkei Dow in Japan, that index is down about 10% in the last two evenings as well. This index is trading at prices not seen since two and half years ago. We have talked about the parity of the Nikkei Dow and the Dow Industrials. When they came into close proximity, the Nikkei moved up quickly. Taking the Dow Industrials close from Friday to the current level of the Nikkei, there is still 500 points of room. But that's not why you're here, is it?
You're here because you want a read on the US market. Well, right now as we write the Dow futures are down 500 points or a little over 4% with the SP 500 and the NASDAQ100 futures down a similar percentage.
This foreshadows a dark day on Wall Street for Tuesday. As we have mentioned several times in the past, and it hasn't happened, the worst selloffs occur After stocks get oversold, which they definitely are now. As the market opens on Tuesday, there should be a loud thud. We're not sure how the market will open exactly but buyers will be scarce.
We have been warning in this blog about the dangers of the stock market and just last Thursday evening we titled our post, "The Break". That break was a technical breach of long established trendlines and support levels and signals a long term bear market in the making. Tuesday's trading will probably confirm a bear market to many. Of course, what it will feel like on Tuesday will be that the worst may just be over--don't believe it.
The stock market has a lot of room on the downside and it will be just getting a good start on Tuesday. We say that due to several reasons but they don't matter this evening. We've said most of them over the past several months anyway.
It seems pretty meaningless to go over last Friday's action, as we described it on Thursday evening, it would be "mere noise". Way back then, IBM had announced earnings and every bull was excited. The market opened on Friday with a large up move to the tune of almost 200 points but that didn't last too long. Both the Fed and the president were saying there would need to be some help for the economy if we were going to prevent a recession. As you can tell, the global markets didn't really think much of it either.
The January options were expiring on Friday and there was a lot of movement in the volume department. The volume was not very helpful in assessing what was going on under the surface because it was mostly just unwinding positions. Come back tomorrow for our take on Tuesday's trading. It should be something to see.
The market is about to collapse and we hope that you have taken your portfolios out of harms way. We have enjoyed a month's worth of falling markets and Tuesday will be a large break that will scare people so more selling will come. Some will sell tomorrow, some will buy but we think the course of the market is down for the time being.
FSI: 90.31 ( this number should be much lower after Tuesday's trading.
Thursday, January 17, 2008
The Break
[Late addition, Friday morning: Great minds think alike.]
Top Line: We call this market a bear market and we should be aware that the tendencies of a bear market are much like those of a bull market, with a little more power due to fear being exhibited versus greed. We here at the Update will promise to be more respectful of the bear market from here on out. Our week has been riddled with whipsaw even though our portfolio remains intact this evening.
More Top Line: Thursday's break of 12,500 in the Dow brings some real trouble to the bulls. The shelf of support revealed a hidden trap door. We need to revisit the numbers we shared in our last post due to the day's action and we are certain that whatever is going on in the after hours is mere noise.
Speaking of the after hours, IBM got to do double duty this week. They preannounced on Monday and tonight they delivered their news. The news was received positively in the thinly traded after hours market and the US futures are up strongly as we write. These are the types of things that are powerful in creating confusion for the participants.
The news of the day has been centered on our FearFul central banker Bernanke and his testimony in front of Congress in the morning. He told them that fiscal stimulus is needed and should be used very soon. If Congress could turn on the fiscal stimulus as the Fed is cranking down the interest rates, Bernanke thought that would be a good preventative dose of medicine to Avoid a recession. (You can only imagine how long it took the politicians to grab onto to that bit of advice.)
Does he seriously think we are Not going to have a recession? That was the question on the traders' minds as stock prices immediately started falling as he was speaking. These helpful hints to Congress to stimulate the economy are not really confidence builders for those who are buying stocks. The US Treasury bonds did do fairly well on the news, thank you very much.
The news on the day was just not very good. Merrill Lynch was the early news and it said they were writing down some more assets. Losses amount to around $10 billion or $12.57 a share. We ask what a company like that is really worth. If the P/E ratio is 10, that would be negative $125, but that's not how it works.
Then there was the Philly Fed's manufacturing report which showed contraction. The housing report that indicated the worst annual drop in 27 years when you now include December's dismal numbers. Washington Mutual, dubbed WaMu, said that it would lose about $1.9 billion.
Then there is the little problem over at the bond insurers, MBIA and AMBAC. These stocks dropped, respectively, 30% and 50% today. This news has brought more energy to the default talk which should appear on the front page of the WSJ on Friday. Inside the article are less than confidence inspiring statements about how the CDS world may have troubles.
CDS's are credit default swaps and the name suggests what they are, swapping the credit defaults of various credit securities. One company owns a bond or mortgage and would like to get "off the risk" so it tries to sell the asset. Some of these assets are so thinly traded that a buyer is difficult to find sometimes. But, in the world of derivatives, this is no problem. An arrangement is made with a speculator who is willing to provide insurance on the asset in the event of default. So, the owner of the asset now is protected from default, right? Not so fast.
This all worked nice and neat over the past several years when defaults were at minimal levels. With all of the losses piling up on various assets, there is a new risk. It is called counterparty risk meaning that the company that provided the insurance may not actually be able to pay for the credit default.
This is quite a predicament for Company A, who buys a security from XYZ but doesn't really like the credit risk of XYZ so it contracts with Company B to provide insurance. If XYZ has a default, Company B is supposed to pay Company A for any loss due to the default. What if the number is so big Company B can't pay Company A? Company A has now lost its "insurance premium" and has lost the value of the asset. Not a pretty picture at all.
Then, after the market closed the Russell 2000, RUT, managed to drop 20% from its 2007 highs. This represents an event known as a confirmed bear market and it will be reported as such in the press on Friday. It was truly a bearish, especially after the market broke through support, or as we call it, the trap door.
Right now it is important to step back and assess the fear of the chairman of the Fed. We think the market has been looking forward to the rate cut in a couple of weeks, and hoping for it early, but now the chairman is explaining why the cuts are necessary and the market does not like it. We think this will continue for a long while.
We received information from our subscription service with Elliott Wave International indicating the break in the market today. They are and have been bearish for a long time and tonight have basically gone red with their bearishness. The market is about to fall a long ways and they think well past the 11,000 we mentioned in our last few posts. Our number is the first in a series of downside targets we expect to hit over the next Five years or so. This will be a painful experience for all. We want to provide some roadmaps for you as we go down this path together. Take the first step slowly and gingerly because it's a doosy.
FSI: 90.20 (not too bad but a new low)
Top Line: We call this market a bear market and we should be aware that the tendencies of a bear market are much like those of a bull market, with a little more power due to fear being exhibited versus greed. We here at the Update will promise to be more respectful of the bear market from here on out. Our week has been riddled with whipsaw even though our portfolio remains intact this evening.
More Top Line: Thursday's break of 12,500 in the Dow brings some real trouble to the bulls. The shelf of support revealed a hidden trap door. We need to revisit the numbers we shared in our last post due to the day's action and we are certain that whatever is going on in the after hours is mere noise.
Speaking of the after hours, IBM got to do double duty this week. They preannounced on Monday and tonight they delivered their news. The news was received positively in the thinly traded after hours market and the US futures are up strongly as we write. These are the types of things that are powerful in creating confusion for the participants.
The news of the day has been centered on our FearFul central banker Bernanke and his testimony in front of Congress in the morning. He told them that fiscal stimulus is needed and should be used very soon. If Congress could turn on the fiscal stimulus as the Fed is cranking down the interest rates, Bernanke thought that would be a good preventative dose of medicine to Avoid a recession. (You can only imagine how long it took the politicians to grab onto to that bit of advice.)
Does he seriously think we are Not going to have a recession? That was the question on the traders' minds as stock prices immediately started falling as he was speaking. These helpful hints to Congress to stimulate the economy are not really confidence builders for those who are buying stocks. The US Treasury bonds did do fairly well on the news, thank you very much.
The news on the day was just not very good. Merrill Lynch was the early news and it said they were writing down some more assets. Losses amount to around $10 billion or $12.57 a share. We ask what a company like that is really worth. If the P/E ratio is 10, that would be negative $125, but that's not how it works.
Then there was the Philly Fed's manufacturing report which showed contraction. The housing report that indicated the worst annual drop in 27 years when you now include December's dismal numbers. Washington Mutual, dubbed WaMu, said that it would lose about $1.9 billion.
Then there is the little problem over at the bond insurers, MBIA and AMBAC. These stocks dropped, respectively, 30% and 50% today. This news has brought more energy to the default talk which should appear on the front page of the WSJ on Friday. Inside the article are less than confidence inspiring statements about how the CDS world may have troubles.
CDS's are credit default swaps and the name suggests what they are, swapping the credit defaults of various credit securities. One company owns a bond or mortgage and would like to get "off the risk" so it tries to sell the asset. Some of these assets are so thinly traded that a buyer is difficult to find sometimes. But, in the world of derivatives, this is no problem. An arrangement is made with a speculator who is willing to provide insurance on the asset in the event of default. So, the owner of the asset now is protected from default, right? Not so fast.
This all worked nice and neat over the past several years when defaults were at minimal levels. With all of the losses piling up on various assets, there is a new risk. It is called counterparty risk meaning that the company that provided the insurance may not actually be able to pay for the credit default.
This is quite a predicament for Company A, who buys a security from XYZ but doesn't really like the credit risk of XYZ so it contracts with Company B to provide insurance. If XYZ has a default, Company B is supposed to pay Company A for any loss due to the default. What if the number is so big Company B can't pay Company A? Company A has now lost its "insurance premium" and has lost the value of the asset. Not a pretty picture at all.
Then, after the market closed the Russell 2000, RUT, managed to drop 20% from its 2007 highs. This represents an event known as a confirmed bear market and it will be reported as such in the press on Friday. It was truly a bearish, especially after the market broke through support, or as we call it, the trap door.
Right now it is important to step back and assess the fear of the chairman of the Fed. We think the market has been looking forward to the rate cut in a couple of weeks, and hoping for it early, but now the chairman is explaining why the cuts are necessary and the market does not like it. We think this will continue for a long while.
We received information from our subscription service with Elliott Wave International indicating the break in the market today. They are and have been bearish for a long time and tonight have basically gone red with their bearishness. The market is about to fall a long ways and they think well past the 11,000 we mentioned in our last few posts. Our number is the first in a series of downside targets we expect to hit over the next Five years or so. This will be a painful experience for all. We want to provide some roadmaps for you as we go down this path together. Take the first step slowly and gingerly because it's a doosy.
FSI: 90.20 (not too bad but a new low)
Wednesday, January 16, 2008
Something for Everyone
Top Line: The stock market as measured by the NASDAQ Comp index traded in a fairly wide range on Wednesday but managed to escape much damage. In fact, the foundation is now in place for a counter trend rally, if you can believe that after the INTC news on Tuesday. Since the market failed to make any progress on the downside on Wednesday after a perfect setup, we are going to go back to our thought that a bounce to the 13,000 level is in order. Then, after that, we will get our move down to the 11,000 area (more about that after we see a rally).
The stock market is difficult to read on a good day but when it wants to go down and so many want it to stay up there are crosscurrents that move it in unlikely directions. Over night last night the futures were significantly lower with the NASDAQ 100 futures down about 30 points at our last look before we put yesterday's post up. In the morning, the futures were down until we heard the news from JP Morgan.
Before the market opened, JPM declared that they had stayed in the black for the quarter and this brought a smile to the bulls as they started buying up the financials, with JPM in the lead. JPM ended the day up more than 5% along with several other financial stocks performing very well??? This group includes the housing sector which was strong on Wednesday.
This was going on even as the tech world was getting hammered (except for most semiconductors) with GOOG ending the day down over 3% to a 3 month low and INTC down over 12% to close under 20. INTC was nearly 28 in early December. Our opinion would be that INTC got off easy and should have been sold more, time will show this may happen. We have had a $12 target on this stock for a long time.
As all of this was going on, a rally in the dollar came in as gold and oil suffered setbacks. With oil down, the transports were doing pretty well today and have done better than the industrials over the past few days. This has created a bullish setup for the Dow industrials helping us to move the bullish scenario up a notch--remember this is counter trend and iffy to trade.
And, bonds did ok in the early going but ended down on the day. Bonds are getting pretty expensive and may take a rest if stocks manage to go up over the next few days. We do think bonds (US Treasury variety, TLT for example) will do fairly well this year even with a little setback here.
We sometimes see strong trends being interupted for options expiration week which this is and Wednesday is the typical turn day. We think there is ample opportunity for us on the downside during 2008, so we remain patient. It's not like we haven't had a solidly down January so far. We just think the next move will take us out of this oversold condition and allow us to drop once again.
Targets are now measured in bear market terms since we are probably not going to revisit the highs any time soon. We go back to our Elliott wave estimates both for the corrective move up now and then the next large move down. We should be correcting the move from 13,750 to this week's lows maybe today's 12,400. That's a 1350 point drop giving us an initial target of about half way or 675 points back up to just over 13,000. The Elliott wave estimates are about 40% (38.2%) or 60% (61.8%) or about 525 to 825 points up between 12,925 and 13,225 or our estimates of 13,000 to 13,200 which we have talked about for several days now.
After that, Elliott would say that we should have another move down that would be more than the 1350 point drop that we saw in the first run down. This proportion is not ever really knowable but at a minimum would be 160% of the first wave, or over 2100 points. That would take us down to about our 11,000 that we mentioned yesterday. Nothing seems to go perfect to plan but at least this is a roadmap we are going to be watching.
Reading Material:
Article on The Education of Ben Bernanke from the NY Times
FSI: 91.79 (a new low in this new index)
The stock market is difficult to read on a good day but when it wants to go down and so many want it to stay up there are crosscurrents that move it in unlikely directions. Over night last night the futures were significantly lower with the NASDAQ 100 futures down about 30 points at our last look before we put yesterday's post up. In the morning, the futures were down until we heard the news from JP Morgan.
Before the market opened, JPM declared that they had stayed in the black for the quarter and this brought a smile to the bulls as they started buying up the financials, with JPM in the lead. JPM ended the day up more than 5% along with several other financial stocks performing very well??? This group includes the housing sector which was strong on Wednesday.
This was going on even as the tech world was getting hammered (except for most semiconductors) with GOOG ending the day down over 3% to a 3 month low and INTC down over 12% to close under 20. INTC was nearly 28 in early December. Our opinion would be that INTC got off easy and should have been sold more, time will show this may happen. We have had a $12 target on this stock for a long time.
As all of this was going on, a rally in the dollar came in as gold and oil suffered setbacks. With oil down, the transports were doing pretty well today and have done better than the industrials over the past few days. This has created a bullish setup for the Dow industrials helping us to move the bullish scenario up a notch--remember this is counter trend and iffy to trade.
And, bonds did ok in the early going but ended down on the day. Bonds are getting pretty expensive and may take a rest if stocks manage to go up over the next few days. We do think bonds (US Treasury variety, TLT for example) will do fairly well this year even with a little setback here.
We sometimes see strong trends being interupted for options expiration week which this is and Wednesday is the typical turn day. We think there is ample opportunity for us on the downside during 2008, so we remain patient. It's not like we haven't had a solidly down January so far. We just think the next move will take us out of this oversold condition and allow us to drop once again.
Targets are now measured in bear market terms since we are probably not going to revisit the highs any time soon. We go back to our Elliott wave estimates both for the corrective move up now and then the next large move down. We should be correcting the move from 13,750 to this week's lows maybe today's 12,400. That's a 1350 point drop giving us an initial target of about half way or 675 points back up to just over 13,000. The Elliott wave estimates are about 40% (38.2%) or 60% (61.8%) or about 525 to 825 points up between 12,925 and 13,225 or our estimates of 13,000 to 13,200 which we have talked about for several days now.
After that, Elliott would say that we should have another move down that would be more than the 1350 point drop that we saw in the first run down. This proportion is not ever really knowable but at a minimum would be 160% of the first wave, or over 2100 points. That would take us down to about our 11,000 that we mentioned yesterday. Nothing seems to go perfect to plan but at least this is a roadmap we are going to be watching.
Reading Material:
Article on The Education of Ben Bernanke from the NY Times
FSI: 91.79 (a new low in this new index)
Tuesday, January 15, 2008
INTC Disappoints
Top Line: Our theory of a market rally may have been thwarted by INTC this evening as the market did not like what it heard. We will see if the market has any follow through in the morning. If there is follow through such that a noticeable downward gap occurs, then our thinking would be that the market will have dropped below the August lows. Right now, it seems to be sitting right on that low, especially in the Dow. Yes, technically the Dow traded below the August low but the break now needs to occur.
To continue that thought, there seems to be only one thing between a large drop and a bounce on Wednesday morning, that would be an "unexpected" Fed rate cut. Even then, the market sort of already "expects" it. On top of that the market, and probably the Fed, may think that a mid-meeting rate cut could be received poorly by the market. Why, wasn't it just a few weeks ago the Fed told us there was going to be no recession? Now, it seems the market is screaming for a rate cut, and a big one at that.
You undoubtedly have heard about the drop in the market on Tuesday so we won't bore you with the details of AAPL and C, you can read about that on your own. What happened after the market closed is what is of interest to us this evening--INTC.
Yes, INTC announced their earnings for the quarter and gave some forward looking statements which the market did not particularly like. This news has driven the futures market down this evening but as we write has come back up a little. The NASDAQ 100 futures were down over 40 points earlier (compared to about a 55 point loss during the day) and now they are only down about, well, 30 points. Still, a large point decline, which could lead to a very harsh opening in the morning.
Wednesday should be a day to remember in the US stock market. If we do get an rate cut from the Fed or we just fall out of bed, the market should provide much to talk about in our regular Update scheduled for Wednesday evening. In any event, it should prove to be important to the overall trend. In fact, if it goes down enough, it could actually be a selling climax and come back by the end of the day. Wednesday will give us a chance to see what the market wants to do.
As we have said, and we have to say again, the worst selloffs occur when the market is oversold. With the market down most days in 2008 and steeply sold on Tuesday, there is a tendency for people to think this is a buying opportunity. If disappointment in that thought happens, the market will fall out of bed, hard. We really can't say tonight, except that it will be something to see. Buyers have been disappointed all year so far and that could lead to a vicious selloff. Stay tuned.
We received an email from one of you, thanks CM, that references a page that talks about the volatility index (as well as a few other things), something we mention here from time to time. We have noticed that this index has hardly moved from where it's been in the recent weeks, even on Tuesday. This would seem to suggest that the market is Not done going down. Until we see a good spike in the fear factor, we won't have a meaningful bottom. This would mean the VIX would spike to 60 or more, at least up to 40 or 50.
FSI: 94.96 (not a new low for the move but after hours trading would be)
To continue that thought, there seems to be only one thing between a large drop and a bounce on Wednesday morning, that would be an "unexpected" Fed rate cut. Even then, the market sort of already "expects" it. On top of that the market, and probably the Fed, may think that a mid-meeting rate cut could be received poorly by the market. Why, wasn't it just a few weeks ago the Fed told us there was going to be no recession? Now, it seems the market is screaming for a rate cut, and a big one at that.
You undoubtedly have heard about the drop in the market on Tuesday so we won't bore you with the details of AAPL and C, you can read about that on your own. What happened after the market closed is what is of interest to us this evening--INTC.
Yes, INTC announced their earnings for the quarter and gave some forward looking statements which the market did not particularly like. This news has driven the futures market down this evening but as we write has come back up a little. The NASDAQ 100 futures were down over 40 points earlier (compared to about a 55 point loss during the day) and now they are only down about, well, 30 points. Still, a large point decline, which could lead to a very harsh opening in the morning.
Wednesday should be a day to remember in the US stock market. If we do get an rate cut from the Fed or we just fall out of bed, the market should provide much to talk about in our regular Update scheduled for Wednesday evening. In any event, it should prove to be important to the overall trend. In fact, if it goes down enough, it could actually be a selling climax and come back by the end of the day. Wednesday will give us a chance to see what the market wants to do.
As we have said, and we have to say again, the worst selloffs occur when the market is oversold. With the market down most days in 2008 and steeply sold on Tuesday, there is a tendency for people to think this is a buying opportunity. If disappointment in that thought happens, the market will fall out of bed, hard. We really can't say tonight, except that it will be something to see. Buyers have been disappointed all year so far and that could lead to a vicious selloff. Stay tuned.
We received an email from one of you, thanks CM, that references a page that talks about the volatility index (as well as a few other things), something we mention here from time to time. We have noticed that this index has hardly moved from where it's been in the recent weeks, even on Tuesday. This would seem to suggest that the market is Not done going down. Until we see a good spike in the fear factor, we won't have a meaningful bottom. This would mean the VIX would spike to 60 or more, at least up to 40 or 50.
FSI: 94.96 (not a new low for the move but after hours trading would be)
Monday, January 14, 2008
IBM Saves the Day
Top Line: In line with our thinking, the market did move up on Monday. While the news was IBM, the market was ready for a bit of a rally. Our current target for the Dow is still that range between 13,000 and 13,200. Until we get there, the rally remains the best direction for stocks. After that, and this is the reason we are not going to play the up move, there should be a good selloff that takes the Dow down quite a ways. How far? Well, if the August lows finally get taken out, there really isn't much support until we get down to 11,000. In down markets, support levels are no match for sellers.
As we mentioned, IBM took the spotlight on Monday with some relatively good earnings news. Good news from companies of almost any kind is in short supply so this little notion of a positive quarter was taken as the message buyers were waiting for. The tech world did manage a pretty healthy move on the back of the IBM news.
In the secondary spotlight continues to be the Fed. As you already know, they don't like to be in the second spot. The market would like to have a nice, big rate cut and they would like to have it Now, please. The problem is that the market should really wait for the cut rather than rally prior to the cut. If the market goes up, the Fed may not need to lower rates. Well, that may not be true because they just enjoy lowering rates so much. We'll just assume that the Fed is going to lower rates 50 bps right now. That's not what the market wants, it wants 75 or 100 bps.
Tonight's news is from C (Citigroup). The news is that the company is supposed to be laying off over 20,000 and slashing its dividend. This news is pushing the Asian markets down now and the US futures as well. Somehow, we figure the market will find some way to make this some bullish news and we'll find out on Tuesday, or Wednesday.
FSI: 98.26
As we mentioned, IBM took the spotlight on Monday with some relatively good earnings news. Good news from companies of almost any kind is in short supply so this little notion of a positive quarter was taken as the message buyers were waiting for. The tech world did manage a pretty healthy move on the back of the IBM news.
In the secondary spotlight continues to be the Fed. As you already know, they don't like to be in the second spot. The market would like to have a nice, big rate cut and they would like to have it Now, please. The problem is that the market should really wait for the cut rather than rally prior to the cut. If the market goes up, the Fed may not need to lower rates. Well, that may not be true because they just enjoy lowering rates so much. We'll just assume that the Fed is going to lower rates 50 bps right now. That's not what the market wants, it wants 75 or 100 bps.
Tonight's news is from C (Citigroup). The news is that the company is supposed to be laying off over 20,000 and slashing its dividend. This news is pushing the Asian markets down now and the US futures as well. Somehow, we figure the market will find some way to make this some bullish news and we'll find out on Tuesday, or Wednesday.
FSI: 98.26
Sunday, January 13, 2008
2008 Part Two
Top Line: The market made an attempt to go down on Friday but failed to break the lows from two days earlier. The most important point about Friday's trading is that the market held its lows and we expect another rally. This gives the Dow one more chance to get over 13,000. When we saw the market rally to 12,950 we thought that might be the chance we were thinking about, the one about the Dow getting some resistance in the 13,000 to 13,200 range. Right now we think the Dow has a bit of rally in it but the next rally will be a little move. There isn't much room for it to go up.
2008 Part Two
Stock market:
The stock market has shown us a high that should stay in place for a long time. In the October to early November period, aall the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index. There is one index that has another story, too.
The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.
Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.
The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signalling a downturn in the economy.
The Bank of America did rescue Counrtywide, or as some call it Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.
All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on the what is going on.
The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.
There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???
FSI: 95.72 (holding above its November lows)
2008 Part Two
Stock market:
The stock market has shown us a high that should stay in place for a long time. In the October to early November period, aall the major indexes pushed to new highs or relative new highs. Since then we have seen a pull back in all of them, well, except the HUI, our favorite gold mining index. There is one index that has another story, too.
The Russell 2000 index, a leader in this market over the past several years, failed to make a new high in the October/November period. This index has dropped nearly 20% since its highs from last summer. The Russell 2000 is a small cap index, one that provides a good representation for the small investors. The stocks in this index have provided a lot of upward movement over the past several years and now they are tired out. This is a good indication that the market is headed down.
Stocks have tried to ignore all of the credit problems. Part of the reason for this is that the oil stocks have proceeded much higher along with the price of oil. Here again, oil should be near its top and $100 should put a lid on it or somewhat higher prices will curb its upward move.
The news over the past few days has given some assurance to the bulls that the mortgage problems are behind us. The news from the Fed is that they are willing to lower rates in "substantive additional action". To us, this means one thing, that the Fed will lower rates at least 50 bps at their January meeting. They are not afraid of the consequences of lower rates, they are simply concerned that the market is signalling a downturn in the economy.
The Bank of America did rescue Counrtywide, or as some call it Country Fried. The other rumor was that one more mortgage bank would be helped out. JP Morgan was rumored to be ready to step in to take over Washington Mutual.
All three of these items are part of the great effort to paper over the problem one more time. The stock market is a result of the attitudes of the many people who own stocks. The people need to be confident for the stock market to stay up, or not move down. This process has already turned down with the unemployment rate going up and the housing market not doing too well. The consumer confidence figures are low based on the what is going on.
The market has no reason to go up in 2008. We think the top of the Dow in 2008 has already been seen. We were hoping to see a bit of a rally going into the first week of the year which is when we were hoping to make that statement. There are possible ways for the market to go up but we think the next moves by the banks or the Fed will not be very well received. The Fed will decide to lower rates several times this year but the market will not react the way they think it should.
There will be some opportunities for upside but they should be from much lower levels. We think the stock market will end the year 2008 with prices lower than where we started the year. You???
FSI: 95.72 (holding above its November lows)
Thursday, January 10, 2008
Fed to the Rescue and BOA Follows Suit
Top Line: The stock market staged another turn around on Thursday taking the Capital One (COF) news in one gulp to start the day lower but then up on the interest rate news from our local central bank chairman and the possible purchase of Countrywide Financial by previous investor Bank of America. What a day! The main ingredient seemed to be that there were no more sellers left after the morning hit and any news then was considered positive. We feel that the call for a rally to 13,200 is the best in the current situation. To fine tune that number a bit, we think the rally will run into trouble someplace between 13,000 and 13,200.
Just another note about the market. We know that the market is heavy with selling and are very concerned that the market will not hold. The big line in the sand is this week's low. If the Dow goes below our 12,500, the market will go down much more. This means that trading any of these rallies is not a good idea unless you are thinking of selling into them.
Here are tonight's headlines from CNN:
The Fed to the rescue: Bernanke says central bank ready to take 'substantive additional action' to cut interest rates in order to support lagging economy.
Countrywide shares soar on BofA takeover talk: Report: Mortgage lender in advanced talks to be acquired by banking leader.
Weakest holiday season in years: Many stores suffer big sales misses in December, but Wal-Mart and Costco benefit from cash-strapped consumers shopping for discounts.
AmEx expects lower profits in 2008: Credit card company forecasts housing slump and decaying credit quality will hurt its profit.
Capital One slashes profit outlook: Credit card issuer says it won't meet its 2007 forecast because of a rise in loan delinquencies and weakening economy.
What do all of these headlines have in common? The stock market went up with all of these. Most of the action followed the BOA takeover talks because the problem will be solved if a big bank takes over. For some reason the mortgage world is not well understood by the stock market. Some of the structured credit or securitized mortgages are collapsing because the home owners are Not paying their mortgages and the housing values are going down. We can't emphasize enough that money alone can Not fix this problem. The credit contraction is now underway and behind it is a serious recession brewing. We hope you have prepared as well as you can for this, like paying down your debt.
The same goes for the Fed. We don't believe The Fed can rescue anything except the banks, which is their main concern, with lower rates or more money. The market seems to believe it for now. If you take a look at an unemployed person who has to pay a mortgage payment on a house that is worth less than was paid, then you will see someone with no motivation or ability to pay that mortgage payment.
As we noted this past week, people aren't paying their phone bills or their mortgages. Countrywide announced that delinquencies and foreclosures were up. But, of course, it doesn't matter to the world because BOA will buy CFC and so don't worry about the actual home owner or the house sitting in the neighborhood.
Gold hit a another new high after the lower interest rate talk from our central bank chairman but we continue to believe that the rally in gold is about over. The next move should be significantly lower, maybe into the $600's. Check the True Contrarian's site to the left.
One other item comes from a reader, thanks CM. Here is the St. Louis Federal Reserve President William Poole's take on the world. It's a classic.
FSI: 98.05 (most of the horsemen were down on the day--not a good day for speculation)
Just another note about the market. We know that the market is heavy with selling and are very concerned that the market will not hold. The big line in the sand is this week's low. If the Dow goes below our 12,500, the market will go down much more. This means that trading any of these rallies is not a good idea unless you are thinking of selling into them.
Here are tonight's headlines from CNN:
The Fed to the rescue: Bernanke says central bank ready to take 'substantive additional action' to cut interest rates in order to support lagging economy.
Countrywide shares soar on BofA takeover talk: Report: Mortgage lender in advanced talks to be acquired by banking leader.
Weakest holiday season in years: Many stores suffer big sales misses in December, but Wal-Mart and Costco benefit from cash-strapped consumers shopping for discounts.
AmEx expects lower profits in 2008: Credit card company forecasts housing slump and decaying credit quality will hurt its profit.
Capital One slashes profit outlook: Credit card issuer says it won't meet its 2007 forecast because of a rise in loan delinquencies and weakening economy.
What do all of these headlines have in common? The stock market went up with all of these. Most of the action followed the BOA takeover talks because the problem will be solved if a big bank takes over. For some reason the mortgage world is not well understood by the stock market. Some of the structured credit or securitized mortgages are collapsing because the home owners are Not paying their mortgages and the housing values are going down. We can't emphasize enough that money alone can Not fix this problem. The credit contraction is now underway and behind it is a serious recession brewing. We hope you have prepared as well as you can for this, like paying down your debt.
The same goes for the Fed. We don't believe The Fed can rescue anything except the banks, which is their main concern, with lower rates or more money. The market seems to believe it for now. If you take a look at an unemployed person who has to pay a mortgage payment on a house that is worth less than was paid, then you will see someone with no motivation or ability to pay that mortgage payment.
As we noted this past week, people aren't paying their phone bills or their mortgages. Countrywide announced that delinquencies and foreclosures were up. But, of course, it doesn't matter to the world because BOA will buy CFC and so don't worry about the actual home owner or the house sitting in the neighborhood.
Gold hit a another new high after the lower interest rate talk from our central bank chairman but we continue to believe that the rally in gold is about over. The next move should be significantly lower, maybe into the $600's. Check the True Contrarian's site to the left.
One other item comes from a reader, thanks CM. Here is the St. Louis Federal Reserve President William Poole's take on the world. It's a classic.
FSI: 98.05 (most of the horsemen were down on the day--not a good day for speculation)
Wednesday, January 09, 2008
At Last, A Rally
Top Line: At the moment, the market seems safe from further deterioration, for the moment. After the intraday reversal, US stocks are poised for further advance. The main question, of course, is how far can it go? Or, can it go? The market will let us know soon enough but our position will continue to be that any rally that exhibits itself will run into resistance at only slightly higher prices. Looking at the chart, the upside potential seems to have a spot that should present some problems for the rally. That level is right around 13,200.
Let's make sure to mention that the stock market does Not have to go up at all let alone back up to 13,200. What we are saying is that if the Dow goes up it should have trouble at this area. If it gets through that area, then we'll take another look. If on the other hand the market can't muster a rally and breaks down, there could immediately be a major selloff. We consider this a very low probability event.
The reason for the low probability is the market's continued faith in the Fed. We are considerably amazed that the market thinks the Fed can fix all ills by a rate cut, but it still lives. The market is now "begging" for 50 bps at the January meeting in a few weeks. Probably more to the point, the stock market thinks a lower rate will push stock prices up. That has not been what has happened with the rate cuts we have seen recently. Again, don't bother with facts.
Today's reversal was pretty impressive so now the market wants to prove itself with further gains in the next few days or a week. Our new short term target of 13,200 is not that far away and the market should run into sober sellers and significant resistance between here and there. This rally will fail and then we will see just how far the market can drop. Let's get back together tomorrow to see if there are legs on this rally.
After the close, Alcoa started the earnings parade with good news except on the transportation costs rising. We now are entering the earnings season which could be tough for most companies anywhere near the mortgage industry.
As we put the Update to bed, we notice there was some news on COF (Capital One Financial) the credit card company. The news from COF, according to the WSJ, is that their business is not producing the earnings that it said it would. Here we see the ooze from the mortgage business hitting other business.
Also, the Asian markets are down this evening which seems reasonable after the last few days that showed strong rallies. But, with the US markets showing some strength, we are surprised by the drop. As we have said, the selling pressures are strong, and that includes global markets.
We are keeping our eye on gold and the mining stocks. Gold has probably made an intermediate high just under $900. The complex is going to come under pressure now as the price of gold rolls over. We suggest that with this drop coming up, not to short the complex but to watch it with us to find a good entry point. Shorting the complex may be quite profitable but we will wait until a buying opportunity appears.
FSI: 98.70 (not exactly a big move)
Let's make sure to mention that the stock market does Not have to go up at all let alone back up to 13,200. What we are saying is that if the Dow goes up it should have trouble at this area. If it gets through that area, then we'll take another look. If on the other hand the market can't muster a rally and breaks down, there could immediately be a major selloff. We consider this a very low probability event.
The reason for the low probability is the market's continued faith in the Fed. We are considerably amazed that the market thinks the Fed can fix all ills by a rate cut, but it still lives. The market is now "begging" for 50 bps at the January meeting in a few weeks. Probably more to the point, the stock market thinks a lower rate will push stock prices up. That has not been what has happened with the rate cuts we have seen recently. Again, don't bother with facts.
Today's reversal was pretty impressive so now the market wants to prove itself with further gains in the next few days or a week. Our new short term target of 13,200 is not that far away and the market should run into sober sellers and significant resistance between here and there. This rally will fail and then we will see just how far the market can drop. Let's get back together tomorrow to see if there are legs on this rally.
After the close, Alcoa started the earnings parade with good news except on the transportation costs rising. We now are entering the earnings season which could be tough for most companies anywhere near the mortgage industry.
As we put the Update to bed, we notice there was some news on COF (Capital One Financial) the credit card company. The news from COF, according to the WSJ, is that their business is not producing the earnings that it said it would. Here we see the ooze from the mortgage business hitting other business.
Also, the Asian markets are down this evening which seems reasonable after the last few days that showed strong rallies. But, with the US markets showing some strength, we are surprised by the drop. As we have said, the selling pressures are strong, and that includes global markets.
We are keeping our eye on gold and the mining stocks. Gold has probably made an intermediate high just under $900. The complex is going to come under pressure now as the price of gold rolls over. We suggest that with this drop coming up, not to short the complex but to watch it with us to find a good entry point. Shorting the complex may be quite profitable but we will wait until a buying opportunity appears.
FSI: 98.70 (not exactly a big move)
Tuesday, January 08, 2008
Another Down Day
Top Line: Well, the stock market decided to head on down into the 12,500's on Tuesday with only a mild up move in the morning to follow through on Monday's late day bounce. Here is where it gets a little dicey. We have long said that sharp downturns come when stocks have been selling off for a while and buyers disappear. The stage is set, again, for a very sharp drop after Tuesday's unexpected down move. When stocks drop when there seems to be some notion that they should rally, that gives rise to additional fear.
There were several news items to drive the market down. Let's start with the one that Seems to be the biggie. This afternoon, the CEO of AT&T said that it had cut off service to subscribers in the fourth quarter. According to the WSJ he blamed the weak economy for customers not paying their bills. These words seemed to have some traction with the market as it went down right after that. It's almost like the market was worried that it might be true but when someone actually says it, then it must be true. We've added the WSJ's link and hope that you can view it.
There had been other news earlier in the day which caused little in the way of selling. The news was considered bullish because it may help the Fed to lower rates that nice 50 bps the market wants. Please. The first was the news from KB Homes, not very good. KBH posted a net loss of almost $10 per share about nine times more than analysts predicted. The stock put in a six year low as it dropped nearly 10% on the news. This stock has traded around 56 this year and today closed under 17. The company has been viewed as one that can withstand the current downturn. Oops, check that. The WSJ will have this news on Page One on Wednesday.
To continue, Countrywide Financial, a company that has been in these posts many times in the past year, got thumped hard today. Investors are leaving this stock in droves as CFC dropped nearly 30% on Tuesday. Yes, 30%. [We can't help but think about how well those 20 call options that we heard about on the bus last fall are doing.] The news was that they had fabricated documents to require someone coming out of bankruptcy to pay back payments. You gotta read this article. (The article is written by Gretchen Morgenson who is an author we think gets a lot of things right.) Read the first three paragraphs and see why investors are getting cold feet. Of course there was the rumor that CFC was going to file for bankruptcy itself which didn't instill confidence. The company halted trading for 15 minutes to announce that it had no plans to file--which stemmed the selling tide for about a half hour before really selling into the close.
One other news item hit the market early was the news on pending home sales index which was down, down 2.6% in November to a low below the September 2001 figure.
An opinion editorial in the Financial Times written by another one of our favorite writers, Stephen Roach, mentions the inflated assets in the US and how they must go down, including the word bubble in his comments.
Last but not least is another one of our favorite financial celebs, who has also tried his hand at writing, Bill Gross of PIMCO. Mr. Gross wasn't writing today, but was speaking on the danger of credit default swaps (CDS). We haven't discussed CDS's much here but given they are the place where the next round of this credit crisis may be, we may need to start talking about them. This is an important topic.
All in all, a very pessimistic day on the Street. With that you may think the over night futures would be down but that is just not the case this evening. We see buying coming in this evening and that indicates No Fear among the investors/speculators.
Right now all of the major indexes we follow are sitting right around the August lows or at least below their November lows. If the market is Not going to fall out of bed right now, then it needs to bounce right now. Even then, we don't see a bounce as more than a small move. Any bounce we have seen recently has been sold hard. Oversold or not, this selling is strong.
FSI: 95.87 (Our low for this index was back on November 12th at 93.75)
There were several news items to drive the market down. Let's start with the one that Seems to be the biggie. This afternoon, the CEO of AT&T said that it had cut off service to subscribers in the fourth quarter. According to the WSJ he blamed the weak economy for customers not paying their bills. These words seemed to have some traction with the market as it went down right after that. It's almost like the market was worried that it might be true but when someone actually says it, then it must be true. We've added the WSJ's link and hope that you can view it.
There had been other news earlier in the day which caused little in the way of selling. The news was considered bullish because it may help the Fed to lower rates that nice 50 bps the market wants. Please. The first was the news from KB Homes, not very good. KBH posted a net loss of almost $10 per share about nine times more than analysts predicted. The stock put in a six year low as it dropped nearly 10% on the news. This stock has traded around 56 this year and today closed under 17. The company has been viewed as one that can withstand the current downturn. Oops, check that. The WSJ will have this news on Page One on Wednesday.
To continue, Countrywide Financial, a company that has been in these posts many times in the past year, got thumped hard today. Investors are leaving this stock in droves as CFC dropped nearly 30% on Tuesday. Yes, 30%. [We can't help but think about how well those 20 call options that we heard about on the bus last fall are doing.] The news was that they had fabricated documents to require someone coming out of bankruptcy to pay back payments. You gotta read this article. (The article is written by Gretchen Morgenson who is an author we think gets a lot of things right.) Read the first three paragraphs and see why investors are getting cold feet. Of course there was the rumor that CFC was going to file for bankruptcy itself which didn't instill confidence. The company halted trading for 15 minutes to announce that it had no plans to file--which stemmed the selling tide for about a half hour before really selling into the close.
One other news item hit the market early was the news on pending home sales index which was down, down 2.6% in November to a low below the September 2001 figure.
An opinion editorial in the Financial Times written by another one of our favorite writers, Stephen Roach, mentions the inflated assets in the US and how they must go down, including the word bubble in his comments.
Last but not least is another one of our favorite financial celebs, who has also tried his hand at writing, Bill Gross of PIMCO. Mr. Gross wasn't writing today, but was speaking on the danger of credit default swaps (CDS). We haven't discussed CDS's much here but given they are the place where the next round of this credit crisis may be, we may need to start talking about them. This is an important topic.
All in all, a very pessimistic day on the Street. With that you may think the over night futures would be down but that is just not the case this evening. We see buying coming in this evening and that indicates No Fear among the investors/speculators.
Right now all of the major indexes we follow are sitting right around the August lows or at least below their November lows. If the market is Not going to fall out of bed right now, then it needs to bounce right now. Even then, we don't see a bounce as more than a small move. Any bounce we have seen recently has been sold hard. Oversold or not, this selling is strong.
FSI: 95.87 (Our low for this index was back on November 12th at 93.75)
Monday, January 07, 2008
Another Volatile Day
Top Line: We predict a quick Update this evening. The stock market is now trying to figure out if it wants to drop into the 12,500 area or move up a bit first. The day's action indicates that a small rally may ensue. We are expecting to see a bit an up move early on Tuesday. The ramp job we saw late in the day on Monday did take up a lot of buying power but the market has probably gotten a bit oversold.
We apologize for the short Update this evening. For your reading pleasure we bring you the recession warning from Harvard University economist Martin Feldstein.
We will bring 2008 Part Two another evening. Let's hear your 2008 comments.
We apologize for the short Update this evening. For your reading pleasure we bring you the recession warning from Harvard University economist Martin Feldstein.
We will bring 2008 Part Two another evening. Let's hear your 2008 comments.
Sunday, January 06, 2008
2008 Part One
Top Line: After last week's poor performance, more analysts are talking about a decline in the market due to a recession. This is definitely new on the horizon. They are also hoping for a rate cut of 50 bps at this month's FOMC so that they can confidently declare the second half recovery. Haven't we seen that movie already? Since we are getting close to 12,500, we will need to be paying very close attention to what the market is saying.
The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.
The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.
2008 Preview Part One:
In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.
Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.
Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.
Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.
Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.
More during the rest of the week...
FSI: 99.94
The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.
The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.
2008 Preview Part One:
In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.
Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.
Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.
Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.
Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.
More during the rest of the week...
FSI: 99.94
Thursday, January 03, 2008
December Jobs' Report Due on Friday Morning
Top Line: You may have noticed that the Dow managed to stay afloat on Thursday, above 13,000. But, the market is definitely trading heavy even in this normally bullish period. There certainly seems to be no fear in trading even though prices are not bouncing off the natural round number support area. If the market decides to drop, the pattern allows for a large drop. We shouldn't get ahead of the market, though our target is at least a test of the 12,500 area in the Dow.
There are so many things going on over the last few days, we hope you have been able to keep up with them on your own. We are focused on the jobs' report due out on Friday morning, probably before most of you get a chance to read this post. On Thursday the ADP employment report revealed a lower number of jobs last month than the month before. ADP said that the nonfarm employment rose by 40K, which doesn't include government workers estimated at an additional 19K, for a total of 59K. The estimates for the Friday jobs' report is for 70K new jobs to have been created. The ADP report has not been widely accepted as a substitute or even a real predictor of the BLS number coming out on Friday morning. The BLS purports to cover all of the jobs while ADP can really only extrapolate from their actual payroll numbers. Anyway, last month the ADP number estimated about 189K new jobs the day before the BLS announced 94K. We aren't going to read anything into those numbers.
What we are going to do, however, is to talk about possible stock market reactions to the number. The market seems worried about the economy, especially when it saw the ISM manufacturing number on Wednesday, allayed by the Fed's minutes indicating lower rates were almost certain. If the jobs' number is weak, there could be a cheer from that same crowd but remember that the rally from Wednesday was not very strong and looking back now seems imperceptible. It is possible that a weak jobs' number will confirm the markets' jitters about the economy. A number that is also coming out on Friday is the ISM non-manufacturing number which could be a counterbalance.
If the jobs' number is strong the market could decide that it is a better thing than the possibility of the Fed lowering rates. We see that the articles being written over the past few weeks are being much less positive about the Fed's ability to rectify the mortgage issues. (The link is to a WSJ opinion from the Thursday edition. If you can't read it, you can find a copy of the Journal to read it.)
Our hope is to provide a little 2007 recap along with a 2008 preview from the Updates perspective over the weekend. We would appreciate any comments before that time about your thoughts on the upcoming year in the markets. As a preview we think there will be plenty of opportunities in 2008 but the timing will be tricky. See you then.
FSI: 105.68
There are so many things going on over the last few days, we hope you have been able to keep up with them on your own. We are focused on the jobs' report due out on Friday morning, probably before most of you get a chance to read this post. On Thursday the ADP employment report revealed a lower number of jobs last month than the month before. ADP said that the nonfarm employment rose by 40K, which doesn't include government workers estimated at an additional 19K, for a total of 59K. The estimates for the Friday jobs' report is for 70K new jobs to have been created. The ADP report has not been widely accepted as a substitute or even a real predictor of the BLS number coming out on Friday morning. The BLS purports to cover all of the jobs while ADP can really only extrapolate from their actual payroll numbers. Anyway, last month the ADP number estimated about 189K new jobs the day before the BLS announced 94K. We aren't going to read anything into those numbers.
What we are going to do, however, is to talk about possible stock market reactions to the number. The market seems worried about the economy, especially when it saw the ISM manufacturing number on Wednesday, allayed by the Fed's minutes indicating lower rates were almost certain. If the jobs' number is weak, there could be a cheer from that same crowd but remember that the rally from Wednesday was not very strong and looking back now seems imperceptible. It is possible that a weak jobs' number will confirm the markets' jitters about the economy. A number that is also coming out on Friday is the ISM non-manufacturing number which could be a counterbalance.
If the jobs' number is strong the market could decide that it is a better thing than the possibility of the Fed lowering rates. We see that the articles being written over the past few weeks are being much less positive about the Fed's ability to rectify the mortgage issues. (The link is to a WSJ opinion from the Thursday edition. If you can't read it, you can find a copy of the Journal to read it.)
Our hope is to provide a little 2007 recap along with a 2008 preview from the Updates perspective over the weekend. We would appreciate any comments before that time about your thoughts on the upcoming year in the markets. As a preview we think there will be plenty of opportunities in 2008 but the timing will be tricky. See you then.
FSI: 105.68
Wednesday, January 02, 2008
A Down Day on the First Day of the Year?
Top Line: The stock market has now been down during the period of normal strength, that being the end of the month [year] and start of the month [year]. Wednesday's low in the Dow was 13,000 and the bounce off that round number was expected. What the market chooses to do now is going to be worth watching. As we have said, the Dow should be headed to 12,500.
The news on SBUX is that it hit a new low on an analyst downgrade (a little late) but it points to our premise that the consumer will lead this economy into recession--a consumer led recession is not a common event so few realize that it is happening. The world is not paying attention to the 2/3's of the economy that is now in pull back mode. SBUX numbers are telling us that the consumer is pulling its spending in a bit, that $5 cup of coffee is being skipped once in a while.
Here we are one day into 2008 and the Fed is already trying to pump the stock market. Wednesday's medicine came in the form of the Fed minutes from the last FOMC, held on December 11th. By now you've read the news that the Fed thinks it will need to lower rates substantially. Well, what do you know, they are finally realizing this. They are usually a little late to the party so we're not surprised.
The market was surprised by a few things on Wednesday. First, the fact that manufacturing indicated poor prospects in December inspiring selling and, second, the Fed's minutes were released prompting the response that the Fed would [try] to save the day and buying commenced. That rally happened late in the day but pretty much was erased by the end of the day as stocks fell hard on the first trading day of the year.
The US Treasury bonds were strong as was gold and oil, strange combo there. As we write, the Asian markets are trading lower in response to the US markets' decline, as usual. As we see it, Wednesday's market should have helped to create an oversold condition but our indicators don't show that tonight. This leaves the market open to go down more, even though the overnight futures are up a bit right now.
Tomorrow brings the first in a series of major political events, that being the Iowa caucus. We will only report on the politics as it relates to the stock market so we don't expect much.
FSI: 105.85 (not down much, AMZN was strong)
The news on SBUX is that it hit a new low on an analyst downgrade (a little late) but it points to our premise that the consumer will lead this economy into recession--a consumer led recession is not a common event so few realize that it is happening. The world is not paying attention to the 2/3's of the economy that is now in pull back mode. SBUX numbers are telling us that the consumer is pulling its spending in a bit, that $5 cup of coffee is being skipped once in a while.
Here we are one day into 2008 and the Fed is already trying to pump the stock market. Wednesday's medicine came in the form of the Fed minutes from the last FOMC, held on December 11th. By now you've read the news that the Fed thinks it will need to lower rates substantially. Well, what do you know, they are finally realizing this. They are usually a little late to the party so we're not surprised.
The market was surprised by a few things on Wednesday. First, the fact that manufacturing indicated poor prospects in December inspiring selling and, second, the Fed's minutes were released prompting the response that the Fed would [try] to save the day and buying commenced. That rally happened late in the day but pretty much was erased by the end of the day as stocks fell hard on the first trading day of the year.
The US Treasury bonds were strong as was gold and oil, strange combo there. As we write, the Asian markets are trading lower in response to the US markets' decline, as usual. As we see it, Wednesday's market should have helped to create an oversold condition but our indicators don't show that tonight. This leaves the market open to go down more, even though the overnight futures are up a bit right now.
Tomorrow brings the first in a series of major political events, that being the Iowa caucus. We will only report on the politics as it relates to the stock market so we don't expect much.
FSI: 105.85 (not down much, AMZN was strong)
Tuesday, January 01, 2008
Happy New Year 2008
Top Line: The start of a new year should give all of us new opportunities to prosper both in the stock market and in our personal lives, including work. The stock market is the reason you have come and our position has not changed (much) since our last post. We think the Dow has a good chance to drop to 12,500. But, with the new year at hand, we think there is a good chance that new money will show up for a few days and send prices higher. That shouldn't last too long but we don't know how high it will take the Dow. As we get more info from the market we will share it.
Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.
The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.
In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.
We will have more in the next few days as the market reveals itself to us.
In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.
The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.
The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.
More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.
FSI: 106.39 (the past week's high was 108.91 on December 26th)
Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.
The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.
In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.
We will have more in the next few days as the market reveals itself to us.
In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.
The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.
The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.
More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.
FSI: 106.39 (the past week's high was 108.91 on December 26th)
Wednesday, December 19, 2007
Volatility Remains, Stocks Struggle
[Editor's note: The Update is going to be taking a break over the next few days and will publish only on the days that give us a reason to write. The market is in a place that does allow for that possibility so if you see a day that has a dramatic move please come here to view the Update. The Update will return on January 1st for your reading pleasure on January 2nd. We'll see you on the other side.]
Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.
In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.
On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...
Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...
With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.
Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.
The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.
We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.
FSI: 102.16
Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.
In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.
On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...
Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...
With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.
Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.
The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.
We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.
FSI: 102.16
Tuesday, December 18, 2007
"Volatility" or "Are the Horses Out of the Barn?"
Top Line: The stock market spent some time doing big zigzags on Tuesday which represents extreme volatility. To us, this is not a bullish sign. People don't like to see this type of action because they think the market should only go up, not down up down up. Our position did not change on Tuesday and it says that the Dow is headed towards 12,500.
In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.
That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.
The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...
The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.
FSI: 101.37
In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.
That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.
The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...
The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.
FSI: 101.37
Monday, December 17, 2007
Just Waiting
Top line: The stock market gave up some ground on Monday but the Dow didn't participate on the downside as much as the NASDAQ indexes. We continue to keep our eyes on the downside strength for clues on the future move. The bulls seem to be content to buy these little drops which is why we don't see a collapse in prices just yet. Currently, we are still thinking 12,500. World markets are quiet this evening with US Futures up slightly.
For a Monday with a lot of price movement down, we don't seem to have a lot to say. The basic pattern is still in tack but the downside strength seemed to wane a bit on Monday. True, the NASDAQ did seem to drop a little harder but the power down is not here right now. This is options expiration week so we don't think people are gone but trading is fairly light as it usually is just ahead of the holidays so traders may be happy to let things drift here.
The only thing that went on Monday was the big auction--TAF. We should hear on Tuesday how that went. Meanwhile the ECB was set to guarantee loans for European banks for unlimited amounts and to take them through the end of the year. This article seems to be a WSJ exclusive again so find out about it in Tuesday's Journal.
There doesn't seem to be much urgent news or pressing issues for the market to digest. The drop on Monday does come without news so it is worth noting. The prices are in a down pattern and could continue to drop. This would eventually bring out sellers. We continue to watch.
The gold market is in an interesting situation right now with the gold mining stocks dropping and the precious metal itself kind of holding its own. We generally say that the stocks move in front of the metal so maybe we will see a drop in the metal coming up. This market is always on our radar screen even though we don't mention it every night. There is an opportunity coming but it's not here just now.
FSI: 100.89 (The horsemen did take a hit on Monday)
For a Monday with a lot of price movement down, we don't seem to have a lot to say. The basic pattern is still in tack but the downside strength seemed to wane a bit on Monday. True, the NASDAQ did seem to drop a little harder but the power down is not here right now. This is options expiration week so we don't think people are gone but trading is fairly light as it usually is just ahead of the holidays so traders may be happy to let things drift here.
The only thing that went on Monday was the big auction--TAF. We should hear on Tuesday how that went. Meanwhile the ECB was set to guarantee loans for European banks for unlimited amounts and to take them through the end of the year. This article seems to be a WSJ exclusive again so find out about it in Tuesday's Journal.
There doesn't seem to be much urgent news or pressing issues for the market to digest. The drop on Monday does come without news so it is worth noting. The prices are in a down pattern and could continue to drop. This would eventually bring out sellers. We continue to watch.
The gold market is in an interesting situation right now with the gold mining stocks dropping and the precious metal itself kind of holding its own. We generally say that the stocks move in front of the metal so maybe we will see a drop in the metal coming up. This market is always on our radar screen even though we don't mention it every night. There is an opportunity coming but it's not here just now.
FSI: 100.89 (The horsemen did take a hit on Monday)
Sunday, December 16, 2007
Further Weakness Directly Ahead
Top line: Our target for the Dow is 12,500 which is right around the August low. If the market can punch down to there, then we can see how much downside strength there really is in this current move. If we see any support between here and there, we may need to revise our outlook but for now the stage is certainly set for a run down to test the August low.
The stock market opened broadly lower on Friday due to C's news. We still think C is doing the right thing by taking these SIV assets onto its balance sheet, where they belong. Shortly after the open, C was trading down but soon rallied on a display of strength which failed by the end of the day. C had received an analyst downgrade after their news--good timing, strong analysis.
The stock market did have difficulty as the day wore on Friday and the Dow fell 178 points by the end of the session. This was not a very good showing but one that we think is justified. This move down is not over and we should see some more selling as the week gets going. The futures are down this evening as we write but this could be just a reaction to the weak Asian markets which is definitely a reaction to the US trading on Friday; as the world spins.
We don't want to bring this up but since it is the "biggest" news of the weekend we thought it should be mentioned. Greenspan has now become an "expert" in the field of guessing what's going to happen next. He's trying to figure out if the odds of a recession are more or less than 50-50: "Whether it's above or below [50 percent] is really extraordinarily difficult to tell," Greenspan said. We'll let you read for yourself some of the other things he said. Yicks.
FSI: 104.43
The stock market opened broadly lower on Friday due to C's news. We still think C is doing the right thing by taking these SIV assets onto its balance sheet, where they belong. Shortly after the open, C was trading down but soon rallied on a display of strength which failed by the end of the day. C had received an analyst downgrade after their news--good timing, strong analysis.
The stock market did have difficulty as the day wore on Friday and the Dow fell 178 points by the end of the session. This was not a very good showing but one that we think is justified. This move down is not over and we should see some more selling as the week gets going. The futures are down this evening as we write but this could be just a reaction to the weak Asian markets which is definitely a reaction to the US trading on Friday; as the world spins.
We don't want to bring this up but since it is the "biggest" news of the weekend we thought it should be mentioned. Greenspan has now become an "expert" in the field of guessing what's going to happen next. He's trying to figure out if the odds of a recession are more or less than 50-50: "Whether it's above or below [50 percent] is really extraordinarily difficult to tell," Greenspan said. We'll let you read for yourself some of the other things he said. Yicks.
FSI: 104.43
Thursday, December 13, 2007
C Doing the Right Thing
Top Line: The market found some footing on Thursday afternoon and the financials led the late day rally. We'll be watching to see if the market's strong down move will continue. Currently, our position has the Dow dropping to 12,500. If it can't make it to there, we will take another look. If it can make it, then there is more downside after that. We'll watch and see.
Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.
One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.
What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.
With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:
From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.
From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.
Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.
FSI: 105.13
Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.
One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.
What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.
With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:
From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.
From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.
Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.
FSI: 105.13
Wednesday, December 12, 2007
TAF To Save the Day
Top Line: Market is in a down phase with a Dow move to 12,500 expected.
How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.
Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"
To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.
Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.
The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.
The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.
Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.
Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.
FSI: 105.04
How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.
Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"
To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.
Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.
The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.
The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.
Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.
Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.
FSI: 105.04
Tuesday, December 11, 2007
Fed -25, Dow -294
When does -25 = -294? That would be on December 11, 2007 when the Fed ldropped the funds rate by 25bps and the Dow followed that with a drop of its own of 294 points. What caused the drop, was it that the Fed decided not to lower rates by 50bps?
Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.
Here is the meat of their statement:
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.
You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.
Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.
So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?
FSI: 104.53
CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).
Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.
Here is the meat of their statement:
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.
You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.
Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.
So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?
FSI: 104.53
CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).
Monday, December 10, 2007
All Eyes on the Fed, Again
As the market awaits the next widely anticipated reduction the cost of funds to banks, the prices go up. We are ever so close to the 13,750 level we have been discussing for a few days. This is a plus or minus 150 points so the move should be fairly close to being over as the Fed manages to excite the crowd on Tuesday afternoon.
Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.
The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?
The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."
As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?
These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.
We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.
FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)
Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.
The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?
The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."
As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?
These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.
We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.
FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)
Sunday, December 09, 2007
Fed to Lower Rates on Tuesday
As we look at the coming week, the possibility exists that we will get to see the top of the recent rally. The runup from the lows of a couple weeks ago has now pushed into our target range near 13,750 and we are very alert to a reversal. Friday's trading did little to change the view that the market is now finding a top. The problem now is not that we have a top in place so much as if the next move is the one we have been anticipating for a Long time.
The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.
Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.
Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.
The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...
The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.
FSI: 107.51
The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.
Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.
Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.
The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...
The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.
FSI: 107.51
Friday, December 07, 2007
13,750 Give or Take
We had technical difficulties last night--internet was down--so no Update.
The market has come up to the area we have been talking about, give or take. With the FOMC next week, it might try to hold on until then with an upward bias toward that 13,750 mark in the Dow.
The jobs' report came in just a bit over expectations but not much. As expected, at least as we envisioned it last night, the market didn't react much to the news. Now, as we write, the market is pretty flat.
We'll be back Sunday evening for Monday's post.
The market has come up to the area we have been talking about, give or take. With the FOMC next week, it might try to hold on until then with an upward bias toward that 13,750 mark in the Dow.
The jobs' report came in just a bit over expectations but not much. As expected, at least as we envisioned it last night, the market didn't react much to the news. Now, as we write, the market is pretty flat.
We'll be back Sunday evening for Monday's post.
Wednesday, December 05, 2007
News Day
The market makes a big up push on Wednesday which should be the start of the "fill" we have been discussing recently. There is a problem with this thinking process, the move wasn't big enough on Wednesday. It failed to get above the highs of the last week in the indexes we follow which leaves the door open, at least, to a total upside failure. We see the futures are trading higher this evening offering the possibility of higher prices than last week.
The problem remains that the major indexes are weak. Normally we would see a stronger push than we did on Wednesday leading to a full move up to the 13,750 we have been mentioning. If the market can not get over last week's highs, the stage will be set for a huge drop. We don't see that happening because of all of the possible bullish news items due out over the next week. Weakness is clear but how weak is it, really.
The news is thick with Wednesday Update type items. The first is the front page article on Thursday's WSJ, a story on Auto-Loan delinquency. You may ask, what does that have to do with the Update? Well, this one of the fallouts from the housing situation and the WSJ seems to connect the dots:
"Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.
By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy. "
Then, on Thursday, the Bush administration is unveiling a plan to help the homeowners who can make their payments under the pre-reset interest rate but not after the reset. The politicians want to swoop down and save the day. Unfortunately, the problem is Too big to solve. When the problem started everyone, including the politicians, were considering that home prices would naturally go to the moon.
The President's proposal is designed to help a small segment of the foreclosure pool. Not everyone can be satisfied but as Fleck reported this evening, there was a Contract signed at the outset of the mortgage. Contract law has a long history that is being questioned at this moment in time. Do politicians really think they can just wave their hands and break these contracts? If they can do that, they can do anything.
And, without much detail, MBIA dropped 16% to 27.42 which seems a little lower than its price back in early October, 68. (symbol MBI if you care to try it on bigcharts.com) From the WSJ: Moody's Investors Service said that it considers MBIA "somewhat likely" to fall short of its capital requirements. Investors seized on this wording, since Moody's put MBIA in the less-likely camp just one month ago.
And, last is the Fed outlook. On Wednesday ADP, the payroll company, said that their employment estimate had jobs increasing by 189K compared to an expected number of 60K. Still, the estimate for Friday's report remains closer to 60K, at 78K. Plus, the productivity number was stronger than expected, too. So, the economy seems to be percolating along and at the same time the credit market is in a crunch and the dollar is declining, or was going into the last few weeks.
What's the poor Fed supposed to do? As mentioned in our last post, the Fed has plenty of room to lower rates if they so choose but with the GDP up over 4% in the last quarter, the employment numbers in pretty good shape, and the stock market in pretty decent shape, an interest rate cut seems pretty self serving, for the banks only. We have yet to decide what the number will be but we will make a stab in tomorrow's post with an refined number early next week--before the number comes out. Our initial thought is, "How can they lower by more than 25bps?"
FSI: 104.70 (and RIMM is down four days in a row, not much but down???)
The problem remains that the major indexes are weak. Normally we would see a stronger push than we did on Wednesday leading to a full move up to the 13,750 we have been mentioning. If the market can not get over last week's highs, the stage will be set for a huge drop. We don't see that happening because of all of the possible bullish news items due out over the next week. Weakness is clear but how weak is it, really.
The news is thick with Wednesday Update type items. The first is the front page article on Thursday's WSJ, a story on Auto-Loan delinquency. You may ask, what does that have to do with the Update? Well, this one of the fallouts from the housing situation and the WSJ seems to connect the dots:
"Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.
By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy. "
Then, on Thursday, the Bush administration is unveiling a plan to help the homeowners who can make their payments under the pre-reset interest rate but not after the reset. The politicians want to swoop down and save the day. Unfortunately, the problem is Too big to solve. When the problem started everyone, including the politicians, were considering that home prices would naturally go to the moon.
The President's proposal is designed to help a small segment of the foreclosure pool. Not everyone can be satisfied but as Fleck reported this evening, there was a Contract signed at the outset of the mortgage. Contract law has a long history that is being questioned at this moment in time. Do politicians really think they can just wave their hands and break these contracts? If they can do that, they can do anything.
And, without much detail, MBIA dropped 16% to 27.42 which seems a little lower than its price back in early October, 68. (symbol MBI if you care to try it on bigcharts.com) From the WSJ: Moody's Investors Service said that it considers MBIA "somewhat likely" to fall short of its capital requirements. Investors seized on this wording, since Moody's put MBIA in the less-likely camp just one month ago.
And, last is the Fed outlook. On Wednesday ADP, the payroll company, said that their employment estimate had jobs increasing by 189K compared to an expected number of 60K. Still, the estimate for Friday's report remains closer to 60K, at 78K. Plus, the productivity number was stronger than expected, too. So, the economy seems to be percolating along and at the same time the credit market is in a crunch and the dollar is declining, or was going into the last few weeks.
What's the poor Fed supposed to do? As mentioned in our last post, the Fed has plenty of room to lower rates if they so choose but with the GDP up over 4% in the last quarter, the employment numbers in pretty good shape, and the stock market in pretty decent shape, an interest rate cut seems pretty self serving, for the banks only. We have yet to decide what the number will be but we will make a stab in tomorrow's post with an refined number early next week--before the number comes out. Our initial thought is, "How can they lower by more than 25bps?"
FSI: 104.70 (and RIMM is down four days in a row, not much but down???)
Tuesday, December 04, 2007
One More Rally Left?
The stock market attempted to go down on Tuesday but it didn't have much punch with fairly low volume and prices down about half a percent. Our opinion is that the wave c, Fill, is going to be right around the corner with a pretty good sized jump--a jump that should be sold. One other opinion would be that the market would just drop right now, but we think one more attempt to rally is probably the right outlook. The futures are up a bit this evening but we all know the significance of that.
The news at the start of the trading day was JP Morgan's downgrade of its competitors. This pushed stocks down generally but most of the damage was done before the market opened. After that announcement things were pretty quiet.
Canada decided to lower its interest rates due to their currency running strong. The officials want to continue selling their products to the world and they are much more expensive with a 20% higher currency. The magic potion is to lower rates and thereby lower the currency.
Here at home, the Fed is now expected to lower rates next week, too. Somehow, we don't think the driving force is the currency is too strong but we could be wrong. As many times as we read that the Secretary of the Treasury wants a strong dollar, there are as many times as we don't think he does. The actions by the Fed are very loud indeed and Fleck describes so of it in his latest Contrarian Chronicles.
Getting back to the interest rate cut due next week, there is some division on the subtraction. What we mean is that the opinion is divided whether the Fed will subtract either 25bps or 50bps from the current level. Recent action in the credit markets are pushing rates down on the Treasuries. The 3 month bill is very near 3% which is lower than it was in the mid-August credit crisis. With the fed funds rate at 4.5%, the Fed could theoretically lower by 150bps but they wouldn't do that next week, would they? We haven't decided what we think they will do next week but we will have an opinion sometime this week.
After the market closed the word from FNM (Fannie Mae) was that they would try to raise some capital, $7 billion, by selling some nonconvertible preferred stock and cutting its dividend by 15 cents or 30%. No one is too surprised by this news but it will be mentioned casually on page three of Wednesday's WSJ, yawn.
FSI: 102.92 (RIMM is down three days in a row, now down 17%)
The news at the start of the trading day was JP Morgan's downgrade of its competitors. This pushed stocks down generally but most of the damage was done before the market opened. After that announcement things were pretty quiet.
Canada decided to lower its interest rates due to their currency running strong. The officials want to continue selling their products to the world and they are much more expensive with a 20% higher currency. The magic potion is to lower rates and thereby lower the currency.
Here at home, the Fed is now expected to lower rates next week, too. Somehow, we don't think the driving force is the currency is too strong but we could be wrong. As many times as we read that the Secretary of the Treasury wants a strong dollar, there are as many times as we don't think he does. The actions by the Fed are very loud indeed and Fleck describes so of it in his latest Contrarian Chronicles.
Getting back to the interest rate cut due next week, there is some division on the subtraction. What we mean is that the opinion is divided whether the Fed will subtract either 25bps or 50bps from the current level. Recent action in the credit markets are pushing rates down on the Treasuries. The 3 month bill is very near 3% which is lower than it was in the mid-August credit crisis. With the fed funds rate at 4.5%, the Fed could theoretically lower by 150bps but they wouldn't do that next week, would they? We haven't decided what we think they will do next week but we will have an opinion sometime this week.
After the market closed the word from FNM (Fannie Mae) was that they would try to raise some capital, $7 billion, by selling some nonconvertible preferred stock and cutting its dividend by 15 cents or 30%. No one is too surprised by this news but it will be mentioned casually on page three of Wednesday's WSJ, yawn.
FSI: 102.92 (RIMM is down three days in a row, now down 17%)
Monday, December 03, 2007
Hope Now
The stock market opened down a tad but soon the buyers were in there taking the market back up. The market then spent some time moving back down toward the close with most indexes closing near their lows of the day. One of the four horsemen, RIMM, has not fared well over the past two days dropping nearly 15%.
We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.
After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.
The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.
As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.
We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?
Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.
We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.
We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.
FSI: 102.55
We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.
After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.
The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.
As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.
We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?
Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.
We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.
We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.
FSI: 102.55
Sunday, December 02, 2007
California Real Estate Troubles
The stock market starts a new month with a bit of a rally just behind it. The current situation is giving a little time for the bulls to gather some steam for one last push. We think this should be a move that takes the Dow back up to around 13,750 give or take...
The next ten days have the possibility of a little volatility due to the position we find the market in currently. The first week of the month has the employment report on Friday and then there is the FOMC meeting next week on the 11th. With the market set up for a rally to relieve the extreme oversold condition the market was in the last couple of weeks.
The WSJ has another front page article, Monday, that talks about the higher credit score borrowers that decided to take out subprime mortgages for whatever reason. We recommend the article for your Monday reading. The article does suggest that with some of these higher credit score borrowers in the mix there might not be as much damage created by interest resets over the next few years. There are other interpretations.
The housing market is in a difficult situation and California seems to be the center of it. The Prudent Bear's Doug Noland shows the drop in the median price of a California home has dropped... from the California Association of Realtors (C.A.R): "Home sales decreased 40.2% in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9%... 'Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,' said C.A.R. President William E. Brown. 'The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.'”
Mr. Noland points out that...California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months.
FSI: 104.84
The next ten days have the possibility of a little volatility due to the position we find the market in currently. The first week of the month has the employment report on Friday and then there is the FOMC meeting next week on the 11th. With the market set up for a rally to relieve the extreme oversold condition the market was in the last couple of weeks.
The WSJ has another front page article, Monday, that talks about the higher credit score borrowers that decided to take out subprime mortgages for whatever reason. We recommend the article for your Monday reading. The article does suggest that with some of these higher credit score borrowers in the mix there might not be as much damage created by interest resets over the next few years. There are other interpretations.
The housing market is in a difficult situation and California seems to be the center of it. The Prudent Bear's Doug Noland shows the drop in the median price of a California home has dropped... from the California Association of Realtors (C.A.R): "Home sales decreased 40.2% in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9%... 'Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,' said C.A.R. President William E. Brown. 'The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.'”
Mr. Noland points out that...California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months.
FSI: 104.84
Subscribe to:
Posts (Atom)
