Helicopter Ben Is At It Again

Top Line: Only one direction on Tuesday and that was up. After the news from the Fed, the market decided that the world is a better place to be.

This evening's post will focus only on the Fed and its move on Tuesday. Any market direction talk needs to wait until we see at least another day of trading. We do think that the move up will be short lived but bullish optimism is difficult to predict.

We have mentioned recently that the Fed would probably Not take action between meetings to lower rates but Tuesday's action is an equivalent move. The Fed coordinated a massive central bank effort designed to "shock and awe" the markets into getting over this little credit crisis.

You have most certainly heard about it, over the roar about Spitzer, so we thought we'd give you a few highlights. This move is the most precarious the Fed has ever done, in our opinion. They decided it would be ok to accept some less than perfect assets, like non-agency mortgage backed securities, in exchange for Treasury securities which they will be able to sell in the market much easier to gain liquidity. (As someone said, the Fed has now entered the mortgage business.)

Yes, we know that is a mouthful so let's break it up and look at it again. The Fed is not the government and does not enter this financial game as the government even though the name Fed may indicate otherwise. It has assets that are used to enter the markets to protect its member banks and of course tries to make money on its ventures.

Normally, the Fed will offer to buy the safest debt securities for a short period of time to provide short term liquidity. Banks in need of reserves normally can sell Treasury securities to the Fed in exchange for Cash to cover those reserve requirements. In recent weeks and months, the banks have been offered a lot of different liquidity methods. The big one was the TAF, Term Auction Facility, which the Fed offered for a longer period of settlement than normal.

Today's announcement brought another facility, called the Term Security Lending Facility. This facility allows the banks to do some barter with the Fed in the form of trading bad debt for good. The banks offer mortgage backed securities for Treasuries. We read that the Fed may be taking a cut on these trades just because of the "risk" it is taking, so instead of giving a dollar for dollar exchange, they will be taking a dollar and maybe giving 90 cents in return.

Here is the thing: The Fed is concerned, deeply we're sure, that the banks are spinning out of control with tight credit conditions and they need to do something to preserve the banking system. The problem is that we are having a Contraction in Credit or as we like to say Debt. When debt contracts, it's a lot like Humpty Dumpty, you can't easily put it back together again.

The banks are experiencing problems due to the huge losses being taken on mortgage backed securities, subprime, yes, but Alt-A and prime, too. What the Fed is trying to do is fill the void left by billions of dollars of debt contraction. The market likes to call this De-Leveraging, meaning people and hedge funds and banks and corporations are not putting on more debt and some are actually trying to pay their debt down.

An economy like ours that seems to thrive on the expansion of credit/debt is destined to shrivel under the Contraction of debt. So, the Fed can provide liquidity to the banks or whoever needs it but what needs to happen is someone needs to actually borrow that money, create more debt, in order for the Fed's efforts to succeed.

This is deflation at its core, the destruction of money--loans that have now gone sour will never be repaid and even if the house backing that mortgage is sold there may not be enough money for the debt to be fully paid.

This part of the story is being ignored on days when the Fed opens up its doors but the facts are still out there. The Fed can not contain convince entities to borrow money.

FSI: 71.38 (a good sized jump)

Jackson was watching the ticker on Tuesday and was wondering just what the Fed was thinking:

Fannie and Freddie Are Club-ied

Top Line: Some follow-thru to the downside produced a negative day but the overnight futures are still singing a bullish tune. As long as we continue to see dip buyers come in, we won't be at a good intermediate term low. The real trading low will be here in short order but not until the buyers go away, at least at the opening.

The stock market had a number of issues to deal with on Monday. While the real news is the credit market generally, the piece of news that seems most important tonight is the news from Fannie Mae and Freddie Mac. These companies are GSEs, which stands for Government Sponsored Enterprises. How do they compare to Ginnie Mae? This is the news today.

GNMA, called Ginnie Mae, refers to investments or securities that are backed by the "full faith and credit of the US government". These securities have very little risk due to their backing by the government. Fannie and Freddie present a different picture, securities that are Not directly backed by the government. So, GSE is not the same as GNMA, at all, or is it?

Fannie Mae (FNM) and Freddie Mac (FRE) are publicly traded companies and make their money in the mortgage market by "speculating" on some mortgages and by charging fees to others for pooling the mortgages in their name.

Both of these companies, FNM and FRE, are in the center of the mortgage storm with some additional bad press that indicated further losses for them today. Both of them were down about 12% today on that news, down to lows not seen since the mid-90's. These stocks are down 75% plus in the last year alone.

The temporary increase in the "jumbo" loan limit allow these companies to help with any liquidity problems that may be constraining the mortgage market. The companies have had trouble actually calculating their capital, which is small in comparison to their loan portfolios. The idea is that an increase in the limit would allow more, shall we say, convenient loans for this size mortgage.

The real question is if the GSEs get into some trouble that is over their heads, will the government step in to rescue them or bail them out. Maybe that's a question for another day but we are trying to see if the government is willing to start taking over private companies.

We have seen a lot of things happen in these markets but we keep our eyes open to what could be a drain on taxpayers. This may not happen but the threat is now there. We continue to be amazed at how all these things are coming to light in the wake of the "contained" subprime situation.

FSI: 67.04 (ouch, the horsemen were down hard on Monday)

Jackson is here:

More Downside Ahead

Top Line: Friday's action managed to be a solid break that should mean the down move will continue for at least a while. The final tally was not as bad as it had been during the afternoon but the position in still in good shape for a drop.

The jobs' report was poor and generated several pronouncements that the US economy is in a recession. Of course, the Official deciders have to wait to Confirm it with live numbers. The point is that the world is coming to realize the poor state of affairs here in the US.

The other big news on Friday morning was the Fed's latest plan, that of increasing the Term Auction Facility from $30 billion a week to $50 billion. While we don't think the Fed will engineer another interest rate move Between meetings, we do think they will have no choice but to lower rates at their next meeting which is only about a week off, March 18th.

On Monday when the market opens, there will be many that will expect a rally. With all the bad news out there, the world is expecting the stock market to find a "bottom". Every time we see a drop, there are buyers willing and able to step in.

Our post is brief again this evening because we want to focus on the decline that we are in. Our last post suggested that the NDX (NASDAQ 100) had about 100 points to go for the next move down. Since it only dropped 5 points on Friday, there should still be about 100 points to go. We remind you that this should be the smallest amount and it could move more. It's just that there is a pattern here and the market likes to trade it.

As we go down on this move, we think there will be ample opportunity to find places to trade from. We just don't want to get in front of this train. There are plenty of ways to lose money in the stock market and we want to avoid the one where the market drops about 10% and takes our stocks down 15% or more.

As the market gives us more information, we will try to interpret it for you to get an idea where the trading low might exist. For now, it's too difficult to predict the depth of the decline.

The speculation index was up on Friday:

FSI: 69.70

One more picture:

The Plan

Top Line: The market closed right on top of the support line created a couple of days ago. That is the beauty of the market, it never really wants to tell you what it wants to do. On Friday morning we get the Real jobs' report for our review. This will not have much of an effect on the market, although it may appear to be doing so.

As we were writing our post last night (Wednesday evening) we had mentioned the strength in the overnight futures. But, before the market opened there were several news items, all credit market related, that managed to change all of that. We aren't going to go into all that news this evening as we try to keep this brief again.

We want you to concentrate on the positioning of the market this evening and over the weekend. After the jobs' report on Friday, the market is free to go where it wants to go. We normally say that the jobs' report is the key report of the month and represents the end/beginning of the month, even though it always comes out on Friday morning.

The stock market has a tough road from here. As we look at the pattern, we see a hard drop coming very soon. We talked about the possibility of a modest rally to 12,400. With the move down to this week's low near 12,000, we have more reason to believe that the market is ready for a fall. It seems the world is thinking that the 12,000 level is a floor due to its "round number" support. We think the market can break through this time.

Our favorite index, the NASDAQ 100 (NDX), has a pattern that looks very much like a possible strong move. The first move down from the highs from last Friday has been about 100 points and then there was a bit of a rally of about 60 points (for those of you that are paying attention, the Fibonacci ratio for a normal retracement is 61.8%, not bad).

These moves suggest that the next move should be at least 160 points which would put the index down another 100 points from here, about 5%. Remember that's the projected minimum move and it could happen extremely fast.

FSI: 69.36 (new low)

Strong Opening Fades

Top Line: The stock market enjoyed a little relief rally on Wednesday. There seems to be a little more upside left, maybe to 12,400. The futures are up a little this evening indicating a strong opening on Thursday.

Jobs: ADP reported that in the private sector, nonfarm employment declined by 23,000 jobs for the month of February. This report precedes the Real jobs' report due out on Friday morning and the consensus estimate is for an increase of about 25K jobs. This estimate follows a loss of 17K jobs in January so we'll see if there are any revisions to these numbers.

Ambac: The market has anticipated the "good" news from Ambac (ABK) for two days so Wednesday's news was a little disappointing. ABK announced that they would be raising capital by selling more stock, thus diluting the current stock. This news took the stock down about 20% on the day and dented the strong stock market rally. The stock dropping would mean that for the same dollar amount raised more shares would need to be sold. Don't forget that ABK has dropped right around 90% over the past year.

Fed: About the same time as ABK was delivering its news, the Fed released its beige book which added to the stock market's confusion. The Fed reported that inflation at the wholesale level had ticked up but companies were having trouble pushing those costs through to the end buyers. The cause for concern is the possible hit to the continued interest rate reductions. As the Fed is considered to be lowering rates at least 50 bps at its meeting two weeks from now, this news should have drawn more selling but it didn't.

The stock market managed to rebound from the shock of both of those two news bulletins and closed higher, although not that much higher. The Fed will have no difficulty in lowering rates at its meeting and everyone knows it. There are really only a couple of questions outstanding on that issue. Will the Fed lower 50 bps or 75 bps? and Will the Fed lower rates before their next meeting like they did last time? We will watch this with you over the next two weeks and report on what we think.

FSI: 71.75 (another new low, slightly)

Is It Really This Bad?

Top Line: Tuesday saw a large reversal in the final hour of trading, that would be in the up direction. We argue that any rally should be sold. The next big move will be down.

In the late day trading, Ambac was rumored to have yet another bail out program in place driving the price of it and the general market up from the depths of dispair. The Dow had been down over 200 points just before the rumor hit and ended the day down a mere 45 points. We can't disregard the reversal but we don't think it is meaningful in the larger sense.

Let's get to the post for this evening...

We received an email from one of our readers, thanks CM, asking if we thought things were as bad as an article that he referenced. This article describes 12 events, or 12 acts in a tragedy, and we would like to recount them here along with our opinion.

1. Home prices will fall 20% to 30% from the peak
Since this blog has this as a tenet, yes, we would agree with this one.

2. Prime and near-prime mortgages losses
Again, we believe the mortgage problem will extend to the prime sector.

3. Consumer debt defaults will increase sharply
We think the consumer has and will continue to retrench and spend less. The reason is due to problems with servicing their debt.

4. The credit insurers rescue package is insufficient
We agree--it is insufficient due to the nature of the problem. There isn't enough "insurance" to cover these losses.

5. Commercial real estate loan market will deteriorate
Yes, commercial real estate has already deteriorated somewhat and with the state of the consumer, the commercial world has fewer and fewer reasons to set up shop.

6. Some large banks with heavy mortgage exposure will fail
Ok, here is where the Fed is trying its hardest to avert trouble. Large banks are their domain and they will fight to keep them solvent. But, again, the problem is that there have been too many poorly underwriten loans causing the problem. We foresee bank failures, we don't know how large the banks will be. We would say smaller banks have the initial problems and then we will see how far up the size band the troubles go.

7. Banks' losses grow as asset values drop further
Yes, we think the banks assets (their loans to consumers and corporations) will go down in value, more than they have already.

8. Once the recession gains speed, expect corporate defaults
This is where the real surprise is happening. Most investors, and we're talking about professionals, thought that corporations had tightened up their balance sheets over the past five years so they would be able to withstand a consumer retrenchment. But, the consumer represents two thirds of the economy and with their own problems, consumers have pulled back and will continue to do so.

9. Unregulated 'shadow banking system' facing huge problems
We have described the problems in the SIVs but not much about the hedge funds that rely on the banks for financing. In these entities there are many potential land mines which we have started to hear about recently.

10. As recession spirals out-of-control, stock markets drop again
Since this has not happened to date, we think this item is not worthy of mention. It is more like a conclusion to the argument. We would still agree with the basic idea.

11. Credit crunch will dry up liquidity in many financial markets
This has already begun to happen and will continue.

12. Massive global recession spreading, spiraling down
This resembles number 10 and is a conclusion.

Our take on this list is that the creator has not seen the future so much as is recounting what has already happened. If you have been reading our blog for a while, we have been talking about these things for a while now. Still, there is no big "problem" or accident going on in the stock market.

So, while we agree that at least 10 of these items have already begun, the last act, so to speak, has not been written. The trouble is that we don't really know what is going to happen but we do know this, it is not a good path to be on. We speak in the general sense of living in this world, not being bearish on the stock market specifically.

We are pretty confident that the financial world does not appreciate the full impact of the troubles that we are facing in the real economy. But, this recognition is about to be felt and that will drive the price of stocks down.

With all of these known problems described in this article, the stock market still has not dropped enough to account for them. Our thought is that the stock market has a long ways to go down.

FSI: 71.77 ( another new low based on GOOG's 12 point drop on the day)

Trish, we did get out at a good price, didn't we :-) And, just for you, here is another pic:

We Are Bearish

Top Line: Here we are, the first trading day of the month, and the stock market had some trouble. Looking back to last week's "successful" test of 12,750 we have gone down about 600 points, near 5% before the final hour's 100 point rally into the close. With a little more rally on Tuesday, or not, we think the next move down should be decisive.

There was news on Monday but we are going to focus this brief post on one item, the near term downtrend that we see.

For those who follow the stock market, there is a tendency to feel good when your positions are moving in the right direction. As stocks rally, you seem to follow your Wealth more closely. Then when the market turns against you, the tendency is to start avoiding the daily check on your stocks.

This reaction is very common and results in poor performance in the market due to lack of action. If there was some way to actually pull the trigger, many dollars would be saved. We have always been quick to sell our profitable trades and usually before they have gone their distance, gold would be a primary example. We were in at $275 an ounce and out around $400 for a nice profit but today gold closed just under $1,000. We were right on the going in price and pulled the trigger early and then never got back in. No, we are not advising that right now, either.

What happens to most people is they don't really like to sell, ever. When their stocks are going up, they are happy and content to watch them going up. Then when they go down, they stop watching them hoping someday they will come back up to where they Were.

The main problem is that very few can actually sell at the Top. For the rest of us, selling into strength is just wrong because, you know prices are going to the moon. This is greed whispering in your ear, don't sell, we can make even more.

We are entering into a time when the other emotion, that being, fear, starts to get into the minds of the "investors". This emotion is driven by a lower selling price than one would like to take but as prices continue to march lower, people get scared that they're going into the abyss.

Fear is the emotion that allows a crash to occur. We are not saying that a crash is near, just that when fear shows up, it is possible. We don't really see a lot of fear right now. What we see is confidence that the next big move is up. We don't really believe that is true and we say that because bull markets do not wait for people to get on board before they go, they just go.

The current situation is one of confidence that the Fed can prevent the market from going down with rate cuts and the market has gone down enough already anyway. So, we had our opportunity to sell but now we have to hold because prices are about to rally.

These things are not true. The Fed can not stop the market from going down and the market can go down as much as it wants to. But, for most, the thinking process is not to sell at the top because there are further gains to be had. Instead of taking a nice profit, the stock they own turns around and creates fear in them when it goes down. Since there is no place to go but down, it must be time to sell. Human nature never changes.

But, back in reality, we think the current state is that the market is just now entering a long down trend that should last quite a while. There will be rallies like we have seen from the January lows but remember we are still down 2000 points from the October highs.

Trish--you have provided the perfect recipe for the stimulus package to be a Non-Stimulus package. We think the current thinking of the recipients of these rebate checks is to pay their utilities and rent. Some will have a little extra money to spend and they will, like you say. For the most part, we think people have Already purchased things and now need to pay the bill. And, along comes the rebate check and provides the funds to pay off the debt.

The only way the stimulus package will work is if a large majority of the recipients go and spend it on new items. Even then, it is only a short term blip in the spending habits and providers of these new items will not plan for this to continue so can not and will not build their employee base or anything else. It will fail to bring the desired results.

Speaking of failing there is One article of interest. This one could write our post tonight.

FSI: 71.99 (new low as the Horsemen were down on Monday)

Also, here is the Pic of the Day:

















We had so many subtitles for this one with the favorite being... Olé

Start of a New Month, New Down Move

Top Line: The stock market did seem to indicate that it wants to start the spike down that we discussed here on Thursday evening. The next few weeks should be the process to get us down quite a ways down in the Dow, initial target would be the January lows near 11,500. These lows are, in Wall Street's mind, a large area of support so if these are taken out, there will be another wave down. We'll deal with that when the time is right. For now, we concentrate on the immediate decline that seems to have started on Friday.

Looking back to the last few days, we again see many articles directed toward the mortgage world, starting with this one from San Francisco, published in the UK. We had never heard the term "ninja" loans before but thought it clever if nothing else. Ninja is an acronym that stands for No Income, No Job, no Assets.

And then there's our favorite NY Times journalist, Gretchen Morgenson, reporting about a new index called the Consumer Spendables Indicator developed by TrimTabs Investment Research, a proprietary research firm in Santa Rosa, Calif. This indicator represents the amount of money consumers have for spending including non-wage sources, like home equity extraction. We recommend reading this great article. It estimates the jobs' data for later in the week at a loss of 77K versus an estimate of between 30K and 40K increase from surveys of economists.

Here's a short article, again from the NY Times, about the rate of foreclosures versus home sales in various states. There is a nice graphic embeded in the article that shows the states with the highest foreclosure rates but also has a chart in it that shows the rate of foreclosure in the four large regions of the US. This chart shows the foreclosure rate in the West is over 80% of home sales.

One last article of interest is the one about Peloton, showing the ups and downs of a mortgage investing hedge fund. Beware of the rough spots in the housing market. Unfortunately, we have no time to discuss this tonight but it is an important part of what is going on in the markets at this time--troubled hedge funds selling assets to meet margin calls.

The last item we have this evening should be required reading for investors everywhere. Actually we have two things and both of them are Buffet related. First is his annual letter to shareholders and the second is a nice article that summarizes his comments.

We think the market is ready for a hard slide and that it has started. Surprises to the Downside at this time. Bull market tactics will not work here, such as buying the dips. The Asian markets are down 3% to 4% this evening as we write--no doubt responding to last Friday's drubbing in the US market. The US futures are down a little right now but not much. Let's see what our market can do on Monday the first trading day of the new month.

FSI: 74.24 (not a new low for the move)

Trish, thanks for the note--don't really know how to respond to that except, the people in charge need to do whatever they can to indicate their confidence in the system and that includes the rate cuts from the Fed and the economic stimulus from the government and bullish economic rhetoric. But, since you are here for pictures here is another one sitting on Grampa's lap:

Bush and Ben Say No Recession

Top Line: With market action following our current blueprint, we think that the current setup will provide a strong down move. As we have been mentioning for a while, the 12,750 area in the Dow has been a strong resistance line. Since the test from Wednesday held, many market watchers will respect that line and that will reinforce it.

On Thursday, the market got off to a poor start with the help of several news items. The first item was the weekly jobless claims which jumped and were higher than expected. This number is unpredictable anyway but the fact that it jumped gave the recession theory some credibility.

Then came the news from Thornburg, the troubled mortgage lender, who said they were trying to make Margin calls on their investments. The key for the market was the Type of mortgage in question and in this case they were Alt-A, no these were not subprime. So, when the world had decided the subprime Problem was contained, they were Hoping that was the case. Now that Alt-A is starting to show up with problems, the stock market was not happy.

You know that the market doesn't like looking at facts that are bearish so there was another item they had to look at, the revised GDP. The market expected a bit of an improvement in the last estimate, which was 0.6%. But, while a number around 0.8% was on their minds, they got the same old 0.6%. This also provided fuel for the recession talk.

The Chairman of the Fed was still on the Hill speaking to the Senate on Thursday. The important points of his speech are concerned with interest rates and the economy. What do you think he said about lowering rates--you guessed it, he was clearly ok with lowering rates. Almost immediately the futures market pushed the probably of a 50 bps cut at their March meeting to 100% and started moving in a 75 bps cut.

The Chairman had his eye on inflationary pressures but said he wasn't really worried about it, but he did say it may make the Fed's job a little tougher. The Chairman also thought the dollar was in no danger of being displaced as the world's reserve currency--the keepers of the Euro may argue with him since it seems to be moving up every time the Chairman speaks about lowering rates.

The President got into the same pool as the Chairman of the Fed when he asserted that the economy wasn't going into a recession. Yes, he said we have had some slower Growth but the economic stimulus should help. So, we now have the Chairman of the Fed and the President of the US both telling us in loud words that we will not go into a recession. Both of them think they can mandate there will be no recession. The rest of the world is making the opposite conclusion, which is that the US IS going into a recession and may be there already.

After the market brought some bad news from both AIG and DELL. AIG says it lost over $11 billion on some of its investments and would therefore put in a losing quarter. DELL disappointed its shareholders with its after hours announcement.

We are pretty sure there was some good news out there somewhere but we couldn't find any. The market could not disregard the news on Thursday and sold off by the end of the day.

We are getting more convinced that the market is ready to spike lower and maybe that could start on Friday. The major successful test of the resistance line somewhere around 12,750 has solidified our thinking. This market is so ready to fall out of bed and the participants will hit a little fear and probably hitting sell orders as well.

The only thing we can do this evening is wait for the developments. This should be a spike down based on the technical picture. Let's sit back and watch this.

FSI: 75.96

OFHEO DAY--OH

Top Line: Wednesday saw another successful test of the 12,750 resistance line, with a high tick of 12,756.56 before coming off. This test was performed on a day that saw some important news. Now, we have to see if there will be another test or two.

One thing we want to mention this evening is the notion of a "bull" market. We have seen market action when the market is in a "bull" phase. Bull markets don't let you get in. If you want to buy something, you don't dare wait until tomorrow because even a pullback in prices tomorrow or the next day would put the price higher than it is right now.

On Wednesday morning, the market got a little shock from the durable goods orders which were down 5.3%, not a great result after all of these rate reductions. But how have those nice rate cuts been doing for the stock market generally? Well, let's take a look.

The time of the first cut, a 50 bps drop on September 18th, the Dow had been right around 13,500 and then the Dow moved up to its high close just over 14,100. Just prior to that cut, the Fed Funds rate rested at 5.25% and now after several cuts sits at 3% and you do remember what level the Dow is today. Yes, right at 12,750 or a little below that since the test was successful and the Dow couldn't hold that level.

So, with the Fed lowering rates from 5.25% to 3% in about four months, the Dow has managed to gain, hey, wait a minute, it has Lost 750 points. Good thing we got those rate cuts so the bulls can make some money.

The other big news on Wednesday was from OFHEO, the regulatory body that oversees the likes of Fannie Mae and Freddie Mac. OFHEO, the Office of Federal Housing Enterprise Oversight, a big mouthful if nothing else, said they would agree to allowing these GSE's to buy mortgages higher than the $417,000 limit they have had to live under for a while now.

This announcement launched both of these companies with both companies trading near decade lows. The launch propelled the Dow to get to our 12,750 test but then fell apart. FNM managed to close up 1% but FRE ended down on the day, this after both of them were up about 20% on the day.

There was one other, hardly worth mentioning, event on Wednesday, that being the Chairman of the Fed's remarks over on the Hill. He said some pretty amazing things (sarcasm, in case you were wondering) about the Fed being willing to lower rates if necessary and that we really should be concerned more about slowing Growth and not so much inflation. Let's see, the stock market has lost 750 points on the rate cut news so yeah, let's have some more cuts. The Fed can do magic with its elixir, or can it?

FSI: 75.57

PS With any of you new readers out there, please feel free to put a comment out there with your questions or comments. We try to answer them at least in the next post. Plus, you can remain nameless if you like and no one will know who you are. Thanks for stopping by.

IBM Enters the Fray

Just a couple more Grandson Pics before we get going:




































Top Line: The stock market is challenging our 12,750 resistance level. The area did hold the advance on Tuesday and we will need to keep an eye on it over the next couple of days. The NASDAQ indexes didn't do as well without IBM in them. In fact our own FSI was down to a new low with all four components down on the day (GOOG, AAPL, AMZN, RIMM).

The blue chip indexes (Dow INDU and SP500) enjoyed a good up run on Tuesday on the back of IBM's news that it would buy back another $15 billion worth of stock. When their announcement came, IBM jumped 4 points (about 4%) in about a minute, equivalent to about 40 points in the Dow. This news was enough to counteract all of the other negative news. Well, we're not sure the record oil price is negative news these days, we think so but the stock market doesn't.

The big bad news was the PPI, Producer Price Index, and that was up a magnificent 1% and the "core" PPI was a little high, too, at 0.4%. The other number was the consumer confidence at 75, a number that the WSJ says is the lowest in 15 years except for the early days of the Iraq war.

Another article that popped up in the WSJ on Tuesday was an (opinion) article on the bond insurers entitled "AAA Oliopoly" back on page A18. Since it is a pay site, we thought we should let you know the key point--"why were the bond insurers facing downgrades in the first place?" The article says that it's in part due to the original "faulty" ratings from S&P or Moody's.

Back to the future: The stock market is at a critical point here. As negative as the news is, there should be no possible way the market could go up but...We know that the news doesn't drive stock prices. We need to wait another day or two to see if the 12,750 level holds the advance. There are strong month end tendencies--which we acknowledge but don't believe they really matter. But, we wait...

FSI: 74.07 (new low after GOOG's back to back 20 point plus down moves)

Bond Insurers Have Their Day

Top Line: The stock market had a slow start on Monday but when the Standard and Poor's affirmation of MBIA's AAA rating. This news gave the market a real lift as the Dow jumped about 100 points in one minute. This lift has left us with a larger lack of confidence about the very near term move. We still envision the 12,750 area as a pretty good area for resistance.

The news from S&P doesn't sound as good as the market traded. When the news hit the wire, the stock market was only paying attention to the headline. That headline was that Ambac would Not lose its rating. The fine print was, "not Now".

Last Friday the market jumped on the scent of the "bailout" for Ambac. While Ambac was working on getting some funding/capital to keep its rating, the shareholders were getting worked over. One of the proposals for Ambac was to sell some additional shares in the company. Let's see, how many shares would you like? Stock is trading around 10 and now they want to triple their stock outstanding to get the needed capital infusion. We suspect the price of the stock might not stay at 10 bucks.

But, let's get to the bottom of this stock market analysis. How does this affirmation give us confidence that the market should be bought? Does the Problem go away now and what was the problem exactly? We think the market has also been suckered into believing that there is some connection to bearishness when Ambac was rumored to be downgraded. Bearishness in the global sense, not just for Ambac as a company but the stock market as a whole.

While it is true that the major defaults would not be a good thing for the market, having a little AAA insurance seems to be good enough. We suggest that the problem is bigger than a little insurance. This blog has a core belief that the economy will suffer from the housing problem. Ambac insures some of the mortgage backed securities that are directly tied to the houses that we are talking about. Somehow, Wall Street thinks that as long as there is insurance, there is no problem.

Oh, and by the way, MBIA decided to forgo its dividend to shore up its capital situation. On Monday they were also planning to split up there business into two pieces, the mortgage (they call it asset backed) and the municipal. As Fleck said, bad plus good equals less than 0.

These two companies, Ambac and MBIA, have both dropped about 80% the past year and have done several things to bolster capital against the screaming mortgage market. When will that problem be over? The bottom line is that the market has, for the moment declared this problem solved. Let's see what transpires now.

We noticed that there have been a few articles that might have been written by us over the past few days. We thought you might think so, too. The first is one from Bloomberg on the stimulus package announced by the Fed and the Government.

Here's one on people digging into their 401(k)'s. The article talks about how they had to tap into their retirement fund and now also need to sell the BMW!!! because American Express had reduced the limits on their credit cards??? What is wrong here??? We would say that people wanted to take advantage of easy credit (remember, we call it debt here at the Update).

There are more stories just like this one. We couldn't find the article but the woman was quoted in the article saying she couldn't make the payments on her child's preschool education. Why? Because a bank had called her and told her that her home had gone down in value and they were reducing her home equity line of credit. She had been writing checks on her HELOC for the costs of preschool!!!

FSI: 76.54 (GOOG was down hard on Monday)

Bear Market to Continue

Top Line: Late Friday the stock market reversed its down move late in the day creating a perfect setup for a last late chance to sell some stock. The main trend is down and this little rally is only some minor noise, again.

The world seems to want to allow the market to go up since it's been down since October. Since the January lows, there has been a little corrective rally that has now run its course. That is not what Wall Street expects and is certainly not what the Fed has spent all of these bullets to achieve.

Speaking of the Fed, the futures market has priced in a nearly one hundred percent probability for a half point cut in the funds rate at their March meeting. Then there is the near certainty of the Fed lowering rates to 2% by summer sometime from 3% today. We're pretty sure that the Fed has no shame saying that the economy won't go into a recession this year, and all the while driving rates down. More and more people are starting to think recession which makes it near certainty just because of that.

The market's sudden turn around on Friday was inspired by a Rumor that one of the bond insurers, Ambac, was going to get some capital, uh from somewhere, early this week. The general feel in the market has a lot of expectations, we would call it speculation, that the bottom is in. As the self appointed contrarian in the room, we think the notion that the market feels like the "bottom is in" means that the bottom Can't be in.

We would enjoy seeing a rally going into the beginning of the week. The market has every right to go up or down, but given the position of the technicals, would think any rally should be sold. This week has the honor of being the last of the month and usually has an upside bias so we'll have to see.

One of our readers, thanks CM, sent us a link to a chart that seems like something we should share. This chart has to do with the value of the Dow in "real" dollars, that would be gold. The people over at Elliott Wave International have been showing this chart for a while now so here it is in your daily read. This chart shows that the Dow has been in a slow bear market for a long time when compared with the price of gold.

FSI: 78.39

Suffering from Bearishness

Top Line: We have been asked to add a few more pictures of the baby. Please indulge us for the moment, we are enjoying each and every one.

Stock market Top Line: The stock market continued its incredible volatility over the past seven sessions or so. Now comes the interesting part where the stock market has to decide which way to go. We say...oh, why don't you guess?

Yes, we think the market will resolve itself to the downside and that it's only a matter of time. The reason is simple, the market has not been able to sustain any kind of rally. As time passes without a real rally developing, the players get a little more nervous all the time.

The problem is that there has been a change in the flow of funds, it has slowed. The Fed has done a lot in order to "force" the world to borrow more money. This seems to be their solution to the problem that we have all borrowed too much. We don't think this will do much.

There really is no good solution at this point. The housing market has now taken control of the situation. The article in our last post talked about the real problem in subprime, that people can't afford the mortgage they are in even before the Reset on their ARM.

Thursday's excuse for the decline is the Philly Fed report which showed a much worse picture than expected. The stock market opened higher but couldn't hold its gains and then this news came out and there was no holding stocks up after that.

This evening we are suffering from bearishness. The reality of the situation is that our small blog doesn't have answers, just a bird's eye view of what seems to be going on. As we sit up in the crow's nest, we look down on the housing mess and know the reason was that the Fed had to do something about the stock market decline and 9-11. It chose the route of easy credit--remember this is debt, not credit, in the hands of the people.

We continue to view the housing mess move to other credit issues, the latest of which is the bond insurers who have two main businesses, municipal bonds and other bonds. Its those other bonds that have gotten them in their trouble, those pesky mortgage loans. The municipal side has been ok until recently when the auction bonds have started to fail, going off without getting funding. The circle is that municipalities will most likely end up having to tax more.

Or, there's the government bail out of Northern Rock. This is sure to cause trouble for taxpayers in the UK.

As we said, we are suffering from bearishness. There is money to be made on the downside right now. We know that people have already lost a lot of money just in the past couple of months. We know these people will continue to Hope that stocks will come back and will not sell. These people expect that the market will save their portfolios. Hope does not drive stock prices.

We recommend Extreme caution in this market. Of course, we will focus on the new baby so we don't have to think about the plight of the US, at least for now. Take care.

FSI: 77.78

Wednesday Upside Move

Top Line: The stock market staged a neat recovery on Wednesday flying in the face of higher CPI numbers. The cause of the rally is questionable because it is based on the belief that the worst is over. This will bring disappointment for many but not today. Our current stance is that the market could move back to the 12,750 range but would run into trouble there. Surprises to the downside for most.

The CPI news should have the bulls running for cover because higher inflation should mean a tougher Fed...but that is so Paul Volker and the Fed of many years ago. On Wednesday the Fed stated clearly that it was ready to lower rates again if they felt it was necessary and that inflation wasn't going to be a problem due to slower economic growth. Ok, whatever you say, we should believe.

Our thought is that a 100 point Dow move is just so much noise. Stocks have been hit hard this year and a little move just gives bulls hope, no real fuel for a sustained advance. Hope doesn't drive stocks.

We saw a good article on the mortgage crisis that we thought we'd share and since it's so late this evening we will again let someone else write the Update.

FSI: 78.11

Tuesday's Bearish Reversal

Top Line: The market has maintained its position to drop from these levels. The market opened strong on Tuesday with a steady leak all day long reversing the strength into weakness. This pattern of up early and selling after that is a typical bear market pattern.

Our thoughts are mostly centered on the continuation of the bear market this evening and we will keep our eyes open over the next few days for further weakness confirming our position. Tuesday's market was filled with higher commodity prices, oil over $100 for one, which was cited as one reason for the turn around in stocks.

Wednesday we get three things, the CPI, the January housing starts, and the Fed's minutes from its January meeting. There shouldn't be too many surprises in these numbers but the market could interpret any one of them as bad.

After the market closed on Tuesday Hewlett Packard (HPQ) announced good earnings pushing that stock up in after hours trading. Funny thing is that the rest of the market continued heavy even after that news. And, as we write, the US futures are down about a half a percent and Asia is down a couple of percent.

We have mentioned credit default swaps on occasion here at the Update but these derivative securities have now been mentioned in an article by Gretchen Morgenson of the NY Times, someone we have mentioned here also. This time she has given us some good info on the subject and will be our primary item this evening. She says that the world of CDS's is arcane and could be the source of another problem.

Her point is that risk is now being traded away and there is no real way to do that but people have become complacent on the way they look at risk, thinking they have traded it away. The idea is that if a problem occurs, there may not be a good way to find out who has taken the risk and who should pay. It's a good article about an important topic.

FSI: 77.31

Northern Rock is the People's

Top Line: The stock market has come to a place that it must now decide if it's going to go down or if it will put the decline off a little while longer. The stage is set for a large down wave that could take the Dow down through the 10K line. The position we have is that the Dow is ready to drop. If a rally ensues above the 12,750 it may go up a little more, maybe to 12,900. We say, If. More likely, the Dow will cascade downward ever closer to going into four digits below 10K.

The news from Friday was fertile but it is old news. The new news is from the UK where the prime minister (Gordon Brown, in case you don't remember) says that the UK should take over the struggling Northern Rock Bank. The WSJ has a front page article scheduled for Tuesday morning addressing this subject.

The WSJ says that the government may have to take over the company "forcing shareholders to accept a deal that will likely leave them next to nothing; evicting some people from their homes amid a forecast rise in loan defaults; competing with private mortgage lenders; and potentially slashing nearly half of the 6,300 jobs at a company long a source of pride and economic growth for the northeastern English city of Newcastle."

The issue here is whether the government will take a direct position in the current housing situation. Here in the US, the president has signed a law that allows small rebates to be sent to lower end taxpayers to spur the economy. They stop short of getting into the mortgages of homeowners, preferring instead to encourage the mortgage processors to take some actions to help homeowners.

There will be much to discuss this week as the market enters a period of danger. We want to focus on the price movements more than the news this week, but news items like this are sure to be part of the psychology of the market traders.

Thank you for your patience with us last week as we spent more time on our grandson than the market but we are back this week and it should be a good one.

FSI: 79.86

Credit is Front and Center Again/Still

Top Line: The stock market hit a speed bump on Wednesday morning when UBS announced earnings that were dragged down by, what else, mortgage problems. But, there was something in the report that suggested that subprime was not the only source of their problems. The stock market reaction to the news was to sell now and ask questions later.

There have been a few news items the Update has missed this week. A notable one is the one about the municipal bond offering that was held without very many buyers causing the rate to jump to 20%. This was a modest $100 million offering that couldn't be sold without raising the rate to an unusually high rate. In the Treasury bond market we have talked about the bid to cover ratio and how important that is. In this case, the same concept applies.

Bid to cover means how many bids were there to cover the auction. An entity says they have $100 million of bonds to sell and would like bidders. If there are enough noncompetitive bids the auction goes off without any trouble at the rate specified in the offering. Competitive bids may come in at higher interest rates, or more to the point, lower prices in order to get higher rates.

So, in the case where noncompetitive bids are inadequate to cover the auction, they offering would have to go out on the Tail to fill its needs. The tail is where competitive bids reside and determine the final interest rate on the bond offering. The rate of interest is the same to all bidders so the more bidders there are, it would seem, the lower the interest rate.

In the case where there are a lot of bids, the bid to cover ratio is high and there is plenty of flexibility to issue the bond. On the other hand, if there are few bids compared to the offering, then you have what happened on this particular offering--not enough buyers to cover the offering and the bond goes out at 20%. Yicks.

In the bigger picture this is all part of the "credit crisis" which we have heard so much about over the past several months. On Thursday, the Chairman of the Fed said to the Senate Banking committee that he was prepared to lower rates again in order to maintain growth, albeit slower growth. He even said that with the government rebate program along with the Fed's rate reductions, the economy would start moving forward again in the fall. Where have we heard this before???

Seriously, we have looked at the headlines in the WSJ for days and weeks now and have seen that credit has been the central theme in what seems like half of the articles. We just can't keep up on reporting them all. We hope that you have been prepared to read these articles with some "insider" knowledge of how some of these things work.

One last item is that the options expiration is Friday (today for you) so there could be a little more volatility. The significance of options expiration is not necessarily very important, it just serves as another opportunity for the market to struggle.

The market is in a dangerous place right now. Many are hoping for the best with all of the attention being thrown at the mortgage problem and the rebate program. The problem is that the stock market is not much better off after all of the attempts of the Fed and the Government to stop the bleeding. We think there is ample room for the market to drop hard due to the dashing of hope that will come from no buying.

FSI: 80.70

Surprise From Retail Sales

Top Line: The stock market spurted ahead on Wednesday indicating that bullishness is alive and well. Here at the Update, we think the bullishness is misplaced because the market is in a bearish condition with more to come; and, bullishness means more downside because in order for the market to make a good intermediate term low, people should be bearish. Make sense?

Well, since there may be a few extra readers here after the last few days of baby pictures, we thought it might be good to review what we are all about here at the Update. The primary reason for this blog is to provide market commentary, and that happens every evening before a market trading day, usually by midnight Central Time. So, normally there is no post on Friday or Saturday evening. Next Monday the market is not open so there will not be a post on Sunday evening this weekend either. Got it? Good.

We are willing to give opinions on the direction of the market which should Not be used as trading advice, just to give us a chance to try our hand at predictions. No one knows for sure what the future holds. Our opinion is that the stock market leads the news and therefore looking at the news needs to done carefully if you are trading stocks. We like to say that the news helps us make the trades that we want to make, as in if we think there is a good chance for an up move, then we would try to buy any early morning weakness. Likewise, if we're bearish (yes, we are bearish now) then we like to have the market up on news in order to position for selling.

At the Top of each post, we have the Top Line which is our assessment of the near term market direction or other pertinent stock Price action. It is our way of giving you a brief synopsis of what we think, as opposed to the rest of the post where we normally report on news or price movement during the day. In particularly obvious (???) points, we think there are opportunities based on our view of the pond and we make statements to that effect--these are Not things you should do, they are things that we see that may make sense for us.

At the end of our post, we have the FSI which is our stock "index" that is based on the four horsemen that Jim Cramer annointed. These stocks are AAPL (Apple), AMZN (Amazon), RIMM (Research in Motion, the makers of the Blackberry), and last, but not least, GOOG (Google). We have been keeping track of the price of these stocks together in order to see how much speculation there is in the market. That's how FSI got its name. FSI stands for Fo(u)r Speculation Index. The index was normalized at 100 back on October 22, 2007.

Our favorite topics are the stock market and specifically tech and financial stocks. We do mention other stocks at times but those two broad sectors are our area of most concentration. We mention other investments like gold and silver, as well as the mining stocks. We write about the bond market and the dollar and what the Fed may or may not be doing, basically anything that may affect the markets we follow. We don't spend any time on politics unless it directly relates to the market. That usually means that the Government has done something which may give the market a lift, not election results.

One of our main tenets has been that the housing market would bring the economy into a recession. The posts are all out in the archives. Here is what we said back on August 24th, 2005:

"And, more real estate news as yesterday we heard that the existing home sales dropped unexpectedly and that inventory of existing homes [is] at 4.6 months. These inventory levels are starting to show some signs of the real estate market getting tired, especially taking the inventory build of new homes in today's report. We want to keep a close watch on these developments as the next few months go by. Some whiff of weakening in the real estate market will have a dramatic effect on the stock market. We will see." Oh, in case you're wondering inventory of existing homes is over 10 months now.

So, what about today? Well...

As we mentioned, the market spurted ahead on Wednesday morning. The news for this was the retail sales figures which showed a 0.3% rise compared to a 0.3% drop that was expected. This data seems inconsistent with all of the recent noise about the economy but maybe it's right??? If it is, why is the president signing a $170 billion rebate program into effect on the same day? Or, better yet, why has the Fed been dropping interest rates so much recently along with all of the other cash enhancements it's doing?

Thursday, both Fed chairman Bernanke and Treasury Sec'y Paulson will be doing there best dance in front of the Senate Banking Committee. This should prove to be a deliberate avoidance of the obvious. The CNN article talks about the five questions that should be asked of the twin towers. (that's a nice hyperlink that you can use to read the article, just click your back button to come back here when you're finished)

More tomorrow...come on back.

FSI: 81.43 (up nearly 4%, speculation is alive and well)

Just a Few More Pics and a Little Commentary

Just a few more pics of my grandson for those of you who might be interested (I had some complaints about not having Gramma in the pictures so here you go):

Gramma Pam is all smiles.
























Even though Jackson doesn't Always smile.



















They do seem to like each other, don't you think?!?


















Dad Jeff seems comfortable even when Jackson is screaming.


























Jackson calms with Dad's thumb to suck.


























And, Grampa Glenn is content with the entire event.

Ok, back to the market for a short Update. Look for a full Update tomorrow. For those of you who have come to visit for a day or two, come back tomorrow for the basics on Update and find out what we're all about.


Top Line: The stock market got a boost from the Oracle and the Sec'y of Treasury on Tuesday with the Dow moving up 133 points but the NASDAQ failed to break even, closing down just a few cents. The market is in a very dangerous place right now. The rally of the last few sessions looks like it is about to roll over into the abyss.

As you have heard by now, Warren Buffet, aka, the Oracle of Omaha, has made an offer to help the bond insurers acquire some capital. Of course, Mr. Buffet is not in a particularly "giving" mood when it comes to his investments. How do you think he got to be a billionaire? Surely not by being willing to take on a lot of risk without any reward.

He has offered to buy the Municipal Bond portfolio insurance premiums if the companies in question also give him an additional 50% above that amount. We are not sure if the investors in those companies will be willing to pay that much. That would leave these companies with a lot of poor performing assets that they are insuring.

Then there was the announcement from Treasury Sec'y Paulson who said that there should be a moratorium on foreclosures for 30 days to give more time to some who might be able to renegotiate their mortgage situations. The government is here to help, again.

There is another article from Glenn Beck (hm...another Glenn) comparing the latest government rebate program and FEMA's efforts after hurricane Katrina.

More tomorrow...come back then, we'll be back.

FSI: 79.65 for Monday and now 78.55 for Tuesday (yes, we'll explain this tomorrow)

Just Another Monday for Some, Not Me

Top Line: No market review this evening, just pictures of our New Grandson:

Please welcome Jackson Glenn Stading.

More stock market analysis in tomorrow's post.



Jackson with Uncle Jason.


























With his Dad, Jeff, that is a mouthful.

























It's Jason again.

























Three Generations of Stading boys:

























Please don't tell Mom that there is a picture here--she'll never talk to me again. She did great.



















Ok, two pictures. Oops.



















Proud Father and son.


























The star of the show, Jackson:


















And, of course, with Proud grandpa:

















One more with Mom:

Grandson Monday?

Top Line: Well, the market has given us an early warning that it is ready to go down in a big way. When the Dow starts to head down now, there should be no stopping it until we get to an intermediate low. Oh, that will be a ways down and we won't be concerned about it right now. Let's just say that the low of late January should be the first target for us to be watching but it will not hold.

We apologize for the brief post this evening. In fact, we expect the market to go down as we kind of sit back and watch it. The posts this week will be available but there is a grandson coming tonight so we are going to be savoring the events of the week. Of course, there is an options expiration on Friday which should sort of top off the week. Take care. We'll be back tomorrow.

FSI: 78.21 (strong 3% move--still down nearly 3o% this year, yes 30%)

Quarterly Bond Auction is Held Without Many Buyers

Top Line: The stock market managed to give a win to the bulls on Thursday. CSCO had opened down about 7% but that was near the low of the day. From there it was mostly up giving a lift to the overall market. We think this day was mostly for marking time. The market needs to go up every once in a while. We think the trend is down and that the 12,750 area would be very difficult to get through if the Dow could manage anything strong enough to get there.

The news of the day is that Romney called it quits in the election--not much to do with the stock market but it was kind of a shock that he dropped out.

Back to the market...Before the market opened, Wal-Mart disappointed the market with its January sales which were up but not by much. This along with the CSCO news was enough to push the market down in the very early going. It didn't take too long before buyers arrived. There was a lot of volatility with the market moving violently in both directions even though at the end of the day there was no real sign of it. The Dow was up 46 points on the day after getting pounded all week.

Today saw the Congressional passage of the economic stimulus package. The media is reporting a very underwhelming expectation by economists. Which brings us to bonds...

The Treasury Department held its quarterly auction of 30 year T-Bonds on Thursday and the report is that no one showed up. Well, that's not exactly true, they showed up but the were requiring higher yields to go out 30 years. The so called bid to cover ratio was a scant 1.82 which means there were $1.82 bids for every $1 of bonds sold. This may sound ok but it is very low. The US is trying to sell its debt to outside buyers to finance all of the spending. If foreigners decide not be oblige, there could be a little back up in rates. The bonds moved up about 14-20 bps in yield, today.

Lots of little news items about the consumer. The main idea is that the consumer is going into hibernation. The WSJ has a front page article scheduled for Friday which describes the plight of the credit card holders or users. Solid article.

FSI: 75.94 (just a little higher)

CSCO Ruins the Evening

Top Line: The stock market tried to put on its normal happy face when the opening bell rang. With the big selloff on Tuesday, there were many, we suppose, that were hoping for at least a modest bounce today, Wednesday. That did not materialize and instead we saw a continuation of the selling. We have been mentioning the 12,750 level as a significant area of resistance and it seems that level has contained the latest rally. The highest Dow print was right around 12,767 about 17 points higher than our mark. We don’t think the market can get back above it after the last two days of trading, lower.

Before the market opened, there was a yawn when Toll Brothers announced that it doesn't see any end in sight to housing-market woes. The housing news must have been completely priced into the market by Wednesday morning...Well, maybe not quite.

The news that may have tipped the market over in the morning came from Macy’s who said they were going to have lay off about 2500 workers. There could have been another reason, too, which was a voting Fed member saying that the Fed’s job includes price stabilization. The market took this as a sign that the Fed was possibly willing to keep interest rates where they are for the time being. We don’t think this is even a real consideration for the Fed. The Chairman is committed to the idea that he can singlehandedly keep the economy afloat. This delusion will soon be rectified but in the mean time we are going to see lower and lower rates from the Fed as Bennie tests his theory.

The market couldn't maintain the rally it started in the morning and has now dropped below some key support. That doesn't mean we'll see an immediate drop but it does mean there is a lot of weakness.

The market had a blow after the close when CSCO CEO John Chambers discussed the outlook which didn't make anyone too happy. The stock fell about 7% after his comments and pushed the US futures down into the evening hours. We can only wait to see if there will be any carryover in the morning. We have to believe that the participants are getting a little tired of seeing the market go down after they buy.

FSI: 75.39 (new low)

ISM Services Sector Raises Recession Fear

Top Line: The amazing thing about this huge decline is the point at which it stopped, right near the support created last week. This amazing stock market marvel let's both bulls and bears hang suspended in the question of where the market wants to go next. The 12,750 area does represent some strong resistance but that is quite a bit higher than Tuesday's close.

The Update is brief tonight with the market saying it all, the Dow being down 370 points on the day. The initial cause was the release of the ISM Non-Manufacturing index, we call this the ISM Services Index. This is one of those numbers that comes out every month and has the 50 level as the line between expansion and weakness, expansion being higher than 50.

Tuesday morning's release of a very weak Services sector was pretty much immediately reflected in the price of stocks, down. What the market was expecting was a slight decrease from last month but still above 50. What it got was a huge decrease and a number well below 50, in the amount of 41.9.

There are a couple of items to note. The ISM has created a new Composite index reflecting a few different components. This new index had a number of 44.6, a little better showing than the traditional service sector index of 41.9 as reported above.

The other thing is that the number was announced earlier in the day than normal. This is highly unusual but the ISM said they were concerned about a possible breach that may have accidentally allowed the number to go out early. To make it equally available to all, they decided to announce it early. Curious. The release of this number brought about a CNN headline that said, "Recession is here - economists". (This topic will be featured on the front page of the WSJ on Wednesday, also.)

The other big item was delivered by a person associated with the Fed, Jeffrey Lacker, someone who is known more as a Hawk than a Dove, meaning they want to be inflation monitors rather than always easing monetary policy and asking questions later. His comments were, as reported in the Recession article above, that "the prominence of downside risks means that further easing ultimately may be warranted." This was taken as a white flag from the hawk and the market didn't like it at all.



FSI: 77.35 (up a bit on a very negative day--no fear in speculation land)

GOOG Below 500

Top Line: As mentioned, the 12,750 area in the Dow has provided some strong resistance. That resistance line got a little help from the shocking UBS downgrade, from "buy" to "sell", of American Express (AXP), a member of the Dow Industrials. In our last post, we mentioned the "throw-over" which did Not happen on Monday. The market is setting up to do that over the next couple of days and then we should see the end of the upward "correction". It should be down from there, with "there" being somewhere just over the 12,750 area. Or, the market will just go down from here. Either way, the market should be heading south soon enough.

There isn't much to mention about Monday's trading except that it was heavy. With the AXP downgrade, even the techs decided to slump. This didn't really seem likely after Monday's trading in Asia, which was strong.

As for AXP, it represented the lead dog in Monday's down move. Looking back over the past few weeks as stocks have moved up, the financials have been the backbone of the move. Even though they dropped hard into the middle of January, their bounce has been strong. Two months ago AXP traded near 60 and two weeks ago it was near 40, a stunning third cut out of it in about six weeks. The rally took it back over 50 late last week so today's 2 point drop, while large, didn't dent the latest up move. Other financials have done mostly the same thing including the homebuilders.

After the market closed, there was some more deterioration in prices. The overnight US futures are down a little which sets us up for a down opening and then maybe a bounce to get this rally phase over and done.

Our FSI (Four Speculation Index) has the four horseman in it. Those four are GOOG, AAPL, AMZN, and RIMM. It has been "normalized" to a basis of 100 from back on October 22. GOOG had been trading at 650 that day and traveled up to around 741 at its high. On Monday, GOOG closed down about 20 to a finishing price of under 500. This helped the FSI to close at its lowest point since October's inception date. The highest closing level of FSI was 111.86, the day GOOG closed at 741.

We recommend reading a housing article from our last post. They are sobering and should give you an idea that a recession is almost unavoidable and that deflation is coming.

FSI: 77.12 (ouch)

Housing is Front and Center With Media

Top Line: The Dow has run back up to the 12,750. This level has provided quite a bit of resistance even in the "strong" part of the month. The market seems to want to push through this area which under normal circumstances would amount to a "breakout". This time we would like to see what is called a "throw-over" and then a fall.

The Main Stream Media seems to be quite concerned about the subprime mortgage "crisis" as we have been reading several articles about it over the weekend. Here is a sample:

Broke Homeowners Linked to Arson: The article says there has been an increase in arson since the housing bust occurred.

Lenders Who Sold and Left: Here is information about the mortgage industry which has seen a great deal of turnover, exodus is probably a better word. The article is by Gretchen Morgenson, a reporter whom we have quoted before.

The Pools of Riverside County: This article laments the general suburban wasteland left behind after the mortgage market went belly up. They use the word exurb which loosely translates to a place that's out of town, past the suburbs. Here's a quote from the article: "Peek behind the palm trees and there you see the most shocking sight: abandoned swimming pools, fetid and green, left to the elements and choked with algae. Thousands of people have walked away without even draining the water. Mosquito control agents now patrol these murky pools, treating them with pesticides to keep disease-carrying larvae from forming."

Trying to Tap Into Home Equity? We'll See: Here's the crux of the problem, limiting credit to people who assume they have some room left on their credit cards.

We read a few articles about this subject which fits in with the deflationary argument. Banks are limiting what we have been calling HELOCs, Home Equity Lines of Credit. These lines of credit are set up against people's houses and then checks can be written against the amount of equity that was originally assumed. Now that home values have declined, there are some lines of credit being reduced.

[We almost think this housing news is old news because we have been talking about it for so long. These articles seem like an echo of the Update. The housing market has a long ways to go and there will be much more trouble, prevention should have been considered.

You probably heard the jobs' report wasn't really all that good, with total jobs dropping 17,000. Of course, the articles also said that the news probably wasn't as bad as the number indicates because the number will most likely be revised next month, oh that's right revised upward. Let's make it clear that jobs being below 0 is not the line that gives the impression of growth or recession. In order for this economy to seem normal there should be nearly 200K jobs added every month...not just plus or minus.

Meanwhile, the market is leaning on the Fed's lower interest rates and the government's latest rebate program. Both of these entities have said we will not going to have a recession. The problem with this situation is there is no answer to the problem except to let the economy go do what's it's going to do. By the way, the economy will do whatever it wants anyway, no matter what any entity does. The stock market is hoping that someone somewhere can fix this. We'll see.

We may have a throw-over directly ahead or the 12,750 will hold. The next week should bring us the answers.

FSI: 79.29 (new low for the move)