Housing is Still a Big Problem

Top Line: The market seems to continue its slow slide which feels more like a water torture for the owners of stock. Our position remains that we should see a little rally to alleviate the completely oversold condition but that doesn't mean we aren't going to see more downside right on the back of that, we should. The market should drop about 20% more going into the month of September. If you do the math on that, 20% of 11,000 is 2200 points so let's round it off to 2000 which brings us down to the 9000 level or so.

On Monday morning, the stock market blasted off at the bell but that was the high tick of the day as the market fell for most of the session. There were some bursts of buying but they didn't last long as sellers continued to push prices down. The interesting thought is that the new owners tend to be more interested in picking a bottom than being long term investors so as they buy they want to sell for a quick gain. When that gain doesn't appear they sell to someone else who has the same idea.

As we mentioned in our last post, the powers that be tried to make some promises on Fannie and Freddie on Sunday evening; and, the stock market greeted that news with joy for all of one minute at the open on Monday. These GSEs are at the center of the mortgage problems that we are facing, it's not subprime. Subprime is so 2007. We now have subprime creep which means that Alt-A is having trouble, too. This resulted in the IndyMac failure late last week.

There are so many issues tied up in the mortgage mess so it's a good thing you have been following along with us over the past several Years. Contained??? Probably not. What is happening now is the socialization of the problem. All these problems are in the process of being taken under the wing of the government, as in, We the People. Last year we heard that the subprime would be contained, then we had that little challenge in Bear Stearns and now we see the need to help out the GSEs. The latest piece with IndyMac being taken over is that the FDIC is going to get involved, too. Remember the F stands for Federal and that also stands for We the People.

There was a non-mortgage related, well pretty much non-mortgage anyway, event on Monday and that was the buyout of Anheuser Busch by a European company at a huge price. This article is cleverly titled "This Bud's for EU". Ok, so it's not really about the real economy or the market but we thought it was at least comical.

On a more serious note, we wanted to recap our position on the housing market. We receive Barron's on Saturday and the most recent issue shows a roller-coaster on the front that is on the downslope but very near the bottom of that slope with a move up right after that. What the picture is supposed to convey is that the housing market is about to turn around. This is not going to happen and here are the reasons why not.

First, demand is weak. The buyers out there are looking to buy "cheap" houses and are looking for that great deal. If they decide to put an offer on a house, then they need to get financing. This is not a slam dunk like it was a couple of years ago which leads us to...

Second, lenders have tightened standards. Yes, there are still some investors who are providing money for home buyers but they are requiring very squeaky clean borrowers. Many mortgage bankers are going out of business, witness IndyMac, which translates to fewer loans being made.

Third, supply of homes on the market could be described as a glut. Whether a for sale sign is in front of a foreclosed house or the house of a desperate seller, there are a lot of houses on the market.

Fourth, the prices of homes are too high. Just because the first three have come 180 degrees (that's math speak for an about face) doesn't mean that prices shouldn't. Prices for homes have fallen, a lot in some areas, but the affordability is still in question. As we have heard, many people can't afford the houses they are in if they had to re qualify for a mortgage. The measuring stick is to compare the mortgage payment with the rent payment. In this case, the rent is not enough to pay for the mortgage payment--houses prices are too high. We know that this is not the case all over but that is the state of the market generally.

FSI: 84.45 (the lowest level since April 17th)

Government Intervention Redux

Top Line: We do think that the market has finally put in a short term low on Friday. We're looking for a corrective rally that will get us out of this hugely oversold condition.

[Editor's note: Thursday evening our internet provider decided to drop us, ok, it was probably related to a storm that came through here. We apologize for missing the post.]

And, we would like to answer your question, Erick, but there won't be time to give you a full answer. So, let's give you some highlights and as we get into this rally phase we can discuss the possibilities of "history" repeating just before we get into the next decline.

The volatility indexes are based on the premium in put options. What makes a put have premium and what is premium? Well, if the market is going up, there is little incentive to buy puts and in fact it might be reasonable to sell them as an investment strategy. In either case, the value of the options is squeezed and therefore the premium is tiny. This action pushes the value of the volatility index down.

Your question has to do with buying puts Before a crash. What we are talking about is when the crashlike event is occurring and people have decided they Have to have puts because the market is going to zero. This is when the volatility indexes explode in price and they give us that very necessary information that puts are being purchased with no regard to price. When fear rules, we need to be selectively buying stocks. More as we approach those moments in September or thereabouts.

But, tonight there is a large news item out there that we must discuss...yes, you have already heard the news if you had the radio on but we do need to talk about the government getting involved again...as we say Intervention Redux...

This move on a Sunday evening just before the Asian markets open is out of the same playbook that we saw when Bear Stearns was purchased by JP Morgan. Back then, we saw the Fed and the Government get involved to get the deal done. They were in the background guaranteeing the deal. This time, we're not so sure what's going on. We wonder what they are thinking when they get involved with the Fannie and Freddie mortgage situation.

We see that one of our favorite journalists has given us some editorial comments on the "bailout" so we'll give her a chance to present some of the important thoughts. Gretchen Morgenson from the NY Times gives us, "The Fannie and Freddie Fallout".

The news that the two GSEs would be "rescued" was greeted with a pop in the futures as they opened this evening. Now, will that hold as we get to the open in the morning? We kind of think it will as we have been calling for a trading low over the past couple of weeks. The main idea is that the market will have a sharp, some would say violent, up move that will last for a handfull of trading days.

One other "little" item that came out late last week was the news about the failure of IndyMac, yes, it's because of the mortgage market. This is a very large player that is now Out. The FDIC is now going to provide some guarantees for the depositors, not all of them will be made whole due to the limited amount that the FDIC covers.

FSI: 85.91 (Thursday's number was 87.88)

Wednesday's Update

Top Line: The trading on Wednesday did not look like a continuation of Tuesday's rally...oh no, much to the contrary. While it does Look bad, we are still holding out for higher prices in the next week or so.

There were a few issues we weren't able to get to last night so let's see if we can recap what needs to be done this evening. Let's start with CSCO from last night. John Chambers, CSCO's CEO, normally one of the most optimistic guys, decided to offer a little dimmer view of the world of electronics. This news could have been disregarded by the market but somehow we don't think it was. CSCO was down almost 6% on the day dragging the NASDAQ market down with it.

Alcoa (AA) started the earnings' season out on Tuesday evening after the close of trading and AA was able to "beat" the lowered estimates by just a bit. From our perspective, AA is a commodity producer and as such will not hold up in a sagging economy. The market opened the stock up about 7% or so but then sold it off to close down over 2%, with much of that related to the entire market getting sold.

Getting back to Wednesday's action, there was little upside on the day. The market tried to put on a brave face but as the day progressed selling continued. The biggest losers of the day were probably in the banking sector, again, as the KBW index was down nearly 6% on the day...yes, it was up big on Tuesday but down on Wednesday.

Still, there doesn't seem to be any real fear. A key gauge for fear is the volatility indexes which were up today but are well below where they should be given the way prices have dropped over the past month.

The volatility indexes go up based on how expensive put options are. The higher the price of the puts, the higher the volatility. What we see is a modest pick up in the indexes but if fear entered the market, then people would want to own puts at any price to protect their holdings or just to speculate on the "guaranteed" decline. That hasn't happened...so far. We expect to see much higher numbers in these indexes and then we will actually consider going long based on the bargains that may be available at that time.

We are going to put this post up now and wait until tomorrow's close to decide if Wednesday's selloff is worth paying more attention to or not. We don't think the market is in the right position to "crash" right now, so we don't see a huge selloff as the next move but the last two days have certainly been volatile. Maybe tomorrow we can talk about the Elliott wave positions that the market seems to be in at the moment...for now, they are a blueprint for much more downside ahead.

Late addition: As we are signing off for the evening, we noticed that the Asian markets have turned higher after opening lower on the back of Wall Street's down day. With that, the US futures market has gained some ground as well so Thursday could be another interesting day...

FSI: 87.78 (significant drop but holding above the last week's lows)

Bounce Should Continue

Top Line: The market gave us a pretty good bounce today and we think there is still a little room to go over the next week or so. Oil prices dropped another $5 today with the dollar up again.

The stock market traded on both sides of unchanged for most of the day even though the NDX, NASDAQ 100, seemed to be a little stronger than other indexes. With about two hours to go the buyers came in and pushed the indexes up to their highs of the day at the close. The Dow was up 150 points while the NASDAQ was up a larger percentage than that.

As you may recall we mentioned that the futures were down a bit as we were writing last night's post and that we were expecting a rally out of that.

Sorry...we lost our post again this evening.

Here are the articles we were commenting on when we lost it:

Bernanke calms markets by extending term lending facilities.

Pending US Home Resales down more than expected.

We expect more upside before this is over. More in our Wednesday post...

FSI: 90.42 (highest since June 25th)

Sorry about the spelling errors but we try to get concepts here not spelling. In last night's post we commented on the Cse's (government sponsored enterprises) and they are really GSE's.

Fannie Mae Getting Her Fannie Kicked

Top Line: Monday gave us another very volatile stock trading session with a jump at the open and then a fall into the afternoon but then a big rally after that and another fall into the close. These types of moves occur, we think, at times when the market really doesn't know what to do and could be ready for a short term change of pace. We still think the Dow will be higher in two weeks than now.

There is a large bear on the front of Barron's this week with the title "The Bear's Back"; and, there has been a lot of chatter about a 20% correction being a bear market. These types of obvious statements give us contrarians a real chill. With that big bear on the cover, Barron's does have an article that says something we thought seemed pretty reasonable. In his Streetwise column entitled "Falling Markets' Nastiest Habit", Michael Santoli reminds us that the "outsized focus last week on the Dow's reaching 'official' bear-market status with a 20% decline from a recent high is a bit like fixating on the moment that storm winds go from 73 to 74 mph to formally become a hurricane." [The link is a pay site but you may be able to read it or you can dig up this week's Barron's somewhere to read it, page 7.]

Monday's big news was a Lehman analyst's remarks about Fannie Mae and Freddie Mac. The analyst said the two Cse's (government sponsored enterprises) would need to add a total of $75 billion in capital. We're not really surprised by this news but several of the current owners of the two companies decided they didn't want to be anymore and sold their shares. These stocks closed down over 15% on Monday even after having been beaten down for the better part of the past year. The prices have dropped about 80% since the October highs and have both become the poster children of the mortgage disaster and this 20% correction, defining a bear market in some minds. These prices have not been seen since the mid-90s.

The focus here this evening is the potential for a stock market rally. As we write this evening, the Asian markets are getting hit to the tune of 3% and we speak of Hong Kong and Japan. In what appears to be a sympathy move, the US futures are fading into the darkness, too. Both the SP 500 and the NDX futures are down about 0.75% looking at fair value so there is the potential for a weak opening on Tuesday morning. That may finally bring us some buying.

On Monday morning, the price of oil dropped back under $140 which caused the bulls to come in and buy in the early morning; but, in the end, that was not enough to hold up the Dow. Oil did close down about $4 on the day. We think this may also finally be the beginning/continuation of the commodity sell off. Most think inflation is going to run wild and commodities will continue to be on fire. What do you think that means to the contrarian here? Correct, we are bearish most commodities. Gold has failed to get back up to $1000 even as oil has continued to move up even though that move has been more moderate lately. Meanwhile, the dollar continues to hold its own putting further downward pressure on the commodities, especially oil.

FSI: 88.10 (the speculation index has been firm for the past few sessions)

New Week Ahead

Top Line: The stock market seems ready to proceed up for the next few weeks. After dropping for the past six weeks, the market has effectively increased the bearish sentiment. This bearish sentiment will not be rewarded in the short run and we think the market will advance. In case you are wondering about our "change of heart", we do not think this up move will last very long and it will be followed by another crushing down move.

After the long weekend, we can hardly remember what happened last week but we know the jobs' report was pretty much in line, the ECB (as we stated in our Thursday edit) raised interest rates by 25bps, and NVDA got hit without much damage to the rest of the market. These news bites did not hurt the dollar which rallied about a percent during the day, nor did the stock market take a dive with the Dow ending up about 70 points on the shortened trading day.

The blueprint we are following is that the stock market will have one of its normal bear market rallies. Normal bear market rallies can be recognized by their violence, meaning price moves are large. Unfortunately, the trend remains down and eventually the market goes down. It's just this type of action that gives the bulls another reason to hold on to their stocks.

Speaking of the bulls, we wanted to briefly mention a couple of thoughts this evening on trading. "Corrections" are sharp and don't seem to let up except for those moonshots in the preceeding paragraph. The bulls think the market will always come back so there is no reason to trade out of the current situaion. Ok, we maybe would concede that the market has come back but we are looking at a protracted bear market, one that will change diehard bulls into bears. In the meantime, these violent rallies keep the "hope" alive. We don't see a real good buying opportunity for a couple of years but there will be some decent ones over the net six months.

FSI: 86.83 (uptick signals an up move to come)

Market Ready for Fireworks?

Top Line: With the short trading day on Thursday and with the Fourth of July holiday on tap, there could be some fireworks on Wall Street. We still think we are very close to a low right now even though there is a possibility of a good sized drop at the opening on Thursday. We expect the Dow to be higher in two weeks than it is tonight. We'll check back in two weeks to see where we're at. We finally got that headline we have been waiting for, you know the one about how Now we have entered a bear market. Again, where were they in October??? These statements are not meant to "scare" people but that's what happens and This contrarian thinks it marks a trading low.

[Editor's note: With the holiday, the next post will be Sunday evening.]

The way the market closed on Monday, we thought maybe a rally would emerge today. Right. Well, at least it was interesting. With two hours left in the day, the Dow was about even on the day. At the end of the day it was down 166.

Then after hours, NVDA warned that their earnings were not going to be up to expectations. Their announcement came with the news that there were some technical problems with some of their chips for notebook computers. You can imagine that the market did not like that news very much and punched NVDA to the tune of 20% after that news.

So, what can happen in the morning? Well, the market could try to ignore the news because it doesn't apply to any other company except NVDA...yes, it's weak we know.

There are some other issues to deal with in the morning such as the decision by the Bank of England on their interest rates. The world worries about the dollar and oil so when the fantasy of the Bank of England raising rates is discussed the results are that the dollar will go down, oil will go up and the stock market will go down. This argument requires some reality. [Thursday morning update: It's the ECB (European Central Bank) not the Bank of England and they did raise rates by 25 bps so now we'll see what happens. The market pretty much expected this rate increase so the futures are not doing much after the announcement a few minutes ago. Of course NVDA is down 27% to 13.70 in pre-market trading.]

Yes, the other big news that actually could have some value is our own jobs' report. The numbers are expected to be job losses of about 60K but an improvement in the unemployment rate from 5.5% to 5.4%.

Have a great holiday weekend...see you next week.

FSI: 85.73 (a new low for the move)

Reversal Day?

Top Line: We missed a little on our call for the day on Tuesday with the Dow dropping hard in the morning and the NASDAQ dropping below last Friday's low. But, then the market turned around and finished up on the day. The NDX rallied nearly 1.5% after being down over 1%. Now we see what happens next. We think at least a pause in the decline has arrived. June was brutal and there are several bears out there who now, all of a sudden, think that the market will go down. Where were they in May?

We wanted to make another comment on the Jackson plus a couple from our last post. There comes a time in the life of an investor when you have been watching a stock or fund for a long time and you get to know that investment as well as anyone. You know the right time to buy and, more importantly, you know the time that you Should sell. This is where things get tough and greed sets in. You think it can go higher but alas you miss your opporunity. Then you tell yourself if it only comes back to where it was, Then you will sell.

The easiest thing to do is buy, but selling is tough. Selling high is tough because you always think you can get more for it...this is greed and has no place in your disciplined trading strategy. So, what you do is watch it go down and down and down some more until you think it will go to zero so you sell it. By the way, some stocks do go to zero.

Anyway back to the Jackson plus a couple bucks...AIG has fallen out of bed over the past year due to several factors. Unfortunately, this is a difficult situation from a trading perspective because the price hasn't been this low in a long time, more than ten years ago. With prices dropping like this on some major bellweather stocks like AIG and GM, you can easily push your thinking that the entire economy might experience something fairly bad.

If you think you want to buy one of those two stocks, you have to ask yourself what your risk tolerance level is. The largest percentage moves occur in the final stages of a down move. What that means is that if you buy a stock that has already dropped quite a bit, you have a great chance to lose a large percentage of you principal.

We advocate caution for the next couple of months until the market finds a more lasting bottom. AIG may have found its bottom but you don't know that until you see a bounce and then a retest of the last low. Then you can make a better guess as to whether you think the stock can move back up. In the mean time you don't want to try to "catch the falling knife".

The question has kind of spurred us to take a bit longer view of the market. We thought we would start by saying that the True Contrarian has issued another post today which is interesting reading. We subscribe to his daily service which is well thought out and calm. His analysis suggests that this is an election year which will lead to its own movements but that 2009 may be when the real bear shows up in the stock market.

And, thanks to CM for providing some additional info on SBUX. Starbucks (SBUX) said they would be closing and additional 500 corporate owned stores on top of the 100 they had originally planned. This is out of about 7000 stores. CM recalled our discussion on the company, saying that SBUX would be a good indicator of the state of the consumer and how willing they are to forgo their latte. As a side note, after their announcement the stock went up...of course.

FSI: 88.01 (big rally on the back of strong gains in three out of four components)

Oh, yeah, one more pic...

Possible Small Rally Coming

Top Line: Don't let the fact that the NASDAQ was down about a percent on Monday fool you. The market was lower on Friday and today's down move was not strong enough to break through to new lows. The market is in the best position for a few up days. Oh, no, this is not a trend change just a relief in the selloff.

If you take the time to look at the trading in the last half hour of trading on Monday, you will see a drop in the averages going into the close. Normally, this is a tipoff that the morning's trade might be weak, too, but we don't think that will be the case. That may not be the result this time.

The details are that the NDX traded down to 1829 on Friday but Monday could only get down to 1837. Again, these are subtle differences but the market knows that these types of things are important. The public is fairly bearish which is enhanced by a down day in the NASDAQ. We are not convinced.

So, let's back up a little. The news doesn't matter right now...we don't think it ever really does but we like to follow it just to see if there are better days to trade than others. The first issue is the calendar with the end of the quarter, end of the month, and the Fourth of July holiday weekend. When we wrote this list last night, we failed to mention our favorite event of the month, the jobs' report.

With the Fourth of July holiday set for Friday this year, the jobs' report will be moved up to Thursday morning. Thursday is a short trading day and there is no trading on Friday. We don't have a good feel for the jobs' report and its effect on the market this week. The market is already expecting another negative jobs' number with a reduction in the unemployment rate.

Getting back to our position, we think the jobs report could indeed be the timing of the high water mark for stocks in July. Looking back to June, the report was expected to be ok and the market was popping just before the early morning report. Then, that 5.5% unemployment rate punched the futures in the mouth. Let's see what happens in July.

We received an email today asking the question if AIG might be worth a Jackson (yes, that's the 20 dollar bill, not the grandson) plus a couple of bucks. We mentioned that AIG might lead the market down (check our May 21st post, "Below 12,750 and Confirmed by our own FSI") and our Top Line that night was: "The stock market gave a signal on Wednesday that the rally we have seen since March is largely over and we are now headed down." That was two days after May 19th when our Top Line said: "The stock market saw an intraday reversal that, in the NASDAQ 100 (NDX) at least, creates a very bearish picture indeed." That day the Dow closed at 13,028.

Tonight we see that the Dow has closed at 11,350, about 1,700 points. We're not saying this is the low for the year, that is coming later this summer, but what we are saying is that the next few Days, we May see a little rally. We are looking to the Thursday morning jobs' report for a tipping point. But, it could be next week sometime.

By the way, this is Not trading advice. The market is very weak right now and may not hold up. Surprises are to the downside in bear markets. Be careful.

FSI: 85.85 (another low weighed down by RIMM again)


So, here's why you came back. A couple of pics of Jackson.

The first one is Gramma stealing toys from Jackson...be nice Gramma. (Maybe Grampa has a chance, after all)



Do you know those E*Trade commercials? (YouTube video--be careful if you're at work) You know the ones where the baby is talking and trading and gets himself a clown with all the money he making in E*Trade's savings account...Jackson said he wants to be the star.




A couple of good pals...

At Least There Are Grandson Pics

Top Line: Friday's action showed a little underlying strength in the NASDAQ relative to the Dow in the final minutes of the day. This is a small and possibly insignificant detail but it does start to open the door for a little bounce in the stock market. We have the end of the quarter, end of the month and a long holiday weekend ahead of us.

Here we are on Sunday evening, reading about the market and looking for something to mention in the blog post. While there are a lot of miscellaneous things going on, the market is our primary focus and there are several outcomes. With the market oversold, the bounce theory may be the best one. The bounce should be more like a temporary pause in the downtrend.

We would not be surprised if the market decided to drop hard but we think the market will wait until a better time to drop, as they say, in a non-linear move. Hopefully we can wait until we see what tomorrow will bring before we have to decide what, if anything, to do.

FSI: 86.80 (down again)

In the mean time, we do have a couple more pics of Jackson to share with you.

Jackson and Gramma Pam




Jackson laughing at the camera man

Down, Down and Down

Top Line: For the stock market, it was down mostly all day long. The news was negative on Wednesday evening and it kept on coming on Thursday morning. Surprisingly, the market didn't go down more than it did on Thursday. As bad as things are looking, there doesn't seem to be any Real fear and that's what we are looking for in order to get a rally. Yes, that's right.

After we had heard from RIMM on Wednesday evening, the US futures market was down and stayed down all night. Then when Goldman Sachs put C (Citigroup) on its "conviction sell" list, the market had no reason to go up at all. Of course, not be to outdone, the oil market jumped again probably because investors were trying to find a place to park some funds because the stock market as going to have a bad day.

Another item that caught the market's attention was FORTIS, a European company, yes, we've worked for that one, too, along with AIG and now ING. Anyway, FORTIS decided to eliminate a $2 billion dividend and substitute a call for improving capital. The company wants to dispose of some assets, say maybe about $13 billion. You might have guessed that this didn't do too much for the European stocks on Thursday and brought some angst to the already troubled US markets. FORTIS dropped about 20% on Thursday. And, AIG is firmly below 30 bucks a share at 28.09. Can someone please tell us when should buy it???

Bank of America (BAC), well, what can we say? Today the company closed at a price it hasn't seen since 2001. That Countrywide Financial purchase is looking downright ridiculous. When the deal was announced, we heard a lot of positives coming out of both companies. Those pronouncements are now being replaced with reality news like "B of A" is cutting 7500 jobs on Countrywide deal.

This evening, we are trying to assimilate the market's drop on Thursday. Yes, the prices were much lower but it really didn't feel like serious thoughts of selling were occurring. This was borne out in the small rise in the volatility indexes and what felt like modest changes in stocks. RIMM was down 13% on the day after Wednesday evening's announcement and the other three members of the FSI were down, too.

To recap the situation, Fortune, part of CNN Money, reported many of the news items that we would probably normally share. We are tired but enjoying the drop in the market. When we surprises to the downside, this is what it means. Wednesday, all the players were giddy buying stocks while today, those buyers were being hit with selling.

The Dow has broken through support with a vengeance but we still think the NASDAQ indexes need to catch up on the down side. Thursday's drop brought the Dow down 20% from its October highs. So, tomorrow's headline might read something like, "Now we're in a bear market". Please...

It's been a great week and month for us here at the Update and we hope you have had a good month, too. Back on Sunday evening.

FSI: 87.09 (5.7% drop Thursday and down 18% on the year)

Wild Wednesday

Top Line: The stock market got what it wanted from the Fed but not from RIMM. The RIMM news could drive the market back down. Yes, we're still bearish but the first down leg could have ended on Tuesday morning...only time will tell.

Here we are with only a couple of days remaining in the quarter which coincides with the normal bullish period near the end of every month. The end of the quarter brings more focus to money managers because they want to have a "clean" portfolio that has high prices. Normal action is up.

Back to the market action, crude oil quickly dropped $4 just before stocks traded and there had been some other news, earnings news from a tech company that was ok and news that Barclays was going to raise some capital, about $9 billion. These pieces of news gave the stock market a chance to get pretty lathered up for the open. At the time, we thought the news from the Fed was thought to be a non-event so no one was even thinking about that at the opening bell.

The Dow was not as strong as the NASDAQ due to another piece of news, a downgrade of Boeing (BA) by Goldman Sachs. BA dropped about 5 points by the end of the day and, since it is a Dow component, BA put a drag on the Dow. 5 points in a Dow stock moves the index about 40 points.

About an hour in front of the opening, durable goods were announced to be flat but that didn't have much to do with the action in the early going. But, when crude oil inventories were released about an hour into the trading session, stocks bolted higher. Traders must have been assuming that the build in crude reserves just might reduce the price of crude another couple of cents and that would be extremely bullish for stocks.

Then the big event of the day, the long awaited Non-Event of the year, the announcement from the Fed about interest rates being left steady. The made some comments, "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased". These weak statements were enough to push the averages up again, the third time in the trading day.

But, we did notice that the rally peaked and then reversed about an hour before the close. At that time the Dow was up about 125 points at the time. Before the close the Dow had traded in the red for a few minutes but closed up a strong 4 points. Wow. The NDX, NASDAQ 100, had been up 50, now that's an up move, but settled up only 30. Right, only 30.

Then came the after hours news from ORCL and RIMM. Both companies had results that were ok but both made difficult forward looking statements that the owners didn't like. RIMM dropped about 8% by the end of the after hours trading session and ORCL was down about 3%. This has set us up for a poor opening here in the US, at least in the NASDAQ.

FSI: 92.37 (this number is based on pre-earnings prices from RIMM)

Roller Coaster Ride on a Small Scale

Top Line: The Fed is going to deliver their non-news on Wednesday. Getting past that, we should be able to get back to the business of going own. Yes, there is this end of the month period which can give us some strength so we will have to review this After the Fed's news.

Monday's market looked much like a roller coaster with the Dow dropping about a 120 points in the first half hour. That's when the consumer confidence numbers were released. These were very bad and should have caused further damage to prices but...from that point, the Dow rallied 180 points such that the Dow was up about 60 points in the early afternoon. Then we saw a back and forth move for about two hours before the Dow dropped again about 100 points to close down about 35 points.

The big news before the market opened was from UPS and the news was not very good at all. UPS said that the economy was"anemic" and that their profitable air shipments were suffering from damping demand. They also blamed higher fuel costs, can you believe it?!?

Then there was the Case Shiller report on housing said that the average home price in the country fell 15.3% year over year. We are not surprised and you shouldn't be either but then there was an article in Fortune (associated with CNN Money). The article says that this drop is "an almost certain sign that the path to a housing recovery is finally in sight." This pronouncement seems a bit premature.

While the housing market will "recover", it will not be like it was in the last five years in our lifetime. That sounds like a major overstatement but it really is not worth trying to defend. The point is that there continues to be a level of optimism about the future course of housing and as long as that exists the recovery is not here. Housing may not "recover" until five years from now and then it may not be noticeable.

We do not think our statements would ever be considered right now but the outlook has very little probability of turning out very well. Since this is the main tenet of this blog, we will find reasons to support this theory. When the outlook improves, we certainly will bring it up here.

Then, of course, there were the consumer confidence numbers. They had been expected to drop a little but they fell out of bed. From a CNN Money article: "The New York-based research group Conference Board said Tuesday that its Consumer Confidence Index dropped to 50.4 from a revised 58.1 in May. The reading was the lowest since February 1992, when it was 47.3. Economists had expected the index to decline to 56, according to Briefing.com."

The economy depends on the consumer and the consumer has recently depended on their home for credit. With that drying up, the government decided to step in and provide the masses with $600 apiece. What will happen next does not feel too good from this side. Going through it and hopefully coming out the other side will be difficult for all of us.

We heard from CM who had a technical article about the Dow and other indexes. We thought we should share it with you. It's the kind of article that just fits too well with the landscape of a declining market. The head and shoulders top formation is pretty bearish once the neckline is broken. Oh we could go on and on. Suffice it to say that the patterns we have been watching combined with the head and shoulders top give even more reason to believe that the market will continue to head South.

FSI: 90.86 (down a bit from yesterday)

Use Your Stimulus Check to "Buy a House"?

Top Line: Monday's followup to Friday was less than bullish and in fact was downright bearish. We have the possibility of a good sized drop but we do have the upcoming Fed meeting getting in the way on Wednesday. We are still bearish...hard to believe, we know.

As we look at the NDX, NASDAQ 100, we see a new closing low for the move with that gapping hole that the market could fall into in the next few days. The move in the NASDAQ indexes should catch up to the down move in the Dow. Today the NASDAQ COMP and NDX dropped to the level seen back in late April. The Dow has already broken through the April lows and is knocking at the March lows, only about 100 points away. As tenuous as this market is, there are very few support levels left.

After breaking through a major trendline on Friday (a trendline is the line that forms below an up move and above a down move, once broken should lead to more movement in the direction of the break) the Dow is free to drop as far as it feels it needs to. For now, we expect that the NASDAQ should be the leader to the downside from here and it was on Monday, as the Dow was flat and the NDX was down 0.75%.

We're not sure that there will be any excitement around the Fed's announcement on Wednesday that they are not going to change rates. That possibility exists but there really isn't much in the way of surprises that they can deliver. If they would change rates in either direction, that would give us a surprise and the market could react to that news but the probabilities are low, in our mind zero, for this event. There is no reason or expectation for the Fed to do anything with rates and this Fed is not about to be deviating from the plan. But, we digress...again...

Our main point is that there should be no surprise on Wednesday. No surprise from the Fed should mean No funny business in the market caused by the Fed's policy statement. That statement is constantly parsed for hidden meaning and the message could carry some shock value with regard to the Fed more definitely making the argument that they don't really mean to suggest they would actually raise rates anytime soon. That could lift stocks for about two minutes but not by much. Realization of a selloff is dawning on traders, it's a slow dawn...

We see there is an article slated for the front page of the WSJ on Tuesday and it belongs in the "truth is stranger than fiction" department. The article talks about a program for zero down payments subsidized by builders through non-profit organizations. Since FHA, a government funded housing division, allows 3% down financing, these builders, and other desperate sellers, are putting the 3% into the hands of would be buyers. FHA is not a GSE like Fannie and Freddie so there is direct government, that would be we the people, responsiblity. One ad suggests you should use your economic stimulus check for your down payment. Stranger than fiction, indeed.

As for gold, it dropped nearly $20 on Monday with what looks to be much more coming up. The oil price went up again on Monday supposedly due to a fire in Nigeria which trumped the Saudi's announcement to pump more crude. Still, the lid should be on oil for now. The next move should be down about $25 or more. Yes, taking gas down with it.

FSI: 91.49 (weakness in all four horsemen again)

Definite Break on Friday

Top Line: As mentioned in our last post, "we think the market is one bad day away from really taking a dive." That "bad day" could have been Friday and probably is. The market has broken below important support and most 200 day SMA's confirming the downtrend is continuing.

[Editor's note: SMA stands for "Simple Moving Average" and represents the average of the last number of days in the average. The main two SMAs are the 50 day SMA and the 200 day SMA. The way prices move with respect to these moving averages can give us important extra information that we can use to trade better. In fact the way these two SMAs move with regard to each other can also give us better information, compared to reading the financial news.]

Looking back to October, the market, as measured by the Dow, was making new highs over 14K and Friday the Dow put in a close below 12K. That's not a new event this year but it is the first time since the May highs when the Dow was above 13K. We bring this up to remind ourselves that those highs brought the Dow back up to its declining 200 day SMA.

Meanwhile, the NDX, our favorite index, has been outperforming the Dow on the upside recently and has been flirting with its 200 day SMA for about two weeks. Friday, the NDX (NASDAQ 100) fell hard away from its 200 day SMA. The implication as we see it is that the NDX is about to accelerate lower and start to lead the Dow on the way down.

This evening we saw one article of interest, well to us, anyway. It is something we have tried to say in our own way, that the fact that the world doesn't care about risk...wait, that should be did Not care about risk. This attitude is what has caused a great deal of trouble in the world. People have thrown caution to the wind and done things that they normally would not do except knowing there was No risk, or being dupped into believing there was no risk.

Tonight the markets in Asia are rebounding from their opening lows and the US futures are happily trading higher in anticipation that the "lows are in again" and that Monday can forget about last week's poor performance. The oil ministers suggested that they would increase production of oil to help prices come down, Obama said he was going to crack down on oil speculation, and the price of oil is trading up this evening. We still think the price of oil will drop very soon and that the $139 price will be the high. We are keeping a close eye on these developments.

This should be an interesting week...

FSI: 92.00 (a strong retreat here with all four members down)

Another Week is Over

Top Line: As the market opened on Thursday there was a sense that maybe it would break through the support levels but within the first hour of trading all major indexes had found their lows for the day and moved up from there. The move up doesn't look like a major up move starting but rather a counter trend move that will be fully retraced back down.

We thought in our last post that Thursday was going to be an important day but it turned out to be like so many others where the market opened one way and then reversed to the other way. In this case we started down on the day and reversed to the upside. We see the market seems to be trying to follow the price of oil for direction. As far as oil goes, it was up in the morning but then fell all day to end down nearly $5 on the day. This gave stocks a reason to move up all day.

As we have said many times before, once something seems like it's going to "always" work, it won't. So far though, the market wants to believe that if oil goes down, the stock market will have no worries. Another familiar theme here at the Update is the price of oil has moved up with the stock market. Yes, the oil move has outlasted stocks but it has been due to the same liquidity availability.

Our position continues to be that liquidity has now been reduced because financial companies are pulling in their horns and trying to raise capital. Banks only want to loan to the cleanest risks out there as opposed to giving 100% LTV (Loan to Value) mortgages to anyone who could fog a mirror (no, it's not our saying but we like it).

The biggest news item was from the CFO of C (Citigroup) who indicated that he thought there would be, according to the article, "substantial additional writedowns and more losses on consumer loans." That doesn't sound like it's company specific or that the Bottom is in on the mortgage crisis. C was down on the news.

In other banking news, BBT (BB&T Corp, a regional bank) was under pressure during the early part of the day due to the market expecting them to cut their dividend; but, the company said it was "thinking" about raising said dividend and the stock jumped out of the doldrums back to even on the day, a huge round trip move on the day. Of course, this news, in contrast to the news from C, was applied to the entire banking industry, well except for C.

As we close the books on another week, we think the market is one bad day away from really taking a dive. Whether we have to wait a couple of days, weeks or months, really doesn't matter. We are short and we are patient. Friday is the options expiration day and may provide some fireworks on both sides of zero so we'll be watching.

FSI: 94.48 ( another record high for RIMM )

Market is On the Edge

Top Line: The market came very close to the edge of danger with the Dow breaking below 12K for the first time since March. The Dow managed to gain its composure and rally out of the abyss...today. From our perch, the Dow is almost certainly going to attempt to test the March lows, those made around the time of the Bear Stearns takeover.

Well, it is Wednesday night and the market is on the edge. We sometimes mention that when the market is oversold there is a real chance for a big selloff. We have been at this brink a few times since we started the slide from the October highs and here we are again. Our momentum indicators were oversold last Thursday night and we got a bounce out of that but that bounce was over when the markets opened this morning.

FDX (Federal Express) announced disappointing numbers and in fact said it lost money last quarter due to some one time charges for Kinkos and of course the cost of fuel rising so fast. (In case you're wondering, we are still holding to lower energy prices over the next few months.) Then there was Morgan Stanley (MS) reporting a 57% drop in profits, yes due to debt losses. The stock opened down about 8% but pretty much rallied all day long from there. You know the story, the bad news is behind us...Again. Right.

And, don't forget the Fifth Third news that they were going to raise some capital by $2 billion assuming they could sell some preferred stock (yes, convertible to common stock) and maybe some subsidiaries. The company said that operating earnings for the quarter would be basically zero with some extra one time charges making it worse than that. They cut their dividend to 15 cents from 44 in an effort to conserve capital in addition to the other moves listed.

The rest of the news wasn't much better but these three items got the market off to a poor start indeed. As per normal though, after about 90 minutes of trading, the lows of the day were in and the market had a violent rally but that led to more selling and a little back and forth into the close. Still, the market was down about a percent across the board. As we write, the Asian markets are down about twice that and the US futures market is down a little, not much. Tomorrow's trading around the globe from Asia to the US will be interesting as the sun comes up on the various stock markets.

We don't like to say this but sometimes it needs to be said...Thursday could be an important day. We've talk about it here tomorrow evening. Let's see if the bear has any power. There is a good chance that the market could continue down tomorrow. One issue is options expiration is Friday the 20th...

What's on tap for news on Thursday is the rate decision from the Bank of England, leading indicators here in the US, and the Philly Fed report. The Bank of England has been threatening to raise rates to counter inflationary pressures but as is the case here in the US that will be difficult to do.

FSI: 94.01 (down again, in spite of RIMM near all time highs)


We received some response to mentioning the CEO dump at AIG. Thanks for the comments and our favorite Southerners are in my thoughts as usual--"Hank the Tank" is great--that would be Greenberg for those who don't know.

And, Trish, here are two pictures for you, taken on Father's day. So, the first one is of three sons and two fathers--how many people are in the picture??? Right, three. Still difficult to believe...






Then, here is the Fearless Foursome, again, ready to tee off.

Fed Speculation by the Financial Press

Top Line: The stock market continues to hang tough at these higher prices but the next move should be down. The next down move should also be strong even though it doesn't seem to want to go down, it's definitely ready.

The news prior to the opening bell this morning (Tuesday) was not very encouraging such as the PPI which was up 1.4% for the Month. Straight from Bloomberg: Producers paid 7.2 percent more for goods from May 2007, compared with a 6.5 percent gain in the 12 months ended in April. Excluding food and energy, the increase was 3 percent from a year earlier, the same as in the prior month. In other "not so bullish" news, the housing starts were down 3.3% to a 17 year low...how long ago was that? Yes, back in 1991, a year we have mentioned once in a while here in these pages.

But, it seems the real news was on page one of the WSJ where we learned that the "Fed Mood Tilts Away From Rate Increase". [This may be a pay site but take a look at the paper version sure to be coming to your desk in the next, oh, week or so, June 17th.]

This article is telling the stock market not to worry about the pesky Fed raising rates until at least the fall sometime. You have been reading Here that the Fed will Not raise rates. That does Not prevent the stock market from going down, in fact more to the point, the market going down will actually insure the Fed will Not increase rates.

The other ingredient is oil and our position on oil is the same as it's been for a while--oil and the stock market go in the same direction because of the huge liquidity available that needs to be put to use somehow. It goes into commodities because the "dollar is weak"...let's not go there tonight since we have argued for some time that the Dollar has probably put in an intermediate term bottom and is now on its way up. No, not everyday, that would not allow all this talk about interest rates and oil and the stock market and how they interact.

The real losers today were the financials with C (Citigroup) and LEH (Lehman Brothers) leading the blue chip indexes lower. The Bank index (KBW as reported by the WSJ) was down nearly 4% on the day. This index was around 120 about a year ago and is now at 65. These stocks have been affected by the deep pull of their mortgage loans. All of the components were down with one, Zions Bancorporation, down over 10% on Tuesday.

Erick reminded us that the Chief at AIG has stepped down. Most people know how this works, give the guy a nice sendoff and Hope that the new guy can bring some stability to the price of the stock--does no one get that they need to tend to Business and the price of the stock will take care of itself. Well, in the taking care of itself business, AIG's stock took another dive along with many financials, this to a 10 year low.

FSI: 94.78 (up on the day but GOOG held the index back with all three other components up)

Miscellaneous Trivia

Top Line: Trading in premarket was subdued because oil had popped to a modest new high, still not too far from the range it's been in for a month. But, from those early highs in oil, prices fell most of the day and oil closed down on the day. Stocks prices were firm as the price of oil dropped.

We find the whole "trade stocks based on oil prices" to be contrived, mostly. Here we see the public being very persuaded that higher oil means lower stocks. It's a foregone conclusion that lower oil is less inflationary and better for stocks. The problem with the theory is that it just hasn't been the case. We say the stock rally has corresponded very well to the oil rally we have seen. Ok, let's not argue facts with the stock market, they hardly care about facts.

The news continues to bleed bad ink with today's New York Fed Manufacturing Index falling to -8.68 from -3.23 on expectations of -1.5. Here anything below zero signifies contraction. Expectations were for an Improvement but the reality was much worse than expected.

Tomorrow we get to see the PPI report and after last week's CPI number, this should be an interesting number. We'll be interested to see how Wall Street spins this one. The CPI number was tortured and remains a Big number but the stock market took it in stride???

Other news for Tuesday is the Current Account Gap and May housing starts, both of with could be market moving but probably won't be. The bullsh contingent is hoping to see a "bottom" in housing again this month. Optimism and Complacency Rule.

We are going to leave you with a short post again this evening but the message of the rally is that there will most likely be a selloff right on its heels. We think that time is close.

The SMA (Simple Moving Average) is an important part of a technical toolbox. Major behavior in stocks as measured by the 200 Day SMA are very important to any longterm trades. Combining the 50 Day SMA with the 200 Day SMA can yield some insightful itmes.

In the case that we are talking about (in our last post), the NDX is riding the 200 Day SMA with what we consider to be Bearish undertones. In this case we think the right look for the position of the Q's, as they're called, is that it touches/touched it's 200 Day SMA 9right around 48.25) and should now fall away from it aggressively.

FSI: 94.42 (highest level since June 5th)

Dollar at a 3 Month High on Friday

Top Line: Friday's markets jumped out of the gates with the Dow quickly up about 175 points. Then we had a pullback followed by another rally such that the stock market ended pretty much on the highs of the day. This move has relieved some of the oversold condition in stocks. The rally has taken us back up to the 200 day SMA (Simple Moving Average) in the NDX and the QQQQ's. This line should provide good resistance for trading in the next few days and lead to further selling. By the way, Asia markets are up tonight in response to the Friday US markets.

The big news on Friday: CPI was up 0.6% for May (about 7% annual rate) but that is a seasonally adjusted rate with the real rate at 0.8%. Of course, not to worry, the "core" rate was only up 0.2%. Also, the sentiment figure dropped on the U Michigan's sentiment index from 59.8 to 56.7. Yes, oil was down a tad but still is near all time highs. Do you think the news is bullish? No, we don't either but the news is not the market...

One of the things to keep in mind for trading this week is the options expiration which should provide some near term volatility--when we say volatility, we mean up and down action. For the most part complacency rules but we think this is about to change with the stock market heading South again soon.

Friday's trading also gave us a new relative high in the US Dollar index which has been on our radar screen for a while. This is the highest it's been since late February. We have mentioned the Dollar in several places recently because we think it will be going up, continuing to go up is what we mean.

Dollar strength leads to some of our other thoughts for the markets. Gold versus the dollar is and should be a constant battle. Inflation erodes Dollars and gold as we buy it is measured in dollars so it tends to go in opposite directions to the Dollar. That means with the Dollar going up that Gold should continue to go Down.

In fact Dollar strength is at the center of our thinking on Oil, too; yes, gas, too. With a stronger Dollar and with Oil purchased in Dollars, it stands to reason that Oil will go down in price, too. Some would say that the price of oil is about to go "to the Moon" but that only strengthens our argument, with our contrarian position.

Dollar strength could be good for US Treasury bonds, too. They do seem to have come off their highs over the past several months (since the Bear Stearns situation in March) and seem ready for a reversal higher. This means the price goes up on the bonds, and the rate goes down.

This subject, interest rates, gives us a chance to talk about the silly talk out of the Fed the past few days. They have recently been talking Tough on inflation, like they are just about ready to raise rates...right. Did anyone tell these guys there is an election this year? Or, that the economy was in a little trouble? The only thing they seem to watch is the rate on the Treasury bills which has come up along with long rates but at a faster pace.

What this rate rise on the T-Bills does to the Fed is persuade them to Think about raising rates. Back in March, these short rates went below a half a percent and now they are back up pushing 2%. Where is the fed funds rate? 2%

The Fed, in their simple model, now are seeing T-Bill rates move back up and think they have succeeded in their task to relieve the credit crunch. Maybe we give them too much credit here but seriously, what they look at is how Banks are affected by the credit problems. They Never give a second thought to inflation or how the Dollar might be affected.

To tie this up in a nice little bow, we have suggested that the Dollar has bottomed and should continue to rise (we watch the Dollar index which is a basket of currencies). This action is a surprise to the markets and they don't really understand what is happening. The short end of the Treasury market is the one that we need to keep our eyes on for the Fed's actions. Since we have little reason to think the Fed will be raising rates anytime soon, we must think the T-Bills rates will fall. We are not convinced of this but it does seem the right answer given all of the above fairly logical reasoning. Of course, your comments are always welcome.

FSI: 92.84 (GOOG had a big day but this index is still down 12.7% on the year)

Stock Market Reverses From Highs at the Start

Top Line: Thursday's market action has the characteristics of a very typical bear market. That is, there is strong buying early because the bulls Want to believe so bad. But what happens next is there is no place to go but down and the sellers come in. These days will become a part of the way trading will be done and as traders, you can capitalize on this pattern.

We're going to let CNN Money write our news items this evening but the highlights are that Oil was down about $5 a barrel early along with higher retail sales, brought on by both higher prices at the pump and several billion dollars in free money from the government. By the end of the day oil had rallied back and closed up on the day which seemed to cause the market to drop all day long. As a backdrop to all of this, the Dollar was rallying strongly and looks like it wants to continue its recent uptrend. The other news during the day was that MSFT(Microsoft) has dropped its bid for YHOO(Yahoo!)

Last, we want to remind you of the situation over at LEH (Lehman Brothers) where the news continues to be bad. LEH had been smacked pretty hard back in the dark days surrounding the Bear Stearns' debacle in mid-March but came out of that episode looking unscathed, sort of. Now, the company seems the next one that is need of being "bailed" out so we will keep our eyes on that situation.

Today's stock market action seems to be bearish on the surface because of the intraday reversal and near collapse at the end of the day. Out of the ashes came a rally in the final minutes of trading that eliminated all of the losses in the NDX (NASDAQ 100) and gave some life back to the Dow which had gone flat after a stunning burst of strength at the open.

The bear market has a long ways to go but we are going to get these types of rallies all the way down and they will hurt our day to day performance but there should be continual progress to the south. We do not recommend that you try to trade this treacherous market unless you are willing to be quick. As they used to say about Los Angeles, they have the Dodgers and the Angels and the way people drive you will be one or the other. Ok, the analogy doesn't really fit but in this market you need to be nimble and dodge as many bullets as you can, maybe we should have used the Matrix analogy instead. That would have been a little better.

In these times of financial uncertainty, you need to figure out the best way to Maintain your principal and gather cash for really good opportunities later, either in the market or in the highways and byways of life. We are here mostly to provide some entertainment for you along the way. Tonight's entertainment is over, oh stop clapping, but there will be more on Sunday evening. Have a happy Father's Day and, whether your father is here or not, think some good thoughts of him.

FSI: 90.50 (GOOG's advance couldn't hold up the Speculation index)

Market Gets Hit Again

Top Line: After a 205 point Dow drop, that index has fallen about one thousand points in about a month. While this sounds like a lot, we don't really think the downside pressure has caused much fear at all which would mean there should be a little more downside to go. Still, bounces, possibly sharp, can occur at any time.

The main event on Wednesday is the action in the Dow Transportation average. We seem to hear that the high price of oil pushes stocks down, which isn't exactly true as we've pointed out several times here, but if it was true you might surmise that the index that would be mostly affected by higher oil would be the Transports. Back on May 19th, that average made an all time high price level as oil was moving to all time highs as well. All that aside, today the Transports dropped over 4% and are down about 10% from that May 19th high.

As we examine the fear factor in the market, we see that there is some but not nearly enough to consider this down move complete. We are speaking mostly of the volatility indexes, the VIX in particular although the VXO is equally as sanguine. Yes, they are both up but only to the mid-20s and we expect a push to about 50 or more before we see a really good buying opportunity.

The Asian markets are having more difficulty this evening, too, with the Chinese market down another 3% again tonight with Hong Kong and Japan down about 2%. This is after wide losses last night, China was down about 7% last night.

We would like to go back to last night's post when we were discussing the rate hikes the Fed is contemplating. We are particularly surprised by Bernanke's announcement that he wants to be an inflation fighter and support the dollar. He has proved to us over and over and over again, hum a few bars with me, that he's only concerned about the banks. But, now, he's all about the inflation story that the main stream media is talking about.

It's almost like he has set us up for a problem that he and his merry men at the Fed can't deal with directly the way they normally do, in lowering the fed funds rate. Effectively, the Fed has now taken a position that the next move in rates will be up. To us this leaves a little hole that the market won't be able to have filled by the Fed. This could be an issue and may cause some deterioration in prices.

FSI: 90.80 (not holding very well)

Jackson is holding very well even though the FSI isn't...

Another Short Post

Top Line: Commodities were in the volatility ride on Tuesday with Oil and Gold both opening up and dropping into the close. Oil was up about $3 early but dropped such that it was down $3 by the end of the day. Gold really didn't open up much at all but ended down over $25 and is poised to drop more.

What was the News? That would be the news that the Fed Chairman thinks the economy is just fine and the Fed is now concerned about inflation and we should be expecting a rate hike, maybe a small one, at the next meeting in a few weeks. Meanwhile, the Democratic presidential candidate is telling Congress the economy is slowing and the government shouldn't wait for his presidency to do something now. Obama thinks the right amount would be $50 billion. Apparently, he thinks we should send this amount at about the same time the $160 billion is being sent out.

We are not really interested in the rhetoric, we just want to focus on how the market perceives the news. At this point, Obama does not carry the weight that Bernanke does. And, well, the bond market was not happy what with the threat of higher inflation and lower rates. What other item might be having trouble??? Well, that would be precious metals. Since they don't have children (as in, no interest) or other way to collect interest, they get sold in times of the threat of higher interest rates. What goes up with the threat of higher rates? Yes, you are correct, the Dollar.

We are sharing the email from last night here:

Okay, I'm just really freaking out about this economy...This is totally and utterly insane. The oil price increase on Friday was just so unbelievable. And of course, you know that will cause another huge increase in gas prices for us all (It's already taking affect). Talk is it'll be $4.25 easily by the end of the month. Wouldn't surprise me. ... It's frustrating for sure and everyone is being hit financially with the raised costs of EVERYTHING!!!! It's definitely not going to get any better anytime soon. Just don't know what to really expect for the future. It just looks so dismal!!!!!

This pretty much sums up the economy as a whole. People, who had very little to do with running up their debt or buying homes way out of their comfort zone, are the very same ones that are going to get hurt by this real estate downturn.

We wish we could give you more info this evening but we need to close down a little early. We'll try to put up a better post tomorrow.

FSI: 92.68 (small rally in the speculative issues)

Lost Our Post Tonight

Top Line: Monday's trading was a roller coaster with a lot of movement both up and down. The trading in the overnight futures seems to be telling us to look for more downside on Tuesday. Asia is trading down this evening probably catching up with Wall Street from Friday since several of the Asian markets were closed yesterday. All of this gives us the possibility of a down opening...which doesn't really mean much normally.

Today we received an email from one of our readers who said we could include some of the comments here in the blog. The reason for the addition of these comments is to provide some added insight into the basis for our position about the way the powers that be have taken us through the last couple of bubbles.

Sorry, about that...We had written a pretty good post but lost it in cyberspace :-( We'll try to bring the essence of the post to you tomorrow...it's too late to re-create this evening. Here are some pics that were part of the autosave, that apparently did not work...

Jason and Bennett ran a half marathon together on Saturday:

Steep Unemployment Jump, Steep Drop in Dow

Top Line: It seems the market has decided to go down. As the jobs' report came out on Friday morning there was a shocking number that seemed to get the most attention, that being the unemployment rate which jumped to 5.5% in May. From there, the stock market had a little trouble on Friday. We think it is just the beginning of the fresh decline that should last for a few months.

There was twisted logic going on again on Friday. The end result is that Oil jumped ten dollars and here's just how the traders figured it...With the jump in the unemployment rate, well, of course, this is news, anyway, with the jump in the rate to 5.5%, the immediate thought the traders had was that the Fed could be back in the game of decreasing rates again. This thinking led to the dollar going down some more and with the dollar dropping oil will be going up. This happened, oil popping ten bucks, right along side of Treasury bonds going up, this is an odd result. Twisted, indeed.

The prognosis for the stock market over the next couple of weeks is for more of the same, downside. The market has spoken, that it reversed on Friday morning, pretty much on cue as the unemployment number came out. With the turn in prices on Friday, there could be a strong selloff going into the next Fed meeting/end of the month.

We are now going to start following the VIX to see how deep this decline can go. The VIX seems to be poised to jump to much higher levels which is consistent with our short positions. The VIX will be an important indicator for us to follow to find an exit point. The VIX is a volatility index that indicates fear when it goes up. The higher the fear, the higher the VIX.

We see that there seems to be no fear this evening as the futures have found some footing and are rallying modestly as we write this post.

FSI: 93.68 (a similar drop here as in the major indexes)

We've added a few more Jackson pics this evening.

Here's one with uncle Jason:




Forget the Belmont, let's see the Doggies:



Smiling for the camera:

Jobs' Report Up Next

Top Line: Friday brings the much awaited (at least here at the Update, anyway) jobs' report. The optimism the stock market has shown the last two days reminds us that we always need to respect the wishes of the traders on any given day. We (still) think this up move is over right after the report comes out on Friday morning.

On Thursday, the stock market jumped on what appeared to be a move based on oil also jumping over $5. We have mentioned Several times that the move in the stock market and the oil market are driven by the same thing--liquidity. What that means is the dollars are floating around and need to find a home. The go into the stock market and oil, similarly. This being the typical bullish period of the month (the week or so before the employment report), we are not surprised by the two moving up together. Not happy about it either...

But, the up move did give us our chance to complete our deployment of idle cash. Right now, we have fully commited as much as we intend to the short side of the stock market. This up move should be a good opportunity to do this...but only time will tell.

The news items that the media deemed the ones that moved the market were fewer jobless claims than expected (this number comes out every Thursday morning and is called the weekly jobless claims) and also improved retail sales. The market wants to believe that the economy can come back from the brink of recession based on one weekly jobless claims figure or that retail sales will bounce back and stay higher after the "economic stimulus package" has been exhausted.

The key informaton for us is the 12,750 level in the Dow and it is still over our heads. We recall this evening the somber mood on Wall Street just before the JPM buyout of Bear Stearns. How many people had figured the market was going to go into a downward spiral and that was only a few months ago. That is all but forgotten now that the market is moving up, two days in a row.

We hate to bring the facts into the conversation but the market probably peaked back on May 19th when the Dow closed above 13,000. Since then the Dow has decisively broken through the 12,750 level and now is trading below it. Still bullish sentiment is at high levels and few believe the market can go down at all. The volatility indexes show near complete complacency at about the same level as the indexes were back at the highs in October.

We remain bearish...

CM, one of our regular readers, has provided us with a little reading material which, of course, lines up with our position on residential real estate leading the economic slowdown. In this article, we read that a milestone of one million homes are in some stage of foreclosure. We highly recommend reading this article because it points out the huge numbers which won't go away easily. Thanks, CM.

We had seen another article that shows how things became the way they did. This article puts the reality of the crisis in perspective. We quote the article here, "She acknowledged that she stated her monthly income as $7,500 on the loan application -- nearly double what she was actually earning in her job as a clerk at a food processing company and a second part-time job." With that stated income, she received an 80/20 loan (this is a loan that has a no insurance payment 80% first mortgage and a 20% home equity loan--so, no down payment is required) on a $412,000 house. The payment recently jumped $450 to $2,650, so it must have Also been an ARM...oh my.

Happy trading after the jobs' report...

FSI: 96.70 (just over last week's high but still down almost 10% on the year)

The Fly Has Appeared--Maybe It Has Red Wings

Top Line: Ok, maybe the down side move wasn't exactly "right straight ahead". This the "fly in the ointment" we were mentioning (and a hockey reference for you hockey fans, Red Wings win tonight in six). There are still some upside potentials out there but everytime the market decides to go up and can't hold it, the market losses its ability to get through prior resistance. So, we are still bearish, the only question is WHEN will it happen?

With Wednesday's rally pushing up strongly on the tech side of the house, the bears got a little scared especially at the day's highs. The blue chips had a much weaker rally than the techs. The banks took a hit on the day. The techs had giant gains during the peak of the rally about mid-day. In fact, we checked on the components of the NASDAQ 100 and we found that out of 100 companies only four were down about that time. By the end of the day there were a few more of them that were down.

On Friday they are still going to announce the jobs' report and we still think the high in the market will have been made at least by sometime Friday morning. Since the NASDAQ was so much stronger than the Dow on Wednesday and in fact the Dow actually closed down on the day. As contrarians we normally would think this is bullish but due to the position of the market we just think the market is trying to fool the people...yes, we still consider ourselves to be people.

The ADP came out with their estimate of jobs and that number was 40K and it was positive. The estimate for the Real jobs' report still is showing between 50K and 60K job losses for the month. Here we have a bit of a dichotomy with the ADP report, at least in the estimate. That doesn't mean the actual number will be that far off but we are interested in seeing if the ADP report needs to be given more credibility or not. Friday is coming.

During the day, the market was trying to remember what the Chairman of the Fed was talking about in the last few days. When the market broke off the rally this afternoon, his remarks from earlier in the week were blamed for it???

FSI: 94.51 (up but not by much)

Another Reversal to the Downside

Top Line: Tuesday's reversal qualifies as a "surprise to the downside" because there were several who thought the worst had been seen. The pattern in the market is still bearish and we continue to think more downside is right straight ahead.

The market opened with a grin and then got good news on the manufacturing front and tried to "jump" but didn't. Then about mid-day, the wheels sort of came off but the market recovered most of its losses going into the last 90 minutes of trading.

Where do we begin? There were a few standouts in the news that we wanted to report. First, Erick left us a comment on the housing market and we had to find the source of the story. Apparently, a builder is desparate to sell some high priced homes. If you bought a $1.6 million home in one location, he would Give you a second home valued at around $400K in another neighborhood. Erick was trying to imagine paying the taxes and insurance on both houses.

The other items were the Bernanke speech, the Toll Brothers (TOL) news, the manufacturing news, and GM to mention a few. The story we read tonight was about Ed McMahon, Johnny Carson's old sidekick. The story said that Mr. McMahon was having trouble making payments on his Beverly Hills mansion and that Countrywide Financial was seeking to foreclose.

It seems Mr. McMahon had run into some financial difficulties when he broke his neck about 18 months ago...here's the amazing stuff...so he was having trouble getting work. Mr. McMahon is 85 years old and his $4.8 million house was on the market but he was having difficulty selling it. He was $644K behind on the mortgage and had just received a $300K home equity line of credit, also from Countrywide. This is truly amazing stuff.

GM announced significantly lower sales and this seemed to prompt a selloff in the afternoon, which we don't really understand. Gas prices are at $4 across the country and GM is having trouble selling SUV's...Shocker. So, we don't really think that caused the selloff.

Earlier in the day Bernanke had been spouting off about the Fed being concerned that dollar weakness may be manifesting itself in higher inflation. We hate to break it to the Fed Chairman but isn't that the Definition of Inflation??? Like they are going to start getting tough on inflation now. They're the ones who helped the Dollar get weak in the first place with their constant cutting of interest rates. Still, the gold market fell in tandem with the oil, which was down about $3 on the session.

But, the most amazing story of Tuesday is the Toll Brothers (TOL) news. These guys are incredible. They are now whining that the government should be doing something to create housing demand. Let's see, what business is TOL in? Oh, that's right, housing. What are these guys doing?

Selling should be the name of the game...

FSI: 93.83 (not much sustainability in the FSI)

A Good Monday

Top Line: Monday, Monday...so good to me. Well, not all that good but a good start. The stock market more than likely has started its descent down to test the March lows. There is a fly in the ointment but otherwise the slide should continue.

That fly represents some late day strength in the market after a pretty harsh selloff earlier in the day. The big news item was that S&P downgraded some of the financials this afternoon, a few banks like C (Citibank), JPM (JP Morgan), and BAC (Bank of America) and a few investment banks, especially LEH (Lehman Brothers), MER (Merrill Lynch), and Morgan Stanley (MS). LEH was actually down about 7% on the day. The referenced article quotes S&P... “The outlooks on the large financial institutions sector in the U.S. are now predominantly negative."

Earlier in the day, an important index of manufacturing came out, the ISM report. It showed that manufacturing actually rose in the period??? but the number was still under the magic 50 number so contraction was still the order of the day. The market's reaction to this report was to show some strength initially but within about ten minutes the market fell out of bed.

Our position on the market is that we have seen the peak and today's (Monday's) action supported that view. As we said at the outset, there is still a possible fly in the ointment, that being downside nonconfirmation in the indexes--a bullish one at that. How bullish? Well, only as far as getting the market back up to around 12,750 again :-( but it would only be a short term pop. The primary move is down and whether that occurs Right Now or after a small rally should not really concern us. As we said in our last post, there is some dry powder that needs to be deployed so a little more rally would give us that opportunity--but we really don't want it.

Tomorrow (Tuesday) will give us better information.

Treasury bonds were strong today. The inverse relationship of bonds and stocks continued on Monday. We are short term bullish on bonds and are in the TLT's for a short term trade.

FSI: 95.01 (down with the market, not leading it like we had hoped)


In the mean time, we promised some more pictures of Jackson, so Finally here are some:

Here is Jackson all by himself in his "crib":



Just hangin' out with the old folks, those over six months old:



Jackson and Gramma are having a laugh together...



The Fearless Foursome after a round of golf...Jackson had already taken off his cap, it says "Chick Magnet" and he gets a lot of grief on the golf course until he tees off. Those 300 yard drives straight down the fairway tend to quiet those kinds of comments...Grampa needs to get those white legs out of sight, ouch.



And, ok, one brag shot...Top of the weight loss leader board for the week...done after 42 weeks.

Complacency Rules, as in, Is King

Top Line: With the month of May behind us, our short positions are mostly in place. We have some reason to think the rally may be over and, if not, will be over by Friday's report on jobs. Similarly, we purchased some T-bonds last week in the form of TLT. We still have a little powder dry and if any opportunities crop up this week, we'll try to take advantage of them.

The big event of the week will be the jobs' report due out on Friday. We don't think there is any reason to expect that it should have any particular impact on trading except that we think it just closes the window on any further upside in the stock market. Again, we have no reason to think this report holds anything important.

Looking at the stock market from last week, there seemed to be a steady upward movement in the major indexes. Our own FSI was up all four days. With it being the last week of the month, that shouldn't surprise us but we really thought there might have been a chance to get something different this monthend.

May did bring a good opportunity to sell. Remember the theme of sell in May and go away. That couldn't be a more true philosophy this year. Stocks should generally have trouble until September just a few weeks before the election. There could be some extreme rallies along the way but there should not be a rally back above where we are now.

And, where is that? The Dow is struggling to get back Up to the 12,750 level. That number has been a support or resistance level for quite a while now. Looking back to February of 2007, we can see the Dow bumping its head on 12,750 for the first time. Since then, we have seen several touch points on that level. The important point here is that the Dow has not advanced since Feb of 2007. People are still bullish...

That leads to the other item of interest, the volatility indexes. These indexes, VIX and VXO, have come back down to the level they were at back at the October highs. This means that traders do not seem to be any more concerned about a stock market drop now than the did back in October. You my recall that the Dow was trading just over 14,000 at that time. This is our classic definition of complacency...something we think coincides with this intermediate top in the major indexes.

We leave you with a couple of articles for reading. Both are from the NY Times and may come with a few ad's but the articles are pretty good. The first is about the higher end residential real estate market and the other is about the CDS market written by one of our favorite journalists, Gretchen Morgenson.

Thanks for the anecdote about the real estate market, Erick. The seven year break even point in real estate doesn't correspond well with the "real estate always goes up" theory. Real estate is going to be a problem for quite some time. Be careful.

FSI: 96.63 (still down 9% on the year, so far)

We were hoping to put up some additional pictures of Jackson but that will have to wait until tomorrow.