Top Line: Well, the stock market decided to head on down into the 12,500's on Tuesday with only a mild up move in the morning to follow through on Monday's late day bounce. Here is where it gets a little dicey. We have long said that sharp downturns come when stocks have been selling off for a while and buyers disappear. The stage is set, again, for a very sharp drop after Tuesday's unexpected down move. When stocks drop when there seems to be some notion that they should rally, that gives rise to additional fear.
There were several news items to drive the market down. Let's start with the one that Seems to be the biggie. This afternoon, the CEO of AT&T said that it had cut off service to subscribers in the fourth quarter. According to the WSJ he blamed the weak economy for customers not paying their bills. These words seemed to have some traction with the market as it went down right after that. It's almost like the market was worried that it might be true but when someone actually says it, then it must be true. We've added the WSJ's link and hope that you can view it.
There had been other news earlier in the day which caused little in the way of selling. The news was considered bullish because it may help the Fed to lower rates that nice 50 bps the market wants. Please. The first was the news from KB Homes, not very good. KBH posted a net loss of almost $10 per share about nine times more than analysts predicted. The stock put in a six year low as it dropped nearly 10% on the news. This stock has traded around 56 this year and today closed under 17. The company has been viewed as one that can withstand the current downturn. Oops, check that. The WSJ will have this news on Page One on Wednesday.
To continue, Countrywide Financial, a company that has been in these posts many times in the past year, got thumped hard today. Investors are leaving this stock in droves as CFC dropped nearly 30% on Tuesday. Yes, 30%. [We can't help but think about how well those 20 call options that we heard about on the bus last fall are doing.] The news was that they had fabricated documents to require someone coming out of bankruptcy to pay back payments. You gotta read this article. (The article is written by Gretchen Morgenson who is an author we think gets a lot of things right.) Read the first three paragraphs and see why investors are getting cold feet. Of course there was the rumor that CFC was going to file for bankruptcy itself which didn't instill confidence. The company halted trading for 15 minutes to announce that it had no plans to file--which stemmed the selling tide for about a half hour before really selling into the close.
One other news item hit the market early was the news on pending home sales index which was down, down 2.6% in November to a low below the September 2001 figure.
An opinion editorial in the Financial Times written by another one of our favorite writers, Stephen Roach, mentions the inflated assets in the US and how they must go down, including the word bubble in his comments.
Last but not least is another one of our favorite financial celebs, who has also tried his hand at writing, Bill Gross of PIMCO. Mr. Gross wasn't writing today, but was speaking on the danger of credit default swaps (CDS). We haven't discussed CDS's much here but given they are the place where the next round of this credit crisis may be, we may need to start talking about them. This is an important topic.
All in all, a very pessimistic day on the Street. With that you may think the over night futures would be down but that is just not the case this evening. We see buying coming in this evening and that indicates No Fear among the investors/speculators.
Right now all of the major indexes we follow are sitting right around the August lows or at least below their November lows. If the market is Not going to fall out of bed right now, then it needs to bounce right now. Even then, we don't see a bounce as more than a small move. Any bounce we have seen recently has been sold hard. Oversold or not, this selling is strong.
FSI: 95.87 (Our low for this index was back on November 12th at 93.75)
Tuesday, January 08, 2008
Monday, January 07, 2008
Another Volatile Day
Top Line: We predict a quick Update this evening. The stock market is now trying to figure out if it wants to drop into the 12,500 area or move up a bit first. The day's action indicates that a small rally may ensue. We are expecting to see a bit an up move early on Tuesday. The ramp job we saw late in the day on Monday did take up a lot of buying power but the market has probably gotten a bit oversold.
We apologize for the short Update this evening. For your reading pleasure we bring you the recession warning from Harvard University economist Martin Feldstein.
We will bring 2008 Part Two another evening. Let's hear your 2008 comments.
We apologize for the short Update this evening. For your reading pleasure we bring you the recession warning from Harvard University economist Martin Feldstein.
We will bring 2008 Part Two another evening. Let's hear your 2008 comments.
Sunday, January 06, 2008
2008 Part One
Top Line: After last week's poor performance, more analysts are talking about a decline in the market due to a recession. This is definitely new on the horizon. They are also hoping for a rate cut of 50 bps at this month's FOMC so that they can confidently declare the second half recovery. Haven't we seen that movie already? Since we are getting close to 12,500, we will need to be paying very close attention to what the market is saying.
The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.
The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.
2008 Preview Part One:
In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.
Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.
Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.
Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.
Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.
More during the rest of the week...
FSI: 99.94
The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.
The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.
2008 Preview Part One:
In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.
Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.
Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.
Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.
Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.
More during the rest of the week...
FSI: 99.94
Thursday, January 03, 2008
December Jobs' Report Due on Friday Morning
Top Line: You may have noticed that the Dow managed to stay afloat on Thursday, above 13,000. But, the market is definitely trading heavy even in this normally bullish period. There certainly seems to be no fear in trading even though prices are not bouncing off the natural round number support area. If the market decides to drop, the pattern allows for a large drop. We shouldn't get ahead of the market, though our target is at least a test of the 12,500 area in the Dow.
There are so many things going on over the last few days, we hope you have been able to keep up with them on your own. We are focused on the jobs' report due out on Friday morning, probably before most of you get a chance to read this post. On Thursday the ADP employment report revealed a lower number of jobs last month than the month before. ADP said that the nonfarm employment rose by 40K, which doesn't include government workers estimated at an additional 19K, for a total of 59K. The estimates for the Friday jobs' report is for 70K new jobs to have been created. The ADP report has not been widely accepted as a substitute or even a real predictor of the BLS number coming out on Friday morning. The BLS purports to cover all of the jobs while ADP can really only extrapolate from their actual payroll numbers. Anyway, last month the ADP number estimated about 189K new jobs the day before the BLS announced 94K. We aren't going to read anything into those numbers.
What we are going to do, however, is to talk about possible stock market reactions to the number. The market seems worried about the economy, especially when it saw the ISM manufacturing number on Wednesday, allayed by the Fed's minutes indicating lower rates were almost certain. If the jobs' number is weak, there could be a cheer from that same crowd but remember that the rally from Wednesday was not very strong and looking back now seems imperceptible. It is possible that a weak jobs' number will confirm the markets' jitters about the economy. A number that is also coming out on Friday is the ISM non-manufacturing number which could be a counterbalance.
If the jobs' number is strong the market could decide that it is a better thing than the possibility of the Fed lowering rates. We see that the articles being written over the past few weeks are being much less positive about the Fed's ability to rectify the mortgage issues. (The link is to a WSJ opinion from the Thursday edition. If you can't read it, you can find a copy of the Journal to read it.)
Our hope is to provide a little 2007 recap along with a 2008 preview from the Updates perspective over the weekend. We would appreciate any comments before that time about your thoughts on the upcoming year in the markets. As a preview we think there will be plenty of opportunities in 2008 but the timing will be tricky. See you then.
FSI: 105.68
There are so many things going on over the last few days, we hope you have been able to keep up with them on your own. We are focused on the jobs' report due out on Friday morning, probably before most of you get a chance to read this post. On Thursday the ADP employment report revealed a lower number of jobs last month than the month before. ADP said that the nonfarm employment rose by 40K, which doesn't include government workers estimated at an additional 19K, for a total of 59K. The estimates for the Friday jobs' report is for 70K new jobs to have been created. The ADP report has not been widely accepted as a substitute or even a real predictor of the BLS number coming out on Friday morning. The BLS purports to cover all of the jobs while ADP can really only extrapolate from their actual payroll numbers. Anyway, last month the ADP number estimated about 189K new jobs the day before the BLS announced 94K. We aren't going to read anything into those numbers.
What we are going to do, however, is to talk about possible stock market reactions to the number. The market seems worried about the economy, especially when it saw the ISM manufacturing number on Wednesday, allayed by the Fed's minutes indicating lower rates were almost certain. If the jobs' number is weak, there could be a cheer from that same crowd but remember that the rally from Wednesday was not very strong and looking back now seems imperceptible. It is possible that a weak jobs' number will confirm the markets' jitters about the economy. A number that is also coming out on Friday is the ISM non-manufacturing number which could be a counterbalance.
If the jobs' number is strong the market could decide that it is a better thing than the possibility of the Fed lowering rates. We see that the articles being written over the past few weeks are being much less positive about the Fed's ability to rectify the mortgage issues. (The link is to a WSJ opinion from the Thursday edition. If you can't read it, you can find a copy of the Journal to read it.)
Our hope is to provide a little 2007 recap along with a 2008 preview from the Updates perspective over the weekend. We would appreciate any comments before that time about your thoughts on the upcoming year in the markets. As a preview we think there will be plenty of opportunities in 2008 but the timing will be tricky. See you then.
FSI: 105.68
Wednesday, January 02, 2008
A Down Day on the First Day of the Year?
Top Line: The stock market has now been down during the period of normal strength, that being the end of the month [year] and start of the month [year]. Wednesday's low in the Dow was 13,000 and the bounce off that round number was expected. What the market chooses to do now is going to be worth watching. As we have said, the Dow should be headed to 12,500.
The news on SBUX is that it hit a new low on an analyst downgrade (a little late) but it points to our premise that the consumer will lead this economy into recession--a consumer led recession is not a common event so few realize that it is happening. The world is not paying attention to the 2/3's of the economy that is now in pull back mode. SBUX numbers are telling us that the consumer is pulling its spending in a bit, that $5 cup of coffee is being skipped once in a while.
Here we are one day into 2008 and the Fed is already trying to pump the stock market. Wednesday's medicine came in the form of the Fed minutes from the last FOMC, held on December 11th. By now you've read the news that the Fed thinks it will need to lower rates substantially. Well, what do you know, they are finally realizing this. They are usually a little late to the party so we're not surprised.
The market was surprised by a few things on Wednesday. First, the fact that manufacturing indicated poor prospects in December inspiring selling and, second, the Fed's minutes were released prompting the response that the Fed would [try] to save the day and buying commenced. That rally happened late in the day but pretty much was erased by the end of the day as stocks fell hard on the first trading day of the year.
The US Treasury bonds were strong as was gold and oil, strange combo there. As we write, the Asian markets are trading lower in response to the US markets' decline, as usual. As we see it, Wednesday's market should have helped to create an oversold condition but our indicators don't show that tonight. This leaves the market open to go down more, even though the overnight futures are up a bit right now.
Tomorrow brings the first in a series of major political events, that being the Iowa caucus. We will only report on the politics as it relates to the stock market so we don't expect much.
FSI: 105.85 (not down much, AMZN was strong)
The news on SBUX is that it hit a new low on an analyst downgrade (a little late) but it points to our premise that the consumer will lead this economy into recession--a consumer led recession is not a common event so few realize that it is happening. The world is not paying attention to the 2/3's of the economy that is now in pull back mode. SBUX numbers are telling us that the consumer is pulling its spending in a bit, that $5 cup of coffee is being skipped once in a while.
Here we are one day into 2008 and the Fed is already trying to pump the stock market. Wednesday's medicine came in the form of the Fed minutes from the last FOMC, held on December 11th. By now you've read the news that the Fed thinks it will need to lower rates substantially. Well, what do you know, they are finally realizing this. They are usually a little late to the party so we're not surprised.
The market was surprised by a few things on Wednesday. First, the fact that manufacturing indicated poor prospects in December inspiring selling and, second, the Fed's minutes were released prompting the response that the Fed would [try] to save the day and buying commenced. That rally happened late in the day but pretty much was erased by the end of the day as stocks fell hard on the first trading day of the year.
The US Treasury bonds were strong as was gold and oil, strange combo there. As we write, the Asian markets are trading lower in response to the US markets' decline, as usual. As we see it, Wednesday's market should have helped to create an oversold condition but our indicators don't show that tonight. This leaves the market open to go down more, even though the overnight futures are up a bit right now.
Tomorrow brings the first in a series of major political events, that being the Iowa caucus. We will only report on the politics as it relates to the stock market so we don't expect much.
FSI: 105.85 (not down much, AMZN was strong)
Tuesday, January 01, 2008
Happy New Year 2008
Top Line: The start of a new year should give all of us new opportunities to prosper both in the stock market and in our personal lives, including work. The stock market is the reason you have come and our position has not changed (much) since our last post. We think the Dow has a good chance to drop to 12,500. But, with the new year at hand, we think there is a good chance that new money will show up for a few days and send prices higher. That shouldn't last too long but we don't know how high it will take the Dow. As we get more info from the market we will share it.
Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.
The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.
In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.
We will have more in the next few days as the market reveals itself to us.
In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.
The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.
The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.
More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.
FSI: 106.39 (the past week's high was 108.91 on December 26th)
Here we are on the other side of the holiday weekend and we are looking forward to a new year, just not yet...another few days off would be good. We would say that again in a few days so we might as well get to it. We trust you all had a great couple of weeks. Welcome back.
The past few weeks have included no fresh clues on the state of the market. In fact the Dow has closed the year very close to the level it was on our last post of December 19th, within a 100 points. The FSI, on the other hand, has moved up quite a bit so the speculative juices are flowing. You can check the two numbers from the two dates below. We'll see if that has any forecasting ability for the rest of the market in the next few days.
In the past week or so the market has been trading pretty heavy even as low volume greets traders. The last week of the year usually brings light trading so that is nothing new. We are surprised at the selling pressure even on these low volume days.
We will have more in the next few days as the market reveals itself to us.
In the mean time, we received a question from a reader asking about overnight repos which gets us back into the subject of the Fed--nicely done.
The Fed has the ability to own securities, usually highly rated bonds or US Treasury securities. But, it also has the ability to provide some "overnight" type funds to banks. A repo, repurchase agreement, is the way this is done. The Fed goes in to the market to purchase securities which it uses its cash to do, thereby adding some liquidity to the market. The banks can then have a little extra floating around overnight in order to meet their requirements. This type of transaction is usually done over a Wednesday evening as this it the primary reporting time for banks to the Fed.
The Fed has begun bigger programs over the past few months to alleviate the liquidity issues in the bond market. The first big move was to offer a lower discount rate and broader access to funds from the Fed's, so called, discount window. As the Fed did this, it also said it would provide these funds for 30 days so a bank could have more time to set its house in order.
More recently the Fed has instituted the TAF, term auction facility (see our December 12th post for more info on TAF) which really is a longer term repo. These are agreements the Fed enters into to provide funding for banks. The way this works though is the Fed doesn't do open market transactions, it actually offers funding directly to member banks similar to the discount window. The Fed buys securities, remember these are Highly rated securities, from banks with the intention to sell them back to the banks at a later date--repurchase agreements.
FSI: 106.39 (the past week's high was 108.91 on December 26th)
Wednesday, December 19, 2007
Volatility Remains, Stocks Struggle
[Editor's note: The Update is going to be taking a break over the next few days and will publish only on the days that give us a reason to write. The market is in a place that does allow for that possibility so if you see a day that has a dramatic move please come here to view the Update. The Update will return on January 1st for your reading pleasure on January 2nd. We'll see you on the other side.]
Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.
In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.
On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...
Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...
With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.
Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.
The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.
We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.
FSI: 102.16
Top Line: Wednesday's action seemed a little less volatile than Tuesday but remains a part of the day to day trading. Right now the market is eyeing a couple of near term events, Friday's option expiration and next week's Christmas holiday, yes and New Year's. The Update is still on the bearish side with a run down to Dow 12,500 in mind. This is not a commitment because the possibilities are still that the market doesn't have the downside power required. We will deal with that if we have to. For now, we're looking down the pipe to 12,500.
In our last post we neglected to mention the news from Hovnanian, another homebuilder with bad results. This company has now recorded five quarters of earnings under water. This report said losses were $7.42 a share--ouch. There is a followup article on Wednesday where the company is just sure things would be ok if only the housing market would pick up again.
On Wednesday the world awoke to more writedowns for mortgage debt. This time it was from Morgan Stanley to the tune of $5.7 billion and by the way that is on top of the $3.7 billion it already said it was going to writedown. (There is a front page WSJ article on Friday on Morgan Stanley, too.) That's a total of $9.4 billion--doesn't sound so bad when you can stay under $10 billion. $10 BILLION...
Morgan Stanley said it was taking a loss due to these writedowns of $3.61 a share, its first loss since it came public back in 1986. Oh, but don't worry about their capital situation because they received $5 billion from China. From our perspective, these are big numbers coming out of various finance companies and...
With that news comes, yes, government or Fed intervention. Not anything new on Wednesday but there is something new. The public is getting less and less convinced that the powers that be (PTB) can actually turn this around. The headlines are not pretty. As we look at the CNN Money Real Estate page we see do see one positive title: Foreclosures in November declined. Of course, the subtitle says that foreclosures are 68% higher than last November. The other headlines are grim...and we're not talking about the fairy tales of Grimm...Mortgage apps tumble, Hovnanian loss quadruples, Homebuilders' index scraps bottom, and New home construction drops, and more. All of this even as the PTB chase their respective tails in order to find a politically correct solution.
Just so you know, the Update believes that the situation is much bigger than the PTB can deal with effectively. This is going to get worse before it gets better. This is not something new to the Update if you take a look at our archives. Now, you are finally hearing others start to say the same things we have been predicting for the past year or two. We are not trying to gloat but urging people to take shelter by anticipating some trouble ahead in the economy.
The last item of interest is the downgrade of bond insurer ACA. This is not our area because it is outside the housing scene but this is how the mortgage problems can seep into other areas. The mortgage problems started a chain of events and no one knows where it will lead. We think a recession is assured in 2008 even as the election bears down on us.
We want to wish you all a joyous holiday season with lots of time to spend with the people you care most about.
FSI: 102.16
Tuesday, December 18, 2007
"Volatility" or "Are the Horses Out of the Barn?"
Top Line: The stock market spent some time doing big zigzags on Tuesday which represents extreme volatility. To us, this is not a bullish sign. People don't like to see this type of action because they think the market should only go up, not down up down up. Our position did not change on Tuesday and it says that the Dow is headed towards 12,500.
In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.
That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.
The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...
The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.
FSI: 101.37
In our last post we mentioned that the ECB (European Central Bank) was offering unlimited funding to the banks in the Eurozone. When we read unlimited we thought maybe that was a little far fetched but today's report that the banks eagerly scooped up over $500 billion proved that they weren't kidding. The ECB is providing funding for needs over the critical year end reporting period.
That news set the US stock market on fire at the open on Tuesday and the Dow jumped nearly 100 points at the outset. By midday, the gains vanished and the Dow sported a 75 point loss before going on a 180 point tear before losing a little steam going into the close, up about 65. This journey logged about 500 points and is the definition of intraday volatility. We have seen more intense volatility but Tuesday showed how fickle the market can be.
The other news was from Goldman and Best Buy which should have been well received by the market but really wasn't, at least not right away. When volatility gets going, the sins of the past hour can quickly be transformed. The market has little awareness of what was going on over an hour ago. But, we digress...
The last item is from the bowels of the Fed. They are proposing changes to mortgage lending.
The changes are mostly things that should have been in place without government or regulatory intervention, like getting people into the right mortgage or house rather than setting them up for foreclosure--sort of like closing the door after the horses are already out of the barn. The bottom line is that the proposal is just one more reason for lending to slow down. The mortgage industry is not going to get a break.
FSI: 101.37
Monday, December 17, 2007
Just Waiting
Top line: The stock market gave up some ground on Monday but the Dow didn't participate on the downside as much as the NASDAQ indexes. We continue to keep our eyes on the downside strength for clues on the future move. The bulls seem to be content to buy these little drops which is why we don't see a collapse in prices just yet. Currently, we are still thinking 12,500. World markets are quiet this evening with US Futures up slightly.
For a Monday with a lot of price movement down, we don't seem to have a lot to say. The basic pattern is still in tack but the downside strength seemed to wane a bit on Monday. True, the NASDAQ did seem to drop a little harder but the power down is not here right now. This is options expiration week so we don't think people are gone but trading is fairly light as it usually is just ahead of the holidays so traders may be happy to let things drift here.
The only thing that went on Monday was the big auction--TAF. We should hear on Tuesday how that went. Meanwhile the ECB was set to guarantee loans for European banks for unlimited amounts and to take them through the end of the year. This article seems to be a WSJ exclusive again so find out about it in Tuesday's Journal.
There doesn't seem to be much urgent news or pressing issues for the market to digest. The drop on Monday does come without news so it is worth noting. The prices are in a down pattern and could continue to drop. This would eventually bring out sellers. We continue to watch.
The gold market is in an interesting situation right now with the gold mining stocks dropping and the precious metal itself kind of holding its own. We generally say that the stocks move in front of the metal so maybe we will see a drop in the metal coming up. This market is always on our radar screen even though we don't mention it every night. There is an opportunity coming but it's not here just now.
FSI: 100.89 (The horsemen did take a hit on Monday)
For a Monday with a lot of price movement down, we don't seem to have a lot to say. The basic pattern is still in tack but the downside strength seemed to wane a bit on Monday. True, the NASDAQ did seem to drop a little harder but the power down is not here right now. This is options expiration week so we don't think people are gone but trading is fairly light as it usually is just ahead of the holidays so traders may be happy to let things drift here.
The only thing that went on Monday was the big auction--TAF. We should hear on Tuesday how that went. Meanwhile the ECB was set to guarantee loans for European banks for unlimited amounts and to take them through the end of the year. This article seems to be a WSJ exclusive again so find out about it in Tuesday's Journal.
There doesn't seem to be much urgent news or pressing issues for the market to digest. The drop on Monday does come without news so it is worth noting. The prices are in a down pattern and could continue to drop. This would eventually bring out sellers. We continue to watch.
The gold market is in an interesting situation right now with the gold mining stocks dropping and the precious metal itself kind of holding its own. We generally say that the stocks move in front of the metal so maybe we will see a drop in the metal coming up. This market is always on our radar screen even though we don't mention it every night. There is an opportunity coming but it's not here just now.
FSI: 100.89 (The horsemen did take a hit on Monday)
Sunday, December 16, 2007
Further Weakness Directly Ahead
Top line: Our target for the Dow is 12,500 which is right around the August low. If the market can punch down to there, then we can see how much downside strength there really is in this current move. If we see any support between here and there, we may need to revise our outlook but for now the stage is certainly set for a run down to test the August low.
The stock market opened broadly lower on Friday due to C's news. We still think C is doing the right thing by taking these SIV assets onto its balance sheet, where they belong. Shortly after the open, C was trading down but soon rallied on a display of strength which failed by the end of the day. C had received an analyst downgrade after their news--good timing, strong analysis.
The stock market did have difficulty as the day wore on Friday and the Dow fell 178 points by the end of the session. This was not a very good showing but one that we think is justified. This move down is not over and we should see some more selling as the week gets going. The futures are down this evening as we write but this could be just a reaction to the weak Asian markets which is definitely a reaction to the US trading on Friday; as the world spins.
We don't want to bring this up but since it is the "biggest" news of the weekend we thought it should be mentioned. Greenspan has now become an "expert" in the field of guessing what's going to happen next. He's trying to figure out if the odds of a recession are more or less than 50-50: "Whether it's above or below [50 percent] is really extraordinarily difficult to tell," Greenspan said. We'll let you read for yourself some of the other things he said. Yicks.
FSI: 104.43
The stock market opened broadly lower on Friday due to C's news. We still think C is doing the right thing by taking these SIV assets onto its balance sheet, where they belong. Shortly after the open, C was trading down but soon rallied on a display of strength which failed by the end of the day. C had received an analyst downgrade after their news--good timing, strong analysis.
The stock market did have difficulty as the day wore on Friday and the Dow fell 178 points by the end of the session. This was not a very good showing but one that we think is justified. This move down is not over and we should see some more selling as the week gets going. The futures are down this evening as we write but this could be just a reaction to the weak Asian markets which is definitely a reaction to the US trading on Friday; as the world spins.
We don't want to bring this up but since it is the "biggest" news of the weekend we thought it should be mentioned. Greenspan has now become an "expert" in the field of guessing what's going to happen next. He's trying to figure out if the odds of a recession are more or less than 50-50: "Whether it's above or below [50 percent] is really extraordinarily difficult to tell," Greenspan said. We'll let you read for yourself some of the other things he said. Yicks.
FSI: 104.43
Thursday, December 13, 2007
C Doing the Right Thing
Top Line: The market found some footing on Thursday afternoon and the financials led the late day rally. We'll be watching to see if the market's strong down move will continue. Currently, our position has the Dow dropping to 12,500. If it can't make it to there, we will take another look. If it can make it, then there is more downside after that. We'll watch and see.
Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.
One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.
What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.
With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:
From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.
From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.
Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.
FSI: 105.13
Lots of stories again this evening. Let's start with late breaking news from Citi (C). C appointed a new CEO this week and he is jumping on one of the glaring problems from the perspective of outsiders. Vikram Pandit, Citigroup's new chief executive as of Tuesday, decided to take the assets of some of its SIVs onto their own balance sheet. This effectively creates a loss for C that should show up immediately. While the SIV had the assets, and the problems, C could continue with business as usual.
One of the reasons these big banks have created SIVs (structured investment vehicles) was so they could be in the "game" of borrowing money in the commercial paper market and loaning money in the mortgage market. Not only could they be in the game, but they could also declare that the SIV is not on their balance sheet. That way, the bank could avoid the capital requirements for such investments.
What C is proposing to do at the moment is to take $49 billion of SIV assets with mounting losses and set up capital on these assets. The WSJ has described the situation in an article that should be on the front page on Friday morning. We're not sure where it will be but this is truly significant news and we applaud C for taking this step. The only thing is, banks typically are black boxes anyway so this transaction may not allow for perfect vision. On the other hand, there are reasons that banks will be more willing to be transparent. We are thinking of all of the current news related to the industry.
With this move by C, the big MLE SIV we have mentioned here will probably not be done. We looked back to our October posts that talked about the "Mightly Large Enterprise" and found a couple of comments worth mentioning here:
From October 15th:
C is the leader of the new deal and it has two big partners, B of A and JPM. These three banks were the center of the plan probably inspired by the Treasury department. The news was that the SIV would have funding of about $100 billion and an implicit government guarantee due to the Treasury's involvment up front.
From October 16th:
There seemed to be some speculation that the MLE SIV we mentioned in our last post was not going to be able to come to fruition. The banks involved expressed some doubt as to whether enough entities would come together to make it work. The uncertainty led to selling early and the financial sector felt it.
Lot's of other news to report so let's get to it. The first is the PPI reported at a whopping 3.2% for the month of November but of course the "core" PPI was only up 0.4%. Wait a minute, 0.4% means a rate 12 times that for an annual run rate of 4.8%. It's a good thing the Fed lowered rates on Tuesday before this number came out today. Speaking of the Fed, they are having a tough go of it with the economy seeming to be doing ok, check the retail sales up last month, and inflation running a little higher last month, PPI up 3.2% but they are telling us there is a credit crunch causing all sorts of problems so we have to set up TAF (see yesterday's post) and lower rates. One quote we read today was now we know why the Fed only lowered 25bps. Given this data, why did they drop rates at all? Here's the article we have wanted to see for months now.
FSI: 105.13
Wednesday, December 12, 2007
TAF To Save the Day
Top Line: Market is in a down phase with a Dow move to 12,500 expected.
How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.
Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"
To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.
Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.
The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.
The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.
Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.
Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.
FSI: 105.04
How do you describe this day? We're not sure what the Fed was thinking exactly but the timing of this latest move seems highly coordinated with the rate cut of Tuesday. Was the move on Wednesday part of the reason for the 25bps instead of 50bps? Well, we'll never know about that but what we do know is that the market got a lift out of the news, at least initially.
Before the market opened on Wednesday, a consortium of central banks announced that they were going to provide global financing as a group. This is a big effort to provide some significant financing to increase the liquidity in the so-called credit crunch. We have another question, "What are the world's central bankers going to do when things get really tough?"
To answer that question, we take a look at the reason they are trying to pump liquidity into the system. Their hope is that they can avoid what is going to happen next, recession or worse. The Chairman of the Federal Reserve didn't get his nickname Helicopter Ben for nothing. His latest trick has Fleck has titled his Daily Rap "Ben's Choppers Get Airborne", perfect.
Here is where we find out just what the Fed can do by lowering rates and floating more liquidity than one can imagine, $40 billion in the TAF, term auction facility. The phrase "pushing on a string" comes to mind first. This is the time when the Fed wants to increase credit, which is really called debt. If the Fed can convince the world to borrow just a little more, then the global economy can continue down the path.
The problem with this thinking process is that we have done this so many times that it may not work this time. When people have limited resources and massive debt servicing to do, there is little need or reason for them to borrow More money that needs to be serviced. So, with loan rates even at very low levels, people can't borrow because they have no more ability to service their loans. They could borrow money to pay off higher interest rate debt but the Fed and other central bankers need them to Spend more money and take on more debt. This is what pushing on a string means. The Fed can lower rates but the borrowers will not spend any more money.
The other news is the Greenspan op-ed piece in Wednesday's WSJ. You may not be able to view this due to the subscription level but you probably have access to the WSJ where you can find this article. Greenspan makes some statements that indicate that he couldn't do anything more than he did and he didn't cause the housing problems with 1% fed funds rate. Please, he was the Chairman of the Federal Reserve, the most powerful position in the world.
Market action was certainly a sight to behold with the Dow almost covering the entire loss from Tuesday in the first minutes of trading. Tuesday, the Dow went down 294 points and at the open on Wednesday it was up about 275 points. Of course, from there it went straight down until it was down over 100 points and then it rallied into the close, finishing up 40. What a crazy ride we've been on for the last two days.
Clearly, the bulls are ready to jump on any hint of good news on a global scale but company news in the mortgage arena was not pretty the last couple of days. Wednesday's news was more of the same that we heard from Washington Mutual, the housing market is not going to improve anytime soon. Today's confessions were more on the lines of we can't believe how bad it's already become even though we thought it wouldn't get this bad when we were talking about it six months ago. We guess they didn't have time to read the Wednesday Update, too bad.
FSI: 105.04
Tuesday, December 11, 2007
Fed -25, Dow -294
When does -25 = -294? That would be on December 11, 2007 when the Fed ldropped the funds rate by 25bps and the Dow followed that with a drop of its own of 294 points. What caused the drop, was it that the Fed decided not to lower rates by 50bps?
Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.
Here is the meat of their statement:
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.
You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.
Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.
So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?
FSI: 104.53
CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).
Our answer to that is yes, the Fed might have disappointed investors with its shallow reduction in the funds rate, but their statement was pretty dismal compared to the last one, too.
Here is the meat of their statement:
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.
"Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
The initial shock of not getting 50bps was bad enough but for the Fed to say that economic growth was slowing And inflation could still be a problem was just too much for the stock market. As you look at a chart for the day, you can see a virtual cliff the market fell off right when the announcement was made.
You may be asking the important questions about how the Update might be thinking this evening. The past week or so we have been saying the 13,750 range was an important place for the Dow and should be near the peak in this rally phase. Well, the top of the range on Tuesday was Dow 13,777 just 27 points higher than our target.
Our impression is that this break Could be the break we are looking for but further downside pressure needs to present itself. Right now the market is ready to drop and it shouldn't find a bottom for a while. If it does find a bottom, it will be something we should notice and will bring it to your attention.
So much to talk about so little time...come back tomorrow for the Wednesday Update. Overnight US futures are strong and could lead to some buying in the morning but will it last?
FSI: 104.53
CM--thanks for the note on BofA. Another enhanced money fund is broken much like GE's move back in November (check the November 15th post "GE Breaks the Buck" in the archives to the left).
Monday, December 10, 2007
All Eyes on the Fed, Again
As the market awaits the next widely anticipated reduction the cost of funds to banks, the prices go up. We are ever so close to the 13,750 level we have been discussing for a few days. This is a plus or minus 150 points so the move should be fairly close to being over as the Fed manages to excite the crowd on Tuesday afternoon.
Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.
The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?
The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."
As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?
These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.
We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.
FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)
Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.
The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?
The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."
As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?
These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.
We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.
FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)
Sunday, December 09, 2007
Fed to Lower Rates on Tuesday
As we look at the coming week, the possibility exists that we will get to see the top of the recent rally. The runup from the lows of a couple weeks ago has now pushed into our target range near 13,750 and we are very alert to a reversal. Friday's trading did little to change the view that the market is now finding a top. The problem now is not that we have a top in place so much as if the next move is the one we have been anticipating for a Long time.
The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.
Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.
Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.
The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...
The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.
FSI: 107.51
The big news this week will be the reaction to the Fed's move on Tuesday, not the move they make. We should know by now that the Fed will be lowering rates and by how much but the market is a little ahead of itself as it tries to figure out a way to get them to move down 50bps. The latest guess has them lowering the discount rate by 50bps and the funds rate by 25bps. The jobs' report on Friday was strong enough to give participants a pause to consider that 50bps in the funds rate may not be something the Fed can do.
Our position is that the Fed will cut 25bps on Tuesday for a couple of reasons, none of which makes too much sense. At there last FOMC meeting, the news was pretty strong that the cut they were making should be enough to take care of the problem. Now, the credit market isn't behaving the way the Fed would like it to so they probably need to lower again but they don't want to because of the recent prior statements they made. As we see it, they have room to move a great deal given the short rates on the Treasury curve.
Here at the Update, the news is the same. The economy is suffering from the letdown of the housing boom. As the houses go down in value, people have more difficulty financing their lifestyle. There is some optimism being mentioned but for the most part the media is telling the story that the economy is now weaker than they thought. While many thought the housing market and the rest of the world could go in opposite directions, there has been some recent comprehension that the two are going in the same direction.
The investment community is trying to bail itself out of the mortgage problems that it is in. That effort has now gone to the President with a plan to reduce the possibility that the US doesn't have more homeless people. The plan has drawn much criticism from a variety of sources even though the actual plan is not so much a plan to help people with upcoming resets but a plan to get people to pay attention to the politicians again. But, we digress...
The important idea here is that the government has just announced a plan to help the people right around the time where we think the market should be topping. The move over the next few days should tell us what the market intends to do. Then we will see how strong the move down is to see if it's strong enough to make some lower lows. This is the important focus.
FSI: 107.51
Friday, December 07, 2007
13,750 Give or Take
We had technical difficulties last night--internet was down--so no Update.
The market has come up to the area we have been talking about, give or take. With the FOMC next week, it might try to hold on until then with an upward bias toward that 13,750 mark in the Dow.
The jobs' report came in just a bit over expectations but not much. As expected, at least as we envisioned it last night, the market didn't react much to the news. Now, as we write, the market is pretty flat.
We'll be back Sunday evening for Monday's post.
The market has come up to the area we have been talking about, give or take. With the FOMC next week, it might try to hold on until then with an upward bias toward that 13,750 mark in the Dow.
The jobs' report came in just a bit over expectations but not much. As expected, at least as we envisioned it last night, the market didn't react much to the news. Now, as we write, the market is pretty flat.
We'll be back Sunday evening for Monday's post.
Wednesday, December 05, 2007
News Day
The market makes a big up push on Wednesday which should be the start of the "fill" we have been discussing recently. There is a problem with this thinking process, the move wasn't big enough on Wednesday. It failed to get above the highs of the last week in the indexes we follow which leaves the door open, at least, to a total upside failure. We see the futures are trading higher this evening offering the possibility of higher prices than last week.
The problem remains that the major indexes are weak. Normally we would see a stronger push than we did on Wednesday leading to a full move up to the 13,750 we have been mentioning. If the market can not get over last week's highs, the stage will be set for a huge drop. We don't see that happening because of all of the possible bullish news items due out over the next week. Weakness is clear but how weak is it, really.
The news is thick with Wednesday Update type items. The first is the front page article on Thursday's WSJ, a story on Auto-Loan delinquency. You may ask, what does that have to do with the Update? Well, this one of the fallouts from the housing situation and the WSJ seems to connect the dots:
"Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.
By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy. "
Then, on Thursday, the Bush administration is unveiling a plan to help the homeowners who can make their payments under the pre-reset interest rate but not after the reset. The politicians want to swoop down and save the day. Unfortunately, the problem is Too big to solve. When the problem started everyone, including the politicians, were considering that home prices would naturally go to the moon.
The President's proposal is designed to help a small segment of the foreclosure pool. Not everyone can be satisfied but as Fleck reported this evening, there was a Contract signed at the outset of the mortgage. Contract law has a long history that is being questioned at this moment in time. Do politicians really think they can just wave their hands and break these contracts? If they can do that, they can do anything.
And, without much detail, MBIA dropped 16% to 27.42 which seems a little lower than its price back in early October, 68. (symbol MBI if you care to try it on bigcharts.com) From the WSJ: Moody's Investors Service said that it considers MBIA "somewhat likely" to fall short of its capital requirements. Investors seized on this wording, since Moody's put MBIA in the less-likely camp just one month ago.
And, last is the Fed outlook. On Wednesday ADP, the payroll company, said that their employment estimate had jobs increasing by 189K compared to an expected number of 60K. Still, the estimate for Friday's report remains closer to 60K, at 78K. Plus, the productivity number was stronger than expected, too. So, the economy seems to be percolating along and at the same time the credit market is in a crunch and the dollar is declining, or was going into the last few weeks.
What's the poor Fed supposed to do? As mentioned in our last post, the Fed has plenty of room to lower rates if they so choose but with the GDP up over 4% in the last quarter, the employment numbers in pretty good shape, and the stock market in pretty decent shape, an interest rate cut seems pretty self serving, for the banks only. We have yet to decide what the number will be but we will make a stab in tomorrow's post with an refined number early next week--before the number comes out. Our initial thought is, "How can they lower by more than 25bps?"
FSI: 104.70 (and RIMM is down four days in a row, not much but down???)
The problem remains that the major indexes are weak. Normally we would see a stronger push than we did on Wednesday leading to a full move up to the 13,750 we have been mentioning. If the market can not get over last week's highs, the stage will be set for a huge drop. We don't see that happening because of all of the possible bullish news items due out over the next week. Weakness is clear but how weak is it, really.
The news is thick with Wednesday Update type items. The first is the front page article on Thursday's WSJ, a story on Auto-Loan delinquency. You may ask, what does that have to do with the Update? Well, this one of the fallouts from the housing situation and the WSJ seems to connect the dots:
"Car loans differ from home loans in one crucial way. During 2004-06, many home loans were made to speculators on the assumption that the underlying asset -- the home -- was sure to keep rising in value. Many people, inspired by fervor in the market, took out home loans that in retrospect they had little hope of paying back.
By contrast, everyone understands that the car behind a car loan is an asset destined to lose value. The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy. "
Then, on Thursday, the Bush administration is unveiling a plan to help the homeowners who can make their payments under the pre-reset interest rate but not after the reset. The politicians want to swoop down and save the day. Unfortunately, the problem is Too big to solve. When the problem started everyone, including the politicians, were considering that home prices would naturally go to the moon.
The President's proposal is designed to help a small segment of the foreclosure pool. Not everyone can be satisfied but as Fleck reported this evening, there was a Contract signed at the outset of the mortgage. Contract law has a long history that is being questioned at this moment in time. Do politicians really think they can just wave their hands and break these contracts? If they can do that, they can do anything.
And, without much detail, MBIA dropped 16% to 27.42 which seems a little lower than its price back in early October, 68. (symbol MBI if you care to try it on bigcharts.com) From the WSJ: Moody's Investors Service said that it considers MBIA "somewhat likely" to fall short of its capital requirements. Investors seized on this wording, since Moody's put MBIA in the less-likely camp just one month ago.
And, last is the Fed outlook. On Wednesday ADP, the payroll company, said that their employment estimate had jobs increasing by 189K compared to an expected number of 60K. Still, the estimate for Friday's report remains closer to 60K, at 78K. Plus, the productivity number was stronger than expected, too. So, the economy seems to be percolating along and at the same time the credit market is in a crunch and the dollar is declining, or was going into the last few weeks.
What's the poor Fed supposed to do? As mentioned in our last post, the Fed has plenty of room to lower rates if they so choose but with the GDP up over 4% in the last quarter, the employment numbers in pretty good shape, and the stock market in pretty decent shape, an interest rate cut seems pretty self serving, for the banks only. We have yet to decide what the number will be but we will make a stab in tomorrow's post with an refined number early next week--before the number comes out. Our initial thought is, "How can they lower by more than 25bps?"
FSI: 104.70 (and RIMM is down four days in a row, not much but down???)
Tuesday, December 04, 2007
One More Rally Left?
The stock market attempted to go down on Tuesday but it didn't have much punch with fairly low volume and prices down about half a percent. Our opinion is that the wave c, Fill, is going to be right around the corner with a pretty good sized jump--a jump that should be sold. One other opinion would be that the market would just drop right now, but we think one more attempt to rally is probably the right outlook. The futures are up a bit this evening but we all know the significance of that.
The news at the start of the trading day was JP Morgan's downgrade of its competitors. This pushed stocks down generally but most of the damage was done before the market opened. After that announcement things were pretty quiet.
Canada decided to lower its interest rates due to their currency running strong. The officials want to continue selling their products to the world and they are much more expensive with a 20% higher currency. The magic potion is to lower rates and thereby lower the currency.
Here at home, the Fed is now expected to lower rates next week, too. Somehow, we don't think the driving force is the currency is too strong but we could be wrong. As many times as we read that the Secretary of the Treasury wants a strong dollar, there are as many times as we don't think he does. The actions by the Fed are very loud indeed and Fleck describes so of it in his latest Contrarian Chronicles.
Getting back to the interest rate cut due next week, there is some division on the subtraction. What we mean is that the opinion is divided whether the Fed will subtract either 25bps or 50bps from the current level. Recent action in the credit markets are pushing rates down on the Treasuries. The 3 month bill is very near 3% which is lower than it was in the mid-August credit crisis. With the fed funds rate at 4.5%, the Fed could theoretically lower by 150bps but they wouldn't do that next week, would they? We haven't decided what we think they will do next week but we will have an opinion sometime this week.
After the market closed the word from FNM (Fannie Mae) was that they would try to raise some capital, $7 billion, by selling some nonconvertible preferred stock and cutting its dividend by 15 cents or 30%. No one is too surprised by this news but it will be mentioned casually on page three of Wednesday's WSJ, yawn.
FSI: 102.92 (RIMM is down three days in a row, now down 17%)
The news at the start of the trading day was JP Morgan's downgrade of its competitors. This pushed stocks down generally but most of the damage was done before the market opened. After that announcement things were pretty quiet.
Canada decided to lower its interest rates due to their currency running strong. The officials want to continue selling their products to the world and they are much more expensive with a 20% higher currency. The magic potion is to lower rates and thereby lower the currency.
Here at home, the Fed is now expected to lower rates next week, too. Somehow, we don't think the driving force is the currency is too strong but we could be wrong. As many times as we read that the Secretary of the Treasury wants a strong dollar, there are as many times as we don't think he does. The actions by the Fed are very loud indeed and Fleck describes so of it in his latest Contrarian Chronicles.
Getting back to the interest rate cut due next week, there is some division on the subtraction. What we mean is that the opinion is divided whether the Fed will subtract either 25bps or 50bps from the current level. Recent action in the credit markets are pushing rates down on the Treasuries. The 3 month bill is very near 3% which is lower than it was in the mid-August credit crisis. With the fed funds rate at 4.5%, the Fed could theoretically lower by 150bps but they wouldn't do that next week, would they? We haven't decided what we think they will do next week but we will have an opinion sometime this week.
After the market closed the word from FNM (Fannie Mae) was that they would try to raise some capital, $7 billion, by selling some nonconvertible preferred stock and cutting its dividend by 15 cents or 30%. No one is too surprised by this news but it will be mentioned casually on page three of Wednesday's WSJ, yawn.
FSI: 102.92 (RIMM is down three days in a row, now down 17%)
Monday, December 03, 2007
Hope Now
The stock market opened down a tad but soon the buyers were in there taking the market back up. The market then spent some time moving back down toward the close with most indexes closing near their lows of the day. One of the four horsemen, RIMM, has not fared well over the past two days dropping nearly 15%.
We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.
After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.
The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.
As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.
We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?
Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.
We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.
We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.
FSI: 102.55
We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.
After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.
The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.
As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.
We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?
Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.
We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.
We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.
FSI: 102.55
Sunday, December 02, 2007
California Real Estate Troubles
The stock market starts a new month with a bit of a rally just behind it. The current situation is giving a little time for the bulls to gather some steam for one last push. We think this should be a move that takes the Dow back up to around 13,750 give or take...
The next ten days have the possibility of a little volatility due to the position we find the market in currently. The first week of the month has the employment report on Friday and then there is the FOMC meeting next week on the 11th. With the market set up for a rally to relieve the extreme oversold condition the market was in the last couple of weeks.
The WSJ has another front page article, Monday, that talks about the higher credit score borrowers that decided to take out subprime mortgages for whatever reason. We recommend the article for your Monday reading. The article does suggest that with some of these higher credit score borrowers in the mix there might not be as much damage created by interest resets over the next few years. There are other interpretations.
The housing market is in a difficult situation and California seems to be the center of it. The Prudent Bear's Doug Noland shows the drop in the median price of a California home has dropped... from the California Association of Realtors (C.A.R): "Home sales decreased 40.2% in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9%... 'Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,' said C.A.R. President William E. Brown. 'The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.'”
Mr. Noland points out that...California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months.
FSI: 104.84
The next ten days have the possibility of a little volatility due to the position we find the market in currently. The first week of the month has the employment report on Friday and then there is the FOMC meeting next week on the 11th. With the market set up for a rally to relieve the extreme oversold condition the market was in the last couple of weeks.
The WSJ has another front page article, Monday, that talks about the higher credit score borrowers that decided to take out subprime mortgages for whatever reason. We recommend the article for your Monday reading. The article does suggest that with some of these higher credit score borrowers in the mix there might not be as much damage created by interest resets over the next few years. There are other interpretations.
The housing market is in a difficult situation and California seems to be the center of it. The Prudent Bear's Doug Noland shows the drop in the median price of a California home has dropped... from the California Association of Realtors (C.A.R): "Home sales decreased 40.2% in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9%... 'Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,' said C.A.R. President William E. Brown. 'The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.'”
Mr. Noland points out that...California's statewide median price was down $33,720 to $497,110, putting the two-month decline at a remarkable $91,860. The month's supply of home inventories was down slightly from September to 16.3 months, this compares, however, to the year ago 6.4 months.
FSI: 104.84
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