The Day that Was - January 31st 2008 - Stock Market Summary

If there was ever a nervous market it is now. If someone says "boo" the market sells, if someone says "don’t worry" everyone buys. You have to realize that the market right now is as nervous and jittery as ever. Jobless claims increased, inflation is increasing, losses grow, and the fear of the bond insurers is giving the market severe panic attacks.

We opened the day lower and sold down significantly after the start. As the day progressed the conference call by MBIA was getting underway. MBIA executives tried to paint a rosy picture on the health of their company. This smooth and reassuring talk by MBIA was the xanax for the market and it went into happy mode. But at the end of the day there was a fast sell as many people don’t want to be holding money in the market with the official unemployment report coming in tomorrow.

I was thinking back to the recession and tech bubble bust of 2000 / 2001 and the bear market which followed. That bear market was much more ‘calm’ than the turmoil we are experiencing currently. Back then it was a recession that was brought on by corporate earnings and over valuations. And then the many dot com companies that failed which took unemployment up and recession followed. Today the market is more nervous as the risks of what ‘could‘ happen are much higher. At risk is our financial system and our livelihood. Thoughts of a ‘run on the bank’ and the loss of savings accounts if a bank becomes insolvent are at risk if there is a collapse of the financial system. Now I understand that the risk of such an event happening is generally low, but the fact that it is there at all is enough to create extreme anxiety in the markets.

At the center of all of this right now is the bond insurer mess. And it is a mess. The credit rating agencies are at the cusp of lowering their ratings and stripping them of their AAA status. So much money is tied up with these bond insurers that the removal of that rating would trickle down into so many places that it is almost too scary to picture. At risk is pension funds, CDO’s, SIV’s, municipal bonds, and commercial real estate. A worst case scenario would be the seizure of bank operations as losses escalate to proportions that force them to shut their doors to control the flow of money until the situation gets controlled, pension funds for government and private sector employers could be wiped out to near nothing in an instant, and municipal bonds and the projects funded by them would be put at risk of being halted, and that in turn would lead to more people out of a job. The image is a scary one, but real. This is why there is so much attention being placed on the bond insurers and what will happen next.

Before the market opened there was thoughts that one of the ratings agencies would issue a downgrade as soon as today, especially after MBIA (MBI) released their earnings and reported a record loss of $3.2 Billion dollars. A loss of $3.2 Billion dollars in only three months! That kind of loss was thought to make the rating agencies move in and make their rating cut. But it did not happen (yet). Instead MBIA conducted a 4 hour long conference call with slides and much discussion. MBIA executives attempted to describe their health as good and well capitalized to withstand the worst conditions. Lisa was kind enough to sit through the entire 4 hour long conference to learn first hand what it was they had to say. After going over the details and seeing the slides from the conference she sent to me I have to say that it was a gallant effort on MBIA’s part to plead with the rating agencies to let them keep their AAA rating. And pleading it was, but will it work? There are many forces at work behind the scenes to prevent this from happening. The credit rating agencies are under scrutiny for why they have maintained the AAA ratings this long, why were they not on top of this problem sooner as the credit crisis was unfolding. Then there are the politicians, the NY insurance commissioner, and many others trying to keep the bond insurers propped up. And an outright ‘bail out’ by the US Government is not out of the question either. It is a very fluid situation and we are sure that every effort is being made to keep the bond insurers from becoming insolvent. But the market knows there is a chance that these gallant efforts might fail. And if it does then at risk is $673 Billion at MBIA and $556 Billion at Ambac (per recent estimates). That is a lot of money that is at stake should these companies lose their ratings.

Swing trading is tough in this anxiety ridden market. Holding anything overnight at this juncture leaves us at risk of a substantial loss should the market gap lower (or higher if we are short) the next day. At the time I am writing this commentary the S&P futures are once again down and at this time would indicate a gap down open tomorrow. Presently the futures for the S&P are down 0.45%.

A question was asked today about the financial sector (XLF). The trend line on the chart shown below has been "punctured" but has yet to close above the trend line. Old school technical analysis teachings say that for a trend line break to be considered valid it must trade above (or below) that trend line for 3 trading sessions. So if we are looking at a daily chart we would want to see three back to back days where the price remained on the other side of the trend line for it to be considered support and no longer resistance. While not all technical traders adhere to that rule by the book, they do view it as a higher level of confirmation when it happens. The XLF has yet to close above the trend line even once yet. We will likely be taking on some swing trades on very select financial stocks once we feel the time is right. But we have to tell you that we are still VERY concerned about the bond insurer situation and the markets will drop substantially if the ratings are cut.

Hours after MBIA concluded their presentation and conference call Standard and Poors put MBIA on notice of a possible ratings cut. I guess they were not impressed with the presentation!

Market Close

Quite the rally today, huh?  If you weren’t in it don’t be upset.  We’ll have a full summary tonight of where we are and what happened today.  I know I’ll sound like a bear, but I’m just not excited about this rally.  If it is to continue, we’ll participate, but we will let you know.

I listened to the MBIA (MBI) conference call today.  4, count ‘em 4 (four) hours!!  There will be a lot of talk about what they said, but here’s a little something I took away from the call:   Bore everybody to death with a bunch of cheerleading and repetition, occasionally answering a pertinent question with an honest answer, refuse to answer other pertinent questions, and by the time it’s over maybe everyone will just remember the cheerleading.  Now aren’t you glad you weren’t dumb enough to listen for four freaking hours?!  The NY Fed is said to be ‘in close touch’ with NY Insurance commish Dinallo, but only to advise.  Didn’t we just hear these bond insurers needed a bailout?  Now everything appears to be hunky-dory, as NY Governor Spitzer says he feels they are making good progress with bond insurer stabilization plan.  Well, ’scuse me, Gov, but according to MBIA’s conference call, they don’t need any stabilizing help from anybody.

Yesterday Fitch downgraded FGIC, and today S&P removed AAA rating from 29 FGIC issues.  S&P put MBIA and XLCA on negative watch.

Google (GOOG) missed on their earnings numbers:  Q4 $4.43 v $4.44est., Revenues $3.39B v $3.45B est.  Shares are trading down after hours by 31.00, conference call later.

I’ve got to run, but there will be more posts later.  A lot of information to go over and digest.

Update

Sorry, will have later update.  I’m listening to MBIA conference call.

January Chicago PMI

Chicago Purchasing Manager’s Index:  51.5 vs 52 est.

- Prices Paid: 81.7 v 63.8 last
- New Orders: 44.7 v 58.4 last
- Employment: 47.0 v 49.0 last
- Inventories:  51.1 v  44.0 last
- Supplier Deliveries: 61.7 v 47.9 last
- Production:  51.3 v 55.4 last
- Order Backlogs: 48.0 v 60.7 last

No slowdown, no inflation?  Not according to these numbers.

Pre Market - January 31st 2008 - Morning Stock Market Report

Our markets are in for yet another volatile day and currently futures are down significantly. In the overnight hours futures recovered somewhat but this mornings data on unemployment have sent recession fears to fever pitch once again.

The weekly jobless claims have risen significantly…

INITIAL JOBLESS CLAIMS: 375K V 319KE; CONTINUING CLAIMS: 2.716M V 2.685ME
- Prior Jobless Claims revised from 301K to 306K
- Prior Continuing Claims revised from 2.672M to 2.669M

Key numbers there is the continuing claims continues to rise. And the weekly jump continues to raise the moving average as unemployment is showing signs of getting worse. This data had a significant impact on the futures this morning.

Additionally, personal income is NOT keeping pace with inflation and personal spending remains very weak.

MBIA (MBI) will hold their conference call this morning at 11am. However, they are not going to take any live calls for questions. They will respond to email questions only and the questions will be pre screened. This is highly unusual. MBIA is a public company, and for them to handle their conference call in this manner is concerning. The bond insurer issue is a serious problem and we can’t stress enough how bad the problems are with these companies.

Home Prices

Something to think about if you are in the market for a home.  See the article:  What Median Home Prices Would Look Like If the Bubble Never Happened.

 http://homeguide123.com/article_directory/Housing_Market_Watch.html

The FOMC cuts 50 basis points and the market fails to hold gains

Before today’s announcement from the Feds at 2:15 pm there were people saying that another big rate cut will be just what the market needs to rally the bulls. Well, the Feds did cut again and they went with a 50 point cut and the rally lasted all of 45 minutes before it died. Even before the rally ended we could see that it was not going to hold. Watching the tape right after the announcement we saw that the buying was weaker than one would expect following a rate cut. But today’s rate cut in my view is just adding to the fears that our economy is very ill and the credit crisis is just getting worse.

When I look at the intraday charts from today I see that the rally was losing steam almost as soon as it left the gate. And then once it failed the selling volume picked up in intensity. On the Financial ETF (XLF) the down trend line held tightly and we failed to break resistance. There is still lots of economic news to be issued but today’s action tells me that we are still very likely to see further deterioration in the markets, perhaps even very significant deterioration.

Right now there are more concerns (again) over the bond insurers. Ambac (ABK) and MBIA (MBI) are scrambling to save their credit ratings and the companies themselves. Should either of these two companies lose their credit rating the implications will indeed be far reaching. As we have spoken of this many times before, these two companies are in danger of collapse. Today we learned that Moody’s or Standard and Poors "may" be very close to a decision on what they will do with the ratings of these companies and an announcement may be very close. Tonight, at 12:06am here in the United States MBIA released their earnings for the 4th quarter. Their 4th quarter results was a record loss of $2.3 Billion. EPS was -$3.30. In a desperate attempt by the company to draw attention away from their substantial losses the CEO made a long statement about how they feel they are well positioned now to maintain their credit rating with an added capital investment of $500 million from Warburg. We should note that $500 million is in our view like pissing on a 5 alarm fire, it would take hundreds of billions to shore up the bond insurer crisis. The CEO is desperately trying to make his company appear sound and well funded in order to maintain it’s ratings. This story has many chapters to go, but we hope the last chapter is not the story of a total collapse of our financial system.

Some charts from today. The financial sector (XLF) was unable to break resistance today, the trend line remains in tact at this time. The second chart is an intraday chart of the S&P (SPY).

 

 

 

 

 

 

 

 

 

 

The Day That Was-January 30, 2008

Chuck has been detained, so I’ll make a few notes here.  We all know he gives much more colorful wrap-ups and I’m sure he will post regarding today’s action as soon as possible.

The market reaction today was a continuing vote of no-confidence.  The XLF (financials) rose to the trendline and pulled back hard.  The futures overnight are dropping and the dollar is up a little at 75.26.  S&P has stated that they expect more losses from some large European banks.  According to a report by Bloomberg, S&P has lowered or may cut ratings on $534 Billion of residential mortgage securities and collateralized debt obligations.

I’m a little more worried about our own financial institutions.  Here’s a link you may find interesting, and I’m still researching the full implications of this:  http://www.federalreserve.gov/releases/h3/Current/  and this: http://www.fdic.gov/news/news/financial/2008/fil08002.html

According to ICI (Investment Company Institute) US Muni Bond funds saw December net outflows of $3.48 Billion compared to November outflow of $1.12 Billion.

I know some of you hold this stock, so I’m posting their earnings.  Altria Group (MO) reported earnings for Q4 of $1.00/share vs $0.97 est., revenues were $9.3B vs $9.19B est.  They announced they will spin-off an international unit by  3/28/08, and there will be a $7.5B post-spin off buyback program over the next two years.  The post spin-off dividend is to be $1.16/share annually.

More later.

Market Close

Amazon (AMZN) reported Q4 earnings of $0.48/share in line with consensus and revenues of $5.7B vs $5.37B estimates.  They guided Q1 and FY08 higher than estimates and they are still trading down after hours.   Starbucks (SBUX) suffering the same fate.  After the rate cut announcement, the indices jumped, with the Dow up almost to 12700, but it was turned away and closed down 37 points at 12442.  What?  You expected some kind of sanity today?  Volume to the upside was not impressive, but volume to the downside was high.  There’s a rumor that a ratings agency may downgrade a bond insurer today.  The only thing we know right now is that S&P has taken action on 6,389 US subprime RMBS and 1,953 CDO ratings.  We don’t know exactly what the action is yet.

We think today’s action shows that recession fears and financial institution’s losses are stifling any enthusiasm over Fed rate cuts.  There are still too many unknowns going on with those financial institutions and the bond insurers.

FOMC Press Release

Press Release

 

Release Date: January 30, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.  Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

 

Note they are not saying "appreciable" downside risk.

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