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!
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