Stock Market Close

The Dow barely held the gains it made after the announcement that OFHEO raised the caps on Fannie and Freddie.  Oil pulled back off it’s high of over $101, and gold is up $12 to $960.

Bernanke’s testimony today indicated that the Fed will continue to cut rates to assist the credit markets.  Of course, the credit markets are important to the economy.  He wouldn’t discuss the value or devaluing of the dollar and the implication, along with other things he said, is that inflation is not a concern for them.  They are quite comfortable with their phony core inflation numbers.  The only thing that will make everything "A-OK" in the entire financial markets, is if the housing prices do not fall.  There are people who are trying to figure out how to make that happen, to keep this asset from deflating.  Part of that plan would have to include convincing underwater, cash-poor borrowers to continue to put all their resources into making mortgage payments.  Where I come from, we call that trying to "get blood out of a turnip."

Bond Insurer Regulations

NY Insurance Superintendent Dinallo says that new regulations for bond insurers may be ready by mid-2008.  He says the aim is not to bail out the insurer shareholders, but to protect policy holders.  And, it what has become the new fad, Dinallo says he has talked to sovereign wealth funds (SWF) about investing in the bond insurers.

The market continues to walk the line, waiting for someone to blink. 

Stock Market Update

The Dow is walking the line of resistance, after spiking up on the news that the portfolio caps were being obliterated by OFHEO.  Oil is bouncing around but sticking in the $100 region.  Bernanke and the politicians continue to waste time with the Q&A today, mostly about inflation.  Seeing more share buyback programs today, mostly from lesser known companies, not blue-chips.  It’s still important, though.

OFHEO Tosses Out More Regulations

OFHEO is removing the portfolio caps on Fannie Mae (FNM) and Freddie Mac (FRE) on March 1st.  Is this going to fix anything?  Not really, but they have just thrown more regulations out the window to keep a collapse in the markets from happening.  This is so surreal.  Here’s a table from the Jan. new homes sales data:

JAN NEW HOME SALES TABLE
Jan       Dec        Nov

Sales At Annual Rate   588,000   605,000    630,000
Percent Change          -2.8%     -4.0%     -13.1%
Northeast               52,000    58,000     56,000
Midwest                 73,000    79,000     78,000
South                  321,000   329,000    344,000
West                   142,000   139,000    152,000
Median Price           216,000   225,600    248,800
Mean Price             276,600   274,700    314,200
Houses For Sale        482,000   493,000    502,000
Months of Inventory      9.9       9.5        9.4

Stock Market - Pre Open Report for February 27th 2008

The big even in the overnight hours was the continued decline of the US Dollar. At 4:07am (US EST) the US Dollar hit a new low of $74.22. Since that time corporate events have continued to deteriorate the pre market futures. The biggest is the earnings from Fannie Mae (FNM) released a short time ago (see Lisa’s post earlier). Also we have bad news on the biotechnology front with Amgen (AMGN) and Johnson & Johnson (JNJ) having received data that one of their prize drugs used to treat anemia may be increasing the risk of blood clots and even death.

This morning we received the Durable Goods Orders data (Durable goods are industrial products with an expected life of one year or more. They include intermediate goods, such as steel, lumber and electronic components; finished industrial machinery and equipment; and finished consumer durable goods, such as furniture, autos and TVs.). The data this morning showed a decline of 5.3% for January. We have been watching this data over the past year and we identified the down ward trend long ago, this new data adds to the trend down ward (chart will be in tonight’s commentary).

At 10:00am we will also get the Mass Layoffs data, this data, which is usually not talked about much in the media is tracked by us as it provides an early look into the unemployment rate.

And Ben Bernanke will be talking today as well… grab some coffee and a bag of pop corn for the show.

Fannie Mae (FNM) Earnings Ugly

Fannie Mae (FNM) reports Q4:  -$3.80 v -$1.24est.  2007 Charge-offs of $407M v $206M Y/Y

- Estimate that home prices declined by 3.1% on a national basis during 2007.

- The credit performance of subprime and Alt-A loans, as well as other higher risk loans, has deteriorated sharply during the past year, and even the prime conventional portion of the mortgage market has seen signs of credit distress. 

- Charge-offs, net of recoveries and foreclosed property expense, as a percentage of the average guaranty book of business during the period. Effective January 1, 2007, we have excluded from our credit loss ratio any initial losses recorded pursuant to SOP 03-3 on loans purchased from trusts when the purchase price of seriously delinquent loans that we purchase from Fannie Mae MBS trusts exceeds the fair value of the loans at the time of purchase.

- Fannie states it "expects housing market weakness to continue in 2008, leading to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in U.S. residential mortgage debt outstanding. Based on our current market outlook, we expect that our credit losses and credit-related expenses will continue to increase during 2008, as will our guaranty fee income.,

- Expects reducing the size of our investment portfolio through liquidations or by selling assets; issuing preferred, convertible preferred or common stock; reducing or eliminating our common stock dividend; forgoing purchase and guaranty opportunities; and changing our current business practices to reduce our losses and expenses in order to meet regulatory capital requirements.

Stock Market Summary - February 26th 2008

In 1959 a television show began airing in the United States called the Twilight Zone, this very popular and highly acclaimed series was a combination of science fiction, fantasy, and horror all wrapped up in one 30 minute story, which most always concluded with an unexpected twist. Today whenever we think of something very strange we think of the Twilight Zone…

There is a fifth dimension beyond that which is known to man.
It is a dimension as vast as space and timeless as infinity.
It is the middle ground between light and shadow,
between science and superstition,
and it lies between the pit of man’s fears and the summit of his knowledge.
This is the dimension of imagination.
It is an area which we call . . . the Twilight Zone

I brought up the Twilight Zone analogy because with each passing day the markets and the economy just seem to be getting more and more surreal. Economic data received today continues to point to a worsening outlook and today the market took that as a sign that more rate cuts will be coming. The economic conditions are deteriorating so quickly and with inflation rising again the US Dollar today set another new low today. Many Wall Street professionals who were paraded on CNBC a month or two ago stated that they felt the bottom was in on the US Dollar. We never made any claims like that because we don’t call bottoms on speculation or conjecture. We work only with facts and the facts showed us that the dollar could still go lower. And lower it has gone. And with today’s gloomy economic data the markets are now pricing in yet another rate cut. With inflation growing substantially over the past few months, the US Dollar continuing to fall, and commodity prices still rising another rate cut will only exasperate this alreay volatile combination.

But today’s advances in the market stopped right at a significant resistance point. As we said previously, our short position on the Dow Jones Industrials would be covered at break even if the market advanced upwards towards the next resistance level. And that we would short at the next resistance level, and that is what we did. We are maintaining our short position on the market. In technical analysis you have to set emotions aside and use the charts as your guide, never mix emotions and investing/trading together… for that is a bad mix.

The chart below is that of the Dow as of today, observe that we are now at a significant resistance level and from the technical perspective this offers us another opportunity to take an entry on the market in a short position. We are at a point where the markets are likely going to become more volatile very soon, and typically when volatility goes up the markets go down.

 

 

 

 

 

 

 

 

 

(Dow Jones Industrials - Daily chart)

 

And speaking of volatility, applying technical analysis to the $VIX works just as well as with any stock. In this chart of the volatility (VIX) index I have identified the ascending triangle pattern and superimposed the S&P 500 on top. The volatility index is the blue line (observe the ascending triangle pattern highlighted with the blue trend lines). The S&P 500 is shown as the red line. Each time the volatility rises the markets decline, and currently we are very near a point in the volatility where we can expect to see a rise as it bounces off the trend line. Ascending triangles usually resolve to the upside, so this would tell us that we are likely to see much higher volatility in the future.

 

 

 

 

 

 

 

 

 

(Volatility VIX Index with S&P 500 - Daily chart)

 

On the economic front we received the Producer Price Index (PPI) data today. This measure of inflation had a top line gain of 1% over last month and a 1% jump is significant. The core PPI rose by 0.4%. Those who say the core is more important than the top line numbers live in an artificial world. Core data is what is left when you strip out food and energy. In the real world people live by food and energy, so those who slam their fist on the table and say "the core is more important" are somewhere in the Twilight Zone.

Inflation is continuing to grow, yet the markets are screaming for more rate cuts. More rate cuts will only add more fertilizer and water to the growing inflation seeds. Cutting the interest rates may help in the short term to un freeze the credit markets, but at what cost to the American people? The old saying is true "They are dammed if they do and dammed if they don’t" (with respect the the Federal Reserve). There is no easy fix to any of these problems, cutting rates only creates an illusion of a functioning market but underneath the fires are being stoked and will result in a pressure cooker explosion.

 

 

 

 

 

 

 

(PPI data - 10 year chart. Data source: Moody’s Economy.com)

 

Home prices continued to decline as measured by the very accurate S&P/Case-Shiller Index. We are now at a point where the year over year declines are the largest ever since the index began in 1988. The summary report issued stated that there are no signs of stabilization in the data. The renewed hopes of more rate cuts by the Federal Reserve coupled with the irrational buying on the announcement by IBM that they are going to buy  back $15 Billion dollars of their stock is what is responsible for most of our advance today. Recall that Lisa wrote about the significance of companies buying back shares of their stock. Companies that buy back their shares are essentially "hunkering down". It is used to artificially inflate their EPS by reducing float. The amount of stock buy back announcements has been very high during the past 6 months. And in the course of history we usually see large stock buy backs in times of economic turmoil and bear markets. We will begin our own index of tracking stock buy backs by companies on the S&P 500 and use this index in the future as one more measure of corporate sentiment of the economy.

How about this news item… The Federal Deposit Insurance Corporation (FDIC) is hiring people to get ready for bank failures. As reported by the Wall Street Journal:

(US) WSJ reports that the FDIC may be preparing for a rise in bank failures

- The FDIC is looking to rehire 25 retirees from its division of resolutions and receiverships.
- Many of these agency veterans worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed due to the savings and loan crisis.

For now, as we wait for the next bit of economic data, or the next announcement of losses by a bank, or as the FDIC is now hiring back employees to get ready for the onslaught of bank failures we can only wait and see, and use the charts for our guide. But one has to admit that the events over the past year could have been something right out of a Twilight Zone episode.

You unlock this door with the key of imagination.
Beyond it is another dimension- a dimension of sound, a dimension of sight, a dimension of mind.
You’re moving into a land of both shadow and substance, of things and ideas.
You’ve just crossed over into . . . the Twilight Zone