Market Summary for July 9, 2008 - Bears 3, Bulls 0

Last evening I wrote the following:

(July 8th, 2008) Was today the bounce that the technical indicators told us was overdue? Was today’s advances a head fake or will this be the start of the next ‘bear market rally’? These questions can not be answered with just one day printed on the tape. We will need to see how any follow through sets up on the charts.

Today was a perfect example of why it is so vitally important to wait for confirmation before positioning yourself for a move. If you based your swing trades on yesterdays action alone then today your positions may very well have been wiped out. An old expression in the real estate business is "location - location - location."  When trading the markets, the saying is "confirmation - confirmation -confirmation". One must NEVER attempt to trade a potential bottom. Trying to place your trades at what ‘might’ be a bottom or a top is not a sound trading method.

The idea of catching that next big move right from the start will not lead you to riches, it will eat away at your capital. The whole concept of successful trading is risk and reward. Risk and reward, two words that must be fully appreciated and practiced at all times. In a bear market, risk and reward become even more important. There can be violent moves, in either direction, that can wipe out your capital if your’re not careful. I wrote last evening that the market has been very oversold (which it still is), and with the advance we saw yesterday I discussed that the potential for a bear market rally (bounce) was a possibility. But, one day is not enough to determine if, indeed, that is the case. Today proved that you cannot, and should not, try to trade what ‘may’ be a bottom or a top. Don’t let the dream of making the "big killing" in the market over power your judgement of sound trading methods and waiting for the best risk/reward setup.

The S&P 500 closed at a level that the media says is "official bear market" territory, meaning it has declined 20% or more from the highs. Our long time readers know we declared a bear market in November 2007. The media’s proclamation today is only important to the person who’s only knowledge of the stock market, is what is seen on the nightly news. First, the Dow Jones Industrials Index entered bear status. Now, the S&P 500 joins the list. The number of average investors calling their brokers for advice will be rising. Or maybe they will even tell their brokers they want to withdraw their funds. Unfortunately, all too often, the brokers will not offer sound advice and will likely tell them to ignore the market, and just leave the money where it is. Brokers don’t work for you, they work for the company who is printed on their business card. No operating arrangement, contract, or payment system one may have with their broker, changes the fact that their first responsibility is to their company and to themselves.  Your money and your well-being is NOT their priority. The best person to handle your money is you.

So what happened today to cause such strong and rapid selling? The financial’s, again.  Concern over the financial’s continues to grow with each day now, it seems. Today it was an escalation of fear that there is a  very real possibility of a collapse of Fannie Mae (FNM) and Freddie Mac (FRE). It is being projected that if these two companies were forced to cover the losses they have in their combined mortgage portfolios now, they would be insolvent. This means more capital will be required, and not just a little, but substantial amounts of capital. The ability of these companies to raise capital is becoming increasingly  difficult, as evidenced today by Fannie Mae’s issuance of $3 Billion of two-year bonds. In order to sell these bonds, the yield offered was higher than the equivalent US Treasury bonds.  The higher yield had to be offered, because of the increased risk associated with the company.  This risk is increasing, and because of this, it will be more and more difficult for these companies to continue raising capital in the future.

Another hurdle facing Fannie and Freddie is that adjustable rate mortgages (ARMS’s) are set for another reset soon. This means that many people who have these types of mortgages are due for their mortgage rates to go up when the ARMS ‘re-adjust’. With foreclosures rising at alarming rates already, the potential for even more foreclosures and losses tied to anything with mortgage backed assets is increasing. This leaves Fannie and Freddie in a situation where they may not be able to cover the losses at all. A collapse of these companies would be a very serious risk to the global economy as US mortgage backed assets are spread around the world, not just here in the United States. Talk on the street is that the United States government can never let them fail, that they would be forced to nationalize the companies. If that ever happens, then current stock holders will be left with nothing; bond holders will likely get paid only a fraction of their original investment; and every citizen of the United States will have just taken on the responsibility of having to back nearly $3 Trillion dollars of mortgages. I don’t know about you, but I already have one mortgage and I don’t want to be paying taxes towards 50% of all the homes in the United States that have mortgages currently.

Once in a while CNBC actually has an intelligent thing or two to say. This morning they interviewed one of the best economists who has spent much time researching the economic problems, and has been very accurate in his predictions from the beginning.  Mr. Nouriel Roubini’s interview can be viewed by clicking THIS LINK. After you watch the interview you may think "there is no way it can get that bad". But, that is what numerous people said last year. I remember all to well the many people telling Lisa and me that we were crazy when we warned of the spreading credit crisis, deteriorating employment, and falling home prices last year and how it would impact the markets. We were proven to be correct and now we are in a situation where it may become even worse.  We still believe that the United States economy will continue to deteriorate further and so too will the stock markets.

As for what tomorrow will bring we have to wait and see. Again, it takes more than one print on the tape to ascertain the next direction. Today’s selling leaves us in an even more precarious situation than 24 hours ago. The possibility of an intense sell off has increased significantly, while at the same time the technical’s still have the market at a very oversold condition. This is the type of scenario that does not happen everyday in technical analysis and it has to be respected. We have to watch 1235 on the S&P 500 index very closely. A drop below this level will likely set in motion computerized selling, and that in turn will intensify as the day continues.

Capital preservation is priority 1… ALWAYS.

 

Off the wires tonight:

HEDGE FUND, SANDELMAN PARTNERS ($4B AUM) HAS TOLD INVESTORS IN ITS BIGGEST FUND THAT THEY CANNOT REDEEM THEIR FUNDS ANYTIME SOON - WSJ
- The fund received redemption requests equal to 20% of the fund.

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MOODYS CUT THE INSURANCE FINANCIAL STRENGTH RATING OF AIG’S MORTGAGE-INSURANCE OPERATING COMPANIES BY ONE NOTCH TO AA3 - WSJ

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(US) WSJ REPORTS THAT PRESIDENT BUSH’S ADMINISTRATION HAS HELD DISCUSSIONS ABOUT WHAT TO DO IN THE EVENT THAT FANNIE MAE AND FREDDIE MAC FALTER - WSJ
- The report cites 3 people familiar with the situation.
- According to the article, these talks have been going on for months and are part of normal contingency planning that the Treasury Dept and other financial regulators regularly undertake, but the talks have become more serious recently.

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PMI - MOODY’S DOWNGRADES PMI’S US AND EUROPEAN MORTGAGE INSURERS TO A3 AND ITS AUSTRALIAN MORTGAGE INSURER TO AA3

Bear Market - Part Deux

An expanded commentary is being put together now, check back later tonight.

Market Update 3:50pm

Wow, someone pulled the rug out!  Intel (INTC) is down 5%.  FRE has hit a 52 week low, it looks like.  We’ll see what the closing numbers are and give you an update later.  This is not pretty. (If you are long)

Market Update/Fannie Mae/Freddie Mac

What the heck?!  Has the rally been called off due to lack of confidence?  The indices and Oil are dropping.  FNM and FRE up big one day, down big the next.  Insolvent? Apparently, Jim Cramer from CNBC has said the GSE’s are insolvent.   We’ll see soon enough, I’m sure. The financials are taking it on the chin again today.  More market updates later

Fannie Mae Goes MultiFamily

This from Fannie Mae (FNM):

DISCUSSES PLANNED INCREASE IN MULTIFAMILY INVESTMENTS
- Will expand liquidity, stability and affordability by increasing its participation in key segments of the multifamily market.  The company also announced that it has invested $20B in multifamily housing in the first half of 2008, further reinforcing Fannie Mae’s leadership in the multifamily market.
- Fannie Mae is increasing its commitment to purchase Small Multifamily Loans of up to $3M, or $5M in certain markets.  These loans typically finance a uniquely affordable asset class consisting of properties that are located in urban areas near public transportation and serve working families. The company invested approximately $5B in Small Loans in the first half of 2008, a significant increase over 2007 mid-year production of $3B. Production includes both pool purchases and flow business.

 

Things are looking weak, but that doesn’t mean the hope for a little rally is dead.  Just going sideways for now.  Fitch says they may cut Merrill Lynch’s senior debt rating.  Oil is staying above $136.  Stay alert!

Crude Oil Inventory

Crude:  -5.8M v -2M expected

Gas: +900K v +100K expected

Bigger drawdown on Crude, build on gas.  Hm…Let’s see what the market does with the numbers.

Morgan Stanley downgrades Retaillers

MORGAN STANLEY ANALYST LOWERS FY09 ESTIMATES FOR RETAILERS; CITES SALES TO DECELERATE

 

This matches our thesis that we wrote about last night in that consumer spending will get worse over time.

Pre Market Report - July 9, 2008

Iran, in a move to say "Don’t mess with us" has test fired missiles that overnight to demonstrate they have the capability to strike their enemies. This has created a slight rise in crude oil prices this morning.

Prime Minister Mr. Fillon of France says the global economic conditions remain difficult and expects the 2nd half of 2008 to "be even harder". Fannie Mae (FNM) and Freddie Mac (FRE) have been downgraded by derivatives traders on capital concerns. Full story HERE.

Pre market futures are up at this time, but it is too early to gauge the extent, if any, what follow through is on tap for today. We have to wait for the market to show us her cards today.

DIA, SPY, QQQQ, amd IYR Charts

 

 

 

 

 

 

 

 

DIA Chart

 

 

 

 

 

 

 

 

 

QQQQ Chart

 

 

 

 

 

 

 

 

 

IYR Chart

 

 

 

 

 

 

 

 

 

SPY Chart