Market Wrap Up for July 10th 2008

Observing the movements in the S&P 500 index today was like watching a heavily intoxicated person attempt to walk a line. The market was all over the place in what was a classic battle between the bears and the bulls. The selling pressure took the S&P very close to the important 1235 level. But on both occurrences where it approached that price range the market bounced, albeit on light volume. On the intra day chart of the S&P futures today it was evident that the volume on the selling side was higher than on the buying side. Each time the market bounced the volume declined as the index went up. Clearly showing that confidence in the market was for the most part absent.

And there certainly was good reason for confidence to be lacking. The concern over the financial institutions continues to weigh very heavily on the overall mood of the market. Today brought additional losses to the share price of both Fannie Mae (FNM) and Freddie Mac (FRE) on growing concern that their financial troubles will escalate. Additionally, Lehman (LEH) continued its declines over growing concerns on their financial health. And the volume levels on Fannie Mae, Freddie Mac, and Lehman suggest large amounts of shares being dumped by large holders, not just the average market trader.

Discussions in Washington, D.C. today with Secretary Paulson and Chairman Ben Bernanke amounted to nothing more than ‘politics as usual’. Hard questions were not asked, and definitive answers were not given. I have to laugh at the statement made by former Senator Phil Gramm today (who by the way is currently vice chairman of UBS bank) in which he said the following in an interview with the Washington Times:

"You’ve heard of mental depression; this is a mental recession," he said, arguing that there is no economic downturn in the U.S.

The problem, says Gramm, is that, "We have sort of become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline."

Well Mr. Gramm obviously lives in his own "special place" of goldilocks and fine wine every day and is not impacted by the real world. I’m sure the hundreds of thousands of Americans who have lost their jobs this year don’t agree with him. I don’t care what political party Mr. Gramm is on, what he said was just simply stupid and an insult to intelligent people, and especially to those who are struggling to get by day to day.

The chatter about what is going to happen with Freddie Mac and Fannie Mae continues to increase. In tomorrows print edition of the New York Times will be an article regarding high level talks in Washington concerning these two companies and what to do about the problems. An excerpt from the article:

[...] Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

The full text of the article can be found HERE.

Tomorrow brings the first of the big earnings reports with General Electric (GE) reporting before the market opens. I can’t venture a guess as to what their earnings will look like. But I do find it interesting that GE is now trying to sell their entire consumer appliance business as well as their GE lighting business. Sounds to me like they want (or need) to get rid of a business unit that is so closely tied to consumer spending. We can expect to see some market movement on their earnings, and what they say about earnings guidance. No matter what they report we still expect that earnings for this quarter will be significantly depressed on the whole.

The market remains hanging precariously by a thread. Still very oversold on a technical basis with economic forces pushing down on it. We remain at a position where the market can experience a severe sell off or a bounce (bear market rally). 1235 on the S&P 500 remains a level to watch on the down side, a break below that level will set off a large selling event.

 

 

 

 

 

 

 

 

S&P 500 - Daily Chart

Dow Jones Closes Up

Holy cow, what a ride.  Dow closes in the green.  How do you like that?  This is NOT the action of a confident market, but a confused and fearful market. Traders continue to try and "buy the bottom", while shorts may be thinking they have one more chance to cover.  Then traders fear they have held in there too long and sell, while shorts are afraid they will miss the next down leg.  And on and on.  In the longer view, the markets are heading south, regardless of these daily gyrations.

Oil shot up $5 and CNBC’s Bertha Coombs (?)  says it’s just because prices went to $138, a technical level.  Yea, whatever. 

The problems in the financial institutions are going to keep this market very jumpy.  How many times did you hear that no institution is too big to fail, and at the same time heard that Fannie and Freddie had the "Fed Backstop?"  What in the world?  I’ve never heard so much nonsense in my life.  I hope you kept your seatbelts tightly fastened.  This volatility is far from over, so remember Rule #1: Capital Preservation!

Lehman Stock Price

The price of oil jumped to $141, Lehman stock has lost almost 20%, the QQQQ hit a new intraday low, and the indices have bounced back down.  1235 on the S&P is the level to watch. 

Fannie and Freddie Legislation-Updated

 1:10pm  Senator Schumer (NY) says that the GSE’s FNM and FRE have a Federal lifeline.  I guess this is all being said to shore up confidence in the financial community.  Feeling any better yet?  No?  Well, you just have to blank-out the fact that this is a complete and utter disaster.  Feel better now?

More Fed and Treasury "talking points".  Good luck making sense of it or believing it:

FED’S BERNANKE: GSES ARE "WELL CAPITALIZED" ON A REGULATORY BASIS, EXPECTS HIGHER HEADLINE INFLATION IN THE NEXT FEW MONTHS
- The GSEs are playing a critical role, would do an even better job with increased regulation and capital.
- Fed has not lost a penny on lending for the Bear Sterns bailout. Does not believe a repeat of the Bear Sterns scenario is likely.

US TREASURY’S PAULSON: CONFIRMS STRONG USD POLICY, AS US HAS THE "BEST LONG TERM FUNDAMENTALS" AMONG DEVELOPED COUNTRIES, BELIEVES THIS WILL BE REFLECTED IN VALUE OF CURRENCY
- says China is "not ready" for a freely floating currency, but continues to encourages China to move towards market driven currency

From the White House:  Focusing on FNM and FRE legislation that should provide markets with confidence. (I’m speechless)

From Bernanke and Paulson:  We need more control and regulations over the financial system, so we can fix this crisis and make sure it never happens again.  (Yes, I’m paraphrasing). 

More regulations, more control over the banking system, more government.  Yea, that’s always been a good solution. 

It’s being said that FNM and FRE are well capitalized.  (Ok, speechless again)

There are rumors that LEH has had some recent issues with "lines" being withdrawn.  CNBC’s Marc Faber says it isn’t true, but LEH investor relations is providing "no comment".  As always, the truth will come out eventually.

Wild rides today, so stay alert and remain buckled up!

HMO’s May Take Cut

US SENATE PASSES MEDICARE BILL THAT INCLUDES $13B IN CUTS TO HMOS
- President Bush has said he is against this bill
- reminder from 6/26:The US Senate has been unable to pass the Medicare Reimbursement Bill.  The measure would have blocked a 10% cut in Medicare payments to doctors that goes into effect July 1

Hey, we have to fund those banks with that money!  Oy vey.

The Fed sets 7 day repo and accepts…….$14 Billion!  We need a bounce, dang it!  How else we gonna get it?

Hank and Bennie will be speaking around 10amET.  Stay tuned for their lovely words of wisdom.

Pre Market Report for July 10th 2008

Early news that crossed the wire of Dow Chemical (DOW) buying Rohm & Hass Co. (ROH) sent the futures up a bit. And some monthly retail sales data from WalMart (WMT) also sent futures up as well. The media is all over the WalMart sales data as if it means the world is "just fine". The only thing the WalMart news tells us is that more and more people are being ‘forced’ to shop at the discount stores as money continues to become increasingly scarce. To us it confirms that the consumer is in deep trouble.

Weekly unemployment claims:

*INITIAL JOBLESS CLAIMS: 346K V 395KE; CONTINUING CLAIMS: 3.202M V 3.140ME
- Prior Initial Jobless Claims no revision from 404K
- Prior Continuing Claims revised from 3.116M to  3.111M

 

The continuing claims is extremely important and it continues to deteriorate.

US JUNE FORECLOSURES +53% Y/Y - REALTYTRAC
- Second consecutive month with more than 250K filings
- Bank repossessions +171% y/y

The pre market excitement over WalMart sales has been quickly extinguished as the weekly unemployment figures brought reality back to the market. Also of note is the pre market action in Freddie and Fannie. There is something very bad going on, but we just don’t know what it is, yet.

The image below is a 5 minute chart of the S&P 500 futures this morning. Notice the ramp upwards from the DOW chemical merger news and the quick dump following the unemployment data along with the added concerns over the financial’s still.

 

 

 

 

 

 

 

 

 

 

5 minute S&P futures

The market remains precariously dangerous this morning. Can’t say which way it will go from here at this time.