Some Excerpts of the Hearings Today

Federal Reserve Chair Ben Bernanke said a failure of Bear Stearns would have been severe and hard to contain.  He was only interested in getting the “deal” done and had no concern for the value of the offer or the stock price for Bear.  He said when the Fed opened the discount window more broadly, they weren’t sure if the deal would go through.

The SEC’s Cox said their agency started monitoring Bear Stearns’ capital daily,  in the summer of 2007.  He said Bear Stearns’ customers were protected.

US Treasury’s Steel said the banking/credit crisis will take a long time to work through.  He said the decision to rescue Bear Stearns was made based on protecting the markets, not just saving one firm.  He cannot say whether or not there will be more bank problem or bank failures.

Stock Market Summary for March 17th 2008

Today’s movements in the market was very erratic, confusion in the market was quite evident. Strong selling volume right after the opening bell with a quick short covering rally that only took 10 minutes to get underway. That took the S&P back up to where the market opened by around 11:00am. From there we saw a steady flow of selling which took us down to new intra day lows around 12:30pm. That is where the ‘confusion factor’ really picked up in intensity. The remainder of the day it became a battle of those who are betting that the Federal Reserve will cure all ailments and we have only one direction to go, up. And then there were those who kept selling right alongside those who were trying to rally the market upwards.

Insanity in the market is prevalent everywhere one looks, and I have to say this "thank goodness I have access to the Bloomberg Financial channel", for CNBC has become so lame in their coverage of events that it is sickening. Their floor walkers continue to transverse the aisles of the NYSE talking about how "resilient" the market is, or that "the bottom is in". They are feeding the hunger of those retail traders / investors just waiting for someone to tell them it is time to start buying. I assure you that the smart money managers in the world do NOT listen to what is said on CNBC. CNBC is solely geared to the retail money and it is retail money that has yet to completely acknowledge the gravity of the situation at hand.

I said that people are expecting the Federal Reserve to cure all ailments. The situation with Bear Stearns over the weekend was a surgical removal of a cancerous tumor by Dr. Ben Bernanke and his trusty nurse Hank Paulson Ratchet (for our foreign readers, definition of what nurse ratchet means). Lets make sure we make an important distinction here, when we refer to the ‘financial system’ we are talking about the backbone of our economy which is the exchange of money from one bank to another, the flow of credit, etc. When we refer to ‘the markets’ we are discussing the stock market and the trading of equities. We all know by now that the health of the economy and in turn the financial system has been deteriorating. The US financial system has cancer and it is spreading. Bear Stearns’ implosion represented a large cancerous tumor that was about to explode and spread sepsis throughout the entire financial system unless it was surgically removed right away. Banks and other financial institutions are growing tumors within the entire system, threatening the life of the financial system. The US Government has been trying to cure the cancer by treating the symptoms and not the disease. The constant rate cutting by the Federal Reserve makes the market feel all warm and cozy for a short time before the pain starts up again, and then it wants even more. All the while the cancer that has been working its way through the body of the financial system has been growing.

Bear Stearns was a cancerous tumor that was about to spread a life killing toxin throughout the system and it had to be removed. So with the help of the the JP Morgan surgical center, Dr. Bernanke and his nurse Hank Paulson Ratchet, performed a swift removal of the tumor before it could infect the rest of the body any further. Instead of practicing preventative medicine from the beginning of this crisis the Dr.s have only been doing pain control and the occasional tumor removal in order to sustain life, albeit on life support that it is.

What happened to Bear Stearns should have never had to happen, if only the Government had been responsive to this situation early on instead of constantly saying that everything was fine with the economy it would have never gotten this far and this bad. Eight thousand employees of Bear Stearns are now going to be unemployed because of the inactions by the Government. Don’t get me wrong here, Bear Stearns deserves plenty of credit for their own demise as well as they needed to tell the truth of their condition. They have been hiding behind level 3 assets for so long that when JP Morgan went into Bear Stearns HQ over the weekend to do the due diligence they found the situation so bad that they felt the company was only worth $2.00 per share. Two bucks! Do you see the gravity of this? A company that had been telling the world they had good cash flow, healthy liquidity, and so on was now worth only $240 million dollars when it was discovered just how much toxic paper they were keeping hidden in the closets. If every financial institution (bank, brokerage, investment house, hedge fund, etc) were to bring their level 3 assets out of the basement and put a value on them at current market rates then the earning of the those companies would nose dive instantly. These financial institutions are playing a shell game with what they are leveraged to and to what extent!

The only reason Bear Stearns got in trouble was that they could not contain the losses and they had to call the Doctor. Instead of revealing to the public (and they were a public company) what their problems were, they lied to their shareholders and the general public. And then secretly went to Bernanke for help. All the while screwing the average share holder of the stock.

Now what happens? How many operating room ‘tumor removals’ will Dr. Ben and Nurse Hank Paulson Ratchet be able to keep doing in the name of keeping the financial system on life support? The housing market and home values will not be cured by rate cuts, consumer spending will not be cured by rate cuts, and the $600 check being mailed out to everyone shortly will be used for paying debt and not used to buy the latest iPod. The average American is hurting badly, the cost of living has increased materially over the past 18 months. More rate cuts may ease the pain in the financial system, but it will increase the pain on the average American. No matter what they do at this point it seems as if the Doctors have a terminally ill patient and it is only a ‘pain management’ issue at this point.

Tomorrow the markets will find out how big of a morphine injection the Doctor will be giving. Ahhh, the euphoria of morphine… but when it wears off we are still in a recession and in a bear market.

We remain short the Dow Jones Industrials (our entry was 12750). We are holding this short position unless our stop loss (break even) closes the trade. We are still in a bear market until proven otherwise.

Charts:

 

 

 

 

 

 

 

 

 

(S&P 500 Technical analysis - Daily Chart)

 

 

 

 

 

 

 

 

 

 

(Nasdaq technical analysis - weekly chart)

 

 

 

 

 

 

 

 

 

(Financial sector ETF technical analysis - daily chart)

Stock Market Summary for February 28th 2008

Denial: de·ni·al

• refusal to believe a doctrine, theory, or the like
• disbelief in the existence or reality of a thing

Today President Bush held a news conference. One of the questions asked was about the state of the economy and his response was "I don’t think we’re headed to a recession, but no question we’re in a slowdown". Now either this man has some extraordinary tricks up his sleeve for rescuing the economy and is not telling us or he is just in denial of the facts. He may very well understand the facts, but instead of telling the truth, he chooses to treat the American people as though they are uninformed.  So he will keep saying "The fundamentals of the economy are strong". The fundamentals of the economy are nowhere near strong.

Ben Bernanke, in his second day of testimony today, said that there is a possibility of some bank failures. Last Monday we learned that the FDIC was hiring back people who were involved with the last large bank failure episode. The Savings & Loan implosion in the 1980’s brought down many financial institutions. The FDIC is trying to bring some of these people out of retirement now. I have this thought… If you are only expecting a handful of bank failures, would not the staff you have be sufficient? Why bring back people who handled the last large banking system failure? Sounds to me like there is an expectation for a lot more than just a handful of bank failures in the future. Just the fact that Ben Bernanke acknowledged the possibility of bank failures tells me it’s very likely to be reality and be worse than he says.

This reinforces, to me, why Ben Bernanke is so hell-bent on cutting interest rates even in light of inflation, which is getting out of control. He is seeing the possible breakdown of the credit and banking system. He can’t say that publicly, of course, for if he did it may create a panic. But for him to say that "there may be some bank failures‘ tells me that there is more going on then we are being told (that should be no surprise, when has the Government ever told people the full story?)

So denial (or not wanting to tell the whole story) is keeping the average retail investor thinking that everything will be OK. But, what happens if the trends of data and other economic data we analyze stay true to their predictions and we see a deep recession? I’ll tell you what happens, it is the average Mom & Pop investors that get screwed, that’s what. Right now the politicians are doing their best to keep everybody from thinking that the economy is falling apart. Even the large banking institutions are afraid of the average Mom & Pop  pulling their money out of the banks or 401K’s. The banks would suffer even greater losses if that happened. Look, we are not trying to sound some alarm bell here or anything, but we don’t like what we are seeing and we always tell it like it is.

Back on December 2nd, 2007, I published a commentary titled "Close your eyes and cover your ears". It was about a letter that an investment bank sent to their clients. In the letter they tried to tell people to ignore what you hear on TV and simply don’t worry about anything. What is happening today is just a continuation of that same thing, just keep people in the dark, tell them to go shopping and buy more things, and everything will be OK. But it is not OK.  Since the time I published that commentary, more banks have suffered even greater losses; foreclosures on homes are growing; unemployment is growing; the economy is deteriorating; and the financial markets of many other countries are in trouble. Now I understand the principal of a ’self-fulfilling prophecy", where if you tell everybody long enough things are bad, they will believe it and will cut back on spending, thus adding to the already deteriorating economy.  But it is a different matter altogether if you deliberately try to keep people from knowing the true scope of a situation, only to keep people from withdrawing their own money if they choose to. We already know that banks and other financial institutions are hurting badly for cash. Why else would they be going to the discount window and to the "TAF" to borrow large sums of money in order to have enough liquidity to keep operating. The banks want you to keep your money with them, regardless of whether the financial system continues to deteriorate. Decisions as to what to do with one’s own money should be made by the individual based on factual information. This is why we are bothered when we read or see people telling the public statements such as "everything is fine", or "this is a normal correction". For what if it is not a normal correction, how will anyone know if they never get the facts

.After the market close we got Dell (DELL) earnings which were not quite up to expectations and they were trading slightly lower in after hours trading. American International Group (AIG) reported their earnings and they were dismal. Tomorrow morning AIG will hold their conference call, if they do not say anything reassuring expect to see AIG sell off sharply. Tonight Fitch Ratings Service said that AIG may be downgraded.

A question tonight from one of our readers regarding Deckers Outdoor Corp. (DECK). Deckers reported earnings tonight:

[DECK] Deckers Outdoor Corp Reports Q4 $2.69 v $2.41e, R$ v $184Me

- guides Q1 EPS "the same or modestly higher than 2007" (implies $0.75+ v 0.92e); guides Q1 sales growth 25% y/y (implies Q1 R$90.8M v $89.6Me)
- guides 2008 EPS up 20% (implies $6.07 v $5.82e); Guides 2008 sales growth 25% (implies 2008 R$561Mv $531Me)
- expects earnings to grow at a slower pace in the first half

The reason DECK sold off so sharply in after hours trading is due to their weak guidance. The company said that their EPS for the next quarter would be about the same as in 2007, this is not good. Additionally, they warned that sales growth would be at a slower pace. The share structure on DECK is so thin that it does not take much to create extremely high volatility. The after market volume suggests to me that there were many share holders who wanted to cash out but needed the volume in order to close their positions. In other words this was a classic ’sell the news’. Large share holders need a significant news event in order to bring in buyers to take their shares from them. The top line (headline) number was a beat of their earnings, this brought in new buyers while at the same time those who were already holders saw the lower guidance and wanted to get out. In this case the selling was more dominate and the price dropped sharply. This is why we are always very cautious with stocks that have such a small float. I would not do anything with DECK at this time. However, Based on the weekly chart a price drop below $95 would be a good place to try a short position. for a failure of that price level would be a signal of a larger failure and a drop is likely. But one still has to be careful of low float stocks.

Another question regarding Cummins (CMI). I agree that CMI looks ready to fall but I would wait for just a little bit of added confidence and wait for it to break below $51.50 which is the lows from today.

At the present time the S&P 500 futures are down 0.65%. Tomorrow should be another interesting day with more economic data coming in at 8:30 am and the Chicago PMI at 9:45am.

We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort ETF, symbol DXD.

 

 

Stock Market Summary for February 27th 2008

Ben Bernanke Speaks…

Some snips of Ben’s testimony today before the US House of Representatives Financial Services Committee. (Bens comments are shown in red text)

The economic situation has become distinctly less favorable since the time of our July report.  Strains in financial markets, which first became evident late last summer, have persisted; and pressures on bank capital and the continued poor functioning of markets for securitized credit have led to tighter credit conditions for many households and businesses.  The growth of real gross domestic product (GDP) held up well through the third quarter despite the financial turmoil, but it has since slowed sharply.  Labor market conditions have similarly softened, as job creation has slowed and the unemployment rate–at 4.9 percent in January–has moved up somewhat

He says that unemployment has ‘moved up somewhat’. This morning we received data on what is called the "mass layoff index". It is an index which is not publicized very often and most people don’t know about it. But it is issued each month by the US Department of Labor and it tracks the number of ‘events’ of any mass lay off. When a company lays off more than 50 of its workers in a single shot it is referred to as an ‘event’, and the number of events is tracked by the Department of Labor. The chart below shows the trend of mass layoffs in the United States. Observe how the trend has been increasing since early 2006. From this we can clearly see the unemployment trend is getting worse. Back in December I projected the US employment rate will reach 5.5% by March or April. This data, which is seldom published in the media, is one indicator I use to predict where unemployment is heading. In January 2008 the hardest hit sector of layoffs was in retail and construction, no surprise there!

 

 

 

 

 

 

 

(Mass Layoff Events - as of 2/27/2008 | Data Source: Moody’s Economy.com)

Consumer spending continued to increase at a solid pace through much of the second half of 2007, despite the problems in the housing market, but it appears to have slowed significantly toward the end of the year.  The jump in the price of imported energy, which eroded real incomes and wages, likely contributed to the slowdown in spending, as did the declines in household wealth associated with the weakness in house prices and equity prices.  Slowing job creation is yet another potential drag on household spending, as gains in payroll employment averaged little more than 40,000 per month during the three months ending in January, compared with an average increase of almost 100,000 per month over the previous three months.  However, the recently enacted fiscal stimulus package should provide some support for household spending during the second half of this year and into next year.

Ben states that the $160 Billion dollar economic stimulus package will add support for spending in the second half of this year. Got a surprise for you Ben.. Most people will not go out and buy TV’s and iPods. A Bloomberg / LA Times poll released today shows that only 18% of those asked plan to use the money on discretionary purchases, the rest will be saved or otherwise set aside. Only 18%, I don’t think that will do much for the economy Ben. The Bloomberg / LA Times poll is not the only one to come up with figures like these. In another poll taken last month by the Associated Press the data was similar:

An Associated Press-Ipsos poll found that only 19 percent of those surveyed said they planned to spend their rebate checks. Forty-five percent said they would pay bills, while 32 percent said they planned to invest the money

So Ben… don’t go counting on that $160 Billion dollars to save the economy. 

The risks to this outlook remain to the downside.  The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further

Ben.. you need to read our site from time to time. We will tell you what is happening. The "Hope Now" plan that was put in place back in October 2007 gave a momentary boost to those people looking to refinance their homes, but that has very quickly burned out. And the amount of new mortgages being applied for continues to drop. The chart below shows the refinance applications and the new applications. Both are heading back down. A clear sign that the housing market continues to suffer badly and that "hope now" has failed.

 

 

 

 

 

 

 

 

(MBA Mortgage Applications | Data Source Moody’s Economy.com)

The next chart is also with data that was updated today. It is the new home sales data that is provided by the US Census Bureau, and from this chart we can see that the housing market continues to decline sharply with no signs of any improvement yet.

 

 

 

 

 

 

 

(New Home Sales | Data Source Moody’s Economy.com)

In summary, Ben Bernanke’s testimony today before the House of Representatives told us that the Federal Reserve is ready and willing to keep cutting interest rates, even in the face of rising inflation. Without him saying so it is obvious to us that the Federal Reserve is deeply concerned about a financial system collapse and that trumps anything else at the moment, and it should. But rate cuts are likely not going to save the financial system from a collapse if conditions continue to worsen. It will require something much more, something even greater than ever enacted or put into place. This is a time for some well thought out plans and not just cutting interest rates which run the risk of influencing inflation further and sending the country into an even deeper recession as the cost of living become unmanageable.

The credit crisis continues to deteriorate, it is that simple. So far the rate cuts, the "hope now" alliance, and the new "project Lifeline" have done nothing to solve the problems, they have simply made the average person think that something is being done. The risks to the US economy remain very high for a substantial decline. Yesterday, Nouriel Roubini, Professor of Economics at the New York University who is a very well known and respected economist submitted a written testimony to the House of Representatives. The media failed to cover this or even mention anything about it. But Mr. Roubini laid out before the House of Representatives the real risks to our financial system. His testimony is a must read for everyone. You can read his testimony on the House of Representatives website by clicking HERE. (the file is requires you to have Adobe Acrobat reader installed to read the PDF file). I encourage everyone to read his testimony.

Currency rates in numerous countries continues to rise with respect to our US Dollar. This is great news for foreign tourists that visit our country, but it is bad for those of us that live here. The US Dollar hit another all time low today of 74.09. Oil is remaining at the $100 level and gasoline prices are starting to climb once again. My local gas station (petrol station for our English readers) has increased the price of a gallon of gas by $0.20 in just the past 13 days. Historically the price of gasoline increases with the Spring and Summer seasons as demand increases. I anticipate that $4.00 gasoline will be here sometime in 2008.

Some news items on the wires tonight:

-Japan’s production falls 2% in January, twice the expected amount as shipments to the United States have declined for the 5th month. The weakening economy is impacting foreign markets as the United States is the largest customer of foreign good for many emerging markets.

-In the first 2 months of 2008 $21 Billion Dollars in new IPO’s have been canceled… this is the highest ever on record.

FIXED INCOME: WSJ NOTES THAT NOW VARIABLE-RATE DEMAND NOTES ARE PRESENTING PROBLEMS TO MUNICIPAL BORROWERS
- Variable-rate demand notes let issuers borrow for long periods, but at short-term rates.
- The problem with variable-rate demand notes its that,like auction-rate securities, interest payments adjust on a weekly or daily basis.
- WSJ notes that rates on variable-rate demand notes are rising because dealers are having trouble selling this type of debt.

THE U.S. SUBPRIME CRISIS HAS DONE WHAT OTHER UNSETTLING EVENTS COULD NOT DO - CURB THE APPETITE OF FOREIGN INVESTORS FOR U.S. SECURITIES - JOE QUINLAN AT BANK OF AMERICA
- Capital inflows "basically collapsed over the second half of last year," when subprime problems "bubbled to the surface." He notes foreign purchases of U.S. securities fell more than 48% in 2H07.
- "A crumbling infrastructure, a government deep in debt, a brewing health care crisis" and continuing reliance on foreign oil all point to weaker capital flows ahead. That "could spell more trouble for the world’s largest debtor nation and for U.S. financial markets."

(UK) FINANCIALS: WSJ REPORTS THAT LONDON-BASED HEDGE FUND RICHMOND CAPITAL LOST ABOUT 50% OF ITS FUNDS IN JAN
- As of Dec 2007, the fund had €350M of assets.
- The fund follows a long/short equity strategy.

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.

Stock Market Summary for February 13th 2008

 

 

NEW YORK (AP) — Wall Street moved sharply higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers’ willingness to spend despite economic uncertainty…

Give me a freaking break… Give the press a piece of news and they jump all over it without understanding the real dynamics of the markets. As you read in my post early this morning regarding retail sales the change was minor and the trend of retail sales remains poor, at best.

The markets advanced 18 on the S&P, 178 on the DOW, and 54 on the Nasdaq. But the volume was weak on the advance. As we have been seeing since August of last year, the selling has been on higher volume than on the upward rallies. The recent few trading sessions are no exception. Volume has weakened as prices have moved up. In technical analysis this is always a sign of a direction change.

Over the weekend I posted a chart of the Dow Jones Industrials. And on that chart I highlighted certain support and resistance levels that we were going to watch closely to make an entry into the market by shorting the Dow. Today the Dow traded very close to the resistance level I discussed over the weekend. Today we took a position in symbol: DXD. This is the Ultrashort of the Dow. The volume today on the price advances was very weak and this built our confidence that this move up to resistance was likely going to be stopped. And it was, prices did not advance any further past the resistance level.

This type of trade offers us a good risk to reward profile. Because it offers to us a clear point at which to know if the trade is going against us and the potential reward is very good if the trade follows as the charts say it should. Now of course news can always throw a monkey wrench into the very best of trades, but at least as far as the chart is concerned this was a good opportunity to take a short position on the Dow.

We will know if the trade is going against us if it breaks upward through resistance, that resistance line is our ‘line in the sand’ and we will close out the trade and go short again on the next resistance level above. Should this be the start of the next leg down now we are protected in that our entry point should protect us from any small bounce from support (purple line - was resistance, now support). Should the Dow bounce from that level we still have our ‘line in the sand’ (which would now be resistance again and if it breaks upward we close the trade. So different possibilities in trading behavior in the Dow leaves us with a clear exit point. Should this be the start of the next leg down then I see the lows from the middle of January  coming back into play which will be a substantial gain for our short on the Dow.

The chart below is an updated chart from the one I posted over the weekend. Notice the trend line I applied to the RSI. Each rally attempt has been stopped by price resistance levels and RSI trend. The circle on the price is where we entered our short today. At the bottom of the chart you will see the volume, and a moving average (black line) has been superimposed over the volume levels. Notice how the volume has been drying up on the recent upward rally. This tells us the rally is losing momentum and conviction and that a fall in the Dow is near. Also note that volume has increased during times of selling and decreased on the buying rallies.

 

 

 

 

 

 

 

 

 

 

 

 

Tomorrow we get the weekly initial jobless claims and we have Ben Bernanke and Secretary Paulson testifying before the Senate Banking Committee on the state of the economy… oh boy, I can’t wait for that one. Better get the popcorn ready now. 

Should be an interesting day tomorrow for sure. On Friday night I will discuss the possibilities of a ’sucker rally’ which could draw in the bulls to only slaughter them later in the year. Film at 11.