Rebel Traders – Analysis Without The Hype

With respect to the S&P 500 futures the key number right now is 800.

S&P 500 E-Mini Futures - Hourly Chart

S&P 500 (SPX) Index - Daily Chart

Dow Jones Industrial Average - Daily Chart

Dow Jones Industrial Average - Daily Chart #2

Financial Sector (XLF) - Daily Chart

Bank Index (BKX) - Daily Chart

Growing losses among banks in the United States, and worldwide, is raising the concern that banks will eventually be pushed into being nationalized. The banking system continues to deteriorate by the day as every effort by the U.S. Government to keep pushing capital into their veins continues to fail. And it is no surprise that these efforts are failing as many of my long time readers understand.

As I and many others have written in recent months the only way to solve this growing problem is to force the banks and other institutions to fully realize their holdings, price them to market values, and default on the debt. Every effort being made by the Government is simply life support and not a cure. The banks don’t want the cure because it would expose that they are truly insolvent for all intents and purposes.

The creation of a ‘bad bank’ sponsored by the U.S. Government to absorb the bad assets of the banks simply moves the problem onto the tax payer and to the balance sheet of the nation. Doing that would put the cancer right into the circulatory system of this nation and there it will spread to all other parts of the economy. That would place the ability of the U.S. to pay its own debt at risk. And we are already seeing some signs that the risk of the U.S. defaulting on its own debt is rising with credit default swaps hitting a record high early this morning.

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Where to begin…

First I will discuss some of today’s economic events then I’ll dive into the charts.

This morning we received additional confirmations that the housing market is still declining. The Case-Shiller 20-city price index dropped an additional 2.2% from the previous month, and is now down nearly 25% from the peak 2 years ago. No bottom is in sight yet, but the Government is trying to put in a temporary floor by throwing (our) money at it like mad.

Then came the consumer confidence reading of 38, and that was another record low. The monthly consumer confidence data comes from “The Conference Board” and has been used as a gauge of ‘real world’ economic conditions for many decades.

The Consumer Confidence Survey measures the level of confidence individual households have in the performance of the economy. Survey asks a nationwide representative sample of 5,000 households, of which approximately 3,500 respond. Households are asked five questions that include (1) a rating of business conditions in the household’s area, (2) a rating of business conditions in six months, (3) job availability in the area, (4) job availability in six months, and (5) family income in six months. The responses are seasonally adjusted. An index is constructed for each response and then a composite index is fashioned based on the responses. Two other indexes, one for an assessment of the present situation and one for expectations about the future, are also constructed. Expectations account for 60% of the index, while the current situation is responsible for the remaining 40%. In addition, indexes for the present and future economic situations are calculated for each of the nine Census divisions. In the base year, 1985, the value of the index was 100.

And just hours after GMAC was provided $5 Billion tax payer dollars they came out screaming loudly about how fast they will begin making new loans this morning. The fact that tax payer dollars are going to be used to backstop new car loans for GM car shoppers is bad enough. But what is even more disturbing is how GMAC plans to make new loans.

[...]The company will modify its credit criteria to include retail financing for customers with a credit bureau score of 621 or above, a significant expansion of credit compared to the 700 minimum score put in place two months ago. [...]

A credit score of 621 is just one point above the classification of ’sub prime borrowers’. GM will begin aggressively selling cars and trucks to people who are just an inch away from being sub prime quality borrowers. This in the face of rising unemployment and a deteriorating economy. This is set to be another round of defaults in the coming years and this time the damage from the resulting bad loans will be taken out of the tax payers pockets.

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Commentary & Charts…

Existing home sales data this morning showed an 8.6% drop from the previous month. This was the largest monthly drop yet. And with the issuance of any economic data there is always many different interpretations of the data. Some say that with the recently falling mortgage rates it will quickly turn the housing market around. Some say the ‘bottom is in’, and some say it shows that sales are getting even worse.

The problem I see with the theory of ‘the bottom is in’ is that it needs banks to lend at the pace they were before the housing market collapsed. And banks are not lending like they used to, and are likely not too for a very long time to come (hopefully never, for that is what contributed to this disaster in the first place).

The attempt by the Government to ’stabilize’ housing prices by trying to lower mortgage rates will be a short lived spike in the housing market as I see it. They are simply trying to keep blowing air into the already collapsing housing bubble. The only way the housing market will stabilize is to allow them to decline to their historical averages, without intervention. I have said on numerous occasions, the system needs to flush itself out.

The reason I see any spike in the housing market being short lived is that it requires people to have jobs in order to obtain mortgages. I foresee the unemployment situation worsening at an even faster pace in early 2009. Following the holiday retail shopping season I expect to see a large number of retail sector job losses, and bankruptcy filings among retail companies. And then as the economy continues to worsen it will impact State and Local Governments at an escalating pace which will begin the next wave of job cuts. A vicious cycle it is. Attempts to ‘prop up’ the housing market will fail.

I don’t see any ‘easy’ way out of the housing market collapse except to let natural price discovery processes be allowed to dictate the markets stabilization over time.

Charts…

On the S&P 500 E-Mini futures (hourly chart) we are clearly under the up trend that began with the November lows. But, we are still sandwiched in between a lot of support and resistance levels in the short term. The break of the trend line (beginning point 11/21/08) is giving the bulls some fear that the lows of November may come back again sooner than expected.

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