Market Summary - August 12, 2008 - Financial Sectors Remain in Trouble

Financial stocks turned back down on renewed concerns on more problems with banks and other financial institutions. The rise in the financial stocks from July 15th till now appears to be in jeopardy as liquidity and additional losses are once again front and center.

While others were calling buys on the financial’s back on July 15th we remained very cautious on any financial sector stock. All bank and financial institution stocks remain dangerous. They are great for day traders, but for anything else at this time is out of the question. Just too much risk.

Some examples:

  

  

   

The individual stocks shown above say to me that their short term pattern has been broken and the path of least resistance is down. The financial sector ETF (XLF) tells a different story.

 (XLF)

The XLF chart says that a possible bounce up from support may be in the cards. But, with many stocks in this sector taken a beating today and having broken to the down side I am cautious on any long positions in the XLF. If I see the XLF fall below $21.00 I will short this index.

Investors keep thinking that the financial crisis is in the rear view mirror. But remember what it says on those mirrors… “objects may be closer than they appear“. And investors are still getting whacked in the side by the continuing crisis unfolding in the banks and other institutions.

“Mr. Mortgage” reported today that foreclosures in California have reached another ominous figure. Banks have taken back $12.5 billion in loans and that figure is an increase of 25% from the month before. Also today we got news from Bloomberg that one third of homes purchased in the last five years are now worth less than their mortgages.

[...]Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes.

For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can’t absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow’s vice president of data and analytics.[...]

The outlook for Goldman Sachs (GS) was lowered today by Deutsche Bank and the famous bank analyst Meredith Whitney of Oppenheimer (famous for she was one of the first Wall Street analysts calling for the problems in the financial sector). The analysts have lowered Goldman Sachs earnings expectations.

So the stimulus checks are just about all spent and the Government (taxpayer) handout of money to every American has come and now gone. In its wake we had a spike in retail sales (that is what they call it, we say it was nothing more than a bump in road), a temporary euphoria on part of the media (even more euphoric than normal), and now we have an even bigger federal deficit…

WASHINGTON (MarketWatch) - Boosted by payments for failed banks and stimulus checks for individuals, the federal budget deficit widened to $102.8 billion in July from $36.4 billion a year ago, the Treasury Department reported Tuesday. The deficit was close to the $102 billion expected by the nonpartisan Congressional Budget Office. Through the first 10 months of the fiscal year, the budget deficit rose to $371.4 billion, more than twice as big as the deficit last year. For the first 10 months, receipts are down 1% and outlays are up 8.5%.[...]

Bloomberg also ran a story today that losses at banks will top $500 Billion. We still hold the view that the losses will be at least double that by time this is all over. And some other trustworthy economists have the total losses near $3 Trillion when this is all over with. See the article here on Bloomberg.

And today Citigroup (C) raised $3 Billion by selling 5 year notes at a yield of 337.5 Basis Points over Treasuries. This shows that risk is increasing with respect to these bond offerings. The financial crisis continues to grow regardless of what the media will tell you.

And on the Crude Oil situation I direct you to an excellent article my friend Frank Barbera wrote tonight on Financial Sense. See article HERE.

Good night and see you in the morning.

Emergency UN Meeting to Discuss Conflict.

Fox News is reporting that another emergency meeting will be held later today at the United Nations. Additionally, the US State Department has begun to evacuate some US citizens from the region.

Monday , August 11, 2008

DEVELOPING @ 2:30 p.m. EDT: The United Nations Security Council has called another emergency session for Monday afternoon, scrambling to resolve the fighting between Russia and U.S.-allied Georgia over the breakaway region of South Ossetia and other parts of Georgia.

Facing Russia’s superior firepower and expanding range of attacks, Georgia requested this latest session, which is to begin at 5 p.m. EDT in New York. Georgia is not a council member; Belgium’s ambassador, Jan Grauls, approved the session as this month’s council president.

It will be the fifth such emergency round of talks the council has held on the conflict since late Thursday night.

Meanwhile, the State Department says it has evacuated more than 170 U.S. citizens from Georgia as the conflict over separatist areas there intensifies between Georgia and Russia.

A spokesman said Monday that two convoys carrying about 170 private U.S. citizens along with an undetermined number of family members of American diplomats based in Georgia have left Tbilisi on their way by road to neighboring Armenia. The spokesman says more convoys are being prepared in case other Americans choose to leave Georgia.

Market Summary - July 30th 2008

Oh my, the Dow has risen 450 points or so over the span of a few short days. The bear market is over and the bulls are in control…

STOP!

This is the bear market of 2000 - 2003 all over again in terms of the media, and others, jumping all over every pivot point in the markets. The factual technical trend of the market is STILL bearish. As was the case in the previous bear market every time there was a rally it was dubbed as ‘the end’. Tonight we have the market circus barker Jim Cramer of CNBC calling the bottom. Saying the bear market is over. This from the man who last year failed to acknowledge the problems and continued to urge his viewers to buy stocks as the fundamentals of the economy were melting away. As we were calling for big problems ahead back then Mr. Cramer kept trying to pump the market up and had his viewers losing a lot of money. So how credible is Jim Cramer?  This funny clip can answer that question…

 

 

All major technical indicators still have us in a bear market. And until the market signals that the bear market has ended then any rally is considered a ‘bear market rally’.

The markets continue to remain under incredible stresses as the housing market and the credit implosion have put a halt to credit growth, which is so necessary for economic growth anymore. The United States has become way too dependent on credit to fuel growth. Without credit the economy seizes, and right now we can smell the pistons of the US economy burning up as the oil in the engine is leaking out the bottom.  Speaking of oil, I still forecast rising oil prices for the long term. Periodic pull backs in the price of crude oil are just that, periodic. The multi year trend of oil remains bullish.

 

 

 

 

 

 

 

Energy Sector (XLE)

GDP and monthly unemployment figures are on tap for the next two days. Hold on to your seats, may get wild. This mornings ADP employment data was much higher suggesting that this months employment figures from the Government will be "better than expected". However ADP has a history of being very inaccurate when it comes to tracking the official numbers. I still maintain my previous projections of unemployment reaching at least 6.4%.

Off the wire tonight:

JULY MONSTER EMPLOYMENT INDEX: 157 V 163 M/M (THE READING FOR JULY 2007 WAS 183)

(JP) THE JAPANESE GOVERNMENT IS EXPECTED TO NEXT WEEK CUT ITS ASSESSMENT OF THE ECONOMY TO "WORSENING" FROM "POSSIBLY AT A TURNING POINT" - JAPANESE PRESS

(AU) AUSTRALIA RETAIL SALES FALL MOST IN SIX YEARS

GENERAL MOTORS WILL CUT 5,100 JOBS AT US & CANADIAN PLANTS

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.

Crude Oil Hits $75.00

Oil reached up and touched $75.00 this morning. It let a little air out of the bulls. Will the bulls learn how to wade through the oil slicks and keep going?

Crude Oil is heading up again

There is always something that gets in the way of the bulls. Now Crude oil is over $74.00 and $75.00 is possible soon. $75.00 would be another psychological number that would strike fear in many.

Lets see if the bulls can dance their way around the oil slick..

Pre market July 3rd 2007

Today will be a short day (markets close at 1pm EST). Don’t expect too much to happen today. On a short trading day the volume will generally be on the light side. Brokers and big money managers are heading out of Manhattan today to get to the Hampton’s and beyond before the traffic gets bad !

There is not much in the way of significant news to report this morning. Apple is catching a little bit of pre market up ticks but by the end of the day my feeling is AAPL will be down again. I am near term bearish on apple but long term bullish.

Yahoo (YHOO), a stock that many investors and traders have given up on (including me) saw this morning an analyst upgrade. Oppenheimer raised their FY07 revenue estimates for Yahoo based on their view that the management changes and their new ad revenue system will pay off. For me I will remain the skeptic and wait for the proof in the charts. I am bearish on YHOO.

Crude oil is currently at about $71. Here are some thoughts on the market for the summer months. Remember that the summer period is usually the slowest in the markets. The “summer slump” as some call it. If oil continues to rise then we will have a greater chance of breaking to the downside of our current market trading range (see DOW chart on my public charts list). If that happens then will will indeed have a summer slump with a bearish summer. I maintain my long term bullish stance on the markets. Just have to watch that the oil prices don’t send the bulls off to summer camp!