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)

Bear Stearns and Emergency Rate cute - UPDATE

It is currently Sunday evening at 10:40pm (US EST). The situation with regard to the Bear Stearns ‘buy under’ for $2 Dollars per share is having wide reaching implications tonight. What had first started out as a ripple effect on the S&P Futures has turned into a Tsunami.

Sine the announcement of the Bear Stearns deal (I hate to even use that word ‘deal’ as this was more of a "scrape up the pieces") and the emergency rate cut the S&P Futures have declined by unprecedented amounts. Futures are now down 3.05% on extremely heavy volume. The magnitude of the decline over the last hour is historic.

The US dollar has also declined significantly and is setting new records against a large basket of foreign currencies tonight. Gold has now risen to $1,024 US Dollars an ounce.

What we are witnessing tonight is a genuine fear that the financial system of the United States is on the verge of collapse. The fact that Bear Stearns, just last year trading at near $160.00 US dollars per share, has now been reduced to only $2.00 per share. Do you realize the implications of this? This says that all other financial institutions who have been claiming that they "are in great shape" (just like Bear Stearns said just days ago) are being put into serious doubt tonight. The "trust" factor in the financial institutions has deteriorated substantially tonight. After JP Morgan looked over the books of Bear Stearns they concluded that the value of the company was only worth $2.00 a share. I can’t stress enough how substantial this is. This has wide spread implications for all other financial institutions, banks, and brokerages.

At this time we are poised for a very significant market sell off tomorrow. The Federal Reserve has already issued an emergency rate cut tonight, which by the way is unprecedented in itself. The fact that the Feds did this on a Sunday evening is historic. And for them to issue an emergency rate cut with their regular meeting just two days away also signals the severity of the situation at hand. Will the Federal Reserve step in and do more cuts tomorrow? Right now the US Government is trying to stop what appears to be already set in motion, and that is a complete failure of the US financial system.

On Friday night I wrote that "you have witnessed history" with regard to what happened to Bear Stearns, I think it is safe to say that history is still being made tonight and could be made again tomorrow.

What kind of efforts could the Federal Reserve do tomorrow to stop the growing fear of a financial system collapse? Hard to say, they have already thrown everything at this and it has only gotten worse. But we should not be surprised to see another emergency rate cut tomorrow morning. Will it reverse the bloodshed taking place in the markets tonight? Can’t say, but I’m sure glad I am still short the market.

Items coming off the wires tonight:

WSJ DEALJOURNAL ON BSC/JPM DEAL - THE $2 PER SHARE BASICALLY SETS DOWN AN IMPORTANT MARKET MARKER: FOR NOW, BEING A WALL STREET TRADING HOUSE IS NO LONGER A LICENSE TO PRINT MONEY
- "It’s a license to absorb plenty of risks. Risks so presumably so toxic and unknown that J.P. Morgan had to turn to the Fed in the way it did."
- "Which perception will prevail in the market? Are the dealers extra protected? Or extra vulnerable? Monday’s markets are going to be an incredible laboratory for finding out."

 

WSJ FED WATCHER GREG IP: THE FEDERAL RESERVE’S DECISION TO INVOKE A DEPRESSION-ERA LAW SO THAT IT COULD LEND TO BEAR STEARNS SHOWS HOW SERIOUSLY IT BELIEVES THE FINANCIAL SYSTEM IS AT RISK
- "The Fed has two principal tools for lending money to market participants. It lends to its 20 “primary dealers,” including Bear Stearns, every day for up to 28 days in return for top-quality collateral such as Treasurys. But this doesn’t enable it to lend any single firm much money. It can lend unlimited sums through its discount window, but only to banks. It has, since 1932, had the authority to lend to nonbanks, but has been reluctant to use it. To underline the gravity of its use, at least five of the Fed’s seven governors must ordinarily vote in its favor. It was last used to make loans during the Depression. The Fed invoked the clause in 1970 to lend to companies cut off from the commercial paper market by the failure of the Penn Central railroad, but did not end up lending any money."
- “I would be very cautious about opening that window up” to investment banks, Fed Vice Chairman Donald Kohn told Congress on March 4. Banks get access in part because they are subject to “extensive” supervision, he said.
- "J.P. Morgan Chase & Co. is the conduit for the loan because it already has access to the discount window, is supervised by the Fed, clears for Bear and knows the firm well. But if Bear fails and the collateral is insufficient to cover the loan, the Fed, not J.P. Morgan, takes the loss."

 

USD SLIDE CONTINUES: WE’RE AT A POINT NOW WHERE REALISTICALLY, IT’S GETTING VERY DIFFICULT TO CALL AN END TO THIS - SHAUN OSBORNE, CHIEF CURRENCY STRATEGIST OF TD SECURITIES
- "For the dollar to recover from here, it would need a strong indication from the Fed that they’re done with this rate-cutting cycle, and I don’t think they’re in any position to do that at the moment."

NIKKEI 225 MOVES BELOW 12,000 FOR THE FIRST TIME SINCE AUG 2005; USD/JPY BELOW 98 FOR THE FIRST TIME SINCE SEPT 1995

BEAR STEARNS FIRST QUARTER EARNINGS ANNOUNCEMENT SCHEDULED FOR MARCH 17, 2008 WILL NOT OCCUR
- In light of entering into an agreement to merge with JPMorgan Chase, The Bear Stearns Companies Inc. will not be announcing its first quarter 2008 financial results on Monday, March 17, 2008, as previously scheduled.

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 - Pre Open Report for February 28th 2008

The Q4 GDP updated figures were issued this morning. The top line GDP did not change, many times in previous GDP data sets there was usually a small revision to the top line number but this time the number was left unchanged. So the GDP of 0.6% is a real number and reinforces to us that recession has arrived.

Moody’s summarizes it as follows:

There was no revision to reported economic growth in the fourth quarter; real GDP increased at an annualized 0.6% rate. The consensus expectation was for a small upward revision. There was a downward revision to imports, which increased GDP growth, and an offsetting downward revision to investment in inventories. Economic growth in the fourth quarter was poor, and the U.S. economy is likely in recession now.

Initial jobless claims climbed to 373,000 and the continuing claims also continues to rise and is now at 2.8 million.

Freddie Mac (FRE) released earnings this morning:

[FRE] Freddie Mac Reports Q4 -$3.97 v -$2.34e, R -$678M v -$198.3Me ($2.5 Billion Loss)

- Notes estimated regulatory core capital was $37.9B at Dec 31, 2007,
- Still extremely cautious entering 2008.
- Remediated material weakness in internal controls.
- Sees credit losses boosting in 2008. (emphasis added)
- Sees varying expenses as housing market is still pressured.
- If economy weakens further credit costs will be higher.
- Reports Q4 total credit losses of $236M.

The CEO of Freddie Mac (FRE) says that they may need to "tap the market" for more capital.

Yesterday’s dismal financial report from Fannie Mae (FNM) has prompted Moody’s to possibly cutting the rating of the company.

FNM: MOODY’S SAYS IT MAY CUT "B+" FINANCIAL STRENGTH RATING FOLLOWING 2007 RESULTS

Thornburg Mortgage (TMA) released their 10-K, and tucked away in there were some scary statements.

Beginning on February 14, 2008, there was once again a sudden adverse change in mortgage market conditions in general and more specifically in the valuations of mortgage securities backed by Alt-A mortgage loan collateral. As of February 15, 2008, our Purchased ARM Assets included approximately $2.9 billion of super senior, credit-enhanced mortgage securities, all of which are AAA-rated and backed by Alt-A mortgage collateral. Our current credit assessment of these mortgage securities in our portfolio suggests a low possibility of future downgrades and even less risk of actual losses. We have not realized any losses on these mortgage securities to date. However, we have observed deterioration in the liquidity for these securities and increased difficulty in obtaining market prices. Accordingly, market valuations of these securities have decreased between 10 and 15 percent since January 31, 2008, and as a result, we have been subject to margin calls on this collateral. Since February 14, 2008, we have met margin calls in excess of $300 million on our Reverse Repurchase Agreements, the substantial majority of which is related to the decline in valuations placed on these securities. However, in the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls, relative to our cash and unpledged securities position of December 31, 2007. In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash

Freddie Mac (FRE) and Fannie Mae (FNM) are being downgraded by various analysts this morning as the realization of the implications of lifting the cap is likely to create. The lifting of the portfolio caps for these two mortgage companies it essentially creates a toxic waste dummping ground.

Pre market futures are showing a very weak opening. Ben Bernanke speaks yet again today, but this time to the Senate Finance Committee. Something very interesting from yesterdays testimony. Someone unknown to us has created a you tube video clip of an exchange between Ben Bernanke and Ron Paul discussing the value of the US dollar. Rather Interesting:

Stock Market Summary - February 26th 2008

In 1959 a television show began airing in the United States called the Twilight Zone, this very popular and highly acclaimed series was a combination of science fiction, fantasy, and horror all wrapped up in one 30 minute story, which most always concluded with an unexpected twist. Today whenever we think of something very strange we think of the Twilight Zone…

There is a fifth dimension beyond that which is known to man.
It is a dimension as vast as space and timeless as infinity.
It is the middle ground between light and shadow,
between science and superstition,
and it lies between the pit of man’s fears and the summit of his knowledge.
This is the dimension of imagination.
It is an area which we call . . . the Twilight Zone

I brought up the Twilight Zone analogy because with each passing day the markets and the economy just seem to be getting more and more surreal. Economic data received today continues to point to a worsening outlook and today the market took that as a sign that more rate cuts will be coming. The economic conditions are deteriorating so quickly and with inflation rising again the US Dollar today set another new low today. Many Wall Street professionals who were paraded on CNBC a month or two ago stated that they felt the bottom was in on the US Dollar. We never made any claims like that because we don’t call bottoms on speculation or conjecture. We work only with facts and the facts showed us that the dollar could still go lower. And lower it has gone. And with today’s gloomy economic data the markets are now pricing in yet another rate cut. With inflation growing substantially over the past few months, the US Dollar continuing to fall, and commodity prices still rising another rate cut will only exasperate this alreay volatile combination.

But today’s advances in the market stopped right at a significant resistance point. As we said previously, our short position on the Dow Jones Industrials would be covered at break even if the market advanced upwards towards the next resistance level. And that we would short at the next resistance level, and that is what we did. We are maintaining our short position on the market. In technical analysis you have to set emotions aside and use the charts as your guide, never mix emotions and investing/trading together… for that is a bad mix.

The chart below is that of the Dow as of today, observe that we are now at a significant resistance level and from the technical perspective this offers us another opportunity to take an entry on the market in a short position. We are at a point where the markets are likely going to become more volatile very soon, and typically when volatility goes up the markets go down.

 

 

 

 

 

 

 

 

 

(Dow Jones Industrials - Daily chart)

 

And speaking of volatility, applying technical analysis to the $VIX works just as well as with any stock. In this chart of the volatility (VIX) index I have identified the ascending triangle pattern and superimposed the S&P 500 on top. The volatility index is the blue line (observe the ascending triangle pattern highlighted with the blue trend lines). The S&P 500 is shown as the red line. Each time the volatility rises the markets decline, and currently we are very near a point in the volatility where we can expect to see a rise as it bounces off the trend line. Ascending triangles usually resolve to the upside, so this would tell us that we are likely to see much higher volatility in the future.

 

 

 

 

 

 

 

 

 

(Volatility VIX Index with S&P 500 - Daily chart)

 

On the economic front we received the Producer Price Index (PPI) data today. This measure of inflation had a top line gain of 1% over last month and a 1% jump is significant. The core PPI rose by 0.4%. Those who say the core is more important than the top line numbers live in an artificial world. Core data is what is left when you strip out food and energy. In the real world people live by food and energy, so those who slam their fist on the table and say "the core is more important" are somewhere in the Twilight Zone.

Inflation is continuing to grow, yet the markets are screaming for more rate cuts. More rate cuts will only add more fertilizer and water to the growing inflation seeds. Cutting the interest rates may help in the short term to un freeze the credit markets, but at what cost to the American people? The old saying is true "They are dammed if they do and dammed if they don’t" (with respect the the Federal Reserve). There is no easy fix to any of these problems, cutting rates only creates an illusion of a functioning market but underneath the fires are being stoked and will result in a pressure cooker explosion.

 

 

 

 

 

 

 

(PPI data - 10 year chart. Data source: Moody’s Economy.com)

 

Home prices continued to decline as measured by the very accurate S&P/Case-Shiller Index. We are now at a point where the year over year declines are the largest ever since the index began in 1988. The summary report issued stated that there are no signs of stabilization in the data. The renewed hopes of more rate cuts by the Federal Reserve coupled with the irrational buying on the announcement by IBM that they are going to buy  back $15 Billion dollars of their stock is what is responsible for most of our advance today. Recall that Lisa wrote about the significance of companies buying back shares of their stock. Companies that buy back their shares are essentially "hunkering down". It is used to artificially inflate their EPS by reducing float. The amount of stock buy back announcements has been very high during the past 6 months. And in the course of history we usually see large stock buy backs in times of economic turmoil and bear markets. We will begin our own index of tracking stock buy backs by companies on the S&P 500 and use this index in the future as one more measure of corporate sentiment of the economy.

How about this news item… The Federal Deposit Insurance Corporation (FDIC) is hiring people to get ready for bank failures. As reported by the Wall Street Journal:

(US) WSJ reports that the FDIC may be preparing for a rise in bank failures

- The FDIC is looking to rehire 25 retirees from its division of resolutions and receiverships.
- Many of these agency veterans worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed due to the savings and loan crisis.

For now, as we wait for the next bit of economic data, or the next announcement of losses by a bank, or as the FDIC is now hiring back employees to get ready for the onslaught of bank failures we can only wait and see, and use the charts for our guide. But one has to admit that the events over the past year could have been something right out of a Twilight Zone episode.

You unlock this door with the key of imagination.
Beyond it is another dimension- a dimension of sound, a dimension of sight, a dimension of mind.
You’re moving into a land of both shadow and substance, of things and ideas.
You’ve just crossed over into . . . the Twilight Zone

Stock Market Summary for February 25th 2008

A few hours ago I wrote that this "soap opera" that we call the bond insurers was not over yet. And it did not take long for another episode to be written. Tonight MBIA Inc. (MBI) released a statement that they will now eliminate their quarterly dividend and are now working on a plan that will break up the company sometime within the next five years. Lisa and I have discussed in great detail the events that have taken place today with regard to the bond insurers and the ratings agencies. We do not wish to sound like we are distrustful people by nature, but we are realists and will never take what is said as "well, if they say it then it must be true"… the world has enough "reporters" and not enough "investigators". Once was the day long ago that being a reporter meant you would dig for the truth, today reporters just echo was it told to them so as to maintain their contacts with those who feed them information. Reporters today don’t want to anger those who give them their information. But that is a topic for another night.

What is happening with the ratings agencies is fraud, this is how we view it. We have the Governor of New York involved along with his insurance commissioner. They are all working on a way to keep the bond insurers propped up on a pedestal so that the general public never realizes how bad the situation is. At some point in time, not now, but down the road this will end in lawsuits, bankruptcies, and perhaps even criminal proceedings. I realize this sounds a bit extreme, but you have to remember that Lisa and I bring to you our experiences and our extensive studies of market history. We want transparency, not cover ups.

The following was issued by Bloomberg.com tonight:

MBIA Will Halt Asset-Backed Business, Split Units (Update3)

By Christine Richard

Feb. 25 (Bloomberg) — MBIA Inc., seeking to stave off a crippling credit rating downgrade, will stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years.

Chief Executive Officer Jay Brown also said he has “questions” about the company’s 2007 preliminary results released last month and hasn’t yet signed off on the statements, according to a letter to shareholders today.

MBIA has raised $2.6 billion in capital in the past three months and earlier today said it would eliminate its dividend amid scrutiny from ratings companies. S&P today said it is no longer reviewing MBIA’s AAA rating for downgrade. The company, which insures $673 billion of municipal and asset-backed securities, faced criticism from ratings companies, lawmakers and regulators over its decision to expand into collateralized debt obligations.

“Everything we are working towards right now is centered on regaining stability,” Brown said in the letter. “We can expect a bumpy ride over the coming months and possibly longer.”

S&P today said the insurer remains on negative outlook, meaning that any ratings move may be lower, though not any time soon. Ambac Financial Group Inc., which ranks second to MBIA among bond insurers, is being given more time to avoid a downgrade pending the outcome of company’s plans to raise new capital, S&P said.

Shares Rise

S&P’s decision sent MBIA up 20 percent in New York Stock Exchange composite trading and Ambac of New York gained 16 percent. A credit rating cut would stymie their ability to guarantee debt and strip the AAA stamp from $1.2 trillion of insured municipal and asset-backed debt. MBIA rose $2.40 to $14.58. Ambac gained $1.70 to $12.41.

Brown said he has been reviewing the company’s 2007 financial statements, with a focus on MBIA’s loss reserves and mark-to-market losses. The markdowns reflect the difference between what MBIA charged to insure certain securities and what it could have charged based on a change in the value of the underlying security during the period.

“It is a difficult and complex task for both the internal teams and the company’s auditors to establish best estimates in the most volatile credit markets in the company’s history,” Brown wrote. “I have a few more follow-up questions that need to be answered for me to confirm the company’s preliminary results which were released a few weeks ago.”

MBIA increased its reserve for claims related to second- lien mortgages by $100 million for a total of $200 million less than a week after reporting its fourth-quarter results.

Record Loss

MBIA posted a record loss of $1.93 billion last year, its first loss at least 15 years, after losses on subprime securities. MBIA and the rest of the bond insurers are paying a price for expanding beyond the safety of municipal debt into securities such as CDOs, which repackage other pools of securities in to new debt with varying ratings.

MBIA’s ability to raise $2.6 billion was “a strong statement of management’s ability to address the concerns relating to the capital adequacy of the company,” S&P said.

Moody’s is still reviewing MBIA and Ambac for downgrades. Fitch cut Ambac’s insurance rating to AA last month and is considering cutting MBIA.

MBIA raised money through selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

S&P estimated that MBIA may have losses of $5.5 billion before tax, eliminating its entire capital cushion.

MBIA replaced Chief Executive Officer Gary Dunton earlier this month after an 80 percent slump in the company’s share price and criticism from investors, lawmakers and regulators for the expansion into money-losing CDOs. The company replaced Dunton with former CEO Brown, who said last week he favored separating the municipal business from the asset-backed guarantees to protect the public finance debt from losses.

How is it that the ratings agencies are able to maintain a AAA rating on a company that is still in trouble?… a company that is now possibly going to re-state their previous earnings?… a company that has to eliminate their dividend in order to save money?… a company that according to the CEO does not even know the extent of their ability to value their assets? There is so much that just does not add up here.

The following statement is from the Standard and Poors  policy on ratings definitions:

A Standard & Poor’s issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion evaluates the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor’s from other sources it considers reliable. Standard & Poor’s does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

Also, the following is their own definition of what a AAA rating means:

AAA

An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

Ok, lets see here now. MBIA’s CEO says they are having trouble calculating assets, have recorded record losses, can not even afford to keep its dividend payment, and needs capital infusions to keep the company going. Does this sound to you like a AAA rated company?

According to Standard and Poors ratings definitions, and the financial condition of the companies a more fair assessment of the bond insurers would be a rating of BB:

BB

An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

After the news was announced this afternoon that Standard & Poors was maintaining their AAA rating, for now, the markets rallied. The rally was NOT on substantial strength as we saw it. There was much apprehension as the market was moving upwards in the last hour of trading. We have numerous economic bits of data to still contend with this week and these will be significant market movers.

This morning the existing home sales data was released. And it continued to show worsening conditions. The media has said that because the decline was not as bad as some had thought they say a ‘bottom’ may be forming. Every time there is the slightest bump in data the talking heads will jump all over it and claim the bottom is near. I want to show you the chart of the existing home sales data. The chart below is the current chart and includes the data released this morning. Notice the arrows I placed on the chart. Each arrow represents a time when the media and analysts said that "the bottom" was near. And each time they were wrong. I guess they figure if they keep saying it they will be right one of these days. We operate different here, we put all of the pieces together and bring to you our assessment of trends, other indicators, and technical analysis. We never make a claim on a "snap shot" like talking heads will do. So the next time someone says the housing market (or anything else for that matter) is now near a bottom… just remember that they said that many times before. You can confirm this by going back to previous Associated Press, or other news agencies, and view their  news releases and see what they said back then.

 

 

 

 

 

 

 

(data source: Moody’s Economy.com)

The Dow Jones Industrial Average closed right at resistance today. This is right where we entered our short position on the Dow on February 13th. We are still holding this trade (Ultrashort ETF symbol DXD). Right now we are at break even on this trade. If the markets advance tomorrow we will close the trade and then we will be jumping right back on and shorting the Dow at the next resistance level (~12,775). We are still in a bear market.

Year to date performance of the major indices:

Some Stock Market Thoughts - February 24th 2008

Surreal:  Having the disorienting, hallucinatory quality of a dream; unreal; fantastic

Surreal, that pretty much sums up the actions that have been taking place of late. The events that transpired at 3:30pm last Friday almost make me think of Rod Serling and the old television show "The Twilight Zone". In my commentary on Friday night I discussed the highly suspicious nature of the timing of the news release regarding the bond insurer Ambac (ABK) which took place at 3:30pm on Friday. It seems that this view is being shared by many more people as over the weekend there have been more discussions on the web concerning this event. And it appears that the level of suspicion of this event is rising.

President Bush: (September 20, 2007) "I say that the fundamentals of our nation’s economy are strong"

Throughout the credit crisis, rising inflation, housing market crisis, rising foreclosures, record losses by financial institutions, rising unemployment trends, retail spending deteriorating, and a United States deficit near record levels the President says "the fundamentals are strong". Unless I need glasses I would say that the fundamentals of the economy are collapsing and no where near strong. Where is the strength that the President sees? I think he is the one that needs glasses.

Maybe he did get some glasses because now he says:

President Bush: (January 18, 2008) "The long-term fundamentals of our economy are strong" (emphasis added)

So throughout 2007, when we have been warning our readers about the worsening economic conditions, the President said the economy was strong. But as the problems became even worse the President could no longer hide behind that same line anymore, so his speech writers added two words to his line.. ‘long-term’. So now he changed his tune somewhat to say that the fundamentals of the economy are strong, not now, but down the road. The President seems to be about 6 to 8 months behind the curve of what the data shows us and what the President tells the public.

The question now is how far in the future (long-term) do we have to wait to see these strong fundamentals? The $160 Billion dollar economic stimulus package is only going to raise the United States deficit to even higher levels. ‘Strong fundamentals’ I feel is a very long time away from now.

The coming week brings us many economic data items to chew on. On Monday morning I will post the list of events for the coming week.

Some questions about various stocks are answered next…

Deckers Outdoor (DECK) is a stock with a very low share float (number of shares available on the open market). A low float always creates a stock that can reach nose bleed levels without much in the way of any substantial financial justification. I see DECK as having more downward price moves to come. Spotting an exact entry price to short this stock is not an easy one, but in the chart below I have identified the strongest resistance and support levels. One could short DECK as it reaches resistance (stop out on the break above resistance) or short on the failure below support (stop out on the break back above support). Below the chart I have included a screen shot of the stock’s current structure.

 

 

 

 

 

 

 

 

 

(DECK) Daily Chart

 

 

 

 

 

 

(DECK) Stock Structure - observe the very low float

 

Another chart analysis requested is for Cummins Inc. (CMI). This stock also appears to be setting up for a good short play (HJ - good eye on your T/A). See the chart below for our technical analysis of CMI.

 

 

 

 

 

 

 

 

 

(CMI) Daily Chart

 

One more chart for analysis is the United States Natural Gas Fund ETF (UNG). This ETF tracks the performance of natural gas. This commodity has been in demand lately and has been reflected in the price. But we would be wanting to protect any profits on this trade as opposed to adding to a long position. The T/A shows us some signs of strong resistance just ahead. We we would not necessarily short this sector here, but we would take profits out of any long positions in natural gas if the price appears to be hanging up at resistance.

 

 

 

 

 

 

 

 

 

(UNG) Daily Chart

 

And my final chart for the night is a recap of the S&P 500…

 

 

 

 

 

 

 

 

 

S&P 500 Daily Chart

Stock Market Summary for February 19th 2008

In my pre market report I discussed that the futures were up with no solid reason to substantiate the advance. And we expected to see the rally fade, and fade it did. The markets inability to hold on to gains reinforces the bear market mentally that is so prevalent in the market. In bear markets rallies are sold, in other words "sell on strength".

One of the reasons we saw the gap open higher this morning was on the thought that Wal-Marts earnings were perhaps showing that the consumer still had a pulse and was on the road to recovery (as how the media reported it). As I pointed out in my pre market report Wal-Marts earnings were nothing great, only in line with their already lowered forecast and they went as far as to provide forward guidance on the lower end of the scale of their previous guidance. Absolutely nothing to get excited about, however the media jumped all over it. The Associated Press reported:

Wal-Mart Expects More Profitable Year After Low-Price Focus Boosts 4th-Qtr Earnings

Defying the gloom that many retailers are feeling, Wal-Mart Stores Inc. expects a more profitable year selling to penny-pinching shoppers after its renewed focus on low prices paid off over the holidays with a 4 percent rise in fourth-quarter profit.

 

But when you dig into the numbers from this morning there was nothing to get excited about. Wal-Mart, just like so many other retailers that have been lowering their forward earnings guidance. So when Wal-Mart came in with earnings ‘in line’ people got excited over nothing more than a company confirming that earnings were just as bad as the company had predicted when they issued guidance last quarter. The media seems to have a very short memory. After the market opened the retail sector (RTH) gapped up at the same time the media was reporting that "all the bad news is now baked into the stocks". "Baked in", a common term you hear on Wall Street which simply means that the price of a stock is already priced at a worst case scenario and not even bad news can keep it down any longer. Well I guess someone took the pie out of the oven too soon because the retail stocks still went lower, even when everyone was saying it was done. The retail sector sold off throughout the day and ended down 1.2%. So much for all the bad news being baked in.. Whenever you hear someone tell you that you need to buy a stock because "the bad news is already baked into the price" you should run, and run fast in the other direction.

The chart below is an intra-day chart of the Retail Holders Index (RTH) for today.

 

 

 

 

 

 

 

 

 

Financial stocks are another sector that has been touted as having all the bad news baked into the prices now. But, just like the retail sector today the financial sector also sold off. I have become very displeased with CNBC for their blatant ‘pumping’ of stocks by bringing on people who have positions in various stocks and/or sectors and they say how great a bargain they are now. Then to only see them continue lower in the following weeks. Except for a few smart and intelligent reporters on CNBC they have turned into the TV version of the Yahoo message boards. CNBC… shame on you!

As I said this morning we are holding our short position on the Dow Jones Industrial Average and that has not changed. That trade has worked well and we are going to keep it until the price stops us out (at break even) or we reach the lows reached back in the middle of last month. If we reach those lows on the Dow we are likely to see a battle of greed and fear and thus we will form some support at that region which would be a great time for us to take our profits from the trade. At that time we will determine our next play on the market. But even if the Dow reaches those previous lows again and it bounces we will still be in a bear market. As a matter of fact until further notice… we are still in a bear market.

Oil hit $100 dollars again. It really does not matter if oil is at $85, $90, or if it surges past $100. What matters is the average cost of oil, and the average has been rising over the past year and it is the average that plays an impact on our gasoline costs and heating bills. The longer the average oil price remains high the greater the impact will be on inflationary data. And inflation is what will continue to weaken the US economy even further.

Tomorrow we will get the Consumer Price Index and the FOMC minutes from their last meeting on January 29-30. Both of these events will likely have some wild impacts on the market tomorrow. Everybody is back to talking about more rate cuts from the Feds, the increasing inflation data (which does not even include the recent rise in oil) is going to impact the Feds even further.

In the after hours trading on Hewlett-Packard (HPQ) I saw a lot of selling on the strength. If we see HPQ pull back after their good earnings report we will know that nothing matters at all, good or bad earnings people just want to cash out. We will watch to see how they trade tomorrow.

Double Recession for 2008?

I want to bring up a potential scenario that may evolve over the coming months which could end up being a trap for long term investors who feel that current prices in the stock market are "a bargain".

The first quarter of 2008 GDP data is expected to show a continued weakening economy. Technically the GDP must dip negative for two consecutive quarters to be officially recognized by the US Government as being a recession. But taking into account the numerous economic indicators which have already shown that the economy is declining at a rapid pace, we feel that recession is already upon us even if the official US Government declaration is not issued. The Government is so concerned with getting people to spend money that they are putting the nations deficit into the hole even further for the sake of having people go out and buy TV’s, toys for the kids, or any other discretionary item. All in the name of lifting the GDP.

But just what will the $600 dollars received from the stimulus package do for the average American? This is a one time shot, not a pay raise, not a reduction in health care costs, not a reduction in the cost of gas and heating, and certainly not a fix to the credit crisis and housing market. So this one time shot of money in everybody’s pocket will only provide a brief blip on the GDP. And that blip will likely be very weak as we anticipate that a substantial amount of the $160 Billion dollar economic package will be used to pay bills and other necessities, most of which will not reflect in the GDP of the country.

But what the economic stimulus package is really going to accomplish is provide a temporary felling of euphoria, a temporary high if you will. And it is hoped by the Government that this ‘free money high’ will spur people to buy even more as they get a false sense that the economy is returning to normal. The Government does not care about the long term implications of their actions, they only want to boost the GDP at any cost…  even at the cost of pushing the average person further into debt and further reducing the ability of people to save money.

The chart below shows very clearly that the ability of people to save money continues to deteriorate and is now negative. In short this means that people are not able to save money, and what money is saved is being used for everyday expenses to survive. If you truly want an economic indicator that gauges the overall health of an economy it would be this one. A strong, healthy, and vibrant economy would be reflected in the ability of people to spend money AND save money at the same time.

 

 

 

 

 

 

(source: US Department of Commerce)

The less money people are able to save means that more and more people have less cash reserves to use as the cost of living continues to increase, further pushing the consumer into debt. This is a ticking time bomb waiting to explode as a breaking point will be reached at some point when credit availability dries up for those already extended too far and they have no reserves to meet their financial obligations such as paying for food, housing, and other necessities of life. Forget about going to Wal-Mart to buy the latest Batman DVD or to Best Buy to purchase a new flat screen TV to watch it. But in the short term the Government only wants to inject money into the pockets of the average consumer in an attempt to entice him or her into spending more money at the local stores to keep the GDP afloat. The only thing that matters is that money flows into corporate America’s pocket so that corporate earnings increase and is thus reflected in the GDP.

So this $160 Billion dollar stimulus plan impact  will only be temporary as we see it. Then as the cost of living continues to climb the consumers will go right back to cutting back on spending, this time the cut backs in personal spending may even be greater as the stimulus package encouraged people to take on even more debt, leaving them further in the hole then they ever were. 

So the economy, as measured by the GDP may show a brief rise around the middle of the year to only fall back again by the end of the year or early next year and bringing the markets right back down with it. And the chances of the markets declining even further then what we have experienced so far are greatly increased.

A "double dip" in GDP would only confirm that the economy is not strong enough to stand up on its own anymore. And with that the confidence in the economic outlook will be further eroded and the markets will decline. So as long term investors are ‘loading the boat’ thinking that the worst is over could be in for a rude awakening later if this scenario becomes a reality, which is increasing with each passing day.

US Economy and the Stock Market

It seems as if every day that passes the economy and the stock market are dying a death of a thousand razor cuts. For it seems that each day is marked with one piece of economic data or another that point to a deteriorating economy. Our long time readers know that back in July of last year we raised the caution flag on the sub prime issue, when the market hit fresh lows in August of last year many were saying the worst was over, and those same people said that again in November and again just last month when the major indices dropped to even lower lows. But all through that we have maintained our stance and would not be swayed from what we see in our own research.

From unemployment data and their trends, manufacturing and service industry data indicating contracting growth, the continuing decline in the housing markets and their prices, to the substantial losses that financial institutions are suffering. Many signs have shown to us that things were only going to get worse and indeed they have. There is an old saying in the stock market… and that is when everyone has a negative outlook then that is the time to start buying. That saying was born out of the early 1900’s when information took many days and weeks to travel to everybody. It is what is known as a contrarian indicator. Contrarian indicators range from extremely high short interest, overwhelming sentiment in one direction or another , or high put or call ratios on the options. These are just some of the popular pieces of data that investors or traders will use a ‘contrary indicator’. And for them that signals that they should start betting in the opposite direction of the current sentiment.

Investing on the methodology of contrarian indicators can be very rewarding or very damaging to a persons money. The contrarian investor is essentially placing a bet on a roulette wheel and hoping they are right . For us, we do not subscribe to the contrarian view of trading or investing. We rely on evidence of a shift in trend, not betting on a shift in trend. There is a huge difference there. Last November, around the time of the Thanksgiving holiday, there was an interview on the US financial television channel CNBC with financial analysts that represented many different brokerage institutions and some independent analysts. The consensus was that the losses that were suffered by the banks and other financial companies had reached it’s peak and that it was going to start improving. I remember very clearly saying to myself  "on what basis and/or factual evidence do you have to make that claim". Those analysts were making those statements on the view of a contrarian methodology, in that the losses, and the decline in the markets had reached extremely oversold levels. And that the Federal Reserve would continue to cut interest rates so the worst of the crisis was over. I became angry at these supposedly expert analysts for discussing a perceived course of the markets based on nothing factual. Unless they had inside information from the large financial institutions which told them that the losses were all  accounted for and it will now improve then they had no right to make the claim that the worst was over. And if they did have inside information then they had just signed their arrest warrant by acting on that information.

My favorite book, that many of you already are aware is "Reminiscences of a Stock Operator", written by Edwin Lefevre. This book provides an insight into the life of one of Wall Streets greatest traders of the early 1900’s… Jesse Livermore.  During the time of the Great Depression and the market crash  of 1929 Mr. Livermore refused to be swayed by those who were bullish in the market, those who were claiming that the markets were going to go to new highs. Instead Mr. Livermore, who was an expert at ‘reading the tape’ (see the end of this commentary for an explanation of ‘reading the tape’) was seeing warning signs that to him signaled something was not right. Mr. Livermore, despite criticism from some of his fellow traders, went short on the markets and he turned out to be correct, and made substantial sums of money while others were committing suicide from their huge losses. Mr. Livermore was not trading on a contrarian view of the market, but instead was a pro at reading the tape and seeing the warning signs. In spite of the overwhelming bullish sentiment on Wall Street at the time he went against the crowd and bet on a fall.

As I said at the beginning of this commentary our economy and the markets appear to be dying a slow death inflicted by a thousand razor cuts. When will this end? We can’t say. Unlike those in the media who claim to know when it will end we won’t make a statement like that just to get attention. Instead we will stick to the facts and tell you what we see. And what we see is problems continuing to grow, there has been little in the way of any sign of a reversing trend in the economy or in the markets. We monitor every bit of economic data that is released and even do our own digging. We take the data that is released and form our own view and analysis of the facts and even apply a technical analysis to the data. And the analysis that we continue to see shows us no change in direction of the economy for the better yet. And this is why we won’t say when this will be over. I cringe when I hear people saying that "the bottom is in". Lisa and I are never swayed by opinions which are based on hope or conjecture, instead we use the charts, our own analysis, and our own digging through mountains of data.

I would like to bring to your attention something that may be very alarming. At a minimum it should be taken into context with what is unfolding in our financial markets so that you grasp the magnitude of the problems. Tucked away on the Federal Reserve web site is a place where statistical data can be viewed and/or downloaded. The Federal Reserve keeps track of the amount of money that financial institutions have on hand. In other words, the health of the banking and financial institutions of this country. Something very shocking is in this data and we would like to know why this does not get discussed by the media. The image below is a screen capture from the Federal Reserve’s web site for statistical data on "Non Borrowed Reserves of Depository Institutions". The key word in this data is "Non Borrowed". This data, if we are correct in our assessment of what this reveals, and we believe we are correct, shows how much money banks have on hand that is a result of their normal operations (i.e. deposits from their own clients, investments, loan interest, etc). In a healthy economy a bank will always have a flow of money coming from their own day to day operations and will always meet the required amount of liquidity to remain solvent. The data below shows that in January 2008 the amount of money that banks had on hand from their own normal operations actually went negative! This is very concerning indeed. What the financial institutions have had to do is make up this difference by borrowing money from the Federal Reserve in order to maintain the required amount of liquidity. Where did all of that money go? That is what we would like to know. Unless we are interpreting this data incorrectly we see this as a substantial financial crisis in the making. The financial institutions are having to maintain proper operating liquidity by borrowing money from the Federal Reserve at record levels.

 

 

 

 

 

 

 

 

 

 

 

(Source: Board of Governors of the Federal Reserve, Washington,D.C.)

A fellow Financial Sense colleague discusses this situation in great detail and I strongly encourage everyone to read Ty Andros’s article which can be obtained by clicking HERE. Mr. Andros presents some very interesting data going all the way back to 1920. When you see his chart on "Total borrowings of Depositary Institutions From the Federal Reserve" going all the way back to 1920 you will be shocked. Maybe this is why the Secretary of Treasury, Henry Paulson said in a statement following the approval of the economic stimulus package by the House of Representatives that "time was of the essence" in getting the money approved and out to the American people. We would like to see the media cover this… instead of talking about how global growth will keep our economy thriving, or how the worst may be over, or even saying that stocks are a good buy now.  What implications will this have down the road when this money has to be repaid? What happens if the banks can’t repay the borrowed funds? What happens if they continue having to borrow more and more?

The whole issue regarding the "Non Borrowed Reserves" will be followed closely by Lisa and I. There are differing opinions of what this data actually means, some say it is simply a ‘technical calculation’ change. But we will remain skeptical of that claim unless we are proven otherwise. It is concerning to us as well that the Federal Reserve has been holding the auctions (TAF) in a manner in which it allows the financial institutions to remain anonymous, to prevent the general public from finding out what banks are needing the money. There is likely much more to this story… and when we find it we will let you know.

Tomorrow I will discuss the possibility of a ‘double recession’ scenario that may end up being a trap for the bulls in 2008.

Reading the Tape: This expression is an early form of describing technical analysis of price movements. In the early days of the stock market prices were printed on a tape machine. And ‘reading the tape’ was what one did to get a feel for the balance of greed and fear (bulls and bears). By reading the prices tick of the tape puncher, the early technical analysts were able to perform in their mind what we do today by plotting price movements in charts.

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