Some Excerpts of the Hearings Today

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

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

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

GSE’s Now The Hero

Fannie Mae and Freddie Mac have been designated as the official toxic waste dump.  Ok, that’s my headline, not the government’s.  It is a wait-and-see situation with this new plan for Fannie and Freddie to take on the problems in the mortgage market.  Will it help at all?  I’m not optimistic, considering these two are in so much financial trouble now, and they need to raise capital even with the lowered reserve requirements.  The Federal Reserve Board has lost their collective mind and everyone trying to come up with new proposals to save the housing market are grasping at straws.  If the government doesn’t stop it’s interventions, this mess is just going to keep getting worse.

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 March 12th 2008

BREAKING NEWS

We have late breaking news to provide to you. At 11:27pm (US Eastern Standard Time) it was announced that "Carlyle Capital", a hedge fund and a subsidiary of the famous Carlyle Group has been unable to reach a deal with their lenders after getting margin calls. Tonight Carlyle Capital is broke and has gone into ‘default’. Billions of dollars have been lost in an instant tonight and many investors have just lost a ton of money. Remember that hedge funds are NOT insured so their clients have lost big time.

CARLYLE CAPITAL UNABLE TO REACH ACCORD WITH LENDERS; SAYS REMAINING DEBT "SOON TO GO INTO DEFAULT"

- Carlye Capital says that its lenders to take possession of assets.
- The only assets held in the Company’s portfolio as of today are U.S. government agency AAA-rated residential mortgage-backed securities (RMBS). During the last seven business days, the Company received margin calls in excess of $400 million. As the Company was unable to pay these margin calls, its lenders proceeded to foreclose on the RMBS collateral. In total, through March 12, the Company has defaulted on approximately $16.6 billion of its indebtedness. The remaining indebtedness is expected soon to go into default.
- Overall, it has become apparent to the Company that the basis on which lenders are willing to provide financing against the Company’s collateral has changed so substantially that a successful refinancing is not possible.

On this news the S&P Futures have dropped dramatically in the matter of minutes. World markets are also selling off at an accelerated pace on this news.

(This late breaking news came in while I was working on tonight’s commentary and decided it was so important it had to go at the top of the page. What follows below is my original commentary for tonight)

 

Global Markets are once again selling off tonight as more and more investors and traders are seeing the true picture of what the Federal Reserve’s action yesterday really means. And what it means is that the Federal Reserves action yesterday was truly desperation to save the economy from a crash. I said last night and I will say it again here now, the Federal Reserve is in a panic mode now as the financial system is falling apart at the seems. The risk of bank failures continues to rise in spite of the Federal Reserve’s actions.

Home prices in the United States have grown way out of proportion with reality during the 1990’s and early 2000’s. Now that housing prices have hit a "reality check" and are dropping, the countless hedge funds and banks are caught holding onto assets that are backed by mortgages and other forms of real estate investment packages which are blowing up on them almost on a daily basis. Banks and other financial institutions have relied heavily for many years on the premise that housing prices would just continue to rise forever and everything would be ok. In the late 90’s and early 2000’s banks and mortgage companies would jump at the chance to buy ‘packaged’ mortgages and other types of assets that were backed by the value of real estate. They simply could not get enough of it. And once they got it they would repackage it again and sell it to another buyer for an even greater profit. Now with the collapse of the entire US housing market the banks, mortgage companies, and other financial institutions can’t unload these assets and they continue to lose value. Credit has built this country up and it is credit that will bring it to its knees as it has all come back to bite them in the ass.

The Federal Reserve’s new ‘Term Securities Lending Facility" that was instituted yesterday is a last ditch effort to give the banks and financial institutions some cash by using these declining assets as collateral. But the money being handed out is only for 28 days and worse yet the collateral continues to decline in value even further. The fact that the Federal Reserve is accepting this "toxic paper" as collateral will not provide any additional value to it as some have suggested it might. It simply leaves the Federal Reserve holding the bag of assets which continue to decline day by day. Buyers on the open market for mortgage (residential or commercial) backed securities is drying up. And each time another financial institution decides to exit the mortgage playing field it leave one less bidder at the table. When the number of bidders depletes so does the potential value of the assets.

The market today was trading slighly in the green for most of the day but what is more important was that the volume was about 15% less than what it was yesterday during the ‘big rally’ as the media keeps touting it as. One of the prime rules in technical analysis is ‘watch the volume’. Volume tells us strength of any move and the volume yesterday on the big rally was no where near levels that would signal any confidence.

It all boils down to this… the Federal Reserve is trying to inflate assets in order to restore the financial system. But the real estate assets can’t be artificially inflated. What they are doing is akin to pumping air into a balloon that has a hole in it. Nothing will inflate the assets and they simply must reach their own bottom, wherever that may be. In the process of trying to inflate assets artificially they have actually created an even bigger mess that still gets worse each day.

This afternoon President George W. Bush was quoted as saying :

WOULD "ABSOLUTELY" LIKE TO SEE A STRONGER DOLLAR; US DOLLAR IN A PROCESS OF "ADJUSTING"

Adjusting? What the hell are you smoking Mr. Bush? Look at this chart Mr. President and you tell me where you see ‘adjusting’!

 

 

 

 

 

 

 

(US Dollar - Daily chart)

Oh, and by the way Mr. Bush. Tonight the US dollar has hit another all time low, twice!

A question was raised today concerning the Fed’s actions and technical analysis of the charts. The short answer to the question is no. Economic events and other market moving news all are a part of the bigger puzzle which technical analysis encompasses. I am still putting together an article which I will post in the coming days on the subject of technical analysis in which I will go over some of the basics along with different methods that can be used and why some methods don’t work at different times.

We are still short the Dow Jones Industrials by our holding of the Ultrashort (symbol: DXD). Our entry price on the Dow was at 12750 and we are currently at a gain of 9.1%.

Stock Market Summary for March 5th 2008 and Ambac - Where’s the Beef?

In 1984, Wendy’s (a fast food restaurant in the United States) came up with an advertisement that coined the phrase "Where’s the Beef?". The announcement today of the much awaited ‘deal’ to save the bond insurer Ambac (ABK) made everyone say "Where’s the Beef?"

At 12:01pm today trading was halted on Ambac with news pending. With this news, speculation that a bail out plan was finalized and the idea that the entire bond insurer mess would now be ending, the markets went higher in just seconds. It took almost 90 minutes before the market knew the details of the ‘bail out’ plan that had been worked on for many weeks. When the details were released it was a huge disappointment and the markets quickly sold down, losing 120 points on the Dow within 10 minutes.

So what was it that was so disappointing? In order to put this in the proper perspective, we have to rewind the clock a bit. First of all, the bond insurer crisis began many months ago. It accelerated around the beginning of this year as the ratings agencies were threatening to downgrade Ambac and MBIA which, if it happened, would create substantial additional losses throughout the financial sector. Both MBIA and Ambac were under pressure to find additional capital, maintaining enough liquidity to meet the requirements that the ratings agencies claimed was needed to have a AAA rating. Last month news was issued by CNBC reporter, Charlie Gasparino, that Ambac was working on a "plan" to rescue the company.  This involved government officials (NY Governer Elliot Spitzer and NY Insurance Superintendent Mr. Dinallo), sovereign wealth funds, and banks. Over the next 4 weeks or so we would receive updates from the media, mostly Charlie Gasparino of CNBC, that the rescue plan was being worked on…

2/18: Ambac Financial Group, Inc Ambac discussing plan to raise at least $2B in new capital; Plans to sell new shares at a discount to current investors as reported in the WSJ

2/22: Ambac Financial Group, Inc Making significant progress on recapitilization, announcement on possible bailout could come early next week as per CNBCs Charlie Gasparino

2/24: Ambac Financial Group, Inc WSJ says that Ambac inched closer over the weekend to an agreement with a group of bankers on its restructuring plan and effort to raise $3B

2/25: Ambac Financial Group, Inc Deal still likely today or tomorrow; negotiations with rating agencies are final hurdle as per CNBCs Charlie Gasparino.

2/25: (later in the day) Ambac Financial Group, Inc Any ABK deal would likely be early next week, not today or tomorrow - wire headline.

2/26: Ambac Financial Group, Inc - reports that private equity and unexposed banks will be participating in Ambac support plan as per CNBCs Charlie Gasparino.

2/27: Ambac Financial Group, Inc NY Insurance Superintendent Dinallo: We are in the 8th inning of a possible Ambac rescue - wires

2/27: Ambac Financial Group, Inc Cerberus among group of investors in bailout, declines to comment - CNBC’s Liesman

2/29: Ambac Financial Group, Inc Bailout has hit significant snag over last couple days over the amount of capital, talks ongoing as per CNBCs Charlie Gasparino

3/3: Ambac Financial Group, Inc CNBC’s Gasparino incremental update: Negotiations with a bank consortium are going slowly, no deal announcement expected tomorrow

3/3: Ambac Financial Group, Inc - Financial Times reports that Ambac has decided against splitting

- The company decided against splitting in two as it completes a $2-3B recapitalization

3/4: Ambac Financial Group, Inc - says no bailout deal quite yet as per CNBCs Charlie Gasparino

- Reiterates that progress is still being made

3/4: Ambac Financial Group, Inc - Says those working on the deal "may work through the night" to close a deal for some kind of announcement tomorrow as per CNBCs Charlie Gasparino

3/5: Ambac Financial Group, Inc CNBC’s Gasparino reiterates that banks seeking to have rescue package to be finalized today

And then came the "deal" that had been worked on for so long…

NEW YORK (Reuters) - Bond insurer Ambac Financial Group Inc (NYSE:ABK) said on Wednesday it plans to sell at least $1.5 billion of stock and convertible securities, to help preserve the top-tier credit ratings critical for its main insurance business.

That’s it! No consortium of banks, no sovereign wealth funds, nothing. Weeks of back room negotiations ended up being nothing more than a dilution of the company’s stock by selling $1.0 Billion of stock and another $500 million through the sale of equity units that would convert to stock in May 2011.

So what happened to all that talk of big bail outs, of banks injecting substantial amounts of money, and to the original plan to raise $3 Billion dollars?

Reuters reported the following comment tonight:

"It looks like (banks) had a close look at what was going on at Ambac, and they backed away. Things may be bad there," said Peter Kovalski, portfolio manager at Alpine Woods Capital Investors, which owns Ambac shares.

Shortly after the news was released by Ambac, Moody’s and Standard & Poor’s issued statements that Ambac would likely maintain their AAA rating.  But Fitch ratings said no way, leaving Ambac at AA.

So this entire soap opera had many in the media, especially Charlie Gasparino at CNBC, being played along the entire time. And every time there was another new update about the rescue plan (always from someone known only as "someone familiar with the situation"), it created a lift to the markets and to Ambac stock. Something about this entire situation does not sit right with me, there is something that does not smell pretty at Ambac!

Ambac’s stock sold off rapidly after this news and ended the day down 18.8%, and down another 3.4% in after hours trading. This bond insurer situation has to be one of the largest debacles in recent history. Where will this all end up? It depends on how many claims Ambac has to pay over time as the credit implosion continues to play out. We could be right back where we started in weeks or months down the road, if Ambac needs even more capital to maintain enough liquidity. The ratings agencies are still, in my view, disgustingly guilty of not being impartial.

Stay tuned for the next episode of the soap opera  "As the Bond Insurers Fail"

Then there is this tonight:

According to Bloomberg, almost 70% of the municipal auctions in the $330 billion auction-rate market failed last week. (Auction-rate securities represent about 13% of the total market for municipal debt.) Failed auctions create a vicious cycle: As municipalities are hit with penalty rates on their debt, it erodes their capital position, increasing the risk of a bond default. This further depresses demand for municipal securities, causing even more auctions to fail.

The market remains VERY jittery and the biggest economic data is still to come. The monthly unemployment report will be issued at 8:30am on Friday. We got a small taste of what it may show as the ADP report today showed a negative number for the first time in 4 years. ADP has usually been all over the map with regard to their accuracy, but the number was substantially lower than even the lowest of estimates. The market is still pricing in a significant rate cut from the Federal Reserve. We remain short the Dow Jones Industrials.

Stock Markets worldwide are selling off

At this time the Asian Markets are experiencing large losses as the United States economy as well as economies around the world are suffering from recessions and high inflation. Currently the worldwide markets are going through some extreme sell offs with the Nikkei down 4%, Strait Times down 3.2%, Australia S&P/ASX down 3.1%, and the Hang Seng down 2.7%

Tonight the US dollar has hit another record low dipping to 73.56 and Gold has hit another new high at $980.60. The risks of some United States banking institutions failing is being absorbed by the markets worldwide. At first the idea that some US banks may fail was met with some skepticism, but the idea of this becomming a reality over time is taking hold. Jim Marino of the FDIC’s Division of Resolutions and Receiverships said last week in an FDIC report:

The notion that a bank is too big to fail shouldn’t be out there

The prospects of financial institutions facing even greater losses is also playing on global markets. It has been said many times that the sub prime crisis would be contained to consumer real estate. Our long time readers know that we have argued against this premise and said it would spread. Commercial real estate problems will be next in the credit crisis and real estate implosion. Once commercial real estate loans begin to deteriorate it will bring financial institutions to their knees. Now it appears that the media is catching on to the possibilities of a commercial real estate crisis in the making which will further increase the risks of bank failures. The Wall Street Journal reports tonight:

WSJ LOOKS AT THE IMPACT OF THE CREDIT CRISIS ON SMALLER BANKS; SOME SMALL BANKS HAVE AN INCREASING LIKELIHOOD OF FAILURE
- WSJ notes that many of the smaller US banks financed the building projects of leveraged builders and now these cash-strapped builders are falling behind on interest payments.
- WSJ notes that some of these smaller banks are accumulating portfolios of delinquent loans and face increased pressure from banking regulators to reassess and hedge these troubled loans, and those banks that don’t have enough capital set aside or are not diversified enough have an increasing likelihood of failure.

We would add here that it is not isolated to smaller banks only. On the contrary, some of the nations largest banks are the biggest investors in commercial real estate. While a larger bank may be better hedged against those loan losses it will still impact the banks earnings, furthering eroding the financial sector.

The largest declines in the Asian markets this evening are in the financial, automobile manufacturers, insurance, and steel producer sectors. Toyota is down significantly on the Japanese Nikkei / US dollar changes. Nippon Steel is also down significantly as they reported tonight that raw material costs are eating away at their profit margins.

Speaking of the automobile industry, Ford Motor Corp (F) has been downgraded to a ’sell’ by Citigroup. Also of note concerning the auto industry is a dealership not far from where I live. A Chrysler dealership which had been in business for over 40 years has closed its doors for good this past week. The showroom is now empty, the lot is empty, and the doors are chained shut. A sign of the times.

Lets talk about housing for a moment, Brian Louis and Dan Levy of Bloomberg have analyzed the housing market and discovered that the number of vacant homes in the United States is at levels not seen since the 1970’s. Newly constructed single-family homes are sitting empty at amounts highest on record. The full article text can be read HERE. This is some good reporting by Bloomberg.

Now for some charts…

 

 

 

 

 

 

 

 

 

(Morgan Stanley World Index)

This monthly chart of the Morgan Stanley World Index is made up of stocks from the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom. This index is showing us that the global markets are entering into a bear market. Those who claim that you are better off investing in foreign markets need to only look at this global index to see that the United States is NOT the only country suffering.

 

 

 

 

 

 

 

 

 

(S&P 500 daily chart)

Notice on this daily chart of the S&P 500 that Friday’s sell off was a hard confirmation of a triangle pattern failure. We have some support just below, however I feel this support is minor when weighing other factors of the intensity of Friday’s selling. The support may offer some short term price support but the longer picture is for more declines in the major indices.

 

 

 

 

 

 

 

 

 

(Nasdaq weekly chart)

The Nasdaq is approaching a very dangerous region in our technical analysis. When the Nasdaq is viewed on a monthly chart the price advances since 2004 resemble a long bear flag pattern. On this weekly chart we see that the price level is very close to the trend support line. Should the Nasdaq fail this trend support and close below it, then the Nasdaq will have made the move into a long and steep bear market. We will be watching this one closely for sure.

 

 

 

 

 

 

 

 

 

(Natural Gas Fund - UNG)

Caution still needs to be advised on commodities, they have advanced too fast to sustain further moves at the same magnitude without some consolidation. While Natural gas has made some impressive moves lately, it is still in a region of possible resistance.

At this time the United States S&P Futures are down 0.60%. The Fed Funds Futures have the chances of a 75 basis point rate cuts by the Federal Reserve at close to 75% tonight. Remember that the FOMC meets on March 18th to discuss their next move. And we can’t rule out another emergency rate cut if the markets continue to decline rapidly.

We remain short on the Dow Jones Industrials and we are currently sitting on a 6.7% gain. (The ‘open trades’ page will be updated soon). Because we have been avoiding individual stocks and concentrating on the indices explains why there have been no additions to the watch list. In this market environment it is to our advantage to be trading the index funds at this time.

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 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.

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