Stock Market Summary for March 18th 2008

Lets start off with the FOMC statement from this afternoon:

Release Date: March 18, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.  Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh.  Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

The market had been pumped and primed for a rate cut of up to 100 basis points. And 100 basis points was what many talking heads were saying would be forthcoming. And the price did reflect the anticipation of a big rate cut as the market had run up before the announcement at 2:15pm today. It was asked why if the market was expecting a full 100 basis points that it did not sell off into the close on getting only 75 basis points. The answer is very simple, while there are many who are thriving on rate cuts there are also many who recognize the inflation problem and were somewhat relieved that we did NOT get a 100 basis point cut. But, 75 or 100 really makes no difference at this point. Inflationary pressures are continuing to mount; forcing more companies to contract profit margins, reduce employees as lower sales mount on consumer spending cutbacks, and lets not forget the housing market which is not getting any better.

This afternoon Lisa made a post to our board here in which she said she was highly disappointed in the Fed’s actions. I agree with her completely, although the market had been pumped up to expect a big rate cut we were really hoping they would cut far less than they did. We look out into the future and see a very damaged economy and a country with a deficit that goes beyond anything we have ever seen before. The Governments’ actions have all been for the "here and now" effect. And for the most part they have not been very successful at that either.

There were reports today that the US dollar soared on the rate cut news, in that it was not as big of a cut as expected. Let us put this in a proper perspective please. The word ’soar’ means "To climb swiftly or powerfully"

Want to see what the media was calling a ’soaring dollar’? Look below:

 

 

 

 

 

 

 

When the US dollar begins to break out of this many year down trend, then tell me it soars. Not when it makes a very small bump in the road.

I have looked over today’s charts, intra day and others. Volume levels on the major indices did not show us any confirmation of the price advance. When compared to other dates when a rate cut was announced (i.e. January 22, 2008) today’s volume was actually lower. Additionally, the short interest in the market remains at record proportions. Today’s FOMC decision and the movements in the markets were not enough to shake loose much of the high amount of shorts. Of course there were some short covering today. Remember everyone has different time periods to which they are trading. A quick swing trader who may have held a short for a day or two would have covered today, longer term position traders (such as our position) appear to be sticking with their positions for now. Believe me on this one, if we were to see a huge rally that convinced shorts that a bottom was in you would have seen volume levels so high today that would make your computer freeze up and crash. So in short (no pun intended), volume did not affirm the price advancement today. Over the next few days we must watch volume to see how it behaves vs price movements. For that will give us more insight into the future actions. Remember that this Thursday is options expiration day (Friday is a market holiday).

Resistance levels on the major indices are plenty. We have significant resistance levels to which still must be broken (and hold) for the market to begin any hope of a recovery. Contrary to the media and the big 400 point gain on the Dow it is STILL a bear market. And until proven otherwise it remains a bear.

We remain focused on the big picture of the economics and use the charts as our roadmap. Speaking of charts, I have had some requests for individual chart requests… I promise I will get to those chart requests shortly.

A look at today’s charts:

 

 

 

 

 

 

 

 

 

(10 year Dow Jones Industrials - weekly chart)

 

 

 

 

 

 

 

 

 

 

(Dow Jones Industrials - daily chart)

 

 

 

 

 

 

 

 

 

 

(S&P 500 - daily chart)

 

 

 

 

 

 

 

 

 

(Volatility Chart vs S&P 500)

On this volatility chart what is important to keep watching is the volatility and if it stays within the ascending triangle. A continued rise in volatility signals more sell offs coming.

NOTE: Clicking on any of the charts above will take you to a recent chart as it updates during the trading day.

Some other notable events tonight:

(US) ACCORDING TO THE WSJ, FANNIE MAE AND FREDDIE MAC ARE EXPECTED TO PURSUE PREFERRED SHARE OFFERINGS
- The new capital would allow the GSEs to increase their purchases of mortgages.
- (reminder from 3/11) FNM: Heard on the Street notes that Fannie Mae and Freddie Mac may have to raise large amounts of additional capital; WSJ notes that to put the market’s balance sheet fears to rest, both firms each may have to issue in excess of $10B of new stock this year; At Freddie this would double the amount of common shares outstanding, while it would increase by half the amount of stock outstanding at Fannie

Related to the news above: There is also news of an announcement tomorrow at 9am by the regulator of the GSE’s. It is expected that the news may be an announcement that they are raising the limits of mortgages these companies can take on. In other words, Fannie and Freddie are being turned into a toxic waste site for all bad mortgages.

(US) FINANCIALS: CARLYLE CAPITAL LIMITED IN COMPULSORY LIQUIDATION
-  On the 17th March 2008, before the Royal Court of Guernsey, an order was granted placing CCC into compulsory liquidation under section 94(a) of the Companies (Guernsey) Laws 1994 as amended pursuant to a special resolution of members. Mr Alan Roberts and Mr Neil Mather, both of Begbies Traynor, were appointed joint liquidators of CCC and duly sworn into office on that day.
-  Under Guernsey law, the Liquidators are now responsible for realising the assets and establishing the liabilities of CCC and are legally empowered to act on its behalf in those connections. All powers of the directors to act on behalf of CCC, except as may be expressly permitted by the Liquidators from time to time, have now ceased and CCC has ceased to undertake business.

S&P CUTS 123 RATINGS ON 23 US CDOS OF ABS; $26.945B AFFECTED

Because our short position on the Dow Jones Industrials was initiated at 12750, we are still in a profit… even with today’s rally. 12750 is a key technical level and we will close the trade if the market reaches that point for breakeven (no loss). We are not convinced that the bottom is in. Too many indicators still point to trouble.

Please take a read tonight of my two friends and their perspective of today’s events:

Frank Barbera

and

Karl Denninger

 

See you in the morning

Stock Market Summary for March 17th 2008

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

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

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

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

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

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

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

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

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

Charts:

 

 

 

 

 

 

 

 

 

(S&P 500 Technical analysis - Daily Chart)

 

 

 

 

 

 

 

 

 

 

(Nasdaq technical analysis - weekly chart)

 

 

 

 

 

 

 

 

 

(Financial sector ETF technical analysis - daily chart)

Stock Market Summary for 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 7th 2008

The risks of a full blown recession increased greatly this morning with the release of the unemployment data. Most people were expecting a soft number to come in but the data was worse than many expected (no surprise to us however, as we have been predicting the decline for many months).

 

 

 

 

 

 

 

 

(United States Unemployment Data: Data source: Moody’s Economy.com)

Shortly before the unemployment data was released the Federal Reserve made a surprise announcement to which they were increasing the "Term Auction Facility", or otherwise known on the street as the ‘taffy’. Originally the ‘taffy’ was for $30 Billion to be made available on March 10th and again on March 24th. Today’s announcement was that they are raising the amount of those auction to $50 Billion dollars each for a total of $100 Billion. It is obvious to us that this is in response to the near complete breakdown in the credit markets yesterday.

The Federal Reserve definition:

The TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help ensure that liquidity provisions can be disseminated efficiently even when the unsecured interbank markets are under stress.

The Term Auction Facility is a new process created by the Federal Reserve just months ago as the credit crisis was getting worse. It provide a means for financial institutions to essentially make bids on money they wish to borrow from the Federal Reserve. Normally this would have been accomplished through the Federal Reserve’s ‘discount window’, which has served the nation well for many years. But the crisis facing the financial institutions has reached proportions that are historic in nature as losses continue to mount. Recall my post on February 17th 2008 in which we highlighted the amount of ‘non borrowed’ reserves of financial institutions. The ‘TAF’ was introduced by the Federal Reserve as a means to allow the stigma of the financial institutions to be moved aside as the TAF allows banks and other financial institutions to remain anonymous. For if it was made public which banks were borrowing large sums of money it could create a run on the bank.

Today’s announcement that the Federal Reserve is increasing the amount of money that they will auction tells us that financial institutions are going even further in the hole. The fact that the Federal Reserve is increasing the amount of money being auctioned via the TAF should be viewed as a very bad indication on the health of the economy and of financial institutions in this country.

The trading in today’s market was downright bizarre. Some attempts to rally the market made for some wild swings, but in the end each attempt failed. The indices all ended in the red and added to the ‘bear market’ print on the charts. The chart below is the current S&P 500 which shows that we have now firmly closed below the previous closing price from January. This sets the stage for further declines in the future.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

Also of note is the volatility index (VIX). The volatility index can be analyzed with technical analysis just as any stock chart. The volatility index provides a clear view of the greed / fear levels in the markets. And just like on a stock chart certain patterns reflect trends in the psychology of the market, or stock. In the case of the volatility index we can see that a new upward trend has emerged (rising volatility equals declining market). The chart below was first shown to you on February 29th as we were predicting an increase in volatility would be near as it was about to bounce upwards from the trend line. Today we can see that upward momentum in volatility has been established (see the black circle on the chart).

 

 

 

 

 

(Daily Volatility vs S&P 500 chart)

Over the weekend we will have some additional charts and analysis. We are maintaining our short position on the Dow Jones Industrials by utilizing the Ultrashort symbol: DXD. As of the close today we are now up 13.2%.

Thornburg Mortgage (TMA) appears to be near complete failure now. Again, we predicted that there would be mortgage companies that were going to fail as a result of this credit implosion. Don’t be surprised to see CountryWide Financial to be facing margin calls soon.

[TMA] Thornburg Mortgage, Inc Provides warning as a going-concern; Receives notice of default from Natixis Securities - Filing

Also, bond insurer MBIA (MBI) has requested to cut their ties with the ratings agency ‘Fitch Ratings". MBIA claims that they don’t like the ratings they get from Fitch (Fitch has been the only ratings agency to not be pressured to maintain a AAA rating on Ambac or MBIA). So since MBIA does not like their rating they are going to stop paying them to provide their ratings. Instead of working to improve their companies health in order to earn the AAA from Fitch they decide to dump them. This is a joke, I give credit to ‘Fitch Ratings’ for having the courage to "say it like it is". And MBIA, your just a big cry baby who did not get what they wanted.

There will be more over the weekend. I will also discuss some aspects of different technical analysis methods. It will be a busy weekend here at RebelTraders as I have another work session with our web programmers. The work on the new site is continuing and we are very excited to soon be introducing our new site to the world once everything is wrapped up. We know you will enjoy the new site!

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 Market Summary for March 4th 2008

The bond Insurer soap opera once again took center stage in the afternoon trading. There were some mentions on the United States financial channel CNBC that the ‘bail out’ of Ambac (ABK) was still being worked on. And that an announcement may be coming soon, tonight, tomorrow, next week? But every time CNBC says that the back room negotiations are still taking place and the market reacts as if a bail out of the bond insurer(s) will save the world. If you read some of the public message boards there are people who are apparently betting their whole life savings on Ambac’s bailout and sending the stock into the stratosphere. How sad, to risk so much on something so questionable. What if the bail out (if there is one) turns out to be a dilution to shareholder value? Then those betting so much will lose so much. What if the bail out package (again, if there is one) requires the company to break apart? Again, could be a disaster for current shareholders. No matter what happens, the injection of billions of dollars into Ambac and/or MBIA is a reflection of just how bad the credit implosion really is. And the injection of that money is simply to maintain the AAA ratings. But in my view those companies, with or without the added capital do NOT deserve to have a AAA rating. The whole ratings agency situation is a disgrace.

An interesting bit of history came to mind and I looked it up last night. In the book "The Smartest Guys in the Room" , by Bethany McLean & Peter Elkind there is a section that talks about Enron and the ratings agencies. A passage from the book:

In a January 29, 2000 presentation that Enron gave to Moody’s and Standard & Poor’s, one of the slides in the presentation said"

"The number one reason (that Enron deserves a high credit rating) is that it is critical to the maintenance and growth of its existing dominant market share business" (Translation: It’s important to us; therefore we should have it.)

It’s not unusual for companies to meet with the credit-rating agencies. What was unusual is the extent to which Enron saw the agencies as just another part of the system it could game. Agency analysts have certain criteria they use to measure a company’s health, ratios such as cash flow to interest expense and total debt compared with total assets. If a ratio was in balance, it was easy for the analysts to simply check it off and move on to the next one. In fact, a big part of the reason Enron used structured finance was to show the credit analysts the ratios they wanted to see. And if the analysts didn’t ask precisely the right question to get under the smooth surface, well, then, Enron wasn’t about to give a meaningful answer.

After the collapse of Enron, the ratings agencies, which came under fire for giving them a high credit rating while the company was collapsing from within said in testimony "Enron duped them" and claimed that they were not aware of the extent of the off balance sheet debt.

My point in bringing this up here is that the ratings agencies are obviously having their arms twisted by the companies themselves and the Government for the sole purpose of keeping that AAA rating. But what will this AAA rating do (if maintained)? It will allow the losses to be bled out slowly instead all at once. It is clear that the soap opera that is taking place behind closed doors with these ratings agencies and the bond insurers is nothing more than an attempt to disguise the extent of troubles and let it bleed slowly, where maybe people will not notice it so much. This soap opera will continue for a long time to come.

Now where are we on the charts? The charts below show our current stance.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

 

 

 

 

 

 

 

 

 

 

(S&P 500 60 minute chart)

Stock Market Summary for March 3rd 2008

Today’s market activity was essentially a "play day" of retail money. What I mean by this is that we did not see much evidence of any significant block trades or other high dollar value trades going through the tape. The commodity stocks brought retail money out of the woodwork as a way to get in on something that is going up. We can’t argue the fact that commodity prices are going up, it is what is partly responsible for our run away inflation now. But even with commodity prices rising there is still caution that is required. For a lot of the commodity stocks we have been watching we are seeing mostly retail money (by analyzing share lot sizes on the tape). Now of course there is some larger money in there as well taking positions but experience has shown us over the years that the larger trades are hedge funds and other large money players who are playing on the exuberance of the sector to only cash out once the ride is over then leaving the retail trader left with the bag.

For the most part those with the big money have already taken their position on the stock market playing field. They are either in cash, short the market, long the market, or (most likely) a combination of all three. Volume has been drying up somewhat lately from our analysis. This tells us that we are in a ‘quiet before the storm’. Time will tell, it all comes down to economic data now, FOMC actions, and major corporate events.

Today we actually did have some ominous events but for the most part the smart money is already expecting these events and are just riding out their positions. It is the surprise bad news that will bring volume levels back up and start the selling in force again. This morning we got the ISM Purchasing Managers Index data for February and it has contracted into the negative growth column. A reading below 50 is considered recessionary. The top line number was 48.3, employment showed a larger decline,  and new orders is also maintaining a down ward path.

The chart below is a 10 year chart of the ISM index. Observe the trend has been declining since 2003.

 

 

 

 

 

 

 

(ISM | Data Source Moody’s Economy.com)

Also of note today was the construction spending data issued by the U.S. Census Bureau. This is more alarming in that the trend reveals to us a very deep retraction in construction. This will come as no surprise to our long time readers as we have been discussing this index for many months. But with each passing month the trend reveals that conditions are indeed getting worse. The first chart below is construction spending as measured in US Dollars. The 15 year chart shows the recession in 2000 / 2001 with a leveling off of construction spending. And then in 2002 the spending started to increase again. But our current situation reveals an even more alarming pattern in that spending in contracting in a fashion not witnessed before.

 

 

 

 

 

 

 

(Construction Spending $US | Data source Moody’s Economy.com)

The next chart is also that of the construction spending data but presented in terms of year over year % change. This chart makes it even more clear just how much construction has contracted over the past 2 years.

 

 

 

 

 

 

 

(Construction Spending Y/Y% delta | Data source Moody’s Economy.com)

In the raw data we are able to see that non residential construction (commercial construction) is starting to show weakness. Commercial real estate and construction will be the next victim of the economy and credit implosion.

Last night I showed you a chart of the S&P 500 with our technical analysis applied. We pointed out the failure of the triangle pattern on the daily chart and some resistance directly below. Today the market traded in a narrow range just at the support line. We don’t see this support level being able to hold once selling volume resumes and is why we are still maintaining our short position on the market. An updated chart is shown below.

 

 

 

 

 

 

 

 

 

(S&P 500 Daily chart)

One the the weakest sectors today was technology. The Nasdaq was the weakest of the three major indices with such names as Apple (AAPL) and Research in Motion (RIMM) adding to the declines in the Nasdaq. Any stock with an elevated P/E ratio is being chopped down to size. Always remember that in a healthy bull market stocks can survive with elevated P/E ratios, but in times of economic trouble high P/E’s are a death sentence for a stock. This is why we were warning last year about our readers taking their profits out of Apple because we saw what was coming. History repeats itself over and over again when it comes to stocks that are bought up on hype, speculation, and hope. Apple (AAPL) was no different, it was a stock that ‘everybody’ had to own as everyone in the media hyped it as the best thing since the invention of bread. Stocks like that are great for a short ride, but not a long term investment. You have to know when to take your profit and move on for once a high P/E stock has been chopped down it usually never obtains those levels again. All one has to do for evidence of this is go back to the tech bubble of 1999 and 2000 to see that. There are still many stocks on the Nasdaq with high multiples and this adds to our concern of the Nasdaq bringing the markets down much further.

The next section of tonight’s commentary deals with one stock. Converted Organics (COIN). One of our readers had asked for a chart analysis of this company and I decided to go a bit further and go into some of the fundamentals of this company as well. Converted Organics is a company that is still in it’s development stage. They have yet to show a profit and they are currently in a negative EPS situation. This company has caught some attention recently as there is some speculation that Dennis Gartman (a highly respected market analyst) has indicated that Converted Organics showed some promise (we have not seen proof of this claim). Aside from the speculation that Dennis Gartman either owns shares in this company, or merely mentioned it as a possible bright spot in the field of agriculture if it is true is not enough to justify the current price. What has driven up the price so much is that this company has been picked up by some stock picking web sites that specialize in ‘pumping’ stocks. There is an enormous amount of stock pumping taken place with this company at this time. And the share structure for COIN is such that it is a stock that can be easily manipulated.

 

 

 

 

 

 

 

 

(COIN - Share Structure)

Observe that COIN only has a share float of 4.2 million shares. This is a dangerously small amount, and the short interest is also rising. We can’t speculate on the claims of Dennis Gartman’s involvement (or non involvement) for we can not locate any proof to support either case. But regardless of that, one needs to exercise extreme caution on this stock and should be taking profits to be on the safe side. A stock with this small of a float can quickly lose 50% of its value in one day of trading. Also of note is that Converted Organics is late in filing their current quarter earnings which should have been released a few weeks ago. Not uncommon for small development stage companies to be late with earnings reports but it should always raise an eyebrow when they are not on time. We are not recommending this company for a buy or sell, we are simply pointing out the facts as they stand currently. We have no position in this company, long or short.

The chart below shows Converted Organics’s (COIN) earnings history

 

 

 

 

 

 

 

 

(COIN - Earnings history)

Stock Market Summary for February 27th 2008

Ben Bernanke Speaks…

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

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

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

 

 

 

 

 

 

 

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

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

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

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

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

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

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

 

 

 

 

 

 

 

 

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

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

 

 

 

 

 

 

 

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

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

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

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

Some news items on the wires tonight:

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

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

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

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

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

Stock Market 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:

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