Expect plenty of bad new to be reported in the financial sector today.
UBS financial reported losses of 19 billion associated with sub-prime, it's stock price rallied 10%. Deutsche Bank reported a write-down of 3.9 billion, it's stock rallied. Pardus Capital hedge fund announced it is suspending redemption's, Lehman Bros. announces it will seek 3 billion in new capital to resupply it's liquidity reserves, Legg Mason injects 195 million to help money market fund, and last but not least, Thornburgh announces plans to raise 1.35 billion to stave off bankruptcy.
The early call for U.S. equities is for the markets to open higher. Folks, if the market refuses to go down, there are only two other options. One, is for sideways action, or two, the markets will rally.
My bet is that the equity markets are going to rally, substantially. Remember, stock investor's are forward looking. That means, that large institutional investor's, insurance companies, pension funds, etc. etc. have discounted the bad news we will be hearing in the next couple of weeks. Additionally, huge pools of money have been on the sidelines invested in treasury securities, money market funds and the like. Tons of cash is sitting around waiting to re-invest into equities.
The mid-January and early March lows are the crucial support levels. If I am wrong, the market will fall below those levels, if I am right, look for new all time highs in the S&P 500 index, the Dow Jones Industrial average and a major rally in the NASDAQ, sooner rather than later.
Tuesday, April 1, 2008
Monday, March 31, 2008
CFTC +SEC
One of the proposals in updating the regulation of the financial system is merging the CFTC (commodity futures trading commission) and the SEC (securities exchange commission). I might be more than a little biased, but I believe this is a bad idea.
Historically, New York (home of a majority of stock trading) and Chicago (home of the worlds largest futures exchanges) have been bitter rivals. New Yorker's won't say it, but, basically, they believe us mid-westerner's have mud stuck between our toe's when it comes to financial pedigree.
Chicago, on the other hand, has been the home of innovation for the diversification of asset classes. e.g. futures on treasuries, currencies & stock index futures.
As an example, on black Monday in 1987, it is a little known fact that futures on stock indexes, saved the American financial system from collapse. How did this happen? Simple really.
Back in "the day", the NYSE (New York Stock Exchange) operated under a rule called the "uptick rule". In order to be a market maker on the exchange trading floor, you had to agree to this rule. Basically, what it meant is that a market maker could not get "short", or sell a stock (in the expectation that the market maker could buy it back at a lower price later) unless there was an uptick in the stock price.
Well, on black Monday, there were no upticks, so the only thing market maker's could do was to buy what everyone else was selling. Eventually (around 11:30 a.m. cst), the market maker's ran out of money and the system was on the threshold of collapse. Phone calls were made the SEC and the Federal Reserve to inform them that "we're out of money". What is a capitalist market system to do?
The Chicago Mercantile Exchange, by the way, had suspended trading. The Chicago Board of Trade, never closed down on black Monday. The CME has a contract on the S& P500, the CBOT, had a little known contract called the "Blue Chip Index".
In, steps the CFTC, and in the first time in the history of commodities trading increased the margin (money needed to trade) requirements for equity index futures by a factor of 10X. Effectively what this did was to raise margin requirements on "winning" positions. Investor's had to meet this new margin requirement immediately, or face forced liquidation of their positions. On black Monday, everyone was "short" or expecting prices to drop. The margin requirement forced market participants to go "long", or buy equity index futures. Basically, this action by the CFTC stopped the market decline dead in it's tracks, and the bottom of the stock bear market was made. This action occured in the CBOT Blue Chip Index and then the CME re-opened it's doors.
Many market pundits point to last years elimination of the up-tick rule as a major contributor to the economic situation we find ourselves in currently. Do you really want the SEC and CFTC under the same roof? When that roof is going to be located in New York?
Historically, New York (home of a majority of stock trading) and Chicago (home of the worlds largest futures exchanges) have been bitter rivals. New Yorker's won't say it, but, basically, they believe us mid-westerner's have mud stuck between our toe's when it comes to financial pedigree.
Chicago, on the other hand, has been the home of innovation for the diversification of asset classes. e.g. futures on treasuries, currencies & stock index futures.
As an example, on black Monday in 1987, it is a little known fact that futures on stock indexes, saved the American financial system from collapse. How did this happen? Simple really.
Back in "the day", the NYSE (New York Stock Exchange) operated under a rule called the "uptick rule". In order to be a market maker on the exchange trading floor, you had to agree to this rule. Basically, what it meant is that a market maker could not get "short", or sell a stock (in the expectation that the market maker could buy it back at a lower price later) unless there was an uptick in the stock price.
Well, on black Monday, there were no upticks, so the only thing market maker's could do was to buy what everyone else was selling. Eventually (around 11:30 a.m. cst), the market maker's ran out of money and the system was on the threshold of collapse. Phone calls were made the SEC and the Federal Reserve to inform them that "we're out of money". What is a capitalist market system to do?
The Chicago Mercantile Exchange, by the way, had suspended trading. The Chicago Board of Trade, never closed down on black Monday. The CME has a contract on the S& P500, the CBOT, had a little known contract called the "Blue Chip Index".
In, steps the CFTC, and in the first time in the history of commodities trading increased the margin (money needed to trade) requirements for equity index futures by a factor of 10X. Effectively what this did was to raise margin requirements on "winning" positions. Investor's had to meet this new margin requirement immediately, or face forced liquidation of their positions. On black Monday, everyone was "short" or expecting prices to drop. The margin requirement forced market participants to go "long", or buy equity index futures. Basically, this action by the CFTC stopped the market decline dead in it's tracks, and the bottom of the stock bear market was made. This action occured in the CBOT Blue Chip Index and then the CME re-opened it's doors.
Many market pundits point to last years elimination of the up-tick rule as a major contributor to the economic situation we find ourselves in currently. Do you really want the SEC and CFTC under the same roof? When that roof is going to be located in New York?
Monday, March 17, 2008
When we are Grandparents
They will recall the history of when Bear Stearns lost 99.9999% of it's value in the brutal banking bear market of 2008.
But somehow, the market managed to rally today from a 200 point deficit, what gives?
On my March 7th entry, I stated how I could see a situation where there was a run on the banking system, but the equity markets would refuse to go lower. Can anyone deny there is a calamity in the American banking system currently?
I've spent plenty of time analyzing the psychological reasons why I feel we are near a bottom in this sell-off, let's spend some time analyzing the technical situation now facing the bears. (people who expect the market to go lower)
I am a big fan of divergences, a divergence is when (in this situation), the market makes a low, followed by a minor rally. Technical indicator's, MACD, Stochastics, whatever you might be familiar with, head lower and confirm the low and then rally's in conjuction with the minor rally in stocks.
The market then resumes it's downtrend making a new low, your technical indicator (see above), also moves lower, but fails to move below it's previous low and does not confirm the new low in the equity you are following. That, is a divergence.
Currently, there is a potential for a bullish divergence on a 60 minute and daily chart of the djia. In conjuction with that signal, the weekly and monthly charts of the djia are both oversold.
Tommorrow, there is a high probability that the equity markets will rally, a cut in interest rates by the Federal Reserve, couple with the IPO of Visa Corp. and a potentially bullish report by the bellweather Goldman Sachs, could act as a pressure relief valve for equities. (causing the djia to rally)
If my presumptions are correct, the MACD or Stocastics would move higher, confirming the bullish divergence on the 60 min and daily charts. A possibility of reversing the over-sold conditions on the weekly and monthly charts might also be in the cards.
Do not, under estimate what a bullish divergence would signal for the djia, they don't happen very often and are readily recognizable by a multitude of investors.
The psychological indicators, couple with the technical indicators, offer the possibility that a significant rally in equities could take place in the very near future. (hours or days) In addition, the inability of the djia to move to my first level of significant support 11,300 indicates that something is going on that is preventing stocks from heading lower.
11,300, would be a logical place to have a stop loss order on any aggressive position someone might put on. (risking a few percentage points in potential losses)
For the more passive, I expect a rally that will be met with plenty of skepticism, followed by a break in prices that will provide a nice entry point.
But somehow, the market managed to rally today from a 200 point deficit, what gives?
On my March 7th entry, I stated how I could see a situation where there was a run on the banking system, but the equity markets would refuse to go lower. Can anyone deny there is a calamity in the American banking system currently?
I've spent plenty of time analyzing the psychological reasons why I feel we are near a bottom in this sell-off, let's spend some time analyzing the technical situation now facing the bears. (people who expect the market to go lower)
I am a big fan of divergences, a divergence is when (in this situation), the market makes a low, followed by a minor rally. Technical indicator's, MACD, Stochastics, whatever you might be familiar with, head lower and confirm the low and then rally's in conjuction with the minor rally in stocks.
The market then resumes it's downtrend making a new low, your technical indicator (see above), also moves lower, but fails to move below it's previous low and does not confirm the new low in the equity you are following. That, is a divergence.
Currently, there is a potential for a bullish divergence on a 60 minute and daily chart of the djia. In conjuction with that signal, the weekly and monthly charts of the djia are both oversold.
Tommorrow, there is a high probability that the equity markets will rally, a cut in interest rates by the Federal Reserve, couple with the IPO of Visa Corp. and a potentially bullish report by the bellweather Goldman Sachs, could act as a pressure relief valve for equities. (causing the djia to rally)
If my presumptions are correct, the MACD or Stocastics would move higher, confirming the bullish divergence on the 60 min and daily charts. A possibility of reversing the over-sold conditions on the weekly and monthly charts might also be in the cards.
Do not, under estimate what a bullish divergence would signal for the djia, they don't happen very often and are readily recognizable by a multitude of investors.
The psychological indicators, couple with the technical indicators, offer the possibility that a significant rally in equities could take place in the very near future. (hours or days) In addition, the inability of the djia to move to my first level of significant support 11,300 indicates that something is going on that is preventing stocks from heading lower.
11,300, would be a logical place to have a stop loss order on any aggressive position someone might put on. (risking a few percentage points in potential losses)
For the more passive, I expect a rally that will be met with plenty of skepticism, followed by a break in prices that will provide a nice entry point.
Sunday, March 16, 2008
Midnight Phone Calls
Bear Stearns CEO, Alan Schwartz, was interviewed on CNBC Wednesday afternoon, and stated that his company didn't have liquidity issues.
Less than 24 hours later, late night calls were being made to the NY Federal Reserve Chairman stating that Bear could not get financial institutions to deal with it and that they would have to default on Friday without intervention.
J.P. Morgan and the New York Fed arranged a package that will keep Bear afloat for at least the next 28 days. On March 27th, the 200 billion promised by the Federal Reserve to exchange "stinky cheese", will become available. Market players expect J.P. Morgan to acquire Bear sometime this week.
It's a legitimate question to ask, why don't they let Bear default? The answer in relatively easy, if officials allow that to happen, all of Bears toxic obligations will have to hit the market and be priced. Nobody, wants that to happen because then there would be a benchmark to value the rest of sub-prime debt. That, would have the possibility of tanking the entire system.
The whole debacle started back in the summer of 2007 when two Bear Stearns hedge funds collapsed. Could karma be so complete that Bear will be the beginning and end of the sub-prime crisis? Is it not scary that liquidity could evaporate so quickly? Watch out for Lehman Bros. and Merrill Lynch, put activity below their current prices (respectively) are beginning to heat up.
To the best of my knowledge, Bear Stearns has 470 billion of highly toxic obligations, with 260 billion of marketable securities. Not a bad ratio, but that 470b is the worst of the worst.
Back in the early 90's Drexel Burnham Lambert, a privately held entity collapsed and was able to pay 100% of obligations. Bear has money and assets, so if it goes under, it will be able to pay off a large portion of it's obligations, maybe that's why J.P. was so willing to step in.
This is the market test I've been waiting for, I expect more bad news to hit soon and how the market reacts to this news is going to be most telling.
It's going to be a crazy week, the Fed meets on Tuesday with a high probability of a 100 basis point cut in interest rates. Visa, comes out with it's IPO (initial public offering). Financial institutions will begin quarterly reporting. (watch for further write-downs) In addition, quadruple witching hour in futures and options is this week. Goldman Saks, the creme' de la creme' of Wall St. reports. They have the best analysts on the street, if they followed their own advice, it should be killer on the upside and could bail out the market on it's own.
Back in July and August of 2007 nobody said the market was at a serious top and to bail. Except Matt Lapointe and I. Now in late March of 2008, the doom and gloom in palatable. This bear market is gasping it's last breath IMO, I still stand by my assertion that one of these three levels will signal the end of the bear. 11,300 - 10,600 - 10,000 based on the djia.
Less than 24 hours later, late night calls were being made to the NY Federal Reserve Chairman stating that Bear could not get financial institutions to deal with it and that they would have to default on Friday without intervention.
J.P. Morgan and the New York Fed arranged a package that will keep Bear afloat for at least the next 28 days. On March 27th, the 200 billion promised by the Federal Reserve to exchange "stinky cheese", will become available. Market players expect J.P. Morgan to acquire Bear sometime this week.
It's a legitimate question to ask, why don't they let Bear default? The answer in relatively easy, if officials allow that to happen, all of Bears toxic obligations will have to hit the market and be priced. Nobody, wants that to happen because then there would be a benchmark to value the rest of sub-prime debt. That, would have the possibility of tanking the entire system.
The whole debacle started back in the summer of 2007 when two Bear Stearns hedge funds collapsed. Could karma be so complete that Bear will be the beginning and end of the sub-prime crisis? Is it not scary that liquidity could evaporate so quickly? Watch out for Lehman Bros. and Merrill Lynch, put activity below their current prices (respectively) are beginning to heat up.
To the best of my knowledge, Bear Stearns has 470 billion of highly toxic obligations, with 260 billion of marketable securities. Not a bad ratio, but that 470b is the worst of the worst.
Back in the early 90's Drexel Burnham Lambert, a privately held entity collapsed and was able to pay 100% of obligations. Bear has money and assets, so if it goes under, it will be able to pay off a large portion of it's obligations, maybe that's why J.P. was so willing to step in.
This is the market test I've been waiting for, I expect more bad news to hit soon and how the market reacts to this news is going to be most telling.
It's going to be a crazy week, the Fed meets on Tuesday with a high probability of a 100 basis point cut in interest rates. Visa, comes out with it's IPO (initial public offering). Financial institutions will begin quarterly reporting. (watch for further write-downs) In addition, quadruple witching hour in futures and options is this week. Goldman Saks, the creme' de la creme' of Wall St. reports. They have the best analysts on the street, if they followed their own advice, it should be killer on the upside and could bail out the market on it's own.
Back in July and August of 2007 nobody said the market was at a serious top and to bail. Except Matt Lapointe and I. Now in late March of 2008, the doom and gloom in palatable. This bear market is gasping it's last breath IMO, I still stand by my assertion that one of these three levels will signal the end of the bear. 11,300 - 10,600 - 10,000 based on the djia.
Thursday, March 13, 2008
Conflicting Signals
Carlyle Financial defaults. Perfect example of the over leverage that caused sub-prime to occur. This company has 650 million of capital to cover 23 billion in exposure. Just off the top of my head, that's about $25 dollars of debt for each dollar of cash on hand.
Chrysler Corp. to shut down entirely for two weeks over the summer in a cost saving move.
Pretty bad news huh? What happened in the stock market today? It rallied.
On the plus side, Standard and Poors Corp. announces write downs at large financial institutions are just about done. In addition, write downs might exceed actual losses. Could we call that a potential cushion to soften the blow?
Don't take the headlines at face value, rather, consider the headlines in the context of what is happening overall. The talking heads on CNBC trumpeted the top in July and August of 2007 and they are trumpeting the bottom in March and April of 2008.
Consider the possibility that this might not be THE bottom, but on an intermediate basis (at least), there is the potential for a rally the average investor might be able to participate in.
The key right now, is the low in the DJIA for Monday's trade. I fully expect the bears to regroup and attempt to force the market lower. If their attempt to take out Monday's low fails, it will be a compelling argument to invest a percentage of your portfolio back into the market.
If anyone reads this good luck and don't get greedy, an old adage of the market is that bulls and bears make money while pigs get slaughtered.
Chrysler Corp. to shut down entirely for two weeks over the summer in a cost saving move.
Pretty bad news huh? What happened in the stock market today? It rallied.
On the plus side, Standard and Poors Corp. announces write downs at large financial institutions are just about done. In addition, write downs might exceed actual losses. Could we call that a potential cushion to soften the blow?
Don't take the headlines at face value, rather, consider the headlines in the context of what is happening overall. The talking heads on CNBC trumpeted the top in July and August of 2007 and they are trumpeting the bottom in March and April of 2008.
Consider the possibility that this might not be THE bottom, but on an intermediate basis (at least), there is the potential for a rally the average investor might be able to participate in.
The key right now, is the low in the DJIA for Monday's trade. I fully expect the bears to regroup and attempt to force the market lower. If their attempt to take out Monday's low fails, it will be a compelling argument to invest a percentage of your portfolio back into the market.
If anyone reads this good luck and don't get greedy, an old adage of the market is that bulls and bears make money while pigs get slaughtered.
Tuesday, March 11, 2008
Stinky Cheese
Today's action by the Federal Reserve may be the beginning of solving the problem of how to deal with large scale holders of CDO's (collateral debt obligations).
Regular readers know this issue is the last man standing in solving the sub-prime crisis. Basically, what the Federal Reserve is saying is "we will allow you to sell us your bad debt, and in exchange we will sell you treasury securities).
Treasury securities happen to be the safest investment on the planet, so I am sure there will be no shortage of takers' for this offer.
These actions should go a long way in thawing the credit freeze between banks while at the same time allowing banks to begin lending to consumers again.
In regards to the stock market, there is a possibility that yesterday was the end of the bear market. If that is the case, the action in the next two to three weeks will tell quite a bit.
After the euphoria of today wears off (probably after a few more days of upside action), the bears will attempt to regain the advantage. If at that time, the bears cannot move the market below yesterday's lows, it would be a compelling reason to re-enter the market.
If the bears are able to take out yesterday's lows, I stand by my assertion that we are near a significant low and would again look to the previously stated support levels.
Regular readers know this issue is the last man standing in solving the sub-prime crisis. Basically, what the Federal Reserve is saying is "we will allow you to sell us your bad debt, and in exchange we will sell you treasury securities).
Treasury securities happen to be the safest investment on the planet, so I am sure there will be no shortage of takers' for this offer.
These actions should go a long way in thawing the credit freeze between banks while at the same time allowing banks to begin lending to consumers again.
In regards to the stock market, there is a possibility that yesterday was the end of the bear market. If that is the case, the action in the next two to three weeks will tell quite a bit.
After the euphoria of today wears off (probably after a few more days of upside action), the bears will attempt to regain the advantage. If at that time, the bears cannot move the market below yesterday's lows, it would be a compelling reason to re-enter the market.
If the bears are able to take out yesterday's lows, I stand by my assertion that we are near a significant low and would again look to the previously stated support levels.
Friday, March 7, 2008
The Crying Game
I have to admit, I found it amusing today as I watched Cramer & Kudlow from CNBC throwing in the towel on the stock market and economy.
All the way down these individuals have offered the eternal ray of sunshine. Now, after a 2,700 point drop in the DJIA, it is suddenly no good anymore. This my friends is a classic case of capitulation which leads me to believe a substantial bottom is near.
Everyone, and I mean everyone is aware of the dangers sub-prime has caused the economy, where do we go now?
I can see a scenario where there is a run on the banking system and the equity markets refuse to go lower, it might sound crazy, but I would ask, why have investor's and money managers fought this bear market during the entire decline? Hope, denial, disbelief?
Now, I'm not saying someone should try to catch a dagger dropped from the tenth floor, but, shouldn't the possibility that the smart money exited the market long ago and is looking for a buying opportunity be considered?
I have several support levels in mind, 11,300, lowest probability of being the bottom, 10,600 and 10,000 (on the djia), any one of these levels could provide substantial support. The bear market is nearing six months old and is growing long in the tooth.
http://www.msnbc.msn.com/id/23518599
All the way down these individuals have offered the eternal ray of sunshine. Now, after a 2,700 point drop in the DJIA, it is suddenly no good anymore. This my friends is a classic case of capitulation which leads me to believe a substantial bottom is near.
Everyone, and I mean everyone is aware of the dangers sub-prime has caused the economy, where do we go now?
I can see a scenario where there is a run on the banking system and the equity markets refuse to go lower, it might sound crazy, but I would ask, why have investor's and money managers fought this bear market during the entire decline? Hope, denial, disbelief?
Now, I'm not saying someone should try to catch a dagger dropped from the tenth floor, but, shouldn't the possibility that the smart money exited the market long ago and is looking for a buying opportunity be considered?
I have several support levels in mind, 11,300, lowest probability of being the bottom, 10,600 and 10,000 (on the djia), any one of these levels could provide substantial support. The bear market is nearing six months old and is growing long in the tooth.
http://www.msnbc.msn.com/id/23518599
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