Musings on the markets for the individual investor
The more things change…
“General sentiment regarding business prospects has been growing optimistic. Meanwhile, there are indications that the Federal Reserve authorities continue to adopt a benevolent policy.”
- The Economist, December 21, 1929
“There is a growing belief that there will be no prolonged business depression, in which case low interest rates will make the current high yields on assured dividend-paying stocks attractive.”
- The Economist, March 22, 1930
And you thought you could sneak that plasma TV by the IRS.
From The Big Picture:
Uh-Oh: Cars/Vacations/Flat Panels Not Tax Deductible
Here’s some more bad news for John Q. Public:
We all know that the bill for the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn’t nearly done.
Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home — *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens — then it is tax deductible as if it were a primary mortgage.
From Realty blog Patrick.Net:
Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements…
Ouch!
Why do I smell some big trouble coming down the road for some people?
At Chart Swing Trader, Mac looks back over his first quarter of trading for the year, and has some valuable (in my opinion) thoughts to share on the challenges of trading:
As we end the first three months of the year, one thing I wanted to do for my own personal growth as a trader was to examine my trading so far this year and what I need to do to be better. Obviously this has been a very difficult environment to trade in, even for bears, since the middle of January. I have been bearish throughout the year, but that bearishness has not always paid off as well as I had hoped. I am still up overall for the year, but not nearly as much as I was after January 22. Some lessons hopefully learned so far include:
- Overtrading is a recipe for disaster - I have definitely been guilty of this so far this year. I had nice positions that I closed early because I couldn’t sit still, and I took bad positions because I couldn’t sit still. I go back to what I saw in a Dan Zanger interview when he said the market presents about three or four money-making opportunities per year that allow you to make tremendous returns, and the rest of the time is just choppy trading that cause most traders to lose a significant amount of money. January 1 to January 22 was one of those nice opportunities to make money if you were short, and I don’t think we’ve had one since. Perhaps this just takes time to learn and as I progress, I will be able to recognize these profitable times and also show the discipline to sit on my hands if there is no real edge to be found.
- Emotional trading is a recipe for disaster - Looking at my gains and losses for the year, I have noticed that many of my losses came from trades that were taken during the middle of the day or from trades in which I changed my original plan after the trade was taken. I am really focusing on making trades only at the end of the day and also not watching the intraday action too heavily, especially in a volatile environment like February. I also need to do a better of job of setting stops and sticking to them, rather than adjusting them after the trade has been made, which usually just led to bigger losses.
- Avoid trading right before or right after decisions by the Fed - for some reason, I thought it would be smart to make a lot of trades around January 30-31. I closed a total of nine trades those days, and only two were winners. Several were stocks I was stopped out of the same day. These days of course correspond with the first Fed decision about interest rates, which led to an extremely volatile trade that I would have been much better off staying completely away from. I plan on doing this from now - I will not be making any new trades during the few days after Fed decisions, at least not in the current environment.
Basically, I feel I am putting in the necessary work to be a successful trader, and I feel my chart-reading abilities are fairly strong, although I can still improve in both areas. I still need to tighten my overall system and trust some of the indicators I use more. For me, it is still some of the psychological difficulties that I am having, and I know those are issues for many traders. You can’t become a master trader until you’ve mastered trading psychology, trading discipline, and your own personal emotions. These are the hardest skills to develop and master, but I will keep working on them and hopefully improve as we enter this second quarter.
Well said Mac. Thanks for sharing those thoughts!
Saving money, maybe. But not saving jobs:
Dell Inc. said Monday it will save as much as $3 billion over the next three years as it cuts costs and lays off workers, with measures including closing a desktop manufacturing facility in Austin.
The world’s No. 2 computer maker will cut 900 of 17,500 jobs in the Austin area by closing the plant, company spokesman David Frink said.
Dell also reaffirmed its plan — announced last year — to cut at least 8,800 jobs, or about 10 percent of its work force. Frink said the Round Rock-based company didn’t have a time frame to reach that number.
In the last nine months of fiscal 2008, Dell cut 3,200 jobs.
The Austin facility will close late in fiscal 2009, which ends Jan. 31, Frink said.
But this is the part of the article that just kills me:
And it is reviewing alternatives for its financial services business, especially its consumer credit and its financing operation for small to medium business customers. The company recently assumed full ownership of its credit arm.
Frink said the review could result in no change or in the pursuit of new partnerships.
“We’re absolutely committed to financing being an integral part of our overall business,” Frink said. “Dell Financial Services is a profitable Dell asset. We believe the combination of Dell and the right structuring going forward will actually be able to enhance it.”
Yet another company depending on their finance business. I’ve got news for this economy - we’ve got far too many companies depending on 1) their financing business, or 2) selling advertising. Not every company can be a ‘finance’ company - some companies actually have to make money producing a product - an amazing concept, I know. And not every web site and/or blog can plan on surviving by selling advertising - same idea, you need to have a few companies out there that are actually buying the advertising, don’t you? Or will those be the ‘finance’ companies…?
What a joke.
As if the drug stocks needed any more bad news. But I thought health care was a ‘defensive’ area:
In a different area of health care, the biotech index looks pretty lousy:
But there is actually a wide divergence among the biotech stocks:
Charts courtesy of StockCharts.com
Unimpressive.
The market managed to scrape together enough green to get the indices near break-even for the month of March, but only the Nasdaq was successful (by less than 8 points), while the Dow and S&P missed by a few points each. Still, there doesn’t seem to be a tremendous amount of enthusiasm for pushing things much higher, at least not for now - despite (or maybe because of) the government’s promises of regulatory change.
All of the majors finished marginally higher:
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The movement in Treasuries was slight, with yields edging a bit lower across the curve:
6-month: 1.49% 2-yr: 1.61% 5-yr: 2.46% 10-yr: 3.42% 30-yr: 4.30%.
Internals tipped back over to the positive side. Volume was not strong, but a late day surge pushed it up above the lighter levels of last week. Advances/declines were 3 to 2 on both exchanges, with up/down volume 7 to 4 on the NYSE and 7 to 3 on the Nasdaq. New highs remain hard to find: highs/lows were 10/44 on the NYSE and 15/93 on the Nasdaq.
More winners than losers in the groups, but many of today’s winners came from the bottom of the longer-term heap: homebuilders (+3.3%), disk drives (+2.9%), biotech (+2.5%), airlines (+2.5%), brokers (+2.2%), oil services (+1.7%), paper stocks (+1.5%), retail (+1.4%) and semiconductors (+1.4%). Leading the losers were the gold and silver stocks (-2.0%) and metals and mining (-1.2%).
Energy prices were mixed. Crude oil dove back down to $101.58/barrel and gasoline fell to $2.62/gallon, but natural gas continued higher, up to $10.09/mmBTU. The dollar index recovered from a morning dip to finish a bit higher at 71.79. Gold and silver fell again, after bouncing last week. Gold slid back to $918/ounce and silver to $17.27/ounce.
BMB Note: Now that we’re getting that end-of-month/quarter out of the way, where do we go from here? We had all this noise about the government, regulation and the Fed over the weekend, and Hammerin’ Hank was talking up their plans today, but the market didn’t see to react much to that. Of course, any of that stuff is a long way from becoming reality, if indeed it ever does.
The market didn’t give up any more ground, but didn’t show a great deal of strength either. Every time we get one of these up days, it seems that it’s just the beaten-down groups bouncing up a bit, and that doesn’t make for any real ‘leadership’.
The commodities got hit again, which wasn’t much of a surprise. I think we’re in a period of consolidation there, especially with things like crude and the precious metals, so it’s going to take some time to see how it all plays out. But I will be taking the opportunity to add to my longer-term precious metals holdings during this time.
I think we’ll be sticking with the ‘three C’s’ plan for a while longer - cash, commodities and currencies. The problem is, those three are acting a lot like stocks right now - they’re not moving either.
Looks like we need to hurry up and wait…
Late note: Not that Lehman needs the money or anything, but they’re going to be offering 3 million shares of convertible, preferred stock…
Gary Kaltbaum tells us why he worries:
I know. The market is working on a follow through day… so by definition, the market is in a confirmed rally. But as I have told you, while every bull move has been preceded by this important characteristic, not every follow through day has led to a bull move. Already, we have seen a couple of failures in this bear market. The market has now experienced a distribution day… and I am just seeing too much poor action. Maybe the market just needs time… I don’t know. But I do know there remains many things I am worried about… inside and outside the market.
It looks like more and more powers are being proposed for the Fed. I do not mind more regulation of Wall Street at this point. They deserve every bit of it. They earned the right to be regulated more. But from the Fed? I repeat for the thousandth time… we are now in this position because of the wayward policies of the Fed going back many years. I have been talking about this for a long time. Only now are many coming around to this theme.
How about the JP Morgan/Bear Stearns (BSC) deal? Did the Fed just become another off-balance sheet entity? Is the Fed now Enron-esque where they are now hiding toxic waste of the maniacal financial companies that took inordinate amounts of risk? The world is turning upside down!
I can go on and on… but I have to move on to the rest of my market-related worries.
I am worried when I see:
- Merrill Lynch (MER) moving up off the last financial move… and heading straight back down to the lows. What is wrong at Merrill? Lehman Brothers (LEH) is also acting the same way.
- The CEO of Capital One (COF) selling 400,000 shares AFTER the drop.
- Auction rate securities now being marked down…
- Insiders at Goldman Sachs (GS) selling shares AFTER recent drop.
- RETAILERS breaking down again off the JC Penney (JCP) news.
- Any breakouts failing.
- No new highs in the market.
- A few leaders actually breaking down? At the start of a new bull market?
The constant calls of a bottom… AGAIN. And the constant yapping that “THE WORST IS OVER!” One goober was out this week calling for 16,000 DOW in the next year. I never say predictions like this are wrong… but aren’t we sick of the over-the-top calls by now?
I am just not seeing the signs that make up a new bull market. When a new bull market starts, you should start seeing great set-ups and strong breakouts. We are seeing none of this. For sure, there are stocks that are “working” and have good relative strength. But there is not nearly enough to really get markets going. Maybe the bottom is in…and maybe the market just needs time to repair itself. I have no bias.
Just not feeling it!
Speaking words of wisdom, let it be…
From Mr. Practical this morning:
There were two interesting articles I read over the weekend from the Financial Times, click below to read them.
- SEC’s new guidance to stop short of suspending ‘fair value’ rules.
- Now is the time to mark to market.
The first article explains that the SEC is “mulling” putting pressure on FASB to suspend accounting rules that require institutions to mark their exposures at prices that reflect reality, where buyers actually want to buy and sellers want to sell. This is called a free market. Apparently free markets are the problem now, so suspending them is the answer.
The second editorial rightly discusses the destructiveness of such thinking. Hiding our heads in the sand will not make the real problem go away: we must address the fact that we’ve lived beyond our means for years and that has resulted in 100 ways too much debt. The only way to deal with it is head on, by accepting the fact that we have already borrowed too much from our children’s future and can afford to borrow no more .
But those that truly understand the derivative risk and how to deal with it are not being called upon. Unfortunately we’re allowing those that have created the problem, from government bureaucrats who drove insane monetary and fiscal policy to the salesmen in charge of large wall-street firms who pushed risk management to the side in pursuit of profits, to come up with artificial solutions based on flawed logic to rule the day.
I will say this now: the Fed’s balance sheet is a mere fraction of what it would take to effectively deal with this solvency problem. The cost of a massive fiscal response, the creation of a trust to buy the debt that no one wants to have anymore, would be born by future taxpayers directly through higher taxes and current taxpayers indirectly through a lower dollar and higher cost of living. The relative size of the trust created to handle the savings and loan mess was tiny compared to what would be necessary here; the cost to taxpayers of that trust was diluted over years while the cost to this trust would be immediately palpable to the middle class.
Integrity to me means the strength to do the right thing. When soldiers are sent into battle what would be the long-term repercussions if they turned and fled? They certainly would live for another day, but the action would embolden the enemy and probably mean long term defeat. They know this, so they fight bravely even though it may mean their very lives. They show the greatest integrity when it means the most. In dealing with the greatest debt bubble of all-time we cannot afford to retreat even though it may be painful in the short-run. Will there be any long term investors left if they don’t believe in the integrity of markets?
We are rapidly losing market integrity. We need bureaucrats to just get out of the way and let the market exact its justice: those that made really bad financial decisions should lose their money. Those that were prudent and saved their money will be there to pick up the pieces and buy cheap assets. Once the debt is destroyed down to the point where the level of savings versus debt in the economy is balanced, recovery will occur.
If we abandon integrity now we may truly destroy the capital markets for good.
Emphasis added - BMB.
From the AP, via Yahoo:
The Bush administration’s plan to overhaul financial regulation, as outlined in a summary obtained by The Associated Press, would:
_Expand the role of the President’s Working Group on Financial Markets to include the entire financial sector rather than just financial markets.
_Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.
_Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.
_Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.
_Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.
_Work to establish as a long-term goal three major regulators: the Federal Reserve as a “market stability regulator”; a “prudential financial regulator” to take over the functions of five separate banking regulators; and a “business conduct regulator” to regulate business conduct and consumer protection.
Not a lot of action showing up this Monday morning, as the indices and the A/D lines hover near UNCH, and the groups are split. Leading to the upside are the homebuilders, oil services, brokers, biotechs and REITs, while the drugs stocks, steel stocks and health care stocks are slipping.
Speaking of drug stocks, MRK is dragging heavily on the Dow, and SGP is being hurt as well, after news of poor drug test results.
Treasuries are higher, yields lower. Energy prices are slightly higher, the dollar index is lower, gold and silver hanging around flat.
I saw reference to this subject a couple of times over the weekend, and Barry picked it up at The Big Picture this morning:
Here’s a honey of an idea that almost slipped by unnoticed last week. Thankfully, the NYT’s sharp eyed business columnist, Floyd Norris, caught it.
An SEC opinion letter advising companies how to deal with their Level 3 assets made a rather curious suggestion. They advised that if the prices of mark-to-model
crappypaper are underwater, well then, declare it the result of forced liquidation — and then you can simply ignore them.It truly boggles the mind.
Would someone please explain to me how providing an official mechanism for allowing companies to ignore market values of the bad investments they made help investors? Instead of working towards transparency, the SEC is providing a mechanism to allow banks to hide losses from their shareholders. This is nothing short of an invitation to commit fraud.
Here’s the offending passage:
“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” (emphasis added)
Norris suggests this is an invitation for banks having two sets of books. One for Bank disclosures for shareholders: Ignore these paper losses, the prices are only due to a forced liquidation — and another for Margin calls: Hey! You are underwater by XX% in this; send in more money! Apparently, the SEC believes prices are irrelevant, except when it comes to margin calls.
While we’re abolishing the Fed, we might want to take some dynamite to the SEC and start from scratch over there too.
Mike Shedlock has a few comments on the Fed and the latest brilliant idea from the Treasury:
The GlobeInvestor is reporting Even on Wall Street, capitalism takes a hit.
Socialist-style Fed or financial saviour?
The cover of the latest issue of BusinessWeek shows Ben Bernanke in profile against a bright red and orange backdrop, pensively stroking his grey beard and looking remarkably like Vladimir Ilyich Lenin.
The imagery is intentional and pointed.
“Comrade Ben is determined that there will be no financial meltdown and no depression while he is in command,” economist Ed Yardeni wrote to clients. “Given the initial reaction [on Wall Street], I suppose this means we are all financial socialists now.”
Guaranteeing Bear Stearns’ portfolio of troubled investments sets a bad precedent by transferring potential losses from the market to taxpayers, complained Allan Meltzer, a professor of political economy at Pittsburgh’s Carnegie Mellon University.
“I do not believe the current system can remain if the bankers make the profits and the taxpayers share the losses.”
—
Who is to blame for the mess we are in?
And who is to blame? The Fed course, with help of Congress, and the SEC.
Congress passed legislation to create GSEs to foster affordable housing. Now the definition of “affordable” is over $700,000, and calls to reduce the role of the Fannie Mae are now calls to increase the role of Fannie Mae in the wake of the housing crisis. There were 300 some programs to create affordable housing and every program made the situation worse. All those programs really amounted to was handouts to the building industry and banks.
And if Congress would stop wasting money on needless programs the dollar would stop sinking. Of course the government is wasting trillions of dollars trying to be the world’s policeman, a role we can no longer afford.
The SEC in its infinitely poor wisdom, decided to give government sponsorship to Moody’s, Fitch, and the S&P and this led to extremely risky garbage being rated AAA. I talked about this problem in Time To Break Up The Credit Rating Cartel.
But the Fed deserves the brunt of the blame for micro-managing interest rates like some central planners from the Soviet Union. The Fed does not know how to set the correct price for money (interest rates) any more than it knows how to set the correct price for orange juice. Only free market forces can properly set prices so that economic distortions do not occur.
Unfortunately, every problem Greenspan faced was an excuse to cut interest rates. Even non-problems like the silly Y2K (year 2000) scare was an excuse to cut rates.
When the dotcom bubble collapsed, the Fed slashed interest rates to 1% to get the economy moving again. The housing bubble was the result. Greenspan added more fuel to the fire along the way by openly praising ARMs and derivatives.
Greenspan May 5th 2005: “Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth.“
I compared Greenspan to Buffett in Who’s Holding The Bag?
Buffett in stark contrast to Greenspan called the explosive use of derivatives an “investment time bomb”.
It’s perfectly clear now who was right. For those who have not pieced the story together properly, it was fear of a dominoes style chain reaction collapse of Credit Default Swaps starting with Bear Stearns that caused Bernanke to force a shotgun wedding between Bear Stearns and JP Morgan.
So what does the Treasury Department propose? The Orwellian answer of course is to give the Fed still more power to wreak havoc.
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The biggest, most reckless credit experiment in history has started to implode. It’s far too late to stop a complete systemic collapse now. Granting new powers to the agency most responsible for the mess simply does not make any sense.
In the long run, the only solution is to abolish the Fed, end government sponsorship of the ratings agencies, and return to sound monetary policies in Congress with a currency backed by hard assets instead of promises.
Instead, the proposal is to give Fed increased authority to watch over additional henhouses. And if there’s one thing worse than the fox watching the henhouse, it’s the Fed watching the henhouse. A quick look at history should be enough to convince anyone of that.
Notes on the latest moves in the industry groups:
| Best Performing Industries | |||
|---|---|---|---|
| Last Week | Last 4 Weeks | Last 8 Weeks | Year To Date |
| Metals & Mining (XME) +6.9% | Steel ($DJUSST) +5.7% | Steel +12.5% | Steel +5.6% |
| Oil Services ($OSX) +6.9% | REITs ($DJR) +5.1% | Natural Gas ($XNG) +8.4% | Natural Gas +4.5% |
| Chemicals ($DJUSCH) +5.0% | Housing ($HGX) +3.1% | Oil Services +6.4% | Gold & Silver +4.0% |
| Natural Gas +4.9% | Transportation ($TRANQ) +1.8% | Metals & Mining +3.3% | Metals & Mining +2.2% |
| Gold & Silver ($XAU) +4.8% | Software ($GSO) +0.6% | Commodities ($CRX) +2.0% | REITs ($DJR) -0.2% |
| Worst Performing Industries | |||
|---|---|---|---|
| Last Week | Last 4 Weeks | Last 8 Weeks | Year To Date |
| Banks ($BKX) -8.4% | HMOs ($HMO) -23.7% | Airlines ($XAL) -32.1% | HMOs -35.0% |
| Brokers ($XBD) -7.1% | Airlines -17.2% | HMOs -31.7% | Brokers -27.2% |
| Retail ($RLX) -4.1% | Brokers -16.9% | Brokers -28.8% | Airlines -24.0% |
| REITs -2.6% | Paper ($DJUSPP) -10.0% | Paper -19.6% | Telecom ($XTC) -20.1% |
| Housing -1.7% | Gold & Silver -8.3% | Banks -18.2% | Networking ($NWX) -19.4% |
Is there an echo in here? Bill Fleckenstein’s latest column picks up where we left off the other day:
Under the current Fed chairman, the central bank’s modus operandi has changed. Not only has the Bernanke Fed strayed far from its long history of supplying liquidity to just AAA government credits, but, via JPMorgan, it is basically setting up an LLC (a limited-liability corporation, similar to a special-purpose investment vehicle) to hold the dreck that almost ruined Bear Stearns.
It’s a structure similar to the off-balance-sheet financial instruments that caused so much pain for so many other financial institutions in the first place.
All of this proves the old saw that fact is stranger than fiction. Or, said differently, you can’t make this stuff up.
Sadly, as my friend Jim Grant put it to me recently, the speculators have gained control at the expense of the savers. It’s a variation of what I said last week: that the prudent are bailing out the reckless. The Fed seems under the impression that its role is to act as enabler-in-chief. As such, the Fed is an abomination.
On the related subject of bubbles, Jon Hilsenrath wrote a very fine column in Wednesday’s Wall Street Journal titled “Wanted: A New Policy for Bubbles,” which everyone should read. (Click here; subscription required.) He makes many points that are near and dear to my heart regarding the pivotal role of the Greenspan Fed in bringing us to this sorry juncture. Hilsenrath’s last sentence expresses my view on the present crisis succinctly and precisely:
“If the government is going to intervene aggressively when bubbles burst, as it’s doing now, then maybe policymakers should do some new thinking about how to prevent bubbles in the first place.”
Amen. If the powers that be would just try to effect that strategy, it would be the silver lining to the housing bubble.
The Fed’s easy money policies of the past 20-25 years - and especially the past 10 - have contributed greatly to the mess we’re in today. So what’s the answer from our government?
Yup. Give ‘em even more power:
The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
The proposal is part of a sweeping blueprint to overhaul the nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.
Did these guys hear Greenspan encourage the use of ARMs, and hail the proliferation of derivatives as ’spreading risk’? Spreading, alright. Like a cancer. If the Fed hadn’t continued to prescribe more easy money and credit creation every time it heard somebody sneeze, those excesses would never have occurred.
What I want to know is, who’s going to regulate the Fed?
Pointer from Calculated Risk.
Update: On top of more regulation, we get more manipulation — rigging ‘the game’ even more than it is already rigged. This from a column on the subject at MarketWatch:
The plan also calls for beefing up the President’s Working Group on Financial Markets, an interagency body founded in the aftermath of the 1987 stock market crash. It said the group’s “focus should be broadened to include the entire financial sector, rather than solely financial markets.”
Yikes. Lemme guess: a ‘floor’ on stock prices…
Let’s take a different view of the sector SPDRs this week, and see how they’ve done since the market topped in October.
This first chart shows the performance of the SPDRs relative to the S&P. We see that 6 of the nine SPDRs have actually outperformed the S&P. That implies that the significant underperformance of the financials, which make up a healthy portion of the S&P 500, helped drag down that index.
But if we look at the absolute performance of the SPDRs, we see that nearly all of them are lower, with the ‘best’ being the Consumer Staples (flat) and the Energies (-3.47%). If you stuck with the entire S&P index, you’re down more than 15% — with the financials, nearly 30.
The numbers as the indices maintain their multi-month sideways walk:
| Sector | Symbol | 8 Week % Chg. | 4 Week % Chg. | 1 Week % Chg. | YTD % Chg. |
|---|---|---|---|---|---|
| Energy | XLE | +2.9 | -3.5 | +3.7 | -7.5 |
| Consumer Staples | XLP | +1.5 | +2.8 | +0.9 | -3.2 |
| Basic Materials | XLB | -1.7 | -1.6 | +5.0 | -3.5 |
| Industrials | XLI | -2.7 | +1.6 | +0.6 | -5.9 |
| Technology | XLK | -5.2 | +1.3 | +0.2 | -15.9 |
| Utilities | XLU | -6.5 | +0.1 | +0.5 | -11.1 |
| Consumer Discretionary | XLY | -7.1 | -2.5 | -2.3 | -6.6 |
| Health Care | XLV | -7.5 | -4.5 | +0.8 | -11.3 |
| Financials | XLF | -16.9 | -4.6 | -6.3 | -14.8 |
Charts courtesy of StockCharts.com
As it turns out, it wasn’t just US bankers putting in late nights trying to deal with the Bear Stearns mess a couple of weekends ago:
The Bundesbank, Germany’s central bank, doesn’t like to see its employees working too late, and it expects even senior staff members to be headed home by 8 p.m. On weekends, employees seeking to escape the confines of their own homes are required to sign in at the front desk and are accompanied to their own desks by a security guard. Sensitive documents are kept in safes in many offices, and a portion of Germany’s gold reserves is stored behind meter-thick, reinforced concrete walls in the basement of a nearby building. In this environment, working overtime is considered a security risk.
But the ordinary working day has been in disarray in recent weeks at the Bundesbank headquarters building, a gray, concrete box in Frankfurt’s Ginnheim neighborhood, where the crisis on international financial markets has many employees working late, even on weekends.
Last Sunday, most of the atypical activity was taking place on the 12th floor, which houses the senior management offices. Bundesbank President Axel Weber was repeatedly in touch — both by telephone and via videoconferencing — with his US counterpart, Federal Reserve (”Fed”) Chairman Ben Bernanke, as well as with the heads of the central banks of other key industrialized nations. And, of course, with German Finance Minister Peer Steinbrück.
Bernanke told Weber about his organization’s failed attempt that Sunday to orchestrate a last-minute bailout for the battered investment bank Bear Stearns. The venerable New York-based company, Bernanke argued, was simply too big to be allowed to go under, and the consequences of such a failure would be incalculable.
—
For some time, there has been a tacit agreement among central bankers and the financial ministers of key economies not to allow any bank large enough to jeopardize the system to go under — no matter what the cost. But, on Sunday, the question arose whether this agreement should be formalized and made public. The central bankers decided against the idea, reasoning that it would practically be an invitation to speculators and large hedge funds to take advantage of this government guarantee.
Everyone involved knows how explosive the agreement is. It essentially means that while the profits of banks are privatized, society bears the cost of their losses. In a world in which the rich are getting richer and the poor poorer, that is political dynamite.
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Should the state use taxpayer money to help greedy bankers repair the damage caused by their unscrupulous speculation? Should it invest billions to save ailing financial institutions, thereby engendering new risks and side effects? And should the government, to use the words of a Frankfurt investment banker, “treat a drug addict with cocaine”?
How does one explain to honest taxpayers that they should pony up their hard-earned money for a bank like Bear Stearns, whose long-standing CEO forked out $28 million (€18 million) for a 600-square-meter (6,500 square-foot) duplex apartment on New York’s Central Park shortly before the collapse of his company? Or that UBS, the crisis-ridden, major Swiss bank, fired three of its senior executives for poor performance only to turn around and pay them roughly 60 million Swiss francs (€38 million/$59.2 million) in golden parachutes?
The central banks and governments of the major industrialized nations are still dodging the answers to these questions.
Hat tip to Mish’s blog.
$100 billion here, another $100 billion there…
The Federal Reserve announced Friday it will auction an additional $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis.
The central bank said it would make $50 billion available at each of two auctions, on April 7 and April 21.
Through the end of March, the Fed has provided $260 billion in short-term loans to commercial banks through the innovative auction process. It also has employed Depression-era provisions to provide money to investment banks.
Here we go again. Despite all of the ‘happiness’ of last week’s Bear save, the banks and brokers have begun to sink for yet another time:
Reports of cutbacks in consumer spending and a warning from JCP took it to the retailers:
Charts courtesy of StockCharts.com
If this is all they’ve got to show for their ‘window dressing’, I’d hate to see what things would look like if ‘they’ decided they really wanted to get OUT.
Weak. A pretty sickly finish to the week, one in which the bulls had their chance to try to make - or even fake - a charge, and they did absolutely nothing with it.
Another light volume leak lower today, with the Russell showing the most ‘leakage’, and the market closed very poorly for the second consecutive day:
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Action in Treasuries was quiet again, and yields were slightly lower on the long end:
6-month: 1.51% 2-yr: 1.66% 5-yr: 2.51% 10-yr: 3.44% 30-yr: 4.33%.
Internals were again weak, but volume pulled back to its lightest level of the week. Advances/declines were 1 to 2 on the NYSE and 5 to 11 on the Nasdaq, with up/down volume 1 to 3 on both exchanges. New highs have gone into hiding again, with highs/lows at 8/45 on the NYSE and 5/77 on the Nasdaq.
Lotsa groups in the red column again today, with some familiar names dragging things down: brokers (-2.7%), retail (-2.7%), homebuilders (-2.5%), banks (-2.5%), HMOs (-1.8%), telecom (-1.5%), networking (-1.4%) and biotechs (-1.4%). Steel stocks (+0.9%) led the very short winners’ list.
Energy prices were mixed. Crude oil slipped back to $105.62/barrel and gasoline lost a penny to $2.71/gallon, but natural gas was higher at $9.81/mmBTU. The dollar index was flat at 71.69. The precious metals gave back some ground, with gold falling to $931/ounce and silver sliding back to $17.81/ounce.
BMB Note: Every now and then we’ve wondered just what this market coul do on its own - without any of the ‘help’ from the news and/or the Fed. I think we found out this week: “Not much”.
A pretty weak follow-up this week to the moves of last Friday and Monday - a large chunk of those gains have already been given back. If this is the best the bulls have got when it comes to ‘follow-through’, then this market is in a world of hurt. Of particular concern are those pesky financials again, which just can seem to hold up when the Fed’s safety net isn’t constantly being paraded around.
We’ll still give it a chance - after all, no less than 20,000 people have come on TV and told us ‘the bottom’ is in - and since there isn’t much (meaning ANY) momentum in either direction, it still remains a very difficult market to play. There are a few economic numbers out next week, and the big monthly payroll report is on Friday, but I’m not sure those numbers can do much right now. This market has been driven much more by ’surprise’ news and the Fed, and of course, those elements can’t really be predicted. That leaves us a couple of weeks until earnings season shifts into high gear and starts to push things around.
So we’ll continue to sit back and see what happens. I’ll continue to favor the short side when looking for opportunities, since that’s the direction of the longer-term trend, but until we start to see some volume kick in, we could remain ’stuck in sideways’ for while longer. And that’s not good for either side.
Got cash?
Andrew Jeffery today, expanding on his comments regarding the global exodus from the dollar yesterday:
Global industries are looking for ways to operate without the help of America’s erratic currency.
We learned yesterday that one of the world’s biggest pension funds is shunning the paltry returns on U.S. government debt. Today the Financial Times is reporting that an increasing number of Chinese exporters are migrating away from the dollar to settle non-U.S. transactions.
Alibaba.com, a company parly owned by Yahoo that hooks up international buyers with Chinese suppliers, says the vast majority of its 700,000 suppliers are moving to pounds, euros or even using China’s own renminbi to complete sales.
Abandoning the dollar is an attempt to minimize currency risk. Alibaba’s chief executive explained his company’s position, saying that prior to greenback volatility, dollar prices were valid for a month or two. Those same quotes are now good for just seven days.
The Federal Reserve’s money printing operations and a stumbling U.S. economy have sent the dollar on a wild ride. The short dollar trade is so crowded, and currency traders are so nervous about central bank intervention into the currency markets, that the dollar’s moves have become increasingly volatile.
Multinationals like General Electric and McDonalds with strong overseas sales benefit from a weak dollar. But they must also protect against a jump in the currency. If the greenback were to pop, their bottom lines would take a direct hit. Firms incur currency hedging expenses to defend against these such moves. The bigger the swing, the more expensive the hedge.
Countries and industries must carefully weigh both the economic and political impact of a dollar departure. The U.S. is the primary trading partner for much of the world. Often the value of that relationship can trump a weakened dollar, but the fact that political expedience is being given less and less consideration illustrates how dire the economic situation has become.
I’ll believe it when I see it:
Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan’s 18 years at the helm.
After this month’s near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern — the longest-serving policy maker — said in a speech yesterday that it’s possible “to build support” for practices “designed to prevent excesses.” New York Fed President Timothy Geithner, whose district bank took on almost $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision-making, and there’s no indication his views have changed.
For Fed policy makers, “the consequences of their permissiveness have become so disastrous that they simply can’t keep singing the same old tune in public,” said Tom Schlesinger, executive director at the Financial Markets Center in Howardsville, Virginia.
They should at least rethink “their aversion to acting against” those bubbles that they themselves have helped to produce. Or perhaps they could just close the doors on the Fed and let the markets work by themselves.
Richard Band is not someone who makes outlandish predictions just to get headlines.
Maybe he doesn’t do it just to get headlines, but he still makes outlandish predictions:
Index could be at 16,000 by year end, Richard Band says.
Maybe he’s right. And maybe probably he’s wrong. But I don’t think I’ll be making too many trades based on his ‘prediction’.
Let’s see what the market does. Looking at the numbers, we need to work on getting back to 12,500 and 13,000 first.
A pretty uninspiring open - rather fitting for the close of a very uninspiring week.
Indices are mixed right around the flat line, with A/D lines right around flat and the groups split. Steel stocks, natgas stocks and defense stocks lead the winners, while airlines, retail, homebuilders and the financials lead the red column.
Retail stocks were hurt by a warning from JCP, a weak consumer spending number out this morning, and a poor consumer confidence number on top of it.
Treasuries are mixed again, yields up at the 3-month end, but a bit lower further out on the curve. Energy prices are mixed - crude and gasoline lower, natgas up slightly. The dollar index is flat, gold and silver are lower.
It’s happening. Slowly, but surely, as yields fall and the dollar weakens:
South Korea’s National Pension Service plans to no longer purchase U.S. Treasurys, citing falling yields and an urge to pursue a broader range of foreign investments, news reports said.
“It is difficult to buy more U.S. Treasurys because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot,” said Kwag Dae-hwan, head of global investments at the National Pension Service, according to a Financial Times report.
The National Pension Service is the world’s fifth-largest pension fund, with about $220 billion in assets. It holds some $14 billion of U.S. government debt, a tiny portion of the overall $4.5 trillion U.S. Treasury market, the newspaper said.
Andrew Jeffery comments at Minyanville:
The Federal Reserve has so debased the dollar and pandered to Wall Street’s calls for lower interest rates that foreign investors have finally begun to shun U.S. government debt. The Financial Times reports a South Korean pension fund — the fifth largest in the world — will stop buying Treasuries.
The fund holds only $14 billion in Treasuries, but increasing demand for withdrawals are forcing it to seek better returns. Kwag Dae-hwan, the fund’s manager, said yields have fallen such that it plans to diversify away from Treasuries and into asset-backed securities, corporate bonds and European government debt to capture higher spreads.
Additionally, last weekend, central bankers from 16 Asian nations gathered and discussed the possibilities of investing over $1 trillion in reserves in each others’ sovereign bonds. Wide swings in the value of the dollar and recent actions taken by the Fed mean the U.S. is no longer the harbor of security it once was.
This is exactly the scenario Mr. Practical fears will ultimately lead to higher interest rates and prolonged economic weakness.
Foreign central banks keep their currencies weak against the dollar to maintain favorable export prices. They do this by buying dollars via the U.S. Treasury market.
If central banks rotate investments from Treasuries to other sovereign debt, rates will rise in the Treasury market, as sellers offer higher yields to attract potential buyers. The dollar will strengthen and asset prices will fall across the board. Higher interest rates will impede already stagnant economic growth.
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The shift in foreign ownership will not happen overnight. But as long as the Fed and Department of the Treasury continue to support policies that weaken the dollar, the trend will gain steam.