Our belief has been that the market has been overbought and continues to be overbought. Additionally, the market has been driven up in a very calculated, and if you will, manipulated way thorough the futures markets. Regardless of our beliefs, looking at different indicators backs up our belief that a rest is needed at a minimum, if not more.
The CBOE Equity Put to Call Ratio reached .40 last week, the lowest reading since the Historic March 2000 top and July 1999 top. The VIX, which we have discussed in the last month, has become almost non existent and even ignored. Rallies to new highs were being done on 30 to 40% less volume in the NYSE. Our proprietary overbought indicator is showing the third highest historical overbought reading since March 2000 and 1998. There had not been a Trend Down day in over 6 weeks (a day where the market closes 1% lower). What was missing for a pullback was a catalyst.
Enter the SEC and their fraud charges against Goldman Sachs. This may just be the tip of the iceberg, as we can not imagine that the SEC will stop here, without putting a microscope on the other Investment Banks. The new proposed financial regulation bill is sure to be something that the Investment Banks do not like. Someone was trying to make a point – the market had just hit a new high the day before, with little volatility, and they brought these charges on Expiration Friday. The day usually has a big time increase in volatility and volume. The charges could have been put off until the weekend or after the close.
Typically, here’s how the correction goes. Once the sellers enter and attack the market, the action that follows has a very similar pattern. The bad news or catalyst catches everyone by surprise, and creates anxiety and fear in a very complacent market. The first pullback is about 30-50 S&P points down. We achieved this (1210.50-1179.75= 31 points). The pullback happens over 1 to 3 days (Check, here too!). This is the first warning that the tide is turning. Then a rally is attempted, but usually the bounce falls short of previous highs on weak action – not much energy and a slow price recovery. The following sell off is much more serious in volume, time and the amount of price decline. This pullback should knock 100 to 200 points off the S&P from the 1210 high. Due to the high level of overbought readings we think the pullback could go even further.
Friday, April 16, 2010
Friday, April 9, 2010
Short Term Market Top or More Market Gusto to come?
The market continues its low volume, low energy drive higher. Many market professionals are calling for a correction of 5-10% now, with the bullish advisor index getting close to 50% and the VIX getting to 15 and change. The really interesting thing is that no amount of selling can do much damage and the volume is so incredibly light. Usually when we see the market having such low volume, it is after a correction, when the market is stabilizing, hence coming off an oversold situation.
Today, we have just the opposite, an overbought environment. Obviously, someone is buying the market. But it is not Main Street or the general public, if you will. Traditionally the last ones to the party, individual investors have been very slow to move back to stocks after the shock of the financial crisis. In fact, the public has been big buyers of bond funds, distrusting stocks. So here is the conundrum, the market rarely has a big pullback before the public jumps in with full force, but it looks so overbought now, being up 70% or so from the lows. Add to that the fact that we have not had a Trend Down day – a 1% decline in the averages – in over a month and a half. There is certainly huge buying support!
We think the market needs a breather and is due for one. However, we also remember the ridiculous run in the internet stocks and IPO’s in 1999 and oil at $147 a barrel, not to mention the 30 year US Treasury bond at 142 in Winter 2008. The point being that overbought stays that way far too long many times, until crazy speculation comes into play. So, we will probably continue to see more of the same in the market a while longer.
Is there really an increase in consumer spending? Well, it looks like many of the people in Main Street are taking one from the playbook of Wall Street, where everyone gets “bailed out”.
Mortgage Defaults May Be Driving Consumer Spending from CNBC http://www.cnbc.com/id/36422316
Lender Processing Services just put out its "Mortgage Monitor Report," and we have a new record:
The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.
Okay, so 7.9 million Americans are not paying their mortgages. Are we really thinking about the implications of that? I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.) That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective. He cites an older stat of 7.4 million delinquent loans, but you'll get the picture.
First he describes a case study of someone who applied for the government's Home Affordable Modification Program. The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc.
Writes Jackson: Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.
Other studies have shown that borrowers are more likely to default on loans if they have friends or neighbors who have. On top of that, the rate at which formerly current borrowers are defaulting now is rising. I guess it's just another, innovative way of using your home as your ATM. It currently takes well over a year, in some cases nearly two years, to go from missing a payment to being chucked out of your home.
That's a lot of time to go shopping.
Today, we have just the opposite, an overbought environment. Obviously, someone is buying the market. But it is not Main Street or the general public, if you will. Traditionally the last ones to the party, individual investors have been very slow to move back to stocks after the shock of the financial crisis. In fact, the public has been big buyers of bond funds, distrusting stocks. So here is the conundrum, the market rarely has a big pullback before the public jumps in with full force, but it looks so overbought now, being up 70% or so from the lows. Add to that the fact that we have not had a Trend Down day – a 1% decline in the averages – in over a month and a half. There is certainly huge buying support!
We think the market needs a breather and is due for one. However, we also remember the ridiculous run in the internet stocks and IPO’s in 1999 and oil at $147 a barrel, not to mention the 30 year US Treasury bond at 142 in Winter 2008. The point being that overbought stays that way far too long many times, until crazy speculation comes into play. So, we will probably continue to see more of the same in the market a while longer.
Is there really an increase in consumer spending? Well, it looks like many of the people in Main Street are taking one from the playbook of Wall Street, where everyone gets “bailed out”.
Mortgage Defaults May Be Driving Consumer Spending from CNBC http://www.cnbc.com/id/36422316
Lender Processing Services just put out its "Mortgage Monitor Report," and we have a new record:
The nation's foreclosure inventories reached record highs. February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase. The percentage of new problem loans also remains at a five-year high. The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million loans. Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.
Okay, so 7.9 million Americans are not paying their mortgages. Are we really thinking about the implications of that? I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.) That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective. He cites an older stat of 7.4 million delinquent loans, but you'll get the picture.
First he describes a case study of someone who applied for the government's Home Affordable Modification Program. The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc.
Writes Jackson: Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.
Other studies have shown that borrowers are more likely to default on loans if they have friends or neighbors who have. On top of that, the rate at which formerly current borrowers are defaulting now is rising. I guess it's just another, innovative way of using your home as your ATM. It currently takes well over a year, in some cases nearly two years, to go from missing a payment to being chucked out of your home.
That's a lot of time to go shopping.
Friday, April 2, 2010
Market Down -2% for the day
Ok, an attempt at a late April fool’s joke. But seriously, the market has to have set some kind of record for not having a single trend down day for all of March & so for April. Things are definitely on cruise control with the market dead set on Dow 11K and S&P 1200. No amount of selling is making a dent. Several of our indicators are flashing sell signals, while one is showing a massive bearish divergence, recording negative numbers while prices appreciate. Almost impossible, a true feat! With loose Fed policies and free money for the banks, anything is possible.
There is a lack of volume issue that is concerning to us. On the up days, according to volume data that I collect daily from the NYSE, equity volume is approximately 30% to 40% less than that of bearish days. The market is somehow continuing to advance on an ever slimmer amount of volume.
Regarding the recent Nan Farm Payroll jobs report:
Nonfarm payrolls were +162k in Mar vs. GS estimate of +200k, & median forecast +184k.
Unemployment rate of 9.7% in Mar vs. GS 9.6% estimate, median forecast 9.7%.
Average hourly earnings -0.1% in Mar (mom, +1.8% yoy) vs. GS +0.1% estimate, median forecast +0.2%.
The 162k increase in nonfarm payrolls reported for March looks like it is mainly due to the hiring of temporary workers for the census (+48k) and weather effects. The census workers will be out of work again in a few months, but ok. While the weather effects can only be estimated, the +100k figure looks right and maybe soft based on three things: (a) an increase in construction payrolls (+15k vs. declines of 60k in Jan and 59k in Feb), (b) a full recovery from Feb setbacks in work weeks, and (c) a sharp swing down in the number of people reporting themselves as out of work due to weather (to 135k in Mar from 1.03 million in Feb, which statistically would be consistent with a weather effect of more than 100k).
Two other aspects of this report are firmer. First, payroll figures for Jan and Feb were revised up, by a cumulative 62k. Second, the survey of households reported a third consecutive large increase in employment, of 264k (cumulative increase now 1.1 million). It is not unusual for the household survey to show firmer a recovery in the early stages of an economic recovery as net business formation picks up more rapidly than the payroll figures may anticipate.
Despite the firmer tone of the household survey, the unemployment rate remained at 9.7%, as labor force participation edged up for a second consecutive month. In fact, on an unrounded basis the unemployment rate came just short of rising 0.1 (9.749%). Meanwhile, the broadest "U6" measure of under employment edged up 0.1 point, to 16.9%, underscoring the fact that there is still quite a bit of unused capacity in the labor market, both in terms of people who are working part time because they cannot find full-time work and those who have not reentered the labor force. Consistent with this, average hourly earnings continue to weaken, slipping 0.1% on the month and dragging the year-to-year trend down to 1.8% (despite a small upward revision to the prior month).
With the recovery of work weeks in March, the index of total hours worked rose 0.4%. For the quarter as a whole, hours worked were up 2.1% at an annual rate. With the expectation for real GDP still fairly consistent with an estimate of a 2.5% annualized increase, the implication is that productivity gains have diminished sharply.
Are Copper Prices about to pullback?
As many of you already may know, copper prices tend to be a leading indicator of stock prices. From Barron’s, “ While China’s 10.7% growth in the forth-quarter gross domestic product alongside soaring imports are theoretically bullish for commodities, worries that Beijing may step up efforts to cool the economy persist. For copper, central to China’s housing and construction, the country’s move to pre-empt inflation risks could spell trouble.
“Monetary tightening in China continues to be the primary focus of the copper market, given that loose stimulus lending in 2009 soaked up much of the copper surplus in 2009,” says Carl Firman analyst at Virtual Metals.
Junk Bonds are Back!!!
Junk bonds had their best year ever in 2009, with a total return of 60% or so. Most investors are keenly aware that the best performing asset class for on year is rarely the best performer the following year. At any rate, risk appetite is back in a huge way and issuers of junk bonds are putting together some high risk structures. Fitch Ratings says in the 1st quarter of 2010 that there was new record in junk issuance, around $60 Billion. At one point after the worst of the credit seize-up, about 40% of new junk bonds were senior in the capital structure and secured by assets, says Eric Tutterow, managing director high yield corporate finance at Fitch. So, they were less risky.
In March 2009, 80% of the new deals issued were senior unsecured. “Recently four issues priced as senior subordinated bonds. Last week, a PIK note, or pay-in-kind note – where the issuer makes coupon payments in debt rather than cash, was snapped up by investors.”
Amazing! I seem to recall that last time junk bonds were in vogue was when Michael Milken was the Junk Bond King in 1987.
Last the sequel to the movie Wall Street, is due out very soon. In fact, the opening has already been delayed once. Wall Street came out in 1987. The famous quote, “Greed is good,” by Gordon Gekko (played by Michael Douglas) was at the forefront of everyone’s mind.
We are indeed in an interesting period.
There is a lack of volume issue that is concerning to us. On the up days, according to volume data that I collect daily from the NYSE, equity volume is approximately 30% to 40% less than that of bearish days. The market is somehow continuing to advance on an ever slimmer amount of volume.
Regarding the recent Nan Farm Payroll jobs report:
Nonfarm payrolls were +162k in Mar vs. GS estimate of +200k, & median forecast +184k.
Unemployment rate of 9.7% in Mar vs. GS 9.6% estimate, median forecast 9.7%.
Average hourly earnings -0.1% in Mar (mom, +1.8% yoy) vs. GS +0.1% estimate, median forecast +0.2%.
The 162k increase in nonfarm payrolls reported for March looks like it is mainly due to the hiring of temporary workers for the census (+48k) and weather effects. The census workers will be out of work again in a few months, but ok. While the weather effects can only be estimated, the +100k figure looks right and maybe soft based on three things: (a) an increase in construction payrolls (+15k vs. declines of 60k in Jan and 59k in Feb), (b) a full recovery from Feb setbacks in work weeks, and (c) a sharp swing down in the number of people reporting themselves as out of work due to weather (to 135k in Mar from 1.03 million in Feb, which statistically would be consistent with a weather effect of more than 100k).
Two other aspects of this report are firmer. First, payroll figures for Jan and Feb were revised up, by a cumulative 62k. Second, the survey of households reported a third consecutive large increase in employment, of 264k (cumulative increase now 1.1 million). It is not unusual for the household survey to show firmer a recovery in the early stages of an economic recovery as net business formation picks up more rapidly than the payroll figures may anticipate.
Despite the firmer tone of the household survey, the unemployment rate remained at 9.7%, as labor force participation edged up for a second consecutive month. In fact, on an unrounded basis the unemployment rate came just short of rising 0.1 (9.749%). Meanwhile, the broadest "U6" measure of under employment edged up 0.1 point, to 16.9%, underscoring the fact that there is still quite a bit of unused capacity in the labor market, both in terms of people who are working part time because they cannot find full-time work and those who have not reentered the labor force. Consistent with this, average hourly earnings continue to weaken, slipping 0.1% on the month and dragging the year-to-year trend down to 1.8% (despite a small upward revision to the prior month).
With the recovery of work weeks in March, the index of total hours worked rose 0.4%. For the quarter as a whole, hours worked were up 2.1% at an annual rate. With the expectation for real GDP still fairly consistent with an estimate of a 2.5% annualized increase, the implication is that productivity gains have diminished sharply.
Are Copper Prices about to pullback?
As many of you already may know, copper prices tend to be a leading indicator of stock prices. From Barron’s, “ While China’s 10.7% growth in the forth-quarter gross domestic product alongside soaring imports are theoretically bullish for commodities, worries that Beijing may step up efforts to cool the economy persist. For copper, central to China’s housing and construction, the country’s move to pre-empt inflation risks could spell trouble.
“Monetary tightening in China continues to be the primary focus of the copper market, given that loose stimulus lending in 2009 soaked up much of the copper surplus in 2009,” says Carl Firman analyst at Virtual Metals.
Junk Bonds are Back!!!
Junk bonds had their best year ever in 2009, with a total return of 60% or so. Most investors are keenly aware that the best performing asset class for on year is rarely the best performer the following year. At any rate, risk appetite is back in a huge way and issuers of junk bonds are putting together some high risk structures. Fitch Ratings says in the 1st quarter of 2010 that there was new record in junk issuance, around $60 Billion. At one point after the worst of the credit seize-up, about 40% of new junk bonds were senior in the capital structure and secured by assets, says Eric Tutterow, managing director high yield corporate finance at Fitch. So, they were less risky.
In March 2009, 80% of the new deals issued were senior unsecured. “Recently four issues priced as senior subordinated bonds. Last week, a PIK note, or pay-in-kind note – where the issuer makes coupon payments in debt rather than cash, was snapped up by investors.”
Amazing! I seem to recall that last time junk bonds were in vogue was when Michael Milken was the Junk Bond King in 1987.
Last the sequel to the movie Wall Street, is due out very soon. In fact, the opening has already been delayed once. Wall Street came out in 1987. The famous quote, “Greed is good,” by Gordon Gekko (played by Michael Douglas) was at the forefront of everyone’s mind.
We are indeed in an interesting period.
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