Sunday, July 13, 2008

Stock Market Update 13 July 2008

Another very tough week in the markets for those who are long equities. For those who are shadowing my moves, I know it is frustrating making 2-3% but when the market is down 20%+ you are well ahead of the game. Preservation of capital and patience is required when playing with a bear!

To start with, here are the year-to-date returns for the funds I hold:

Core Holdings (currently approx 94% of portfolio):

Fidelity Australian Dollar Fund: +3.3%

Fidelity Euro Fund: +1.8%

Fidelity International Bond Fund: +3.6%


Ongoing Equity Purchases (currently approx 6% of portfolio):

BlackRock/MLIM Equity: -14.4%

Fidelity International Fund: -13.9%

Russell Global 90 Fund: -13.2%


Representative Charting Index:

Dow Jones World Index: -14.4%



There were two key developments late Friday that have set the stage for either a massive waterfall crash-like scenario or a massive countertrend rally scenario.

The first was the announcement after the markets closed on Friday (how convenient is that?) that one of the big U.S. banks has gone bankrupt (see Bloomberg article):

_____________________________________________________________________________________

IndyMac Seized by U.S. Regulators; Schumer Blamed for Failure

By Ari Levy and David Mildenberg

July 12 (Bloomberg) -- IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash.

The Federal Deposit Insurance Corp. will run a successor institution, IndyMac Federal Bank FSB, starting next week, the Office of Thrift Supervision said in an e-mail yesterday. The regulator blamed U.S. Senator Charles Schumer for creating a ``liquidity crisis'' after a letter on June 26, in which he expressed concern that the bank may fail.

The Pasadena, California-based lender specialized in so-called Alt-A mortgages, which didn't require borrowers to provide documentation on their incomes. The demise adds to the crisis caused by the subprime collapse and may mean regulators will have to raise more money to support the federal deposit insurance program that repays customers when a bank fails.

``IndyMac is the vanguard, the precursor of more stuff coming,'' said Christopher Whalen, managing director of Institutional Risk Analytics, a market research company in Torrance, California. ``It's not surprising to see IndyMac resolved. What you have to ask is what's coming next. It's going to be a wave of medium to bigger-than-medium institutions.''

IndyMac's home state, where Countrywide Financial Corp. was also located before it was bought last week, has been among the hardest hit by foreclosures. California ranked second among U.S. states, with one foreclosure filing for every 192 households in June, 2.6 times the national average.

IndyMac's Losses

The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record. IndyMac becomes the largest OTS-regulated savings and loan to fail, according to the FDIC.

Mortgages serviced by IndyMac will be turned over to the FDIC and the regulator will be reaching out to customers immediately, Chairman Sheila Bair said on a conference call yesterday. Customers will have access to funds this weekend via automated teller machines and electronically and by phone starting next week.

The FDIC intends to sell IndyMac within 90 days, preferably as a single entity, Bair said. If that doesn't work, the lender will be sold off in pieces, she said.

After peaking at $50.11 on May 8, 2006, IndyMac shares lost 87 percent of their value in 2007 and another 95 percent this year. The stock fell 3 cents to 28 cents yesterday.

Schumer's Comments

IndyMac came under fire last month from Schumer, the Democrat from New York, who said lax lending standards and deposits purchased from third parties left it on the brink of failure. During the 11 business days after Schumer explained his concerns in a June 26 letter, depositors withdrew more than $1.3 billion, the OTS said.

``This institution failed due to a liquidity crisis,'' OTS Director John Reich said in the statement. ``Although this institution was already in distress, I am troubled by any interference in the regulatory process.''

Schumer blamed IndyMac's own actions and regulatory failures for the bank's seizure.

``If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,'' Schumer, a New York Democrat, said in an e-mail yesterday. ``Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.''

The failure will cost the federal deposit insurance program about $4 billion to $8 billion, the FDIC said. Some $1 billion of uninsured deposits are held by about 10,000 customers, the FDIC said. Those depositors will get an ``advance dividend'' equal to half the uninsured amount, according to the statement.

Firing Workers

The FDIC insures $100,000 per depositor per insured bank, according to the agency's Web site. Customers may qualify for more coverage depending on the type of accounts they own, and some retirement accounts have a $250,000 limit.

IndyMac announced on July 7 that it was firing half its employees. The lender agreed to sell most of its retail mortgage branches to Prospect Mortgage, giving the Northbrook, Illinois based-company more than 60 branch offices with 750 employees. IndyMac also has a retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC.

The company was started in 1985 by Countrywide founders Angelo Mozilo and David Loeb under the name Countrywide Mortgage Investments. In 1999, it converted into a bank from a real estate investment trust. That year, Michael Perry replaced Mozilo as chief executive officer.

Under Perry's leadership, profit more than doubled from $118 million in 2000 to $343 million in 2006 amid the housing boom. The stock more than tripled over that stretch.

Perry will not be continuing with the new FDIC-controlled institution, while other executives will be retained, Bair said. The FDIC's John Bovenzi will assume the CEO role.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net.

Last Updated: July 12, 2008 00:23 EDT

_____________________________________________________________________________________

The second shoe to drop was the violent fall in the stock price of Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association) this past week. These two institutions are semi-government sponsored mortgage companies (known as GSE's; Government Sponsored Enterprises) that combined hold almost 6 Trillion dollars in U.S. mortgages. They are essentially insolvent (bankrupt) and something needs to be done.

What that "something" will be is anyone's guess. What is certain is there will be many high level meetings this weekend and I expect something major will be announce before Monday's market open to attempt to stop the bleeding in the stock price of these two organizations (see Bloomberg article) and avoid a possible market crash:
_____________________________________________________________________________________
Fannie Mae, Freddie Mac Turmoil Pose New Economic `Headwind'

By Matthew Benjamin and Craig Torres

July 12 (Bloomberg) -- The slides in Fannie Mae and Freddie Mac, the largest providers of U.S. mortgage financing, threaten to deepen the economic slowdown by curbing credit to a housing industry already in its worst recession in 25 years.

The two companies' shares reached the lowest level in more than 17 years yesterday, making it tougher for them to raise capital at a time when they account for about 80 percent of mortgages packaged into bonds. A failure of the companies would likely send home loan rates higher, causing further declines in home sales and prices.

The dangers mean the Bush administration, which yesterday indicated a government takeover isn't needed, must be ready to keep the companies afloat, investors said. Lawmakers aim to take up a housing bill next week to help buttress confidence in Fannie Mae and Freddie Mac.

``There is no way the [=^]federal[^=] government is going to let either of those agencies die,'' said Eric Hovde, chief executive officer of Hovde Capital Advisors LLC, which runs a $1 billion hedge fund. ``You can't take housing, which is the most important asset class in the country, and mortgages, which are the largest debt markets, and destroy them.''

Fannie Mae and Freddie Mac own or guarantee about half the $12 trillion in U.S. home loans outstanding. Even if the government steps in with some type of rescue, mortgage rates may rise as much as half a percentage point as the cost of selling mortgage-backed securities rises, said Keith Gumbinger, vice president of mortgage research firm HSH Associates in Pompton Plains, New Jersey.

`Headwind for the Economy'

``No matter how this turns out, you have to think'' the mortgage market ``is going to be under more strain,'' said Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington who used to work at the Federal Reserve. ``That is a headwind for the economy, and something the Fed will have to take into account'' in considering when to raise interest rates.

Fed Chairman Ben S. Bernanke will deliver updated quarterly forecasts when he gives his semiannual testimony on the economy to Congress next week. Traders anticipate the central bank will raise rates this year to head off an acceleration in inflation spurred by oil and food costs.

The Fed, which opened lending to investment banks in March in the first extension of credit to nonbanks since the 1930s, is looking at options for Fannie Mae and Freddie Mac along with other agencies.

`Range of Options'

Spokeswoman Michelle Smith said in an interview she was ``not prepared to discuss the range of options and alternatives being considered.'' The Fed hasn't spoken with the two firms about access to direct loans, she said.

Treasury Secretary Henry Paulson said in a statement yesterday that ``our primary focus is supporting Fannie Mae and Freddie Mac in their current form.'' The government-sponsored enterprises have [=^]federal[^=] charters and are shareholder-owned companies.

Shares of the two companies closed lower, with Fannie Mae losing $2.95 to $10.25 and Freddie Mac down $0.25 at $7.75 in New York Stock Exchange composite trading. Washington-based Fannie Mae's market capitalization has fallen to $10.1 billion from $38.9 billion in December, according to Bloomberg data. McLean, Virginia-based Freddie Mac's total has slumped to $5 billion, from $22 billion over the same period.

``The substantially smaller market values could dramatically hinder the companies' ability to raise additional capital,'' CreditSights Inc. analysts Richard Hofmann and Adam Steer wrote in a note to investors Friday.

House Prices Fall

The declining availability of credit pushed down home values in 20 U.S. metropolitan areas during April at a record rate, according to the S&P/Case Schiller home-price index. The index dropped 15.3 percent from a year earlier.

Senate lawmakers yesterday approved a bill including $300 billion to help thousands of Americans keep their homes and tighter regulation of Fannie Mae and Freddie Mac. The House previously approved its own version, and legislators may reach agreement on a final bill to send to President George W. Bush for signature next week, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said yesterday.

Economists already anticipate economic growth will dwindle to a 0.6 percent pace by the final three months of 2008, the weakest pace in six years, according to the median estimate in a monthly Bloomberg News survey. Declines in residential construction have subtracted from gross domestic product for nine straight quarters through March.

Rising Role

As mortgage providers retreated from signing new loans, the housing market has relied on Fannie Mae and Freddie Mac to step up. The two firms accounted for 81 percent of the home loans that were packaged into securities in the first quarter, according to the Office of [=^]Federal[^=] Housing Enterprise Oversight.

``This rapid growth pace'' in firm's portfolios ``will probably need to continue if we want to avoid an even sharper deterioration in overall credit availability than is already occurring,'' said Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. Deteriorating credit creation is the ``key vulnerability'' for the U.S. economy, he said.

To contact the reporters on this story: Matthew Benjamin at mbenjamin2@bloomberg.net

Last Updated: July 12, 2008 00:01 EDT

_____________________________________________________________________________________
The key to note here is it appears there is a level of panic building in the U.S. This could result in a massive stock market crash on Monday (after "Joe Sixpack" has seen all the bad news in the papers/FOX/CNN/etc and calls his broker on Monday to "sell everything").

Alternately there is a ton of money sitting on the sideline looking to go back into the markets (including mine) and should there be a good "flush" on Monday it may be the clue we have hit a short term bottom.

It is impossible to judge what might happen; Monday will be a very interesting day to say the least.

Now on to the charts:


First chart is the Dow Jones World daily line chart (click all charts to enlarge):



This chart last went bearish on an ADX (14) -DI line (red line) break above 60, a price break below the MA50 (50 day moving average) and an MACD cross below the zero line.

This chart is still BEARISH but there are some nice signs a bottom might be forming (if not already in). The key to note is the Slow STO is still massively oversold and the MACD histogram (blue bars) are putting in lower lows as the price continues to drop. This tells us the selling momentum is reducing even as the price continues to fall, which is a potentially bullish indication.

This chart will not be truly bullish until the +DI (green line) crosses above 60, the price crosses above the 50 DMA and the MACD reverses above zero.


Next chart is the 1 box Point and Figure chart:



This chart switched to BEARISH on a price break below 288 and is still in a downtrend. It projects a target of 254 (that is essentially where we are at now) so this tells me the short term downside is close to an end.


Next chart is the traditional Point and Figure chart:



This chart had been one of the only charts that remained bullish over the past 2 months. It flipped to bearish on a price break below 264 and projects a target of 212. This chart is now BEARISH.


Next chart is the 10 year weekly chart:



Once again, this chart told me a bear market was in place in late 2007 when the 13 week moving average crossed below the 34 week moving average. Nothing has changed and this chart remains BEARISH.

A reminder once again that if/when I make a move back into the markets, it will be done only with the intent of scalping a short term trade. Until this chart turns back to bullish (13 week ma above 34 week ma), the bear market is intact and any rallies should be sold into.


Next chart is the monthly chart:



Again still BEARISH and will remain so until we get a monthly closing price above the 12 month moving average.

Last chart is the U.S. dollar (all dear to our hearts given the Dirhams continued ties to this toilet paper).

I was somewhat bullish on the dollar but a major change may have taken place Friday (due to all the financial woes in the US):



A short term bottom was found in March @ 70.70. Since then the USD has worked its way back to a high of 74.31. The key to note is it did not break above the previous resistance level of 74.48 and is therefore still in a downtrend (note both the bigger downtrend channel in red and the smaller downtrend line in blue).

It has since dropped quite dramatically and on Friday broke out of what is known as a "Bear Flag" pattern. Should this pattern play out "textbook", it would mean the USD will continue to decline and we would not look for a bottom to the pattern until 64.85 (the "flagpole extends from 77.85 to 70.70 which equals 7.15 points. You take the breakout below the "flag" currently at 72.00 and subtract 7.15 and you get 64.85).

The key to watch is whether the USD stays above its previous support level at 70.70. A break below and I think 64.85 easily comes into play.


Bottom Line

The markets are severely oversold. The fear is rapidly building in the U.S. over further possible banks being insolvent and you can bet many are thinking this weekend about making a run on the banks next week to withdraw their deposits.

It is times when the "blood is flowing in the streets" that those who have the courage to go against the crowd make the most money. It is impossible to call a bottom but it feels to me like we may be near one now. We may not be there but we are definitely close.

I will be watching the markets closely next week. Once again, I reiterate any move I make will be done only with the intent of scalping a short term swing trade.

This is a bear market. Bear markets last 9-15 months "on average" and decline 30 % "on average". These are not "average" conditions so there is no reason to assume we will get an "average" bear market. I fully expect we will get a severe bear market (50%+ losses) but we will not know how bad it was until it is past.
When I make a short term trade into the markets I will blog it immediately. The key is to be careful out there kids. This bear will eat you alive if you are not careful.

I remain invested as follows:

-50% Fidelity International Bond Fund*

-25% Fidelity Australian Dollar Fund*

-25% Fidelity Euro Fund*


*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary 1-2% from that posted.



Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

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