Munching on the Numbers – by Max Whitmore

Apologies for this being late……

MUNCHIN’ ON THE NUMBERS

What a day! It all started off in Japan as a mild up action day when a noted analysts confirmed that his discussions with officials both in Japan and China quietly assured him that each intended to continue to buy our U.S. Treasury debt instruments, dollar problems or not. And why not. They are both very dependent on the U.S as their prime trading partner – read market to sell their “stuff.” You don’t kick the kid that brought the cash to the party, do you?

From there the mild up move in the markets continued right across Asia, Europe and when it got to the U.S. two very important reports – consumer confidence and Retail Sales came in well ABOVE what was expected. Well, the rest of the day was a good one for the bulls. No, we didn’t move above the key resistance on the S&P at about 1,130-40, but the market held on to nice gains and closed the week very happy. And this was despite several very heavy tries by the bears to knock down the bull seven month rally.

The good news on the consumer front, however, had a very bad effect on the bond market. The good news said to bond holders that THE Fed might consider raising interest rates in the near future (2-4 months) and that sent many to the sidelines after they sold their bond holdings. It was the second straight hard sell of bonds and took the index down to within striking distance of my Keyline at 117 20/32, just 7 ticks below the Friday bond close. So what do I make of this? Well, a cross below the Keyline would signal the possible inevitable rise in interest rates sooner than some expect and that means a possible dent in earnings out 6-12 months. Not a good sign. Not a lot more to say for now, but if the Keyline is broken come the close next Friday, I will have lots to say in the Weekly letter I post each Monday.

I will be closing a bit early tonight, as I need to get some family business done before the banks and stores close, so hope you will excuse me. I will have los more about his week in the regular weekly Monday Report.

So, until Monday, I do hope your day was a profitable one. Will be back here on Monday after the market close (will have the Weekly Report by posted by noon Monday, too), the Lord willin’ and the creek don’t rise.

NEED SOMETHING TO TALK ABOUT TONIGHT?

SIX MAJOR IMPACTS ON THE MARKET TODAY

1. Retail sales up almost twice expected. Markets surprised, but loved it.

2. Bond took a big hit on the good consumer news. Price fell, rates increased. Future uncertain here.

3. Consumer Confidence (by Univ. of Michigan) rose more than expected, giving support to Retail sales!

4. Sweeping financial sector control bill passed House. Uncertain how Senate will respond. Pile on?

5. Oil continues to fall in price, but some expect higher prices as consumer numbers improve.

6. VP Biden goes to Conn. to support friend Sen. Dodd as Conn. turns against Sen. Dodd big time

Do you think Dodd is in that much trouble? And the controls on the financial markets, will they be enough or too much? But, I love the consumer numbers!! That was exciting news.

Closes as of Fri. 12-11-09 CHANGE (cash index prices)

DOW INDU. 10,471.50 +65.67 points

S&P 1,106.41 +6.40 points

NASDAQ 2,190.31 -.55

30 YR BONDS 117 21/32 -24/32

GOLD 1,132.50 +$2.00

DOLLAR 76.57 +.52

OIL 70.48 -$.36

COPPER $3.133 +$.0285

*The name Super Chart Keyline is a registered Trademark of Max Whitmore.

Interest Rates in the Fed’s Sights?

This is the weekly column by Max Whitmore that he writes after the market closes on Fridays…..

Enjoy!

Tom

 

12-7-09

INTEREST RATES IN THE FEDS SIGHTS?

CURRENT BUY – 100% of portfolio stock allocation $$$

SUPER CHART 7-25-09 BUY 50% allocation only (S&P @ 970)

SIGNAL 10-9-09 BUY balance of 50% (S&P @ 1071)

Well, we got the best of both worlds last week, lower bond and gold prices and a higher dollar, plus a bonus by getting above the 1,100 S&P level and staying there most of the week, finally closing at 1,105.98 on the S&P cash index. And add to that the cooling of the Dubai problem, at least to the degree that it is not a front page worry. It was an almost perfect week for the charts.

But, don’t think that we are out of the woods just because all the good stuff lines up end to end. The weakness that the Dubai episode uncovered nearly two weeks ago is still there. But, as of this writing, it is fair to say that it is likely no longer a game-breaker. But, what it did show to all was that the world’s central banks still have a long way to go to regain the confidence of investors.

I have said a number of times over the last two years that the worst nightmare of Mr. Bernanke, our Fed chairman, is to lose the confidence of investors. His concern over this is one of the reasons that the huge flood of “newly printed” dollars continues. At all costs, he does not want deflation to gain the upper hand. So far he has been able to keep control, which is testified to by the stock markets seven month rise.

But, last Friday’s employment report may signal the beginning of a different battle for investors. Instead of the expected near 125,000 job loss, the report showed only an 11,000 job loss and every investor in the world suddenly looked up from their computer screens and said in unison “What!?!”

The bond guys were the only ones not caught flatfooted, as I see it. They began to sell bonds last Tuesday and sold bonds heavily on Wed and Thur. When the employment number came out they just continued to sell. Bonds fell over 4 points in those three days. That is a huge drop and a clear sign that they had some sense of the coming employment numbers. I don’t mean they knew somehow from a cheat sheet. They just sensed it coming from data released during the previous three weeks. They were right.

Now, the big fear gripping the markets shifts into a whole new direction. Remember last week when I told you that Australia had hiked their interest rates for the third month in a row? I told you that there was a drum beating in the distance. Well, the drummer is at the door now beating like there is no tomorrow. The tune is called “When?” That is, when will the Fed and other world banks begin to hike rates?

Last February the Fed said they would keep rates low for “an extended period," as you may recall. Now investors are wondering if that period is rapidly coming to an end. Will the Fed cease entering the market and buying bonds to thrust more funds into the economy? Will Mr. Bernanke say something soon (maybe even today as he continues to face Congress during hearings that seek to give him another four year term) to indicate that rates may finally go up a bit? You can be sure that investors will be watching. And, of course, so will I.

OK, with all this as the backdrop, just where are we on the charts? Well, there is a short answer and a long answer. Let’s just stay with the short one. OK? The short answer is that the S&P continues to climb. Right after the employment numbers were announced at 8:30am Friday, there was a shot by the markets to break above the current overhead resistance (at about S&P 1,130-40). But, the attempt failed as the dollar gained a huge chunk as the day progressed, mostly from the “carriage trade” traders buying dollars to cover their borrowing activities.

Whatever the reason, the bottom line for the charts was that supports did hold up as the markets backed off sharply. Will there be another try to break up through overhead resistance. For sure. When? Don’t know at this point, but a very important event occurred last week with regard to my Keyline that makes me more confident that this next try or two will succeed. For the first time since the crash 14 months ago late in 2008, my Keyline closed at tad higher price than the previous week. Why is this important? Because when my Keyline slope turns up, upside momentum has gained control of the chart.

Now this event is no guarantee we will just continue to climb higher, but in every BUY trade called by the Super Chart Keyline since I started to keep it 40+ years ago, that “turn-up” point was followed by at least 5-7 months of higher Keyline prices each week, with the S&P close each Friday staying above the Keyline.

Note I said Keyline prices continued higher each week. There were still ups and downs of the Friday S&P cash index prices, but even with these ups and downs the cash index stayed above the Keyline all during that time, too. My Super Chart Keyline still says that we are heading for the S&P 1,220-50 area (about 11,300-600 Dow) and, unless we close for six weeks consecutive below my Keyline, that is still where it indicates we are going. Will it be true to its 40+ year history again? No guarantee, but until it breaks my Keyline to the downside, we are going to the S&P 1,220-40 level, as I see it.

There was one other good chart development technically last week. Remember I told you of a concern I had about the Momentum Section possibly signaling a price retreat? Well, it did NOT come to pass. The green stochastic (fast) did drop to the 50 level as I felt it would, but then it move up sharply to close last Friday at 79.01. This means, also as I had hoped, that any potential decline that might have been signaled by this formation is, for the present moment, wiped away.

However, there is one cloud on the horizon, as I alluded to above. The most significant chart development of the week was the decline in bond prices last week. The bond market, one that no one can really control because it is so huge (not even the Fed), will now be watched closely by all savvy investors. For me, I will be watching my Bond Keyline like a hawk. Currently, it sits at last Friday’s close 115.26. I have attached the current Bond chart so you can see what last week looked like.

You can see that Bonds closed at 118 26/32 down from the over 123 reading of the previous Friday. But, we are still a tad over 3 points above the Keyline, still OK. But, if we were to close below my Keyline, it would signal to me that interest rates will likely be going up very soon, as the Fed anticipates a need to suck dollars out of the economy to dampen a possible inflation move. If that does occur, Mr. Bernanke will have achieved his goal of avoiding deflation for now. And it will be the first time in history that the Fed actually has changed the outcome of a possible depression. Will it work out that way? Hummmmmm. Stay tuned.

But, in the meantime, back at the ranch stock investors will be keying on the bonds far more than the dollar for awhile. Any real potential for higher rates – read that as pressure on earnings – will send them scurrying for the sidelines and we might see a test of my Keyline sooner than expected. But, let us not get ahead of ourselves. I would still be a stock buyer in here, albeit it on a bit of a reduced scale for now, until we see how this current change in the winds plays out. Keep checking here each day or so. For, if the situation gets more pronounced in bond selling and higher interest rates become a real threat, I will have a special report for you as to the next steps to take. Never a dull moment!

Now, for those of you that always like to have a quick wrap-up of what news influenced the market last week, here is how I saw it:

1. Dubai moved to the backburner, still there, but not a game breaker.

2. Bonds sold off as the big players in the bond market sensed a recovering economy worldwide that might lead to higher interest rates.

3. The Friday employment report caught most investors off guard, as it indicated only an 11,000 job loss, far below the expected 125,000 job loss. And the unemployment rate dropped to 10% from 10.2%. But, be careful, one month’s number does not a trend make!

4. The metal market, especially gold, eased off its recent new high price levels, as the dollar gained ground. And the dollar gained ground as “carriage trade” traders – those that borrow dollar at almost 0% and invest for higher interest rates elsewhere in the world – began to cover their borrowing by buying dollars to repay their borrowing.

5. Several of the big U.S. banks announced that will be paying back their government loans – opps, their Fed loans; remember the Fed is NOT a government entity – with the Bank of America the biggest one making such an announcement.

6. Not much in the way of political developments to move the market last week, but keep your eye on the troop surge progress and the Congress battling over the health care issue.

Of course, there were other events, but all were of much less importance that these six, as I see it. Hope that helps you put the markets reactions into perspective.

Well, that’s about all this week. The bottom line remains that the S&P is still above its Keyline by over 40 S&P points, bonds remain above their Keyline by over 3 points, gold is way above the Keyline, oil has been above its Keyline since early October (not such a good sign) and the dollar continues well BELOW its Keyline. Best scenario this week would be bonds steady, dollar steady to a little higher, gold soft, and the S&P staying above its 1,100 level. Worst scenario would be bonds dropping fast, dollar rising fast, and the S&P dropping below its 1,080 level.

Well, as always, do have a good investing week. And you keep in touch. I do! See you next week.

Max Whitmore

Closes as of Friday 11-27-09 CHANGE (cash index prices)

DOW Indu. 10,388.90 +79 points

S&P 1,105.98 +15 points

NASDAQ 2,194.35 +56 points

30 YR BONDS 118 12/32 -4 12/32 (big drop here!)

GOLD 1,169.50 -$10

OIL 75.81 -$.15

TOP 10 STOCK SECTORS LAST 6 MONTHS @12-6-09

1. BROADCAST (++67%) #2 LAST WEEK

2. PRINTING (+48.7%) SAME AS LAST WEEK

3. AUTO (+45.4% #4 LAST WEEK

4. ENGINES (41.3%) #1 LAST WEEK

5. PUBLISHING (40.8) SAME AS LAST WEEK

6. ELECTRICAL (+40.3%) SAME AS LAST WEEK

7. TOOLS (+37.7%) #9 LAST WEEK

8. CONSUMER PRODUCTS (+37.1%) NEW TO LIST THIS WEEK

9. MINING (+31.8%) #10 LAST WEEK

10. TEXTILE (+30.4%) #8 LAST WEEK

*The name Super Chart Keyline is a registered Trademark of Max Whitmore.

17% = 33%?

Yeah, that’s right 17% of the stocks in the Dow make up over 33% of the gains since March.   That’s not what I’d call a well distributed growth throughout the entire economy, would you?

Also, take a look at the chart below (courtesy of CNBC) and ask yourself the following questions:

• Has Bank of America done anything close to good enough to justify the 379% return that they have had in the last 6 months?
• What about American Express?   They have gone up by over 231%.  
• JP Morgan – the only “big bank” that made money in the 3rd quarter of 2009 is “ONLY” up a paltry 195%.
• Are these kind of returns justified given the state of the current economy?
• If you think, as I do, then what would you do differently to prepare for the time when the market comes back to reality?

Like I wrote earlier today talking about what Dr. Roubini said yesterday in a piece called, “Is the Rally Real?” there is a certain amount of the stock market rally that’s real but what is currently happening isn’t supportable by fundamentals.

Tom Vanderwell

5 Stocks Make Up 1/3 of Dow’s Gains Since March – CNBC By The Numbers – CNBC.com

Hovering around the 10,000 level again, the Dow Industrials [.DJIA 10062.94 --- UNCH (0) ] has advanced over 3,400 points since its March closing low of 6,547.05. Since the March 9 low, the price-weighted Dow has gained 53% – underperforming other market cap-weighted indexes like the S&P 500 (up 61%), the Nasdaq Composite (+71%), and the Russell 2000 (up 81%).

While the Dow’s financial stocks have been by far the best performing stocks since that low (Bank of America up 379%, American Express up 231%, JPMorgan up 195%), other industrial and tech stocks have actually been the primary source of the Dow’s move higher.

Technorati Tags: Stock Market

Is the Rally Real? (and what does it mean for mortgages?)

Okay, here’s my synopsis of what Dr. Roubini is saying:

• Yes some of the rally is fundamental.   Any time you step back from disaster, there’s a sense of “wow, we survived.”
• But the market is rallying like a V shaped recovery is happening and the current employment situation doesn’t justify that.
• So, we’re most likely going to see an adjustment in the market.   Roubini’s estimation is some time in the next 6 months.

So what does that mean for the mortgage markets?
A couple of scenarios that I can see playing out:

• If the adjustment/correction is a mild and orderly one (they haven’t been lately), then I don’t expect it will have a major effect on mortgage rates.   Money would move from the stock market to the bond market and that could push down some, but not significantly.   Keep in mind that at the same time, we’ll have the upward pressure of the Fed leaving the mortgage backed securities market.   So I’d expect the two to wash out with very little change.
• If the adjustment is a CORRECTION, we could see a dramatic movement of money.   Depending on the emotional toll that comes from it (aka “here we go again?”), will determine if money goes from the stock market into bonds and mortgage backed securities (push down on rates – see above) or if money goes all the way to cash.   If people just get out of the market and take everything to the sidelines, then we could see higher rates and lower stock prices.

The way I see it, if Roubini is right (and I wouldn’t bet against him on this one), the two most likely scenarios of how that would play out would result in either stable rates or rising rates.

Keep that in mind as you make plans going forward.  

Tom Vanderwell

Roubini Warns of ‘Significant Amount of Froth’ in Markets – Real Time Economics – WSJ

“Some of [the rally] is fundamental,” he said. “We avoided Armageddon, there is a light at the end of the tunnel, and risk aversion is lower.”

“But it has occurred so fast, so soon, in my view that it’s diverging from the underlying economic fundamentals,” he said. “Markets today are pricing in a V-shaped recovery and they have to start pricing in a U-shaped recovery, so the fourth quarter or first quarter could see a correction.”

Part 3 – Predictions for the New Year (Part #3 of 8)

Tuesday’s installment of the predictions comes from Robert Shiller.   Robert is a well known as one of the authors of the Case-Shiller Home Price index which is getting a lot of press these days.   He’s also one of the few people who have “called” both the dot com and the housing bubble correctly.   Here’s some of what he said.   More after…..

We don’t currently have anywhere near the level of unemployment that we had in the 1930s, but otherwise there are many similarities between today’s environment and the Great Depression, with things happening today that we haven’t seen since then….

First of all, there’s the magnitude of the stock market’s move up and down. The real (inflation-corrected) value of the S&P 500 nearly tripled from 1995 to 2000, and by November 2008 was down nearly 60% from its 2000 peak.

The only other comparable event was the one in the 1920s where real stock prices more than tripled from 1924 to 1929 and then fell 80% from 1929 to 1932.

Second, we’ve had the biggest housing bust since the Depression.

Third, we’ve seen 0% interest rates. We’ve actually seen briefly negative short-term interest rates. That hasn’t happened since 1941. There was a period from 1938 to 1941 when we were bouncing around at zero and sometimes negative, but that hasn’t happened since.

And the list goes on: Our numbers don’t go back as far as the Depression, but consumer confidence is plausibly at the lowest level since then. Volatility of the stock market in terms of percentage changes day-to-day is the highest since the Depression. In October 2008 we saw the biggest drop in consumer prices in one month since April 1938. Another thing is that it’s a worldwide event, as it was in the Depression……

What I’m worried about right now is that our confidence has been hurt, and that’s difficult to restore. No matter what we do, we’re trying to deal with a psychological phenomenon. So the Fed can cut interest rates and purchase asset-backed securities, but that only works in really restoring full prosperity if people believe that we’re back again. That’s a little hard to manage…….

But after the stock market crash of 1929, the price/earnings ratio got down to about six, which is less than half of where it is now. So that’s the worry. Some people who are so inclined might go more into the market here because there’s a real chance it will go up a lot. But that’s very risky. It could easily fall by half again

8 really, really scary predictions – Robert Shiller (3) – FORTUNE.

Tom here…..

Did you hear what he said?   He said a couple of things that are important:

• There are many comparisons that can be drawn between the Depression and what’s happening now.
• During the Depression, the price to earnings ratio was half of what it is now.    This lays out a pretty convincing case that if things “aren’t different this time” we could be in for some pretty substantial price adjustments in the stock market.

So what does that mean?

• Hold on to your hat, this ain’t anywhere near over yet.
• If these predictions are right, we could see a Dow 4000.
• That means it’s never been more important than it is now to deal with financial professionals who know what’s going on in the market.
• Even the worst predictions have home values going down by maybe another 10 to 20%.   That’s a pretty mild amount compared to an additional 50% drop in the stock market.   Real estate needs to remain a part of your overall investment portfolio.

What do you think?

Tomorrow we’re going to “talk” to Sheila Bair, chairwoman of the FDIC.

Thanks!

Tom Vanderwell

Half of last week’s Stock Market gains are gone……

U.S. stocks slump on the first day of climatic winter, as gloomy worldwide economic data take the wind out of last week’s rally.

MarketWatch.com: Stock Market Quotes – Business News – Financial News.

If you subscribed to my Mortgage Market Week in Review, you’d know that the reason for the rise last week is the exact same reason I’m not surprised that the stock market has dropped today.

Click on Mortgage Market Week in Review to send an e-mail and sign up for it.

And hang on to your hats!

Tom Vanderwell

S & P 500

thanks to Calculated Risk for the chart

Stock Market Rollercoaster

courtesy of The Big Picture