Friday, May 21, 2010

Morning Update/ Market Thread 5/21

Good Morning,

Equity futures are lower once again this morning after trying to rebound yesterday evening. The overnight action can be seen on the 5 minute charts below, the Dow is on the left and S&P on the right:

Bonds are substantially higher again, breaking to new highs for this wave – this shows money is still moving to “safety.” The dollar is lower and the Euro is higher – not as high as they were, but there is a correction in progress. The Yen is higher, that seems to be a better indication of market action over the past couple of days. What’s there to say about oil? A complete and very rapid collapse, down some more today. Gold is also down again, bouncing off the $1,170 support area.

Both the S&P and Dow futures have now made lows that are beneath the May 6th pin lows, and the S&P is very close to breaking its February low. If this is a wave 3 movement, as I suspect, the bounces will be minimal in size and duration until we hit wave 4, but the wave math says 1,018 minimum, so any bounce is likely a part of the wave 3 structure.

There are no economic releases today, but remain aware that it is options expiration and wild moves can occur. Yes, the markets are very oversold in the short time spans, but in the longer time frames it is not. Yes, bounces can come from any point in here, but wave 3’s tend to create extremes in internal readings. The put/call, for example is at an extreme. There are other indications that you would normally expect a bounce from, BUT not all indications are at extremes, in fact some are very far from them. Wave 3’s are generally the longest waves, and if this is wave C down, this wave 3 is only wave 3 of wave 1 – the beginning.

Just to put this market into perspective, below is a chart of the XLF going back to the beginning of 2007. Note the all out collapse, and the WEAK rebound that retraced only to a perfect 38.2%! This is the index for the financials, you know, the companies who can’t lose on a trading day and who report billions in earnings. They are now off 17% from their most recent highs – that meets the 15% threshold definition of a crash. Why do you suppose that chart is so weak and now is breaking down even further? It’s telling us something about which we have failed to address as a nation and around the globe:

The Senate just yesterday passed the “Wall Street Reform” bill. The Senate bill has more teeth than the House version and now they have to work together to create a cohesive bill. Below are excerpts from a CNN article on what was passed:

Senate passes sweeping Wall Street reform

"Those who wanted to protect Wall Street, it didn't work. They can no longer gamble away other people's money," said Majority Leader Harry Reid. "When this bill becomes law, the joyride on Wall Street will come to an end," he added.

Senate passage marks the last big hurdle for an effort more than a year in the making. The bill will now be reconciled with the House version in "conference" negotiations, where differences are ironed out.

Then both chambers will vote again and send the compromised bill to President Obama sometime before July 4, said the bill's main shepherd, Sen. Christopher Dodd, D-Conn.

Earlier on Thursday, Obama praised the Senate's progress saying, "Wall Street reform will bring greater security to folks on Main Street."

What reform means: Congress first started working on financial overhaul last spring. The House passed a version in December, and the Senate began drafting bills last November.

Since January 2009, financial services firms have spent nearly $600 million and hired hundreds of lobbyists to influence the debate, according to the Center for Responsive Politics.

The legislation would establish a consumer financial protection regulatory agency that could write new rules to protect consumers from unfair or abusive mortgages and credit cards.

It would create a council of regulators that would sound an alarm before companies are in position to trigger a financial crisis. The bill would also establish new procedures for shutting down giant financial firms that are collapsing.

The bill aims to shine a brighter light on some of the different kinds of complex financial products, called derivatives, that are blamed for bringing down financial companies such as American International Group (AIG, Fortune 500) and Lehman Brothers. It would force most derivatives on to clearinghouses and exchanges, to help pinpoint the value of the trades.

Republicans objected to some of the bill's major provisions, particularly parts that establish the consumer agency and create new rules for the derivatives. While they generally favored more consumer protection and more regulation of derivatives, they argued that the legislation is too heavy-handed in these areas.

Sen. Richard Shelby, R-Ala., who helped craft parts of the bill, blasted it in a 30-minute speech late Thursday, calling it a "massive new consumer bureaucracy" and a "liberal activists' dream come true."
"This bill doesn't listen to the American people -- it promises massive government overreach in ordinary business transactions," Shelby said.

However, the final vote garnered more Republicans than earlier key Senate votes on the bill.
Joining Democrats were Sens. Scott Brown, R-Mass, Susan Collins, R-Maine, Chuck Grassley, R-Iowa, and Olympia Snowe, R-Maine.

Two Democrats, Sens. Russ Feingold of Wisconsin and Maria Cantwell of Washington, voted against the bill saying it wasn't aggressive enough against Wall Street.

Sen. Robert Byrd, D-W.Va., and Sen. Arlen Specter, D-Penn., missed the vote.

What's next: The Senate will appoint 12 members, seven Democrats and five Republicans, to negotiate with the House over differences in the bill.

The Senate's negotiators plan to vote next week to figure out where they stand on a controversial issue that didn't make into the final bill: a Republican-backed move to exempt auto dealers from the purview of the proposed new consumer protection regulator. The House version has that carve-out for auto dealers, but the Senate didn't get to it.

There are several other key differences.

The Senate bill limits the size and scope of banks' investment activities, preventing them from owning hedge funds and trading on their own accounts. It also includes a controversial measure preventing banks from trading any derivatives. Banks would be forced to spin off their swaps desks that make these trades.

The House bill lacks such limits on banks' investment work.

Also, while both versions of the bill create a council of regulators who monitor big Wall Street banks, the Senate gives the top job of running that panel to the Treasury Secretary and the House gives the top position to the Fed chairman.

Consumer protection agency under the control of the Fed or Treasury is a huge mistake. Separating hedge fund activities is terrific, as are restrictions on derivatives – a good start. However, this is only partially closing the barn door AFTER all the animals are gone. It will NOT cure the bad math of debt backed money, it will not change who is in control of that process, it will not bring back mark to market, but it may help to limit speculation and it will definitely end too big too fail bailouts for the banks.

What does that last part tell you about the psychology of wave C down? Are we likely to see the same sorts of maneuvers as we did during wave A? Unlikely, and the single largest factor, in my opinion, that created the wave B bounce was the bank’s ability to mark toxic assets to model. Pure Fantasy.

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