Wednesday, May 5, 2010

Morning Update/ Market Thread 5/5

Good Morning,

Equity futures have taken another leg lower this morning, below is a 5 minute chart of the DOW on the left showing the overnight action, and on the right is a 30 minute view of the S&P:

You can see in the above chart that there is now a well defined channel in place, prices are dipping below the bottom of that channel now. The bottom of that channel will be about 1,160 at the close today and the top will be about 1,195.

The Euro is getting smacked once again, it too is in a down channel but it has a way to go to get to the bottom which is just below 1.26, a huge move still. Below is a chart of the dollar on the left and Euro on the right. The dollar is racing towards the top of its channel, now just under 85 and I think it is targeting near the prior highs right around the 88 area. That’s a huge move from the last low down at 74, and it happened very quickly:

Three people were killed in Greek riots yesterday, some buildings were burned. Also, Moody’s placed Portugal on watch for another downgrade.

Commodities are collapsing again this morning, oil is making a huge move down again today and is back under $80 after losing $7 in just two days. Gold, which started out strong yesterday, collapsed mid-day and is down again this morning although not as hard as other commodities. This is margin type selling, it is affecting everything.

Yesterday’s rout was a 93.5% down day by volume, the third such 90%+ down day in the past 13 sessions. This is very bearish to have a cluster of them like that, they often occur at major tops.

The number of new 52 week lows on the NYSE picked up considerably yesterday to 29. That is three times recent numbers. Think about that, we have been going straight up for 14 months, are still barely off the highs and yet we have companies who are hitting lows! That’s the type of marker that shows internal unhealthiness. New highs plunged to just 80. Remember, we were just over 600 at an all time record and I was repeatedly warning that was an extreme that often marks significant tops. Should the selling continue for awhile, we may get into Hindenburg Omen territory. That requires BOTH 85 new lows and 85 new highs occurring together along with some other conditions. That could occur if the selling continues awhile and then we bounce, I’ll be watching for it and will keep you informed.

Here’s a piece that shows the human side of what’s happening to the American middle class dream. An Air Force Major and his wife, working for their country get moved and have to find a place to live. Yes, they made the mistake of buying into the hype and bought a home at bubble prices, but just look at how much pressure society places on them to do so – everything is marking spin and flat out lies. This is really a tragedy, something that is affecting the trailing edge Boomers and those immediately following much more harshly than those who were on the leading edge of the demographic bubble. Their future will not be anywhere near what their parents experienced and they will likely never own a home free and clear:
Drowning in debt as home prices dive

(Money Magazine) -- A transfer in 2005 landed Air Force major Richard Hallbeck, his wife, and two kids in Southern California smack in the middle of the real estate bubble. Home prices in the area had doubled in the past five years and were still climbing. So the Hallbecks swallowed hard and bought an $845,000 four-bedroom in a suburb of Long Beach.

The $3,800 monthly payment was high but affordable on two incomes. (Laurie, now 37, worked as a claims adjuster.) And they figured the market was so strong that when they had to move again, they'd at least break even. "Our house actually appraised over what we paid for it," Richard, 42, recalls wistfully.

Since then, area sale prices have fallen 26% -- when properties sell at all. Meanwhile, the recession cost Laurie her job, and the payment on the couple's adjustable-rate mortgage will jump $800 in July. Next year Richard will face mandatory retirement from the Air Force, and his pension will be a third of his current $117,000 income.

All that's got the Hallbecks anxious to move to a more affordable city -- like Dayton, where they used to live. But they're just as anxious about how much they could lose on the sale of their house.

A similar home down the street lists for $655,000, $21,000 less than the Hallbecks' outstanding mortgage. At that price, the couple would be out $231,000, including their down payment and closing costs. "The stress has really worn on us," Richard says.

Nationwide, about one in four home mortgages are now underwater, meaning borrowers owe more than their places are worth. No surprise, California and other bubbly states -- Nevada, Arizona, and Florida -- lead the nation.

While a bevy of new federal programs aim to help, underwater owners who want to move still face uncomfortable choices: Postpone the move and continue sinking money into a pit; sell for a loss, forfeiting the down payment and some savings to close the deal; desperately try to enter into a short sale; or simply walk away and face the consequences of foreclosure. If you (or your kids) are in this situation, here's how to think about the options.

Since Money first spoke to the Hallbecks, they have listed their home and attracted an offer of $655,000. That would've meant shelling out the $21,000 difference, plus some $40,000 in commissions and closing costs. So, the couple decided to hold out for more. "Hopefully," says Richard, "our expectations aren't too high."

Those prices still sound like bubble prices to me. Truly, an Air Force Major has no business buying an $845,000 house, but look at it... completely average. The banks certainly also have no business lending that much on a home like that, they are the experts and as far as I'm concerned should eat every penny. Note the reset of their likely Option-ARM loan, there is a wave of these coming, you are going to see upper end homes take another very large hit in the next couple of years.

Of course the article goes on to offer advice and several options for them, none of which are palatable. They need to forget that continued hype, put aside their emotions and treat it like a business decision. Get an attorney and get a real estate agent who knows how to work a short sale.

The worthless as ever MBA Purchase Applications index came in with wild weekly readings again. This time the purchase index was up a totally unbelievable 13%, while the refinance index fell 2.1%, here’s Econoday:
Buyers seeking second-round tax credits needed to have a contract in place by April 30 making for a 13 percent spike in mortgage applications for the week. Month-to-month, purchase applications rose nearly 24 percent. Both conventional and government applications showed significant increases in the latest week but especially government applications which made up over 50 percent for the highest share in 20 years. But like the first-round, second-round tax credits likely pulled a significant amount of sales forward and point to trouble for housing demand in the coming months.

But one plus will be what was thought to have been a negative, that is interest rates which are moving lower due to the sovereign-debt crisis in Europe and related demand for U.S. Treasuries. The average rate on a 30-year fixed mortgage fell 6 basis points in the week to 5.02 percent and looks to move substantially lower in the next report. But rates have been this low before and may have to break new lows below 4.90 percent to attract significant refinancing demand. The refinance index fell 2.1 percent in the week.

Boy, good thing interest rates are moving lower again, of course it’s taking a drain on equities to do it. By the time the central bankers are done, the Hallbecks won’t have a pot to piss in.

The ADP Employment Report went from negative 23,000 in March to a positive 32,000 for April. March’s figure was revised upwards to positive 19,000. I take the ADP numbers with a huge grain of salt. Of course the Employment Situation report is released this Friday and this will set expectations high for that. I am hearing that the Census hired, get this, 120,000 workers in the month of April! Think about that, yet another crime for the American taxpayer. At least during the Great Depression we had the CCC working on building trails and roads, today we just count one another and engineer financial products based on false accounting. So proud of that.

Speaking of false accounting, Goldman failed to hold over the $150 level yesterday, if it joins the selling party again, that would be very bearish.

The non-manufacturing ISM will be released at 10 Eastern this morning.

Just look at that VIX go! I think what's happening here is that we had a market sell signal and the Bollinger just got in the way. The fact that it is way above the upper band now means that obviously the latest market buy signals are negated for now. It is following a ballistic trendline up, it will produce another market buy signal at some point, but it needs to break that trend line to have significance for me:

The VIX P&F chart showed yesterday's triple top breakout and produced a target of 36:

Here’s a little mood music for the not too distant future:

Steely Dan – Black Friday: