Wednesday, September 29, 2010

Morning Update/ Market Thread 9/29

Good Morning,

Equity futures are slightly lower before the open this morning. Bonds are higher, the dollar is down, the Yen and Euro are stronger, oil is up, while gold touched $1,315 an ounce overnight as it nears its $1,325 target.

The still worthless MBA Purchase Applications index rose 2.4% over the prior week, but the Refinance Index fell 1.6% leading to an overall decline in the index of .8%. Here’s Econoday:

MBA Purchase Applications rose 2.4 percent in the September 24 week to end two prior weeks of decline in what has been an up-and-down month. The gain is centered in a 4.5 percent rise in government purchase applications vs. a 0.8 percent rise for conventional applications.

Yet the great bulk of mortgage applications, 81% in the latest week, is for refinancing where the index slipped 1.6 percent. MBA's composite index fell 0.8 percent. Rates are extremely low, at 4.38 percent for 30-year loans, down six basis points in the week and a new low for the series.

Here’s the deal – the private bankers who own the Fed have managed to buy off all the politicians to get their financial engineering (derivatives) and false accounting put into place. This has saturated everyone and every level of government with debt. The GSE’s have been used as a conduit to push off THEIR bad debts onto the American public and we’ve been far too passive and have let them. Since the entire economy is saturated with debt they are looking for any way possible to continue their schemes.

The latest trial balloon that’s beginning to get traction involves a new House Bill that would allow anyone with a FNM or FRE backed loan (30 million households – 90% of loans) to recast their loan at a low rate of interest (approximately 4%) REGARDLESS of the creditworthiness of the borrower or the value of the property!

Make no mistake that should this occur it is a bailout of the BANKS, not of the people. And this would have a very large effect, and it is possible that it happens due to the desperateness of the coming mortgage crisis. It would take the Option-Arm reset chart I’ve been showing and it would immediately flatten the curve:

It would also be used to shed the broken mortgage paper trail, thus killing two birds with one stone. You can bet, however, that any such reset program would turn any loan that wasn’t a recourse loan into a full recourse debt.

Should this occur, you will not want to be short the equity markets, especially bank stocks! Any pop received, however, would be short lived as the dollar would suffer and Americans would find that their cost of living will increase a commensurate amount. There is no free lunch – all debts get repaid with interest in one way or the other. A falling dollar, like what’s been occurring recently on QE rumors, is the other.

A mortgage reset scheme will simply further saturate America with debt, but it will kick the can down the road just a little further. If they do it at 4%, we will find that the kick wears off in 6 months or a year and then they will be forced to do it again at 3%, then 2%! But interest rates that low would also remove any profit from the banks in terms of arbitraging interest rates. The ending destination is thus the same, it would simply create a wild ride in-between. For now this is just a trial balloon, but remember that wild animals, and wild bankers, will do anything when they are backed into a corner.

Yesterday’s read on Consumer Confidence was awful and reflects the fact that an artificially rising stock market does exactly nothing for the majority of people who are still wallowing in debt saturation. It does nothing to Investor Confidence as it too is collapsing despite ultra-bullish sentiment readings in the market:

For now the market is still stuck between SPX 1130 and 1150. The action in bonds and in the Yen say that the break when it comes will be lower. McHugh is pointing to a potential ending diagonal on the DOW, but I don’t think it’s very well formed so I won’t show it. Tomorrow we have a bunch of important data and that could be impetus to move the market off the fence.

Yesterday’s action produced many hammer candlesticks in the indices, the RUT is a good example below. Those are potential reversal indicators, however most are inside the previous day’s candle and they need confirmation with today’s action below yesterday’s high:

The NDX produced a Hung-Man candle. You can see that the red uptrend line was broken and that the man is “hanging there” with no floor beneath him. Again, potentially bearish we will need confirmation:

Many of the NDX momo stocks faltered yesterday with AAPL stumbling on not one, but two mini flash-crashes. That’s got to make the average investor very nervous. Many other stocks are showing signs of rolling over as the rotation trade appears to be reaching exhaustion.

The VIX yesterday rose dramatically and then fell. That action produced a large black inverted hammer. That is also a potential clue, I would expect the VIX to rise up that stem and negatively impact equity prices. Again, when dealing with candle shapes we need confirmation:

On the plus side, the McClelland Oscillator did return to positive yesterday, but it’s close enough to the zero mark that a small decline will turn it negative again. All the divergences I’ve been pointing out have been growing. These WILL get resolved – the longer they go on and the bigger they get, the worse it will be. For example, yesterday I showed you how the bond market and stock market are divergent. Yes, most of it is due to the government buying up their own debt, but to put that divergence into perspective, the last time bonds were at this same level, the SPX was 300 points lower (more than 3,000 points lower on the DOW)! This will be resolved, and when it is we’re likely to see a lot of people looking a whiter shade of pale!