|
Today's Market WrapUp 02.12.2008 Mon Tue Wed Thu Fri Barbera Archive What Buffett Bounce? Well, Well, Well…Warren Buffett to the rescue. Ah…maybe! Certainly today’s news of the Buffett offer to reinsure municipal bonds has to be seen as a potentially substantial help in that the Muni Bond market at nearly 1 trillion dollars would surely have undergone a major quake had the major monolines failed, and no one stepped up to the bar. Yet, Buffett is not looking to bail out or assist any of the major firms currently in such dire straits, and nor will his actions have any affect on the sagging housing market and sinking sub-prime loans. In fact, the Muni Bond market has been functioning quite well and really was not showing any particular signs of being in any trouble. Yet, trouble could have followed in the sense that all of these bonds would have needed to be re-priced (sending out a negative wealth affect and lots of additional ripples) had the monoline insurers failed as a result of there CDO foray. With Buffett entering the picture, at least one corner of the market and an important one at that, Muni Bonds, looks likely to withstand a failure from one or more of the monolines, implying there will be one less domino to fall. Kudos to Buffett for stepping up and sensing a sweet deal, offering re-insurance for bonds that don’t need it, but must have it. Yet, this changes the picture in only a very small manner. Over the last few days to week or so, the bulk of the news has been crushing for the bulls, disheartening to say the least. First off, the situation with Ambac and MBIA and garnering a bail out fund supported by 8 to 10 of the largest banks seems DOA. In my mind, this is mind numbingly stupid behavior since, if one of these companies fails, it will be the banks that are forced to take another round of massive write downs on capital. Yet, banks are hoarding capital, banks are acting in a darwinistic ‘survival of the fittest mode’ and seemingly instead of pulling together to forestall a larger systemic risk, are acting in a selfish, self-preservation mode, and by doing so, are putting us all on the path for the 2008 version of financial Russian Rolette. Another potentially substantial negative over the last week or so, has been market reaction to the 1/4 point cut last week by the Bank of England. Instead of engendering greater market confidence, European markets sold off sharply on the news, almost doubling their losses in the last portion of the day last Thursday. To a very real extent, I understand what markets were trying to communicate, namely, that the BOE and the ECB need to be more aggressive in combating this burgeoning global slow down and stop dragging there feet in cutting rates. In that sense, the sell off in capital markets was a ‘thumbs down’ vote to what appears to be ‘gradualism’ alive and well in Europe. Under the present circumstances, the gradualist approach neither forestalls the recession, nor fights future inflation, but does negate the psychological ‘confidence building’ value of monetary policy. Markets today, are concerned that central banks are ‘out to lunch’ and not focusing enough attention on the credit market deflation -- or worse, fear that central banks are not working in a unified front, but instead are acting in either disjointed fashion, or even combative fashion. Given today’s globally linked financial system and the securitization of credit markets, it is incomprehensible how central banks can do anything less than work together in a fully coordinated fashion, yet lack of unity on the Central Bank front appears to be what we see taking place. This has the potential for making the current downturn, far deeper, and far longer lasting than it may otherwise be, and for ultimately triggering protectionist backlash between nations. Taking a look at the charts, we still see lots of sign posts which signal cause for concern. In the charts below, we show the monocline insurers, both of which remain locked in strong down trending patterns, with today’s action revealing a break down below near term support. No wonder the stock market gave back most of the gains, as problems in the financial sector are now the problems for the market as a whole. Rule #1 in the stock market: the stock market hates uncertainty. The longer the uncertainty is allowed to breed and fester the more potent the downside outcome; and what we see here looks like a failing rally.
Should S&P or Moody’s decide to get religion (after the fact) and downgrade either of these two issues, there is a really good chance that the stock market will quickly move below 1250 on the S&P in a waterfall style decline. Among many trouble spots, the GSE’s also continue to look poor on the charts, as both Fannie Mae and Freddie Mac are building triangle type formations, which usually end up as downside continuation problems. Here again, we are talking about a major nerve center for the capital markets and further share price erosion in the GSE’s will be the curtain coming down on systemic confidence. Can the big banks be far behind?
Adding to the current brew was last week's price action on behalf of the major averages where prices open lower on Monday and simply continued moving steadily lower all week. Toward end of the week, we saw one or two intra day rally attempts, but these could not stop the S&P from marginally breaking below our 1320 stop out point discussed in our last report. While it is also true that today’s rally lifted the S&P back up above the 1320 level, which is a .618 fibonacci retracement of the prior rally from 1250 to 1400, once again, the market ended the day on a soft note closing well off its best levels. This is not inspiring price action and it suggests a very shaky price foundation within the stock market at the current time. Considering the degree of oversold values seen in this market just two weeks ago, this type of sluggish response and inability to hold gains most clearly resembles powerful bear market conditions. This means we need to downgrade our expectations for any come- back rally, and realize that if prices are to slip below 1320 once again in the near term, that all bets could very quickly be off, with prices quickly challenging new lows. In our view, 1320 remains a very important near term support threshold for the S&P, and IF the S&P can hold it, then perhaps there is a chance for a second rally back toward 1400. However, even if prices are able to extend the counter-trend rally for another few weeks, at this juncture we see the upside as being more and more capped with each passing day. In the chart below, we show the chart of the NASDAQ 100 Index equally weighted, so as to remove the market cap weighting of a few high flying names like Google and Bidu. Note that the index broke down from a well defined Head and Shoulder pattern, and while a snap-back bounce to the underside of the neckline remains possible, that may be the best case scenario on a going forward basis.
Likewise, we see the same type of chart configuration now evident on the Amex Institutional Index, a composite of large cap stocks. Once again, note the large and well defined reversal pattern, with prices breaking down during January. Like the NASDAQ 100 Unweighted, the Institutional Index shows near term room to the upside for a snap-back bounce toward the neckline. However, we also note that with the 50 day average crossing down below the 200 day average, the so called, ‘Golden Cross-Over,’ the larger trend is still most certainly down and from the halting nature of the rally so far, likely to stay that way for some time to come. A final element to be watching for the current picture is overall market breadth, which has actually been lagging prices over the last 10 days.
Again, without conviction showing up within the internal statistics for the broad tape, advancing issues over decliners with a wide plurality, or Up Volume over Down Volume starting to show up with a few 9 to 1 type days, the market seems to be transitioning slowly and inexorably into the hands of Grandfather bear. Yes, it is true for the time being that any number of medium term gauges are still oversold, like the “% of Stocks Below the 200 Day Average” shown below, but unless some real money starts flowing into the stock market soon, the absence of conviction will pave the way to new 52 week lows in the days ahead and a long painful decline still to come.
For now, while Warren Buffett seems to be making a good business move for Berkshire Hathaway, and maybe a good move for the beaten down Muni Bond market, this one piece of ‘good news’ seems to be too little too late for the capital markets which are struggling and struggling mightily to even hold key support. In our view, for the average investors, the mantra of the day should now be tilting once again back toward an approach of selling strength, with an eye toward raising cash and adopting a renewed defensive approach… the counter trend rally from the late January lows appears to be running out of gas. The S&P 500 closed Tuesday at 1348.86 up 9.73 index points, while the DJIA ended at 12,373.41, up 133.40. On the NASDAQ, prices actually slipped by .29 index points, with the NASDAQ Composite ending at 2319.77. The 10 Year Bond yield ended at 3.68%, with the nearby Gold contract finishing at $907.40, down 15.50. That’s all for now, Frank Barbera Copyright © 2008 All rights reserved. CONTACT
INFORMATION |
