Monday, August 31, 2009
Sunday, August 30, 2009
Friday, August 28, 2009
Here is my bearish outlook I think S&P500 is near top and soon it will head lower. Wave (II) could go as high as 1130 or 1200, but I think this rally is over done and we should roll over sooner. Please note if 950, 880 & 666 support lines could hold, this scenario won't come to play.
As I explained in previous post, we are going to face the second wave of foreclosures in 2010 & 2011. Option ARM and comercial real estate are going to hit banks very hard by 2011 therefore I anticipat by mid 2011 we will hit the bottom. We could get a nice bounce from 600 but we could go lower, my bearish forecast for S&P is ~400. It coincides with the lower side the major uptrend channel that go back to 1930. Please see the chart below.
S&P500 from 1930 to 2009. The tick black line is my prediction of market moves in coming months.(originaly posted at 04/03/2009)
Bulls might want to check this out:
Bulish scenario, Inverted Head & Shoulders Pattern
Thursday, August 27, 2009
1)A fully amortizing 30-year payment.
2)A fully amortizing 15-year payment.
3)An interest-only payment.
4)A minimum payment option that adjusts after the first 12 months.
The option ARM loan program was one of the most popular mortgage choices for borrowers in the United States in the last few years due to its forgiving payment flexibility. This same loan originally was designed for high quality credit borrowers who invest in housing market and wanted to take advantage of payment flexibility, and low payments, but Wall Street abused this financial instrument and starts to use it broadly for anyone who could find. Payment flexibility has also made it one of the most scrutinized loan programs in history because of its sometimes misleading ability to qualify borrowers for a home they truly can’t afford. Typical option arm programs do not have any caps aside from the lifetime cap of 9.95%, though the minimum payment generally increases 7.5% each year until it is no longer an available option.
If you think the worst in behind us and banks are going to be just fine , YOU ARE OUT OF YOUR MIND. I have news for you "option ARMs tsunami" is on the way. It will hit us by mid 2010-2011.
So how big is the next wave of foreclosures? what you should recognize is that prime mortgages on average are significantly larger than sub-prime, and the larger the house and mortgage, means the bigger the loss. With over 50% of mortgages failing coming from prime loans, bigger loan losses lie ahead. The total losses to come is anyone’s guess, but the $11 trillion in outstanding home mortgages could easily produce over $2 trillion in defaulted mortgages!!
It would be fun to see if Bernanke & co. could do any thing, when the Option ARM tsunami hit the U.S. financial industry? He should let those insolvent institutions like City group,Goldman Sachs,AIG,Bank Of America be placed in conservatorship, but he saved his friends in Wall Street. He made this bed, but all of us have to sleep in it. It is coming just wait for the second waves, it would be interesting to see how many of these Zombie banks have the stamina to stand it. The peak of the storm will be in August of 2011. This time banks are weaker compare with the first time, that the first wave of foreclosures hit them. Figure below speaks for its self.
Wednesday, August 26, 2009
S&P500 in intermediate term:extremely overbought.
S&P500 in long term: neutral.
Short Term Resistances:
Short Term Supports:
S2: 1000 (Psychological Support)
S4: 950 (MAJOR SUPPORT)
Tuesday, August 25, 2009
The U.S. government faces exploding deficits and mounting debt over the next decade, White House and congressional budget officials projected Tuesday in competing but similar economic forecasts.
Both the White House Office of Management and Budget and the nonpartisan Congressional Budget Office predicted the budget deficit this year would swell to nearly $1.6 trillion, a record, and far above the then-record 2008 budget deficit of $455 billion.
But while figures released by the White House foresee a cumulative $9 trillion deficit from 2010-2019, $2 trillion more than the administration estimated in May, congressional budget analysts put the 10-year figure at a lower $7.14 trillion.
Yet he warned that policymakers face a "damned if they don't" conundrum in trying to unwind their massive fiscal and monetary stimuli to keep the global economy from toppling into a depression.
He said that if policymakers try to fight rising budget deficits by raising taxes and cutting spending, they could undermine any recovery.
On the other hand, he said if they maintain large deficits, worries about excessive inflation will grow, causing bond yields and borrowing rates to rise and perhaps choking off economic growth.
Roubini said another reason to worry is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand.
He said the global economy "could not withstand another contractionary shock" if speculation drives oil rapidly toward $100 per barrel. U.S. crude oil futures traded Friday at about $73.83.
Roubini said the anemic growth he expects would follow a couple of quarters of rapid growth, as inventories and production levels recover from near-depression levels.
Monday, August 24, 2009
I start to wandering who could be next? Victoria's Secret or Disney?! Are we going to bailout every body? Are we going to subsidize everything? Are we going to subsidize underwears too? I would love to get government subsidy to buy some for my girlfriend LOL.
This is a phony recovery; we can't keep doing it for ever. Sooner or later it is going to blow up. If they continue to bailout every single "too big to fail" company, dollar won't be the world reserve currency in near future and that day will be a sad day for America.
Our government acts like drunk person. They keeps making wrong choices. As I said many times before we need to spend the precious money on real economy to create industrial jobs who have potential to export because American consumers will be weak for a while.
The thing that worries me the most is the number of foreclosures that is on the rise and increasing number of prime mortgages that are delinquent. To me it shows people with good credits are falling behind their loans.
On Friday the existing home sales was better than forecast that is very positive, but devil is in the details, single-family, town homes, condominiums and co-ops – rose 7.2% to a seasonally adjusted annual rate1 of 5.24 million units in July from a level of 4.89 million in June, and are 5.0% above the 4.99 million-unit pace in July 2008. The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005. Note that the seasonally adjusted data was much higher than raw data, non-seasonally adjusted June vs July sales increased 2.1% vs seasonally adjusted of 7.2% increase.
You may ask where is the problem? month to month we have 2.1% increases in existing home sales not decline. I agree but this increase is due to $8000 government subsidy for first time buyers that is going to expire in November, any body who wants to take advantage of this program should buy a house by end of September to be qualify. Obviously spike in home buyers is expected when we getting closer to final days of program. The real problem is shadow inventory, many buyers who bought houses that could not afford and they are waiting for first sign of recovery to flood the market. As long as number of sellers are higher than number of buyers we won't see increase in housing prices. Note that we have 40-50 months worth of inventory. It is normally about 12 months worth of inventory. We need to see the inventory of houses declines.
S&P500 moved above 1015-1020 resistance that I mentioned last week. If it can hold on to 1015 it would be very positive. As you know fundamentals can't justify the rally ,but the technicals look good as long as S&P500 stays above 1015-1020. Watch out for these levels, failure of the bulls to keep the market above 1015 means starting the pull back that I have been looking for.
S&P500 Possible Moves In August
Sunday, August 23, 2009
Friday, August 21, 2009
Census numbers show:
• More than 14 million housing units are vacant. That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied part of the year. The combined vacancy rate of almost 15% is higher than during previous recessions: 11% in 1991 and 9.4% in 1984.
• About 3% of owned homes are vacant. In normal times, maybe 1% would be vacant.
• More than 9% of homes built since 2000 are vacant compared with about 2% for older homes.
• Homes priced at $500,000 or more are just as likely to be empty as homes that cost less than $100,000.
The numbers are further documentation of the gravity of the housing problem. This inventory is delaying any kind of housing recovery. The surge in empty houses, condominiums and apartments is creating a wave of problems for communities desperate to shore up property values and tax revenues that pay for services. Vacant homes create upkeep and safety problems that ripple through neighborhoods. It has a contagion effect. A house that is vacant is often a house that is less well kept up.
Historically, vacant housing was more of a concern in cities that have poor neighborhoods. Now, it has hit suburbs and new subdivisions.
The stimulus bill before Congress contains $2 billion to help communities buy and fix foreclosed, vacant properties, but it is not enough to stop the flood of vacant houses. A construction frenzy began pushing the vacancy rate up in 2005 but empty homes sold quickly at that time due to easy financing and greed. This is a different problem, it's high now because of lack of demand. There is no easy money and high unemployment has made the situation worse. Now, vacancies we see are from units that have been empty for a period of time. This is not good for already weak housing market. The thing that worries me the most is the increasing number of delinquencies(90+ days delinquent) in prime fix rate mortgages, this is very scary, it shows people with good credit are falling behind their mortgages due to weak job market and falling house prices. When homeowners are 10 to 15% under water it makes sense to continue to pay their mortgages as long as they have jobs, but when they are 30 or 50% under water there is no point to keep paying their mortgages, and this is what is happening.
Thursday, August 20, 2009
Instead of allowing a cathartic and reconciling recession to run its course, the Federal Reserve (Fed) decided last year to again bail out the economy by greatly expanding the money supply. In this latest case of artificial intervention, the expansion in the monetary base was a record-breaking trillion dollars, but that intervention has abated in the last few months. What should become clear fairly soon is that the apparent recovery in the markets and the economy has been built primarily on the devaluation of the U.S. dollar, not from a healing of the economy’s fundamentals. That clarity will become evident once the dollar begins to make a brief rebound.
For the last few months, the Fed has temporarily halted its assault on the greenback in the mistaken belief that the economic crisis has ended. Therefore, the most likely result will be a major correction in the market and a resumption of economic deterioration. Unfortunately, that should eventually cause the Fed to resume its misguided efforts to bolster growth by wrecking the currency. The Fed’s conundrum is this: whether he is aware of it or not, Fed Chairman Ben Bernanke needs to defend the dollar and raise interest rates to provide for a viable and long-lasting recovery. But the short-term effect would be a devastating recession which is, of course, politically untenable.
Negative correlation between dollar and markets
The basis for the perceived healing has been a Fed-induced 12% drop in the U.S. dollar since March alone, which has caused the S&P 500 to rally 50% and copper to increase 80% in the same time period. It’s just not a coincidence when the dollar goes down; stocks and especially commodities go up. But remember monetary policy works with a lag. The Fed has since halted the increase in the monetary base, which reached $1.77 trillion in May of this year, and has now reduced it to $1.64 trillion today.
The result has been a sharp decrease in the rate of increase for all monetary aggregates. The monetary base is up 93% year-over-year but is down 4.2% since the beginning of the year. M2 is still up 8% from last year but up just 3.5% from January. And perhaps most importantly, the four-week compounded annual rate of change in the monetary base is actually negative 26.3%!
What this means is that at least on a short-term basis, the dollar may be oversold and commodities and stocks overbought. We can hope that Ben Bernanke will not acquiesce to the desire to be reappointed and maintain this brief period of monetary sanity. If he behaves like Paul Volker and doesn’t care about being liked, he will drain the excess liquidity and allow the severe economic contraction to run its course.
However as mentioned earlier, the most likely outcome will be for the Fed to rebuild the base in an effort to stem the coming slide in markets and the economy.
That’s because we just haven’t yet acknowledged the reality of our addiction to debt and inflation as the basis for economic activity. What I find most amazing about all this is how most in Washington and Wall Street fail to recognize what caused the crisis in the first place. The problem never was that there wasn’t enough borrowing, consuming and cheap money around. The problem was that the level of debt in the country had become unsustainable. In fact, as a country we are still actually increasing our level of debt. Therefore, all our perceived healing was predicated on the devaluing of the dollar, not from the paying down of our obligations or a repudiation of our past behavior.
We just can’t escape the day of reckoning. The country will most likely go through a devastating bought of inflation to avoid a strengthening dollar and further erosion in asset prices. However, a protracted period of deleveraging is still needed as a nation. What we need is to return to real economy based on a sound currency and reduced debt. That will certainly be painful in the short term, but the only way to provide a long lasting and healthy economy.
I won't go over fundamentals because there is not enough good news to justify the rally. My analogy is based on pure technical analysis.
KBW has formed an uptrend channel. Watch out for $44, it is the short term support, if 44 support line holds we should see a nice move higher, in the short term $46 is the resistance.
Note that if banks want to continue higher; KBW should not violate the lower side the channel.
Wednesday, August 19, 2009
All we got was less bad news, second quarter earning was better than forecasted due to cost cutting not revenue growth, foreclosure is on rise, banks don't lend, retail sell did not improve, overall retail sales on a year-ago basis in July were down 8.3% . Bulls might argue that we got less bad news; I agree but less bad news can’t justify +50% rally. We rallied base on hope. Hope is not a strategy. I don’t deny the lower rate of decline in ISM and lower rate of decline in house price or unemployment, but here is the catch they manipulate the real data by diluting the seasonally adjusted data with actual data to come out with these fictitious numbers, bulls are so desperate who try sugar-coat any possible data to justify this humongous rally.
But I have news for you this is a bear market rally not a new bull market. Don’t look for green shoots if there was any I would be the first person to tell you. If you look at the 1928-1932 bear market we had an identical rally. Dow Jones rallied 50% but market dropped 89% in coming moths. Obviously I don't look for such a drop, but I want to point the similarities. In fall we are going to face the second wave of foreclosures. It would be interesting to see how many of these Zombie banks can stand it.
There is no green shoots. Bernake was hallucinating when he said "I saw the green shoots of economics revivals".
Tuesday, August 18, 2009
Monday, August 17, 2009
Sunday, August 16, 2009
Chinese Stock market made a bubble again, it rallied over 95% since Oct 2008 low (10676.30). That was due to a big sum of liquidity available to lend that caused +95% rally in Hang Seng Stock Index and +109% rally in Shanghai Composite Index. As you know last bubble burst back in Oct 2007, which caused a huge drop, this time Chinese are trying to stop the equity bubble burst. They hope by tightening the lending the bubble gently deflates, but in real world bubbles usually burst, people will race to exit before others do therefor they cause the bubble to burst. it's almost impossible to stop the bubble from bursting. We will soon find out if Chinese succeed or not.
Thursday, August 13, 2009
I'd like to step back and look at the big picture. on the chart above you see the 25 years S&P500 monthly time frame. 200 SMA should act as resistance. Last time S&P dropped below 200 SMA on monthly time frame was back in 1977.
S&P broke the 200 SMA back in Oct 2007 and failed to move above it since then. We tried to test it this week but S&P failed to close above it. Watch out for 1020-1050 I think it is going to be a very strong resistance.
This is the level that smart money would go to the side line and bears should come with full force. On the other hand if bulls push the market above 1050 the bullish target will be 1130.
S&P500 Possible Moves In August
Wednesday, August 12, 2009
The blue circles show bear traps. As you see in the chart bears who were late in party got crushed and caused two big shortsqueezes in recent weeks.
We are beneath the major support (12.70). If UNG fails to move above 12.70 with in next 2 days, it is going to retest 11.90 . Light blue lines shows a short term uptrend channel but you can't count on it, that much.
Big picture is very bearish for natural gas, and fundamentals do not support higher price, as I said many times before do not gamble with your money wait for big guys to find the bottom.
Tuesday, August 11, 2009
U.S. dollar is above 78.34 that is very positive in short term.
Next level to watch is 80.14 if dollar can break through it next target would be 82.50. Let's see what is going to play out.
U.S. Dollar Technical Analysis (Part 2)
Dollar Technical Analysis
Sunday, August 9, 2009
As you see in the chart above column #10 shows the non-farm payrolls in month of July the red column is -247000 the announced data, and yellow column shows the real data (-669000).
That's why I never trust the information that I get from talking heads on TV. Be smart do your own research. You can easily extract any data online.
Saturday, August 8, 2009
The broadening top pattern has completed. If S&P500 moves above 1050 the Broadening top scenario won't come to play.
There are 2 important supports that you should pay attention to, 950 and 880, S&P500 should not violate these levels. If S&P violates 950 we should head lower to 880, if S&P500 drops below 880, bulls are in a big trouble.
On the other hand if S&P500 manages to move above 1020-1050 it could shoot to 1100-1130 (the upper side the channel #1)
As I mentioned in my previous post if bears want to push the market lower they should come with the full force at 1020 level, on Friday S&P500 could not reach the 1020 and bulls started to take profit at 1018 in closing hours. S&P rallied over 52% since March low, despite the less bad news like ISM and GDP ,there is no fundamentals to justify such a rally. This is a humongous bear market rally not new bull market, do not let talking heads on TV fool you. Think about it, they didn't see this crisis is coming how could they see when we are going to get out of it. If you remember in Oct 2007 they were calling for Dow Jones 16000, instead it dropped to 6547.
It is naive to think everything is getting back to normal just in 6 months. Banks are not fine by no measure. Commercial real estate and credit cards are next shoes to drop, 10000 foreclosure per day is huge, and government did not do anything real to stop it. They just talk about it, but so far there is no will to do anything about it. Because people bought houses that they could not afford and if banks want to do anything they have to write down huge loss. Think about it, if banks want to modify loans who is going to lose money? the answer would be Banks. Obviously they are not going to do that in a big scale. The number of modified loans in 2009 is a big joke. When you owe more than your house value you are in the ditch, you can not refinance... all you can do is to continue to pay your mortgage as long as you have job, and hope eventually your house value increase.
Our government do not spend taxpayers money wisely, to me "Cash for clunkers" is just waist the money. This is another bailout for bankrupt automakers. They manufacture temporary market for cars who last for a couple weeks. It won't create a sustainable demand to create new jobs. The irony is that 80% of cars has purchased through this program are foreign cars. Please pay attention that "Cash for clunkers" program will boost the 3rd quarter GDP, but it is not going to have a meaning full effect on 4th quarter GDP or first quarter 2010. They could spend taxpayers money wisely to create new jobs in tech sector or renewable energy... People can continue to use their old cars for many years, but if they loose their jobs they won't be able to pay their cars loans. You don't need to have PhD in macroeconomics to figure it out. We need a sustainable jobs, let's face it many jobs won't come back ever. We need to direct the workforce to the new fields.
No one can say when market bottoms. Being cautious is the name of the game, be open for anything. lets see what is going to play out.
S&P500 Broadening Top Pattern
Friday, August 7, 2009
I won't take any action tomorrow. I would wait to see what is going to play out by Tuesday.
Wednesday, August 5, 2009
NASDAQ is getting close to its target 2000-2100 (the upper side the channel). This was the level that I was looking for profit taking and heavy short selling. NASDAQ should start to roll over soon, but if it manages to break out the channel and shoots higher would be very positive. I don't mean you should take big risk and go short ,but it would be a good level to take profit,and move to the side line. My bullish target for Nsdaq is 2155-2166. Lets see what's going to play out.
NASDAQ possible moves in July
S&P500, Dow Jones and Russell2000 have formed the broadening top pattern, this is a very bearish pattern. As I mentioned before if S&P500 moves above 1050 this scenario won't come to play.
Broadening Top pattern
Bulls might want to check this out:
Bulish scenario, Inverted Head & Shoulders Pattern
Tuesday, August 4, 2009
Dollar could not hold on to the 78.34 support that I mentioned in previous post, if dollar can move above the 78.34 it has chance to move higher. Next level to watch is 76.17 support. Note that Fundamentals do not support the strong dollar because Bernanke & company printed so much money and continuing to bailout his bodies in Wall Street.
Sunday, August 2, 2009
Please pay attention year-on-year growth for real GDP declined by 3.9%, after contracting 3.3% in the fist quarter, that would be a cause for concern.
The rate of decline in the latest quarter was due to a slowing in the decline in inventories, less negative business fixed investment, less negative housing, a gain in government spending, and a narrowing in net exports. The big negative was a drop in personal consumption.
Sorry I didn't want to repeat "less negative" several time in one paragraph, but all we got was "less negative" news. ;)
OK! lets get serious.
I'm going to take a closer look at second quarter GDP:
1)Government Spending raised +5.6%
2)Consumer Consumption dropped -1.2% .It was forecast to drop 0.5%. Obviously the high unemployment won't get better in near future and consumption should drop farther in 3rd quarter.
3)Inventories dropped by -0.83% if we get the recovery as bulls expected it should be very helpful, because companies have too boost their production to catch up.
4)Investment dropped by -13.5%. Inventories dropped at a record $141.1 billion annual pace, after a $113.9 billion decline.
5)Net Exports increased by +1.38% due to sharp drops in import.The trade gap shrank last quarter, preventing a steeper decline. The gap between exports and imports fell to $339.3 billion at an annual pace from $386.5 billion.
The Institute for Supply Management-Chicago Inc. Friday said its business barometer increased to 43.4, the highest level since September, from 39.9 in June. Readings below 50 signal a contraction. If we don't see a significant uptick come Q3, you should be worried.
No one can denial a big jump in GDP from -5.5% to -1% ,but the unemployment and shadow inventories will slow down the rate of recovery. We are going to get a very sluggish recovery contradict to average investors believe, unless Obama's administration comes with the stimulate package (II) & (III) to fill up the lack of consumer consumption. I'm looking for a "W" shape recovery not "V" shape as many believe. I'm slightly less bearish, but I'm not going to call March low the bottom unless S&P500 takes out the 1200.
If you are new to my blog. I recommend to read my article "What is wrong with the US economy?"
Saturday, August 1, 2009
If investors believe we has started a new bull market treasuries should go down with head in coming days instead of moving higher, and my broadening top scenario should fall apart.
We are getting mix messages. Treasury has been going up in last couple days that shows flee to safety, but at the same time stock market rallied! this is not make any sense. Treasury and stock market have invert relation. When one of them is going up the other one should go down.