Archive for November, 2009

Start of a New Crisis?

Monday, November 30th, 2009


I’ve had a couple of people ask me if the Dubai debt default is the start of a new financial system crisis, much like the bankruptcy of Lehman Brothers started last year’s stock market crash.

To determine if there is a systemic issue with the global financial system, we have to look at the chart above. I’ve written before about the TED Spread – the ratio of treasury to euro dollar yields. Generally, in a normally functioning market, the spread between the yields is around 1/4%. However, as you can see on the chart, when the subprime crisis started to pick up in 2007, you can see that the TED spread jumped from its normal range.

Those of you who’ve been reading this blog and my other writings since then recall that I told you we were reducing our financial sector exposure to zero at that time. The move of the TED spread was our indicator to do that. However, a significant move above 250 generally means that we have a systemic problem with the financial system. Normally, we’d anticipate an elevated level for a bit to precede a stock market crash – much like we had for a few weeks prior to the 1987 crash. However, you can see that the Lehman bankruptcy (which happened over a couple of days) shows that the indicator moved from 100 to 450 virtually overnight.

Fortunately, you can see that the TED Spread is hovering in the normal 25 range. So, given that the this indicator does not show we have a systemic problem, I don’t believe the Dubai crisis will lead to a wider global financial system crisis. It is more indicative of just the next stage of the ongoing current financial problem. The thing that is cushioning the impact of this dropping shoe is all of the liquidity that is floating around the world.

So, it is possible that there are other Dubais our there in the world that will pop up, and they might be giant sized problems. It is even possible that there will be a domino effect of one after another that could cause a Lehman-like impact on the system. However, the TED spread doesn’t show it, and until it does there is no need to borrow trouble.

This video requires that you follow the link to YouTube to watch it. They have the embedding feature disabled for some reason

34-day Moving Average Holds Trend

Friday, November 27th, 2009


As you can see on the chart above, the candlestick on the chart that represents today did in fact sell-off, and you can see the tail touching the 34-day moving average before rebounding strongly – but still in losing territory for the day.

Since the March lows, the 34-day exponential moving average has consistently provided a support level for the market. Only twice have we dropped below it and not immediately rebounded (that was in the June consolidation of the uptrend and again briefly in the October consolidation of the uptrend.

Given that today was a shortened trading session and that much of the senior Wall Street trading staff were on a 4-day weekend, its tough to say what the real fallout would have been if it was a normal trading day. However, today was not nearly as bad as the futures overnight projected. We were projecting a down 300 day on the Dow Jones Industrial Average, but we ended down half of that.

Monday will be the telling sign, and the overseas markets will lead the way as Asia and Europe both open for trading well before we do.

As I’ve written before, the low volume has been bothersome for me. You can see that we have had several sessions in a row that have been below average (the blue line on the volume chart) which indicates that many of the big institutions have been sitting out much of this month’s activity.

We had no stop losses trigger today, which is probably good given the knee jerk selloff then move higher – but we came very close.

Monday we’ll see how things turn out.


Quick Market Update

Friday, November 27th, 2009


Well, we are now a bit over an hour into the trading day and as you can see we did have the Dubai induced selloff I noted in today’s earlier post. We are now moving higher, much like Europe did – will we see a positive close? I’d guess not as we are trying to move to parity with the move down in European markets yesterday.

More later as the day unfolds.


Dubai Rocks Investment Markets

Friday, November 27th, 2009

As we wake up this morning we hear news of Dubai unable to pay the interest on its bonds. The announcement was made on Wednesday night, at which time Asia and Europe sold off yesterday. The US market was closed, so we will likely be in catch-up mode this morning on this shortened trading day.

I’ve posted the story below fro the Times of London, but as I write this, the European markets have turned positive. That is a good sign that the investors that have had 36 hours to digest this news have concluded that this isn’t a big enough issue to completely derail the uptrend we’ve seen.

However, since this is a credit market issue, expect any asset that has benefited in a major way from the liquidity in the market (gold, oil, emerging markets, financials) to sell off today. Also watch for a pop up in the dollar as some investors head to the safety of t-bills to let this play out.

The next week will be key to this issue and how extensive its implications are, but today, given that its a shortened trading day in the market and that the junior traders are in charge on Wall Street, anything can happen. However, I’d guess that some of our stop losses will trigger today.

More later on this and other things impacting your investments.

From The Times
November 27, 2009
Dubai in deep water as ripples from debt crisis spread
Patrick Hosking and David Robertson

Fears of a dangerous new phase in the economic crisis swept around the globe yesterday as traders responded to the shock announcement that a debt-laden Dubai state corporation was unable to meet its interest bill.

Shares plunged, weak currencies were battered and more than £14 billion was wiped from the value of British banks on fears that they would be left nursing new losses.

Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.

Although the scale of Dubai’s debts is comparatively modest at $80 billion (£48 billion), the uncertainty spooked the markets, with no one sure who its creditors are. Several banks rushed out statements to reassure investors that their exposure was small.

The FTSE 100 plunged by 171 points to 5,194 — its biggest one-day fall in eight months in one of the most jittery days in the financial markets since the depths of the banking crisis.

The Treasury, the Bank of England and the Financial Services Authority were monitoring events closely and are demanding figures from UK banks on their loan exposures to Dubai.

According to a senior government official, Dubai’s crisis is regarded as modest and manageable for Britain, but there were growing fears that Abu Dhabi, the oil-rich neighbouring emirate that has in the past given rescue loans, would leave Dubai to its fate.

Dubai World, the state-owned corporation that began the panic on Wednesday by demanding a standstill on its interest payments, worsened the mood when it postponed a teleconference for its bond holders, saying the phone lines were overwhelmed.

Gerard Lyons, chief economist with Standard Chartered, said: “The market reaction shows how vulnerable some economies are to the aftermath of the debt binge. This highlights how fragile confidence is.”

The Eid al-Adha religious holiday in the Middle East, and the closure of financial markets in the United States for Thanksgiving, exacerbated the sense of uncertainty in markets that were open for business.

A computer crash at the London Stock Exchange, which by coincidence is 21 per cent owned by the Dubai Government, left dealers unable to trade for three and a half hours.

Shares in HSBC slumped by 5 per cent, wiping £6.2 billion from its value. According to the United Arab Emirates Banks Association, HSBC has £11 billion of loans outstanding to the UAE, of which Dubai is one of seven emirates. HSBC declined to comment.

More than £2.6 billion was slashed from the value of Barclays, while Lloyds and Royal Bank of Scotland, both partly owned by the taxpayer, saw their values fall by £1.7 billion and £1.5 billion respectively.

One analyst said that the fears were overdone because Abu Dhabi would eventually come to the rescue to save the UAE from embarrassment. Dubai World has liabilities of £36 billion, about three quarters of Dubai’s total state debt. Its subsidiary Nakheel built The Palm Islands development, but the property bubble in the emirate burst a year ago, leaving buildings unfinished, debts unpaid and paper fortunes erased.

You May Say I’m A Dreamer…

Thursday, November 26th, 2009

As we ease our way into this Thanksgiving holiday, I’d just like to say Thank You to all of you who read this blog and email me your comments – whether they be your opinions on the markets, the economy, the graphics, the news clips or the music videos. Your input is valuable as it helps me know what is on your mind so that I can address it.

The purpose of this blog is to provide analysis of the markets, the economy, and how world events can impact your and my clients’ wealth. I try to make it interesting and useful, while having some fun at the same time.

But, as we are now into my busy season, its easy for me to lose track of some of the important things that have nothing to do with the direction of the stock and bond markets.

I have a whole laundry list of things that bother me right now that may or may not impact the future of the investment world and our bear market that is now into its second year. As always, I’ll tell you about anything in future posts that I believe to have a bearing on our strategy or portfolio management activities.

This song caused quite a controversy when it came out – is it condemning religion, is it promoting socialism, is condemning capitalism, is it promoting social upheaval. I’ve always thought of it as just trying to get you to think about what could be possible – and what a more positive message is there than possibility.

I’ll be back with market analysis after the holiday. But now is a time to be thankful for what we have, to look toward the future and imagine a better world. The current economic malaise will run its course and over time people’s wealth will recover from the crashes in the investment and housing markets. The wars in the Middle East will end and our country will adopt a sensible energy policy that focuses on domestic natural gas, nuclear energy, and renewable resources while ending reliance on foreign oil. Health care inflation will decrease and access will increase.

You may say I’m a dreamer, but I can imagine it’s possible.

Happy Thanksgiving!


Fed Comments Push Market to Ever Higher Ground

Monday, November 23rd, 2009

Stock markets around the world are up big today on statements from the President of the St Louis Federal Reserve Bank that the Fed will likely extend the program of buying mortgage backed securities past the March 2010 expiration date.


Investors have interpreted this comment to mean more printing of dollars and more a further extension of the rally in the stock market.

This news came on top of comments from the Bank of Canada and the International Monetary Fund that the policy of fighting deflation (ie, easy money) would continue and that its better to be too late than too early in ending the fight.

Watch for Gold and Basic Materials to continue their march higher and the dollar to continue to be weak (although there will ALWAYS be temporary reversals within the major trends. Just look at the dollar chart below:


You can see that since May, the 34-day moving average -the red line – has acted as the upper boundary of any temporary reversal (we see it happening right now, but this current rally has not made it up to that boundary yet – and may in fact resume the downtrend based upon these central bank comments).

You get the picture – easy money with no place to go but into the investment markets will continue to act as a catalyst until either the real economy picks up enough that it can absorb the liquidity into productive GDP enhancing activities OR until the Fed shuts off the liquidity spigot. I don’t see the former happening to a significant degree anytime soon and the Fed’s own comments discount the latter.

So, our plan continues – ride the market to higher ground but protect against a fall.


“You Are Home” – Mortgage Bankers Assoc Weighs in on Housing Crisis

Saturday, November 21st, 2009

Here is a story from the AP that has implications for the stock market recovery. It’s that chicken and egg thing: is the stock market recovery anticipating the recovery in the broader economy or is the continued softness in the broader economy forecasting a correction in the stock market? For now, trends and technicals say it’s the former, but as always we don’t bet the farm on that. Fundamentals (like this story) say its the latter. As always, we are monitoring things closely for clients, taking advantage of the strong uptrend while its here and protecting against the downside with stop losses.

Home crisis going deeper
Associated Press

WASHINGTON — The foreclosure crisis likely will persist well into next year as high unemployment pushes more people out of homes, pulls down housing prices and raises concerns about the broader economic recovery.

The latest evidence was a report Thursday that a rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure. That’s a shift from last year, when riskier subprime loans drove the housing crisis.

The report from the Mortgage Bankers Association also found that

14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September. It was a record-high figure for the ninth straight quarter.

The data suggest that the housing market and the broader recovery will remain under pressure from the surge in home-loan defaults, especially as unemployment keeps rising. Lost jobs are the main reason homeowners are falling behind on their mortgages.

After three years of plunging prices, the housing market started to rebound this summer. That lifted hopes for the overall economy. But analysts say too many foreclosed homes have yet to be dumped on the market and expect further price declines.

The worst damage is still concentrated in the states hardest hit from the start: Florida, Nevada, California and Arizona. Together, they accounted for 43 percent of new foreclosures.

One in four mortgages in Florida was either past due or in foreclosure, the most in the U.S. Nevada was close behind at 23 percent.

“There’s no indication in this data that foreclosures are going to abate any time soon,” said Mark Zandi, chief economist at Moody’s Economy.

com, who projects that nationwide home prices will fall as much as 10 percent before bottoming next fall.

Driven by rising unemployment, prime fixed-rate loans to borrowers with good credit accounted for nearly 33 percent of new foreclosures last quarter. That compares with 21 percent a year ago.

Many laid-off homeowners might be able to survive on their savings for a while, but “the longer the economic situation stays in place, the less likely they are to hold on,” said Jay Brinkmann, chief economist at the Mortgage Bankers Association.

In markets where foreclosures already are high and still rising, prices likely will remain soft. That will cause developers to keep their bulldozers idle and prevent the industry from making a big contribution to the economy’s recovery.

“Builders only start homes when they can make money,” said John Burns, an Irvine, Calif.-based real estate consultant. “In a lot of areas, until prices go back up, construction doesn’t make any sense.”

The crisis has struck people such as Betty Wilson of San Diego. She was laid off a year ago from her job at an insurance company.

Since then, Wilson has managed to pay her $1,090 mortgage bill by collecting unemployment benefits, renting out a room and dipping into savings. But money is running low. She fears that she won’t make her payment for December.

Wilson, 56, said she had tried to get her mortgage company, GMAC Mortgage, to lower her 6.25 percent interest rate or give her a temporary break from payments. Many mortgage companies will let a borrower skip as many as six months of payments, though they require that the money be paid back eventually.

After The Associated Press inquired about her case, a GMAC spokeswoman said Thursday that the company would offer Wilson reduced payments for four months, “while we continue to review her financials for a permanent solution.”

After a typical recession, foreclosures peak about six months after the unemployment rate does. But the process could take longer this time, in part because loan-modification programs and new state laws have prolonged the process. Unemployment, now at 10.2 percent, isn’t expected to peak until next spring or summer.

Another unknown is the effectiveness of the Obama administration plan to attack the foreclosure crisis. As of last month, about 20 percent of eligible borrowers, or more than 650,000 people, had signed up. But most of those enrolled have been chosen for trials lasting up to five months.

About 4 million homeowners were either in foreclosure or at least three months behind on their mortgage payments as of September, according to the mortgage bankers group. Even if some of them manage to stay in their homes, the market is likely to absorb a wave of new foreclosures. Those properties are concentrated in states such as Florida and other already beleaguered areas.

Subprime loans with adjustable rates have fallen to 16 percent of new foreclosures, from 35 percent a year earlier. Loans backed by the Federal Housing Administration also show rising signs of trouble. More than 18 percent of FHA borrowers are at least one payment behind or in foreclosure.

The Mortgage Bankers Association’s quarterly survey of 44.6 million loans is considered the most authoritative report on mortgage delinquencies. A separate report, issued monthly by foreclosure listing service RealtyTrac Inc., is based on courthouse filings.

House Considers Estate Tax Legislation

Saturday, November 21st, 2009

One of the big mysteries in the estate planning world is what the government would do to keep the estate tax from expiring in 2010 as scheduled. It has always been clear, even when the House was controlled by Republicans, that we would never allow the estate tax to expire completely.

It was always assumed that a permanent solution would be agreed upon that would shelter some level of income above $600,000 per person and most likely tie it to the CPI for inflation adjustments into the future. However, the government has been a bit busy with other things and now finds itself with six weeks to do something or face an automatic expiration of the estate tax for one year and a return to the a much lower exemption level.

Charlie Rangle, Chair of Ways and Means, initially proposed a one-year extension of the current exemption and tax rate, but House leadership intervened and asked him to come back with a permanent solution prior to year-end.

Clarity on this issue will be good for everyone, from planners like us to clients trying to plan for the future and structure their estates within the confines of the law, so they can leave their children more than “alone.”

Enjoy The Temptations video – this is one of my favorite songs and this live performance really takes me back to the early 70’s when music was truly a force for social commentary and positive change in our society.