Can you say OIL! Oil broke through 100 yesterday and the dollar slide against the Euro. The market also gave up all gains and closed lower by the end of the day. The market is taking on a serious load and is getting ready to make a power move and odds are to the downside. The techs also started sliding by late afternoon and just could NOT hold.
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The dominos are tipping….
Corporate bond default risk is rocketing as concern over the structured investment products defaulting is climbing and the bond insurance companies are barely treading water. So far we have ONLY seen $150+ billion in write-downs, but there is between $200-$300 billion more to come (predicted by S&P and UBS), the bond insurers don’t have enough to cover the current losses (god forbid the flood gates open and more begin to default). All of which we have known for a couple of months now….but the cracks are NOW forming in the Corporate Bond market – since many of these companies are involved in CDO, SIV ,and other structured investments. Most of these corporate bonds are in the AA or AAA rating level and are believed to be able to pay back their loans, however yesterday an economist pointed out that you NEED to connect the dots, these are the same companies that are holding these CDOs, these corporate bonds are rated by the same agencies that rated the CDOs, these companies rely on the same bond insurance companies that are failing, at some point you need to ask yourself can these companies afford to lose more?
The concern is directly reflected in the cost of protecting corporate bonds from default via credit-default swaps to hedge the mounting losses, those costs have rocketed to an all-time high. The scramble to hedge default as concerns mount in the $2 trillion dollar CDO market.
Some Florida state investment funds have already seen losses that happened so fast they had no time to even try to sell them. When ratings drop from AA to D in on cut – they have just said your investment just went from secure to default in a blink of an eye. KKR Financial (a $20 billion publicly traded credit fund) already froze (delayed) repaying some of their asset-backed commercial paper – most of which has been rated D by Fitch – is in talks with creditors. They are only one of many facing serious issues.
Keep an eye on this – if any one of these dominos fall – the blood WILL run in the streets.
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Housing Starts Down
Housing starts remain at their lowest levels since 91 and show the deepest housing recession in over 20 years. Couple that with a serious drop in new mortgages and we could see the housing market continue lower and remain low for some time. While work did start on some new homes – the growth rate is negligible. Additionally – many of the new home starts are being built by developers and have not sold.
After speaking with someone in the foreclosure business (one of the largest firm in the south) – the rate continues to increase exceeding 30,000 foreclosures in the state of Florida per month and does NOT show any sign of slowing.
Locally – at the foreclosure auctions the banks (1st mortgage) are not even able to unload them – as the make the first bid (just enough) to cover the first and no one bids behind. My neighborhood (on the water), after reviewing county records, is about 10% foreclosed, 90% of the homes are fully mortgaged. We have a lot of room for more foreclosures and defaults.
This will curtail both the job market (in construction) and consumer spending as they do not have any more money to tap. It’s interesting that my father’s generation goal was to just get that “monkey” of their back and did NOT want to have a mortgage. They felt free – once it was paid off. So what happened to our generation? We believe that a house is an ATM! It looks like our generation is in for a serious life lesson.
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Inflation is on the rise (CPI)
As I have been saying that inflation will continue to rise and the dollar continues to sink – it’s very simple math. The reason is that the majority of the products we consume are made overseas (including some food). As the dollar falls, the companies the purchase goods from overseas to sell domestically are getting squeezed on the currency exchange rate. Through in ramping shipping costs from oil going higher….. well you get the picture….the consumer (the bottom of the food change) will have to pay more for their goods.
As Bernanke hacks at interest rates with his ax, the dollar will continue to slide (as foreign nations do NOT cut their own rate). We are all affected by a weaker dollar and the need for hedging against it is very important. We certainly don’t want what happened in Japan, Mexico, or the many other nations that either devalued their currency (or the market devalued it) to happen to this country.
I am not a fan of government data (as you may know) but even the Consumer Price Index (CPI) is reporting a rise in inflation. Regardless if you believe the government numbers are accurate – they are reporting inflation is rising.
Expect it to continue….
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Futures Pre-Market
The futures are getting a slid whack in the pre-market between rising inflation, housing starts looking soft, and the concern now spreading to corporate bonds – well the market is getting a pessimistic impact prior to the opening. Expect the ARB traders getting long futures to short the basket - to put additional pressure on the market at the opening. The spread is about 7 points in the NQ and 5 points in the ES. It will narrow some going into the opening – but the selling pressure on the basket will send the market down at the opening.
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Support & Resistance
The spring is loading and looks more likely to UNLOAD to the downside.
INDU 12250 / 12500 (is the narrow band – once it breaks one side or another it could start moving very fast. Watch 12,250 closely – if it breaks – it will break down fast)
NDX 1750 / 1800 (1750 is key support – don’t get long here without fully hedging…if it breaks look out below)
SPX 1350 (This is about to unload – probably to the down side)
RUT 700 (Same thing – ready for the spring to unload)
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Conclusion
You cannot argue with billionaires (Rogers, Ross, Buffet, Pickens) these old school investors have been calling the commodity market (and oil) and shorting the crap out of the dollar. Rogers went as far as saying he wouldn’t own any dollars by the end of 2007 and the stock market is overvalued. Ross and Buffet are circling the dying bond insurers looking to scoop the taste flesh of the mono-line bonds and leave the rotten meat on the bone. Pickens has been buying oil on every pull back – as the young talking heads call him a fool. One thing is for sure – they all beat to their own drum, they all don’t give a shit what people think about them, and they have all made their fortunes by casting HOPE and OPTIMISM aside and just following fundamental data.
Well – they have all pretty much called the US economy a pig and have been for some time. Rogers has his children learning Mandarin.
So follow what they say – and if you are in the US market – hedge your equities, expand into commodities, hedge your dollar risk, look outside the borders of the US (there is a whole world out there).
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