The bears aren’t dead and buried yet

March 30, 2009

The SPX only stayed above the 50 day simple moving average this time for 5 days.  At the turn of the year, it at least managed 7.  The 2002 lows are crucial support to test the will of new buyers.  If they fail to hold, the 741 level will serve as the canary to warn of a possible complete retest of the March lows.

So far, we have only another headfake to the upside created by jawboning from the Feds.  We still believe this is part of a bottoming process, but we need more honest buying (not short covering) to confirm the lows are already in.

spxtesting800033009


The Fight Over Who Will Guard Your Nest Egg

March 28, 2009

By JASON ZWEIG
wsj.com

A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra’s rules, brokers must recommend only investments that are “suitable” for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of “fiduciary duty,” or the obligation to put their clients’ interests first.

Most investors don’t understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don’t. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.

Brokers can sell you any investment they have “reasonable grounds for believing” is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.

A key factor still is missing from Finra’s suitability requirements: cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is “suitable’ for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.

If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.

Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. “It’s time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers,” he told me. “Both should have a fundamental first responsibility to their customers.”

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The Sky already fell?

March 25, 2009

The Commerce Department said sales of newly built U.S. homes rose 4.7 percent to a 337,000 annual pace, the fastest increase since last April, from 322,000 in January.

Despite the increase, February sales were the second lowest ever after the drop in January to the slowest pace in records going back to 1963, the department said. Economists, who had forecast another decline in sales, were still encouraged.

“This completes a trifecta of positive housing reports for February. A sustained increase in housing demand would be the best tonic for the credit crisis and a major sign that the worst of the recession is behind us,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

Sales of previously owned homes rose 5.1 percent in February, while housing starts soared 22.2 percent that month.

Stabilizing the housing market, the main trigger of the current economic slump, is crucial for the economy’s recovery.

The median sales price in February fell a record 18.1 percent to $200,900 from a year earlier, the department said.

The inventory of homes available for sale in February was at 330,000, the smallest since June 2002. The February sales pace left the supply of homes available for sale at 12.2 month’s worth.

“New and existing home sales have hit their lows for this cycle. We expect housing inventory-to-sales ratios to fall from still-high levels as 2009 unfolds,” said Michael Darda, chief Economist, MKM Partners in Greenwich, Connecticut.

“Home prices should begin to flatten out after inventories fall to 7-8 months, which we expect before the year is up.”

In other good news for the housing market and the economy, applications for home loans jumped last week as interest rates hit record lows after the Federal Reserve announced it would buy longer-term U.S. government debt.


The Feds use a backhoe for a gravedigger

March 25, 2009

“It’s déjà vu all over again.”
– Yogi Berra

In mid-December, after the Fed lowered rates to 0 to .25%, we noted:

Aggressive action by the Federal Reserve today pushed most markets above their respective simple 50 day moving averages for the first time since September.  We have highlighted the 50 day as resistance level number one in prior notes and have shown it to be critical resistance along with the 200 day and 80 week.  This is a primary step to recovery and opens the door to a potential challenge of the 200 day near the beginning of 2009.

That rally was short lived, eventually failing after a more sustained move above the 50 day near the beginning of the year.  What is interesting is that we may be seeing a similar sequence of events again.

After a brief dip below the 2002 lows, the SPX has rallied back significantly on the back of announcements from the Treasury and Federal Reserve.  The combination of these announcements (along with better economic reports) has again pushed most major market averages over their simple 50 day moving averages.  Unfortunately, volume has not expanded with this push, even though volume levels are higher than earlier in the year.

The market managed about 7 days above the 50 day in early January.  So far, we have 3 days on this trip.  To avoid a repeat of action earlier in the year, it is critical that the SPX remain above the 50 day and the 2002 lows.  The Feds can do all of the grandstanding and wagon circling they want, but the market will not be forced higher.  We need to see organic buying build on this foundation for the bears to truly remain buried below the 2002 lows.  Ideally, a high volume rally will spring from support at the 50 day to challenge the Feb highs in the area of 875.  If this occurs, the 50 day and 800 will serve as very solid support going forward as we move toward the Jan highs around 940.

If the market again fails after a quick Fed induced burst over the 50 day, we look at 741 as the first support level below the 2002 lows.  A significant break at 741 would argue for at least a retest of the lows at 667.  With other indicators showing improvement, including some leaders exhibiting notable relative strength, it is our assumption at this point that the lows at 667 will not be broken.

spxtesting800032509


How will U.S. asset cleanup plan work?

March 23, 2009

Mon Mar 23, 2009 4:04pm EDT

WASHINGTON, March 23 (Reuters) – U.S. Treasury Secretary Timothy Geithner on Tuesday unveiled his long-awaited plan to cleanse toxic assets from bank balance sheets.

Here are some questions and answers about the plan.

Q: What is the problem the Treasury is trying to solve?

A: The bursting of the U.S. housing bubble caused mortgage failures to skyrocket and triggered massive losses for banks on complex mortgage-related securities. The excessive discounts now embedded on these hard-to-trade assets is weighing down bank balance sheets, choking off lending and worsening an already deep recession.

Q: What is the objective of the Treasury’s plan?

A: The plan aims to bring in private investors to help jump-start the markets for these assets. By providing attractive government financing, the Treasury hopes private investment firms can afford to pay prices for the assets at levels at which banks are willing to sell. With these assets off their books, banks would have capacity to resume lending again, and will be better able to attract private capital. Fears over their potential losses would be greatly reduced.

Q. How much will this cost the government?

A: The Treasury will initially contribute $75 billion to $100 billion from the $700 billion financial bailout fund approved by Congress last fall. It will be able to stretch these funds by combining them with private capital and leveraging them with loans from the Federal Reserve and the Federal Deposit Insurance Corp. Losses for taxpayers could be much larger than the amount the Treasury is using to seed the program, since the FDIC and Fed are extending loans. The Treasury estimates that $500 billion of assets can be bought through the plan, and this could grow to up to $1 trillion. Geithner said he is not ready to decide whether to ask Congress for more bailout money.

Q. How is the plan structured?

A. There are three basic programs. The largest one will enable investors, partnered with the government, to buy whole loans from banks with FDIC financing in an auction process run by the banking regulator. The second would expand a securities loan program run by the Fed to enable firms holding certain mortgage- and asset-backed securities to pledge them as collateral for new loans to invest in these markets. In the third part, the Treasury would hire at least five asset managers to raise capital to buy distressed mortgage- and asset-backed securities. The Treasury would then match the private capital dollar-for-dollar and provide additional debt financing to boost buying power. The funds would compete in the open market to buy legacy securities.

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Contrarian Quotes

March 19, 2009

“Follow the path of the unsafe, independent thinker. Expose your ideas to the dangers of controversy. Speak your mind and fear less the label of ‘crackpot’ than the stigma of conformity. And on issues that seem important to you, stand up and be counted at any cost.”
– Thomas Watson

“Whenever you find yourself on the side of the majority, it’s time to pause and reflect.”
– Mark Twain

“The ‘crowd’ is most enthusiastic and optimistic when it should be cautious and prudent; and is most fearful when it should be bold.”
– Humphrey Neill


How many bears could a bear trap bury, if a bear trap began to bury bears?

March 18, 2009

A shovel is not enough longs, we may have hit rock.  The question is, did we hit rock bottom?

The 50 day moving average is in play once again.  Can we remove this huge stone in time for Easter?  The resurrection of the market depends on it.

spxtesting800031809


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