Monday, November 26, 2007

Stocks and the Credit Markets

I don't see the stock market even hinting of a bottom yet. Technically, I note this -- I've been following the Lowry's statistics since the 1960s. Their Buying Power Index reflects buyer's willingness to buy or accumulate stocks. Lowry's Buying Power Index is now roughly 60 points below where it was at the August lows. Buyers would not enter the market at the August lows, and now Lowry's Buying Power figures are even lower. This suggests that buyers will demand considerably lower prices before they will be even thinking about serious buying.

Also, on a common sense basis, current prices hardly suggest that we have seen a full bear market correction of the greatest bull market in history. After all, the S&P is currently selling at 18.30 times earnings with a mini-dividend of 1.99%. These are statistics characteristic of a bull market peak, not a bear market bottom.

"There is now increasing evidence that the liquidity and credit crunch in international financial markets is back to its summer peaks of August and, in most dimensions, even worse than in the summer; financial markets are now in a “virtual panic mode” according to a market participant (as reported by the FT).

"This worsening of the financial markets turmoil has occurred in spite of the hundreds of billions of dollars and euros that have been injected in the financial system by the Fed, the ECB and other central banks and in spite of the 75bps cut in the Fed Funds rate by the Fed. This massive easing of liquidity – both its quantity and price - has miserably failed to stem a severe liquidity crunch that is now back to the summer peaks, as evidenced for example in the interbank markets – both in US and Europe - by the sharp widening of Libor rates - at a variety of maturities – relative to equivalent maturity government yields and/or policy rate; such sharp rise of spreads to summer levels signals a worsening of the liquidity crunch"

From: DowTheory

Friday, November 23, 2007

Banks and the "Legal Title" paperwork

Deutsche Bank got a hard shock a few days ago when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments.

A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.

A new unexpected factor

The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMO’s in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States. That’s a lot by any measure!

In the Ohio case Deutsche Bank is acting as “Trustee” for “securitization pools” or groups of disparate investors who may reside anywhere. But the Trustee never got the legal document known as the mortgage. Judge Boyko ordered DB to prove they were the owners of the mortgages or notes and they could not. DB could only argue that the banks had foreclosed on such cases for years without challenge. The Judge then declared that the banks “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test,” the Judge concluded, “their weak legal arguments compel the court to stop them at the gate.” Deutsche Bank has refused comment.

What next?

As news of this legal precedent spreads across the USA like a California brushfire, hundreds of thousands of struggling homeowners who took the bait in times of historically low interest rates to buy a home with often, no money paid down, and the first 2 years with extremely low interest rate in what are known as “interest only” Adjustable Rate Mortgages (ARMs), now face exploding mortgage monthly payments at just the point the US economy is sinking into severe recession.

Is this a real problem??

What investor would be interested in any of this debt?

Wednesday, November 21, 2007

Forclosures peak this month and March 2008

The October forclosure figure is a 568 percent increase over the same period in 2006.

There were 8,818 properties sold in September in foreclosure auctions with a value of $3.6 Billion dollars, according to ForeclosureRadar.

“We see no sign of a foreclosure peak at this point, and we don't expect to see one until the third or fourth quarter of 2008 at the earliest,” says ForeclosureRadar.

The sales we are seeing now are from missed payments in March. So current auction sales really have not yet been impacted by either August’s liquidity crunch or the ARM reset peaks this month and again in March 2008,” he says.

Tuesday, November 20, 2007

Homebuilders getting killed Monday and Tuesday

Thursday, November 15, 2007

Housing and Recession

Click on image to read

Monday, November 12, 2007

Dow coming close to 12,845

The PTI closed right on its moving average.

Lowry's statistics continue to deteriorate with Buying Power at a seven month low.

If the market is down tomorrow, the PTI will almost surely deliver a stock market sell signal. The Dow closed today just 142 points above a Dow Theory bear market signal.

If the Dow closes below 12845.78, particularly on rising volume, then the primary trend of the stock market will be down according to Dow Theory. Looks like an interesting week ahead. Be very conservative here. Remember, in a bear market everyone loses but the winner is the one who loses the least.

From DowTheory

Wednesday, November 07, 2007

Stock market trends: bearish

Transports broke below their August 16 support today -- but Industrials closed 455 points above their own August 16 critical low of 12845.78. If Industrials close below that figure, the great primary trend of the market will have turned down, and -- we'll be in a primary bear market.

If a bear market is signaled, it will be imperative to be off margin and light or out of all common stocks with the exception of top-quality gold shares.

If or when a bear market is signaled, there is absolutely no way of knowing its duration or extent. It could conceivable be a short-lived affair or it could be an extended and crushing disaster. There is just no way of knowing in advance.

Is there an ideal position to be in if it turns out we're in a primary bear market? None that I know of, since every situation is different. But if I had to pick an ideal situation, it would be one half of liquid assets in gold and the other half in cash. What kind of cash? For most people, the kind of cash they are familiar with -- US dollars.

The VIX was up an amazing 5.10 to 26.49 as panic was in the air.

"When a stock or a commodity (GOLD) advances into new territory or to prices which it has not reached for months or years, it shows that the force or driving power is working in that direction. It is the same principle as any other force which has been restrained and breaks out. Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reaches another dam, or some obstruction or resistance which would stop it.

"Therefore, it is very important to watch old levels of stocks and commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect, because the accumulative energy over a long period naturally will produce larger movements than if it only accumulated during a short period of time."

If gold can close above its 1980 peak price of 850 -- it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing about 850 could bring about at least a doubling of the current dollar price for gold.

If gold can close above its 1980 peak price of 850 -- it will have overcome a resistance level that has held it back for 27 years! Thus, a decisive closing about 850 could bring about at least a doubling of the current dollar price for gold.

Suddenly gold is in the news. The public is reading about gold an actually asking questions. "Why is gold going up?" "What's the meaning of the rise in gold?" "Should I buy gold?" "Is there something wrong with the dollar?" "Where does one buy gold?" "Is silver related to gold?" "How much does it cost to buy a gold coin?" "What is GLD?" "Who sells gold coins, and if I buy a few, where should I keep them?"

Yet our citizens have been kept in the dark about gold for generations. Instead, Americans have been touted on the value of fiat money, rudderless money. This fiat money is created by a private banking cartel (the Fed). This transfer of US money-creation has never been authorized by a Constitutional amendment.

I've said this before, but I'll repeat it -- the whole system of fiat (paper) money is the greatest fraud ever perpetrated on the American people. Our defense against this "counterfeit" money is, and always has been, Constitutional money -- gold and silver. Federal Reserve Notes (currently termed "dollars") are a blatant lie. Today, rising gold is dragging that lie out into the open.

From: DowTheory news

Saturday, November 03, 2007

More on Gold and deflation

We have a key barometer at our disposal. It's called gold. We also have a fierce problem at our doorsteps. It's called deflation. Yesterday, we saw the stock market's reaction to the Fed's meager quarter-point cut in the Fed Funds. The market's reaction was to take a swan-dive -- I might even call it a semi-crash.

Why did the market take a dive? Here's the background. The housing situation is deteriorating. The specter of mass foreclosures next year is haunting the building and real estate industry and its workers. US consumers are growing increasingly pessimistic. US consumers are pessimistic about the war, they're pessimistic about our President, they're even more pessimistic about Congress, they're pessimistic about their inability to keep up their standard of living because of rising prices, they're pessimistic about their government's debts -- and their own debts. And they're pessimistic about Social Security and Medicare and their own and their children's futures.

Where might all this pessimism lead to? It will lead to a cut-back in consumer spending. Consumer spending amounts to nearly 70% of the Gross Domestic Product of the United States. If consumers cut back substantially, the nation will sink into recession.

The ramifications of a recession are international in scope. US consumer spending comprises 19.3% of the world's GDP. If the US goes into recession, it will impact adversely on the world economy.

Fed Chief Bernanke's got a brutal problem. He'd probably like to go all-out on the path of inflation, knock deflation on its fanny. But to do that means we must kiss the dollar good bye. Already, Bernanke is hearing the hoots and the warnings. The New York Sun newspaper is now calling the US dollar "The Bernanke." The world is sneering at the once all-powerful "Yankee dollar." And that's not a good omen.

What would happen if the US let the dollar fall, and I mean fall hard? We know that the Fed talks to central banks the world over. But the biggies, China, Russia, the Mideast, would they stand for a crashing dollar? After all, they hold billions in US securities. What would they do? What is Bernanke to do?

Maybe Ben should come out with the truth. Maybe he should announce that if the US goes into recession, the whole world is going to feel the pain -- and that will create political and social problems across the face of the globe. Therefore, the US must inflate.

GOLD is a barometer. Currently, gold appears to be holding its own. Is that enough? Remember, Bernanke has to do whatever it takes to inflate, and the key gauge will be the price of gold. To put it another way, if Bernanke can't get gold moving higher, we're in trouble. If gold rallies above 800 and continues to climb, we'll know that Bernanke is succeeding in holding off deflation. But if gold begins to slide, if the gold charts start breaking down, then we'll know that deflation is on the verge of winning the game. And I promise you that if gold loses, we'll all lose.

So the great drama is starting to unfold. The US must hold off the forces of deflation at all costs.

From: DowTheory