4um: Market WrapUp (7-25-2008)

Title: Market WrapUp (7-25-2008)
Source: FSO
URL Source: [None]
Published: Jul 25, 2008
Author: Tim
Post Date: 2008-07-25 18:35:45 by orangedog
Ping List: *unUsual Suspects* Subscribe to *unUsual Suspects*
Keywords: None
Views: 707
Comments: 43

Today's Market WrapUp 07.25.2008 Mon Tue Wed Thu Fri Wood Archive
Another Look at Crude Oil, the Dow Theory Double Non-Confirmation and Gold
BY TIM W. WOOD

In the June 27th WrapUp I explained that Crude Oil was in an unsustainable parabolic spike. Then, on July 15th I had a short-term sell signal that immediately evolved into a sell signal of intermediate degree. The question now is whether or not this intermediate-term sell signal further evolves into marking an even longer-term top, or if it is a mere correction in the path of an even longer-term advance. Monitoring the Cycle Turn Indicator at the various levels will be key at answering this question.
Below is a long-term chart of crude oil showing the 1,322 percent advance that occurred from the 1998 low at 10.35, into the recent high at 147.27. Since the July 11th high, crude oil dropped 23.77 into the most recent low. This decline in and of itself does not necessarily mean that crude oil has also made a longer-term top. But, given the nature of the recent parabolic spike along with some of the other statistical factors that I’m watching, this is indeed a window of opportunity. The key item for me at this point is whether or not this intermediate-term decline is successful enough to also turn my monthly Cycle Turn Indicator negative. Also, the other key element is whether or not this occurs within the statistical window surrounding the entire commodity complex that I have been watching and telling my subscribers about for months now.
0725.1
Since we are on commodities, I next want to briefly discuss gold. In doing so I am also going to show you how my Trend and Cycle Turn Indicators can be used to help identify primary and counter-trend moves. The chart below is a weekly chart of gold, which I use for my intermediate-term work. I have also included both my intermediate-term Trend Indicator as well as my Cycle Turn Indicator. If we begin at the low last August, note that both the Trend and the Cycle Turn Indicator were negative as that low was made. Then, the first week in September both indicators turned up as gold began to climb out of the cycle low that was associated with that price low. With the Trend Indicator positive, this told us that the longer-term trend had turned back up. As price continued to move up, note that the Trend Indicator remained positive all the way up into the March high capturing that entire advance. When the Cycle Turn Indicator turned down at various points along the way it was signaling counter-trend cyclical moves within the context of the longer-term up trend. Then, when the Cycle Turn Indicator turned back up, another buying opportunity was confirmed. To say this another way, the fact that the Tend Indicator remained positive during the downturns, seen by the Cycle Turn Indicator, told us that these dips were buying opportunities.
0725.2
But, once the Trend Indicator rolled over below its trigger line in late March, it told us that the trend at this level had turned down. This also told us that as long as the Trend Indicator remained negative that any rally was to be considered a counter-trend move. The week of July 18th the Trend Indicator came within a hair of crossing back above its trigger line. However, this crossover never quite materialized and this past week the weekly Cycle Turn Indicator turned negative. As a result, the current picture suggests that the May to July rally was a counter-trend affair at this level. Until the Trend Indicator turns back up, the trend at this level remains negative and any bounce must still be considered a counter-trend move.
As for equities, from a Dow theory perspective we still have a mixed bag. The longer-term primary bearish trend change that was confirmed on November 21, 2007 remains intact. This confirmation occurred when the blue horizontal line on the chart below was jointly violated by both averages. Since that violation, both an upside and a downside Dow theory non-confirmation has evolved. The upside non-confirmation occurred when the Transports moved above their previous secondary high point and ultimately into all time new highs in June, but with the Industrials failing to better their previous secondary high point this upside non-confirmation was born. To clarify, this upside non-confirmation is marked in red and has a bearish bias that until corrected will remain intact.
0725.3
At the same time, we also still have a downside non-confirmation, which is noted in green. This downside non-confirmation occurred when the Industrials moved below their previous secondary low point, while the Transports held above their corresponding secondary low. Downside non-confirmations are indicative of an upside reversal, which is now underway.
To date, the November 21st bearish primary trend change remains intact and takes precedence over everything else. The upside non-confirmation is also bearish. But the downside non-confirmation was last to occur, and given the fact that non-confirmations tend to indicate trend reversals, we must also respect this fact as well. At present, price is advancing out of what I believe to be a secondary low point. From a Dow theory perspective, the key is whether or not this advance is sufficient enough to invalidate the existing primary bearish trend. From a cyclical perspective, which has nothing to do with Dow theory, the key is the cyclical structure of the market and the Cycle Turn Indicator at the intermediate and longer-term levels.
Tim W. Wood
Copyright © 2008 All rights reserved.
CONTACT INFORMATION
Tim W. Wood, CPA
Email l Bio | Market WrapUp Archive

Copyright © James J. Puplava Financial Sense^® is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939
Disclaimer

July 25 (Bloomberg) -- Legg Mason Inc. reported a second straight quarterly loss as subpar investment returns led to $18.4 billion in customer redemptions and the Baltimore-based company bailed out money funds saddled with bad debt.

Legg Mason rose as much as 4.6 percent in New York trading on signs the worst may be over. Chief Executive Officer Mark Fetting said he doesn't expect to raise more capital to support the company's money funds. Customer withdrawals were down from $19.2 billion in the prior quarter.

Investors had slashed Legg Mason's market value by almost 50 percent this year as bond funds run by its Western Asset Management unit and stock funds managed by Bill Miller and Bruce Sherman lagged behind benchmarks. BlackRock Inc., T. Rowe Price Group Inc. and Janus Capital Group Inc. gathered a combined $37.3 billion in deposits this quarter as they turned in high- ranking returns.

Investors pulled $11 billion from Legg Mason's stock funds, primarily from Miller's Legg Mason Capital Management division; Sherman's Private Capital Management unit; and ClearBridge Advisors, the division carved from Legg Mason's acquisition of Citigroup Inc.'s asset-management business.

Investors took another $11 billion bond funds during the quarter. The withdrawals were partly offset by about $4 billion deposited into money-market funds and other cash products.

July 25 (Bloomberg) -- Standard & Poor's may downgrade the subordinated bonds of Fannie Mae and Freddie Mac, surprising investors who had anticipated the securities would be supported by any Treasury rescue plan.

The potential cut would affect $19.2 billion of AA- rated subordinated debt at Fannie Mae and Freddie Mac, according to data compiled by Bloomberg. The cost to protect the bonds from default rose for the first time in three days. S&P said it may also downgrade $26 billion of preferred stock, pushing down the securities in New York trading. The AAA ratings on the companies' senior debt were affirmed with a stable outlook.

New legislation authorizing a backstop of the mortgage- finance companies leaves it up to the Treasury Secretary to decide whether to honor preferred dividend payments or to repay subordinated bondholders before the government, S&P analyst Victoria Wagner said in a telephone interview. That ``ambiguity'' casts a cloud over the securities, she said. Once analysts have fully analyzed the final legislation, the ratings may be cut one or two levels, she said.

``We had factored in some federal support for these securities, but now I think the financial risks are now outweighing support and have to be reflected in the rating,'' Wagner said.

Fannie Mae dropped 47 cents, or 3.9 percent, to $11.55 in New York Stock Exchange composite trading. Freddie Mac dropped 54 cents, or 6.1 percent, to $8.27.

Freddie Mac's 5.57 percent preferred stock fell 1.9 percent, and Fannie Mae's 5.5 percent preferred shares dropped 10 percent.

The plunge in the stocks is ``adding to the already-stressed business cycle'' and may make it difficult for the companies to raise capital, Wagner said.

``We feel that given the changing market dynamics and the changing legislation landscape, that that heightened risk should be more of a factor in our current,'' Wagner said.

The company told its dealers on Friday that it would stop leasing vehicles to customers through its finance arm as of Aug. 1, a move that comes as falling resale values of gas-thirsty trucks and sport utility vehicles cost Detroit automakers billions of dollars.

It also comes a day after the Ford Motor Company took a $2.1 billion write-down, part of an $8.7 billion second-quarter loss, related to leases at its finance arm, the Ford Motor Credit Company.,

A co-president at Chrysler, James E. Press, said the carmaker would focus on traditional financing offers rather than on lease subsidies. Leasing carries more risk for the automakers, and in many cases low interest rates have made it less appealing to customers than it was years ago.

Chrysler dealers can still offer leases through companies other than Chrysler Financial.

“There was a time when leasing was really very attractive,” Mr. Press said on a conference call. “We really reached a point today, in this environment, where the economic advantages of leasing have really disappeared.”

Fitch Ratings, arguably the only rater with their act together other than Egan-Jones, just finished with its ResiLogic enhancements. Its new mortgage loss model will be released today. In it, its new National, State and MSA-level economic and house price forecasting will make their modeling ‘far more predictive and forward-looking.’ That is a nice way to put it.

BIG PROBLEM - This more micro look at the housing market in the 25 MSA’s that in the past have contained the most ‘non-conforming (Jumbo) lending, is coming up with massive house price losses in key areas with San Diego dropping as much as 47% over the next 5-years! San Francisco is looking at an additional 33%.

These are your heavy Alt-A areas. Fitch is getting ahead of the curve this time around. I have been telling you for a few months now that according to my proprietary data while subprime defaults are falling slightly, Alt-A defaults have been soaring in the past four months led by Pay Option ARMs. Prime defaults have also spiked.

Their estimates are dire, but I feel could still be on the conservative side given the absolute lack of non-conforming financing, massive supply, sales not picking up substantially this summer selling season, over 40% of all sales coming from the foreclosure stock, values only falling for about a year and defaults in Alt-A and Prime mortgages substantially picking up steam.

* The MSAs represent the 25 areas that have historically exhibited the most non conforming mortgage lending activity. ‘Some MSAs such as San Diego and San Francisco, CA are expected to experience home price declines by as much as 47% and 33% over the next five years, while home prices in MSAs such as San Antonio, TX are expected to appreciate by 7%, over five years,’ said Somerville. The home price forecasts are imbedded in the state and MSA level risk indicators and will be updated quarterly.

ResiLogic’s new model looks to be robust and takes into consideration many of the things that are top on my list of risks. The systems new capabilities include:

* Introduction of MSA and national macroeconomic risk multipliers;
* Ability to analyze seasoned loans and to take into account loan payment history and house price changes since loan origination;
* Additional penalties for loans originated with stated income or no income/no asset documentation programs;
* Additional penalties for loans originated with second liens;
* Reduced credit for loans with mortgage insurance

This new model will negatively impact Fitch’s loss assumptions and credit enhancement levels for Residential Mortgage Backed Securities. This is mostly your Prime and Alt-A RMBS and not the subprime, meaning if S&P and Moody’s update their systems, round 2 of the mortgage and housing implosion could kick off with Alt-A and Prime leading the way. - Best Mr Mortgage

Fitch will host a webcast next week to discuss its new U.S. RMBS modeling criteria (separate press release will follow). In the coming months, a commercialized version of ResiLogic (ResiLogic 2.0) will be made available by Fitch Solutions.

Four past and present British Airways executives are to be charged with price-fixing in a landmark criminal prosecution that will send tremors through leading multinationals, the Financial Times has learnt.

The cartel case, only the second ever brought by the UK’s Office of Fair Trading, leaves senior figures from one of Britain’s biggest corporate names facing the threat of up to five years in jail.

The OFT’s action, the latest in a crackdown on price-fixing in industries ranging from supermarkets and tobacco to construction, raises the prospect that other executives could face prosecution.

The watchdog has decided to charge the four men over a conspiracy between BA and Virgin Atlantic between 2004 and 2006 to fix the price of passenger fuel surcharges on transatlantic flights. Those to be charged are: Andrew Crawley, BA’s head of sales; Martin George, former commercial director and board member; Iain Burns, former head of communications and Alan Burnett, former head of UK and Ireland sales.