Imminent and severe market correction

[Uncle Festivus]

A positive spin could be that the market may have factored most of the US financial crisis in, and it could well be contained in the sector. While the financial system will probably see many more write downs, it's now expected, so any 'good' news will be well received. I'm a bit naive though, so take anything I make up as most likely tosh.

I'm not sure Kennas. The way things are unfolding we are not out of the woods yet, in fact the real contagion may only be just starting?

If anybody is likely to put a positive spin on all of this it would be Helicopter Benny, and he says they/we are in for a rough patch ahead, the next 6 months or so. This is the same man that also said the sub prime (read real estate bust) melt down was 'contained', so make your own conclusions up as to what is in store, 'going forward'. I mean, if this is the best he can do then the reality is a magnitude worse, as he has access to supposedly better data than we do.

As to containment, California may already be in recession -

WASHINGTON (MarketWatch) -- California is on the edge of recession, economists say. Or perhaps the nation's most populous state is already in one.

"California seems to be sliding into recession," wrote Jan Hatzius, chief economist for Goldman Sachs, in a research note earlier this week. Hatzius based his appraisal on the sharp increase in the unemployment rate in the state from 4.7% in November 2006 to 5.6% in September 2007.
While a 5.6% jobless rate may seem low, the important thing is how much it's risen. Hatzius said any increase of more than 0.6 percentage points in California's unemployment rate has always been associated with a national recession.

WASHINGTON (MarketWatch) -- Consumers are worried and getting more worried.

Their view on current economic conditions has been lower only once during the past 15 years -- when the United States invaded Iraq in 2003, according to a survey released Friday by Reuters and the University of Michigan.
"Sentiment readings are now out of the caution area and into the DANGER zone," wrote Robert Brusca, chief economist at Fact and Opinion Economics. "Things do seem to be unraveling a bit faster."

 

[nizar]

A positive spin could be that the market may have factored most of the US financial crisis in, and it could well be contained in the sector. While the financial system will probably see many more write downs, it's now expected, so any 'good' news will be well received. I'm a bit naive though, so take anything I make up as most likely tosh.

I think we should expect some sort of rebound next week.

Its difficult to know the reasons behind these movements because those "analysts" can be so funny sometimes.

I remember on wednesday the markets went up by 117pts (DOW), it was a night when gold/oil went up and the dollar went down. Isn't that the story of the year, lol. The analysts/journos were talking about how the high oil price boosted big weighting stocks such as Exxon, which carried the index higher going into the last hour of trading.

But then on thursday, high oil and low dollar, was part of the reasons why the market went down?? LOL

Thank God these guys analyse and don't actually trade. lol.

 

[Sean K]

I'm not sure Kennas. The way things are unfolding we are not out of the woods yet, in fact the real contagion may only be just starting?

UF, Yes, I agree and stated such in the post. The point I'm making is that it may be factored in. Who is to know how much though? It's like discussing the Chindia story and how much of the 'supercyle' is factored in. Bears will lean one way, and Bulls the other with the factoredinedness of either.

(is factoredinedness a word? )

 

[Aussiejeff]

I think we should expect some sort of rebound next week.

Its difficult to know the reasons behind these movements because those "analysts" can be so funny sometimes.

I remember on wednesday the markets went up by 117pts (DOW), it was a night when gold/oil went up and the dollar went down. Isn't that the story of the year, lol. The analysts/journos were talking about how the high oil price boosted big weighting stocks such as Exxon, which carried the index higher going into the last hour of trading.

But then on thursday, high oil and low dollar, was part of the reasons why the market went down?? LOL

Thank God these guys analyse and don't actually trade. lol.

I think as long as the US dollar stays low or goes even lower, the US economy will continue to nosedive (reagdless of momentary dead cat bounces in the markets). Let's face it, the whole basis of their economy is to "spend, spend, spend" - a lot of it on "useless" luxury imported items like BIG plasma/LCD home theatres, luxury imported clothes and foods etc... add to that their hunger for BIG gas guzzling cars, BIG houses with even BIGGER mortgages and the plunging dollar is really starting to bite them in the proverbial *um... [this all sounds depressingly like the road Australia seems to be currently heading down - but at the moment the skyrocketing Aus dollar is allowing us to keep spending like there is no tomorrow on imports and luxury goods. Of course, like the US has discovered, this scenario won't last forever!]

So, how are the Yanks going to turn around their way of life to become "more frugal" and "less demanding for useless luxury items"? I guess change will be resisted until after a lot of PAIN has been felt in the coming years and months, amid the realisation that their ever sickening economy is no longer as dominant on the world scene. Who knows, something "good" might eventually come out of it - a New American Reality perhaps? One can only hope.... and take our own lessons from what they are going through now and what they are in all likelyhood to go through in the coming months and years ahead.

Of course, we are smarter.... aren't we?

 

[ithatheekret]

Is there any potentially good news coming out of the US markets anytime soon? I know zit about the American financial schedule, but am tired of every day them announcing some foolish company losing billions; and dragging us down with 'em!

Well if the banks reported to the market properly , we would at least have some idea about their CDO's and their sub-prime CDO's .

This unfortunately means we will keep hearing bad news coming out of them until the market is finally desensitized , or can understand the polyglot writings in the banks records after we have broken the codes .

I think the real rough patch to come will be between Jan-April when the credit resets hit , then we may get a fleeting glimpse into that labyrinth of financial records .

Now if that's the worry of worries for you , take heed of this , US bonds are closing in on a 4% yield , if they hit 3.75% ( which I believe they will ) , those worries will suddenly shift toward a US recession . Then the worlds biggest bank will default .............

 

[dhukka]

A positive spin could be that the market may have factored most of the US financial crisis in, and it could well be contained in the sector. While the financial system will probably see many more write downs, it's now expected, so any 'good' news will be well received. I'm a bit naive though, so take anything I make up as most likely tosh.

I think to a certain extent you're right kennas. This week felt eerily similar to August. Everytime you turned around there was some negative news. The market comes to expect it so then when you get a day with positive news or even just with no bad news the market rallies.

Markets are quick to factor events in but tend to over and undershoot on their expectations. Just look at all the euphoria surrounding the Fed's first rate cut in September and the subsequent rally. The US markets are now below where they were before the first cuts. What were the markets factoring in then and was it warranted?

What has happened since the Fed cut rates? Housing has gotten worse, employment is about the same, consumer spending has slowed and confidence as measured by the Michigan survey is lower than before September. It is almost exactly the same scenario that played out when the Fed began cutting in 2002. The market rallied on the cuts but moved significantly lower over the medium term.

As stated above this feels eerily similar to what happened in August. Credit spreads are widening again, The ABX indices are cliff diving again, instead of rumours of writedowns we now have them. Instead of potential large credit losses we now have them. the evaporation of ABCP has reaccelerated. Homebuilders are now going bust, rating agencies are cutting more and more ratings on anything remotely infected by the US mortgage market.

On top of that you have US Government officials running about the globe trying to organize a mass bailout of SIV's. Things must be bad.

Welcome to credit crunch 2.0 which is much more advanced that the first version.

 

[bean]

DOW THEORY

First the transports have already taken out there August lows

----------------------------------------------------------------
Extract on Dow Theory ( Sounds familiar to current setup)

How Averages Confirm

Hamilton and Dow stressed that for a primary trend buy or sell signal to be valid, both the Industrial Average and the Rail Average must confirm each other. If one average records a new high or new low, then the other must soon follow for a Dow theory signal to be considered valid.


Combining the guidelines set forth for trend identification with the theorem on confirmation, it is now possible to classify the primary trend of the market. The chart above shows an array of signals that occurred during a 7-month period in 1998.

1.
In April, both the DJIA ($INDU)[$INDU] and DJTA ($TRAN)[$TRAN] recorded new all-time highs (blue line). The primary trend was already bullish, but this confirmation validated the primary trend as bullish.
2.
In July, trouble began to surface when the DJTA failed to confirm the new high set by the DJIA. This served as a warning sign, but did not change the trend. Remember, the trend is assumed to be in force until proved otherwise.
3.
On July 31, the DJTA recorded a new reaction low. Two days later, the DJIA recorded a new reaction low and confirmed a change in the primary trend from bullish to bearish (red line). After this signal, both averages went on to record new reaction lows.
4.
In October, the DJIA formed a higher low while the DJTA recorded a new low. This was another non-confirmation and served notice to be on guard for a possible change in trend.
5.
After the higher low, the DJIA followed through with a higher high later that month. This effectively changes the trend for the average from down to up.
6.
It was not until early November that the DJTA went on to better its previous reaction high. However, at the same time the DJIA was also advancing higher and the primary trend had changed from bearish to bullish.

Volume

The importance of volume was alluded to above with the chart of the Apr-97 bottom in the DJIA. Rhea notes that while Hamilton did analyze volume statistics, price action was the ultimate determinant. Volume is more important when confirming the strength of advances and can also help to identify potential reversals.
Volume Confirmation

Hamilton thought that volume should increase in the direction of the primary trend. In a primary bull market, volume should be heavier on advances than during corrections. Not only should volume decline on corrections, but participation should also decrease. As Hamilton put it, the market should become "dull and narrow" on corrections, "narrow" meaning that the number of declining issues should not be expanding dramatically. The opposite is true in a primary bear market. Volume should increase on the declines and decrease during the reaction rallies. The reaction rallies should also be narrow and reflect poor participation of the broader market. By analyzing the reaction rallies and corrections, it is possible to judge the underlying strength of the primary trend.

 

[ithatheekret]

Consumer confidence as a measurement , is now akin to a tantilizing smell turning into a tasteless reality . It's like having a bowl of fruit on the table only to find that it's really a sly composite of plastic and wax .

Another silent event that has been delicately washed over , is that the gap between corporate bonds and junk bonds has widened into a chasm .

Now we here cries for intervention on the USD coming from both home base Americans and European provincial minded politicians . All at the same time Paulson is trying to leverage action on the Yuan by the Chinese collective .

Yet we still see a two year realism gap in the US on just about every negative they have tucked away , like their last recesssion . It just wasn't on their agenda at the time so it became a non-happening event .

Just like the gap between corporate and junk bonds , the reality gap between the average American and prime time America has expanded .

The US needs a recession urgently , to ameliorate the ongoing problems it's administrations have brushed over or created . The reality of the previous recession saw the administration touting a 4% growth rate , that in reality was closer to just under 2% . Next year that 2% growth could look like a peak as the band struggles to push past 1.9% .

I can't wait to see the polish , the spin doctors put on that one .

 

[dhukka]

Consumer confidence as a measurement , is now akin to a tantilizing smell turning into a tasteless reality . It's like having a bowl of fruit on the table only to find that it's really a sly composite of plastic and wax .

Another silent event that has been delicately washed over , is that the gap between corporate bonds and junk bonds has widened into a chasm .

Spreads on just about everything are getting back to mid-August levels

 

[ithatheekret]

When looking at the charts comparing the ranges between Treasuries and Corporate it's does not really compare with the BB's and under . Eyeball the Treasuries and watch 3.75% approach in the coming months ahead .

Although BB's are going to have to pay much higher yields , just to absorb the credit level that dominates their bonds . The main worry I would suspect is the fact that Leveraged loans have replaced the junk market also , with these loans made against assets . They're still highly speculative graded loans , that could find themselves in hot water .

 

[sassa]

Have a change in mood and look at a British comedy clip about SIV's.

http://club.ino.com/trading/2007/11/09/the-funny-side-of-subprime-sivs-and-cdos/

 

[Kauri]

Now I wonder what exactly that means???...
Cheers
.........Kauri

November 12: The UK Telegraph is running a story suggesting that a new US FASB regulation known as FASB regulation 157 will come into effect on Thursday and could lead to a further 100 BLN USD in writedowns. The new regulation will not allow institutions holding sub-prime mortgages or other exotic debt on the basis of assumptions and force them to revalue at market prices. The new regulation affects the Level 3 tier of assets that are currently valued according to in- house models

 

[Pommiegranite]

Now I wonder what exactly that means???...
Cheers
.........Kauri

My understanding is:

It mean assets have to be revalued based on market value of the asset as opposed to some spreadsheet model which was created before US housing market took a nosedive.


I'm assuming that the banks have been very conservative in their depreciation of their assets as they have not factored in the state of the US housing market.

 

[ithatheekret]

Have a change in mood

Thank heavens for humour hey , good clip , my load was a bit jittery .

Speaking of moods .

A mood is an emotion , neither apply here to me , whatever direction the markets go , there is money to be made . Emotions inherently affect technique in wealth creation . The only benefit is the ability to assess the markets "mood" and look at what can disturb it .

But , I'm one of those persons who would rather watch a tick chart than t.v.

 

[Whiskers]

It sounds like the US might be bracing for another dump this week.

Could be that FASB regulation 157 forcing the hand of the money merchants.

HSBC, the Subprime Seer:
Sanguine View Isn't Likely
By CARRICK MOLLENKAMP
November 12, 2007

When British bank HSBC Holdings PLC reports third-quarter results for its U.S. business this week, it will provide an early look at what could be in store for U.S. mortgage lenders, banks with big holdings of securities tied to subprime home loans and even the broader U.S. economy.

That picture isn't likely to be pretty.

HSBC's American consumer-lending unit, HSBC Finance Corp., is the classic canary in the coal mine when it comes to identifying new problems in the market for subprime loans, or those that were made to borrowers with weak credit.

A year ago, the bank, in a little-noticed securities filing, flagged some unexpectedly high delinquencies in its subprime-mortgage book that in February led to an increase in bad-debt costs. That proved to be the beginning of a crisis that spread around the globe, engulfing most of the world's largest banks and big mortgage lenders such as Countrywide Financial Corp.

Now, some analysts are expecting another unpleasant disclosure from HSBC's U.S. consumer-lending business, one of the biggest subprime lenders in the country. Robert Law and Raul Sinha, London-based banking analysts for Lehman Brothers, said they believe HSBC might have to boost its reserves against souring subprime loans at HSBC Finance's mortgage-services division by $2.4 billion, to a total $4.5 billion. The unit, formerly known as Household International Inc., was acquired by HSBC in 2003.

The level of reserves suggests that by the end of this year, losses to defaults over the life of the loans could wipe out about 14% of a loan portfolio totaling $41.4 billion, according to Messrs. Law and Sinha. That would confirm some of the more pessimistic forecasts of how the subprime market will fare. The Lehman analysts initially had projected losses of 8%. Lehman has an "overweight" recommendation on HSBC shares, the firm's highest ranking. The analysts said they believe HSBC's access to emerging markets is one factor that outweighs the problems in the U.S.

"HSBC has proved to be one of the most frank, or perhaps realistic, of all the players in the consumer-finance space," said UBS AG banking analyst Alastair Ryan. "If their message is indeed that things have again turned for the worse, others will follow."

HSBC's results also could have bigger implications for the U.S. economy. Some analysts expect the losses at HSBC Finance to prompt a slowdown in lending at its 1,260 U.S. branches and other lending outlets, which provide mortgages, auto loans and credit cards to retail customers. That is an area that economists have been watching closely for signs of contagion from the credit crisis. Any pullback in such lending could curtail U.S. consumer spending, which has been the country's main driver of economic growth...


...In recent days, other financial firms have trumpeted new concerns about next year. Last month, Morgan Stanley analyst Betsy Graseck said in a report that she expected "contagion from subprime housing to prime housing to auto to card loans." Capital One Financial Corp., a large-credit-card issuer, reported Friday an increase in loan charge-offs and delinquencies in October. Last week, home lender Washington Mutual Inc. predicted a bleak outlook for 2008 U.S. mortgage originations, predicting a drop to $1.5 trillion from about $2.4 trillion this year.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com

http://online.wsj.com/article/SB119481148063189270.html?mod=yahoo_hs&ru=yahoo

 

[Whiskers]

China increasing reserve requirements and the unwinding of the carry trade still has some catching up to do according to this guy.

Doesn't bode well for the markets if the cash supply is drying up, does it!

Gold and silver are still falling too.

FT.com
Asian stocks sink as exporters suffer
Monday November 12, 12:05 am ET
By Andrew Wood in Hong Kong


Shares in major markets across Asia fell by 3-4 per cent as further reports of subprime losses in the US unsettled investors on Wall Street on Friday and China increased the reserve requirements for banks to try to control its surging economy...


...Carry traders, who borrow cheaply in currencies like the yen to deposit the cash in high yielding currencies like the Australian and New Zealand dollars, lost their appetite for risk. The Australian dollar drooped by 0.8 per cent to 90.1 US cents and its New Zealand counterpart fell 0.5 per cent to 75.8 US cents.

"The unwinding of the foreign exchange carry trade has been limited so far, but we are now looking for some catch up," said Patrick Bennett, Asia FX and rates strategist at Societe Generale in Hong Kong in a note this morning.

http://biz.yahoo.com/ft/071112/fto111220070015322943.html?.v=1

 

[dhukka]

Now I wonder what exactly that means???...
Cheers
.........Kauri

Something for the media to beat up but it's really just old news. All the major US brokers and Citigroup adopted this standard early and break out the difference in level 1,2 and 3 assets. The standard comes into effect on November 15th, that doesn't mean anything will happen on that date it just means that they have to start using it. Any changes to the valuation of assets won't be reported until 4th quarter results come out or earnings pre-announcements so you could be waiting until next year to hear about it.

Minyanville had a good piece on what it all means in last Thursday's "5 Things You Need To Know":

We continue to read more and more about this November 15 "deadline" for implementation of U.S. Financial Accounting Standards Board Rule 157 (FASB 157 for short) that make it harder for banks to avoid "mark-to-market pricing" of securities. (See this Special Five Things You Need to Know About Mark-to-Model for more.)


* CFO Magazine has an article titled, "FASB 157 Could Cause Huge Write-Offs."
* Why? Because under the new provisions firms are forced to whenever possible use "observable inputs" in pricing their Level Three assets.
* In somewhat overly simplified terms, Level Three assets are those that may rely on mark-to-model inputs since they so rarely trade.
* In may cases there is no way to price the securities. This gives the firms a lot of leeway in determining their value.
* But when something does trade, under the new rules it forces that asset out of Level Three based on the pricing data that becomes an "observable input."
* "It you think banks are writing off large amounts of assets now, wait until new accounting rules take effect this month," the CFO article says.
* But Goldman Sachs (GS), Merrill Lynch (MER), JP Morgan (JPM), Morgan Stanley (MS) and Citigroup (C) already adopted early implementation of FASB 157 beginning in the first quarter of 2007.
* Still, we keep reading vaguely grim predictions of looming disaster beginning on November 15.
* What gives?
* We think there may be confused causality here.
* Firms such as American International (AIG) in their 10Q said they are "currently addressing the effect of implementing this guidance."
* A lot of firms out there are in this boat.
* Meanwhile, Wall Street's major firms are about the only firms that have already adopted the FASB 157 provisions.
* The issue is not increased writedowns based on this FASB 157 "implementation date."
* The issues remains the fear of forced sales creating "observable inputs" at distressed prices that will force assets to be valued at starkly lower levels.

 

[macca]

An article on the News website

<BANKS worldwide may lose as much as $US400 billion ($442 billion) from subprime mortgages, as at least one in four of the risky home loans go into default, analysts said overnight. >

the link

http://www.news.com.au/dailytelegraph/story/0,22049,22750030-31037,00.html

This problem seems to be never ending doesn't it, just when it calms down someone else writes off a few billion to stir the pot.

I guess they are trickling it through the system trying not to spook the punters

 

[blablabla]

The USA volatility index is spiking up again, now nearly as high as it was in the August correction. A volatility peak usually indicates a bottoming in the markets.
http://stockcharts.com/charts/gallery.html?$VIX

Going with the trend, there could be a few more days (or perhaps even weeks?) of falls still to come before a volatility peak is reached.

However, the US dollar has become noticeably stronger in the past 2 days, also reflected in falling gold, oil and base metal prices. A trend reversal could depend on just how much gold, oil etc prices fall. A big fall in gold and oil prices outstripping the rise in the US dollar could signal a return to bullish conditions in the USA. For Australian resource companies a strengthening US dollar is good news as it results in higher AUS dollar receipts, but this could be more than offset if resource prices fall too much.

 

[Porper]

Thought this chart of the Dow was interesting.Only just noticed it unfortunately.

The patterns in the red boxes are uncanny in their likeness.

The bars above the two wave B's are very alike, and judging by what the Dow is doing as I write the next bar will be identical as well.

If the bigger count is a wave a,b, and C the two patterna will be similar, but they don't usually match as well as this.

Not to say we will go all the way down to the 13000 area, but it is looking more like it.

Well an update to the chart from a couple of weeks ago, and as expected we hit the 13000 level.

I have ammended the count slightly, but all going along nicely.

It looks highly likely that we have a double zigzag pattern in place, ie.3 waves down, 3 waves up and again 3 waves down.The reason I don't think we will have 5 waves down and hit the August lows at 12500 is that the daily, and more importantly the weekly oscilator has just crossed up from the oversold zone.

We have hit the cluster and rebounded up as can be seen on the chart.If this level does fail and we reverse then we should hit the next cluster just under the August lows.

The Dow isn't home and dry yet but it is looking better, even with all the doom and gloom with the economy.