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HomeEquity Market Key Reversal on 9/23/09
Posted by Larry Doyle on September 23rd, 2009 9:16 PM |
I believe Wednesday’s equity price action was very significant. Many market participants believe the market is trading much more on technical analysis than fundamental valuations. I put myself in that camp. So, why was Wednesday’s price action so significant? We experienced a very rare occurrence, technically known as a key reversal, an outside day, or outside reversal. Each of those terms means the same thing.
In layman’s terms, these key reversals are indicators of a change in the trendline of the market. In an attempt to simplify how a key reversal works, one needs to analyze the trading range of an index or security relative to the prior day’s trading range. If the current day’s trading range incorporates a “higher high” than the previous day, a “lower low” than the previous day, and a “lower close” than the previous day, then the market will have experienced a key reversal. We witnessed that very price action on Wednesday. Allow me to display this price action for a few major market equity indices:
DJIA
on 9/22 High 9843 Low 9772 Close 9830
on 9/23 High 9918 Low 9741 Close 9748
S&P 500
on 9/22 High 1074 Low 1066 Close 1072
on 9/23 High 1080 Low 1060 Close 1061
Nasdaq
on 9/22 High 2151 Low 2137 Close 2146
on 9/23 High 2168 Low 2130 Close 2131
This key reversal is not a guarantee of a continued decline in prices (a key reversal could also be bullish if it made a lower low, a higher high, and a higher close), but it is a strong indicator of such. I am not currently a day trader, but I have fond memories of my trading days on Wall Street using this technical indicator.
Let’s monitor the price action and see if it proves to hold true once again.
Thoughts, comments, questions always appreciated. Don’t be bashful.
LD
What Does the Fed’s Statement Mean for Mortgage Rates?
Posted by Larry Doyle on September 23rd, 2009 3:40 PM |
The Fed’s statement at 2:15pm had no real surprises, but there is one development that bears comment — especially for anybody looking to finance or refinance a home. The Fed stated:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.
What does this mean? The Fed’s program of buying mortgage-backed securities to support housing was scheduled to end December 31st. It will now be extended through the end of the first quarter 2010. The fact is, though, the Fed is not purchasing more MBS (mortgage-backed securities) than the previously advertised $1.25 trillion. The Fed is merely lengthening the time over which it buys those MBS.
Add it up, and the largest buyer of MBS in the market will have a lessened impact because its purchasing power is being diluted via this extension. As a result, overall conforming mortgage rates will not likely come down much if Treasury rates were to continue to decline. By the same token, if Treasury rates were to rise, mortgage rates will likely rise at an even faster rate.
Recall that just the other day Wells Fargo CEO John Stumpf shared that his bank was not purchasing any MBS for its own portfolio nor was it retaining any of its own mortgage originations. Why? From a pure relative value standpoint, MBS are overvalued. Why? The Fed has effectively been overpaying to buy MBS in an attempt to get mortgage rates down and support housing.
With the end of the Fed’s purchase program on the horizon, mortgage rates will likely start to move higher in order to attract other potential investors.
What is a homeowner to do? Don’t wait to refinance thinking that rates are going to come down much further.
LD
Economics Trumps Politics During Times of Turmoil
Posted by Larry Doyle on September 23rd, 2009 9:54 AM |
Will the United States be able to make real progress on major diplomatic initiatives during the current economic crisis? The diplomatic path may ultimately be nothing more than a ‘road to perdition.’ Why do I feel this way? We don’t need to look all that hard to witness a number of countries pursuing economic policies at the expense of international diplomacy. During the current economic crisis, this should not be surprising. Political leaders of all stripes will sacrifice principle in an attempt to appease and assuage the economic pains of their electorate.
I do not pretend to be a political scientist nor an economic historian, but I believe I understand enough about market forces to view these economic maneuvers by a number of countries as nothing more than an international version of Game Theory.
This gamesmanship is playing out across the world stage from political hot spots to the friendly confines of our nation’s backyard. The Financial Times prominently highlights a wide array of nations pursuing their economic interests via increased trade with Iran. This trade flies right in the face of Washington’s hopes to curtail the development of Iranian nuclear capabilities.
The FT writes, Beijing Begins Petrol Supplies to Iran:
Chinese state companies this month began supplying petrol to Iran and now provide up to one-third of its imports in a development that threatens to undermine US-led efforts to shut off the supply of fuel on which its economy depends.
While China would maintain that it is pursuing diplomatic initiatives to curtail Iran’s development of nuclear weapons, make no mistake China and other countries will look for any market to fill the enormous decline in exports which previously flowed to the United States. The FT further highlights this very point in writing, Business at Sharp end of Iran Sanctions. Despite legislation enacted in Washington to address nations trading with Iran, the legislation lacks enforcement powers. As a result, nations that are flush with oil or other commodities, but relatively cash poor, will pursue trade alliances which benefit them economically. The FT writes as much:
Hojjatollah Ghanimi-Fard, the vice-president of National Iranian Oil Company for investment affairs, said Iran had a “big list” of suppliers “scattered” around the world and that it was “very easy” to replace one with another.
We should not be so naive to think that this economic gamesmanship is only occurring in political hotspots. If we look hard enough, we can see that the U.S. is pursuing economic benefits at political expense even with our Canadian friends. A recent visit to Washington by Canadian Prime Minister Steven Harper was for the purpose of addressing increasing U.S. protectionism right here in North America. While Harper and Obama ‘smiled for the cameras,’ the relationship is becoming increasingly strained by U.S. protectionist tendencies. A specific example is embedded in Obama’s proposed cap and trade legislation. Harper addresses this issue in a recent New York Times commentary, Harper on U.S-Canada Energy Relations:
Mr. Harper said that while Canada and the United States shared the goal of combating climate change, he disagreed with one provision in the Waxman-Markey climate bill that passed the House of Representatives in June. That provision would impose tariffs on countries that did not keep their emissions under control.
Such a measure “would become a front for protectionism quicker than you can say ‘hello,’ ” Mr. Harper said.
Hello indeed and welcome to a world in which sovereign economics will continue to trump international diplomacy and politics for the foreseeable future. The immediate benefits of these pursuits will come at the expense of significant risks down the road.
LD
The Modern Mystic Reads from Sense on Cents
Posted by Larry Doyle on September 22nd, 2009 6:47 PM |
How can we measure just how small the world has become? When a commentary I wrote a few days ago becomes the topic for a public reading displayed on a YouTube video produced in France, it’s a small world after all.
I have to admit, I chuckled this morning upon viewing the video in which a man who uses the pseudonym “The Modern Mystic” talks about the dollar carry trade. In so doing, he actually reads my commentary from September 16th entitled “Dollar Carry Trade Drives Global Equity Markets.”
I am flattered that ‘Modern Mystic’ would read my work while simultaneously critiquing it and adding his own insights. His surroundings only add to the allure of this clip. If you care for a bit of a chuckle while taking a virtual trip across the pond, this 12 minute clip is rather amusing.
Now, if I could only convince the Mystic to acknowledge me and Sense on Cents, perhaps the next clip may may be the big screen . . . (LOL)!!
Enjoy.
LD
Is the Federal Reserve Readying a Stealth Tightening of Monetary Policy?
Posted by Larry Doyle on September 22nd, 2009 4:11 PM |
The Federal Reserve impacts the economy by raising and lowering the Federal Funds Rate. With the Fed Funds rate currently at a range of 0-.25%, the Federal Reserve has no more ammo to positively impact the economy, right? No! Readers of Sense on Cents are fully aware of the other measures the Fed, in conjunction with the Treasury, has utilized to inject money into the economy, including:
1. quantitative easing in which the Fed has purchased U.S. Treasury and mortgage-backed bonds
2. backstopped money market funds (FYI . . this program ended last Friday)
3. providing federal guarantees for banks to issue debt
4. facilities to assist in the issuance of securitized assets (TALF)
Collectively, these programs have achieved an effective negative Fed Funds Rate. This development is not only historic but very daunting for the economy and market. When and how will the Federal Reserve and Treasury begin to exit some of these programs, and take some liquidity out of the system without spooking the markets? In the process, the Federal Reserve will begin a de facto tightening of the monetary policy even if it does not immediately begin to raise the Fed Funds Rate.
This tightening process may be in its formative stages. How do we know? Bloomberg reports, Fed Said to Start Talks With Dealers on Using Reverse Repos:
The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.
Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.
Given the amount of liquidity the Fed has pumped into the economy over the last year, these reverse repurchase agreements would have to be of huge size and for a longer tenor in order to truly make an impact.
What would be the impact of sizable reverse repurchase agreements? I would make the following assessments based upon my feeling that the market would perceive these agreements as a tightening of Fed policy:
1. the yield curve would flatten, meaning short term rates would raise relative to long term rates (revisit your Algebra II chapter on slope)
2. the U.S. dollar would strengthen as the market perceives this move an indication that the Fed is closer to raising the actual Fed Funds Rate than it was previously.
3. the markets, both equities and bonds, would very likely sell off in a reversal of the price action of the last six months. Both our equity and bond markets have been supported by the cheap funding provided by the Fed. This phenomena led to the dollar carry trade which I highlighted a week ago in writing, “Dollar Carry Trade Drives Global Equity Markets.”
The dollar is getting hammered again today and that fact is supporting our markets, both equity and bonds. Watch the US Dollar Index as it is clearly the best indicator as to the Fed’s intentions and market direction. If and when you see the dollar start to improve (currently quoted at 76.13), then look for stocks and bonds to weaken.
LD
Is the Wall Street Cop, FINRA, Ready to Talk?
Posted by Larry Doyle on September 22nd, 2009 9:00 AM |
Pressure does funny things to people.
Is the pressure boiling inside the pot of the Wall Street “cop” known as FINRA getting ready to blow? A Bloomberg report indicates the steam is rising inside FINRA. I am not surprised that FINRA is feeling real pressure at this point in time. FINRA should be sweating. Why? Try the following:
>> Lawsuits Trying for Transparency at FINRA (September 21, 2009)
>> Attorney Claims Wall Street’s Cop, FINRA, Invested in Madoff (September 15, 2009)
>> An Open Letter to the Board of FINRA Regarding Auction-Rate Securities (July 27, 2009)
>> U.S. Attorney and SEC Investigating Lehman’s Auction Rate Securities Sales; They Should Also Investigate FINRA’s (May 29, 2009)
Bloomberg reports this morning, FINRA Board Said to Debate Releasing Report on Madoff, Stanford:
The U.S. brokerage regulator’s board is debating whether to release an internal report of its examinations of firms run by Bernard Madoff and R. Allen Stanford, according to people familiar with the matter.
Why should there even be a debate? Why isn’t it standard operating procedure that a financial self-regulatory organization such as FINRA would be mandated to provide total transparency of all its business dealings? Where FINRA has failed, transparency will serve as the leverage to compel them to improve their policies and procedures. If current policies and procedures and past failures are exposed in the process, so be it. History has always shown that coverups only make bad situations worse.
I am heartened that FINRA board member Charles Bowsher, a man of real integrity, seems to be pushing FINRA to release information. Bloomberg asserts:
Bowsher, the committee’s chairman, is adamant the document be released, according to one person. He didn’t return a phone call seeking comment.
Finra spokeswoman Nancy Condon said the board formed the committee to review the examination program “in light of the Madoff and Stanford cases.” A draft was shared with the board, which will decide whether to release it, she said yesterday. She declined to comment on whether any board members oppose making the document public.
Finra, funded by Wall Street firms and overseen by the SEC, inspects and write rules for more than 5,000 U.S. brokerages. The board includes 10 representatives of the financial industry along with former regulators and academics.
Recall that to this point, FINRA has never willingly released information on its internal investment or oversight activities over and above what has been published in its annual reports. FINRA spokespersons, Herb Perone and Nancy Condon, have always maintained FINRA has released more information in its reports than it is required. If in fact that is true, then clearly FINRA’s overseer, the SEC, needs to increase those requirements.
The simple fact is, given the historic times in which we live any self-respecting financial regulator should be obligated to provide full and total transparency across all its initiatives. While FINRA may be embarrassed – if not worse – in the process, FINRA must provide this transparency if we are ever to regain confidence in our markets and our regulators.
Why else may FINRA want to talk? In a current lawsuit brought by Standard Investment vs. FINRA, the judge assigned to hear the case is none other than our friend of the American public, Jed Rakoff. Yes, the same Jed Rakoff who recently undressed the SEC’s contrived $33 million fine levied on Bank of America and stated the fine, “does not comport with the most elementary notions of justice and morality.”
Yes, indeed, pressure does funny things to people!!
LD
Lawsuits Trying for Transparency at FINRA
Posted by Larry Doyle on September 21st, 2009 2:55 PM |
Will the American public receive real transparency from the financial regulatory community? We will learn a lot more over the next 6 weeks.
Bloomberg News has filed a Freedom of Information request compelling the Federal Reserve to release information on loans it made to a wide array of banks. The Fed is currently appealing a judge’s order requiring the release of this information. The judge is expected to rule on the Fed’s appeal by month end. Sense on Cents will be monitoring this situation closely.
A second situation which has received less public notice but is no less important revolves around two lawsuits filed by a Washington D. C. law firm, Cuneo, Gilbert and LaDuca against FINRA (Financial Industry Regulatory Authority). High five to BA for bringing this story to my attention. The Corporate Crime Reporter highlighted these suits the other day and writes:
They say sunlight is the best disinfectant.
If so, then Jonathan Cuneo is on a campaign to disinfect FINRA.
Cuneo and his law firm – Cuneo Gilbert & LaDuca – have three lawsuits pending against the Financial Industry Regulatory Authority (FINRA).
In each, FINRA is being represented by F. Joseph Warin of Gibson Dunn & Crutcher.
“FINRA is the largest private regulator for all securities firms doing business in the United States, yet it is run like a secret society,” Cuneo told Corporate Crime Reporter. “The organization claims to promote transparency in the financial industry, while simultaneously fighting a battle to hide very basic information from its members and the public. Our lawsuits challenge this secrecy and aim to bring accountability to this organization.”
Two of the lawsuits – Benchmark Financial Services v. FINRA and Standard Investment v. FINRA – allege that FINRA member firms are due more than the $35,000 they received as part of the 2007 merger between National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange – a merger that resulted in the creation of FINRA.
At the time of the merger negotiations, NASD told its members that because it was a non-profit, the most it could pay each firm was $35,000.
But in March 2007, the Internal Revenue Service (IRS) issued a private letter ruling which indicated that in fact NASD could pay a lot more than $35,000.
How much more is a secret.
Earlier this month, the Second Circuit Court of Appeals ruled that amount of money the IRS said NASD could pay each firm was confidential.
The NASD told its members at the time of the merger negotiations that the source of the $35,000 “was projected future savings resulting from anticipated efficiencies of the consolidated entity.”
“This was false,” the Benchmark lawsuit declares. “The true source of the funds was an over $1 billion fund that constituted a portion of NASD’s member’s equity, a pool of cash that had been amassed largely as a result of the development and sale of the NASDAQ stock trading system.”
“The misrepresentation was designed to deceive members into believing that they should accept the amount offered lest they upset the NASD’s projections of future efficiencies and cause difficulties for the consolidated entity going forward. Defendants knew that if they told members the truth – that they would be paid $35,000 each (or a total of $175 million) out of their own equity fund of more than $1 billion – they risked a wide-open evaluation demand scenario that would have delayed, invited more scrutiny concerning – and potentially even threatened – the whole transaction.”
The Benchmark lawsuit alleges that one motivation for the merger was to secure higher executive compensation for officers.
Mary Schapiro is currently the chair of the Securities and Exchange Commission (SEC).
Before leaving to the SEC, Schapiro was CEO of NASD, then FINRA.
In 2006, before the merger, Schapiro’s compensation was $1.9 million.
In 2007, as head of the newly created FINRA, her compensation jumped to $3 million.
“The amounts of total executive compensation are eye-popping by any measure, but are especially staggering for a non-profit institution,” the lawsuit alleges. (more…)
Is the Wall St. Block Party at the Geithners and Bernankes Breaking Up?
Posted by Larry Doyle on September 23rd, 2009 12:37 PM |
We will all learn more today at 2:15pm or thereabouts when the Fed releases its regular statement assessing our economy. Will a slightly more positve view of the economy actually be met with a selloff in the markets? I believe that may very well happen. Why? The Wall Street party’s ‘hosts,’ that being Bernanke and Geithner, need to prepare the partygoers to sober up, which is a very delicate undertaking. As with any sobering process, the first thing you do is make sure you have called your friends down at ‘the station’ so nobody gets picked up unnecessarily. That ‘cover’ has worked wonders for a long time, but the partygoers may want one more ‘get out of jail free’ card at this juncture. We saw as much in the token fine assessed by the SEC ‘cops’ against Bank of America just last week.
Bloomberg highlights the predicament of the party’s host in writing, Fed May Signal U.S. Economic Recovery Has Started. We do not need to be mentalists to read the tea leaves indicating the Fed’s juice is likely to slow and that it may be time to go home. Bloomberg writes:
How are the partygoers on Wall Street preparing for the slowing, if not the end, of this block party? The Treasury yield curve is flattening today. I highlighted this likelihood yesterday when I wrote, “Is the Federal Reserve Readying a Stealth Tightening of Monetary Policy?”
You do not have to listen very hard, though, to hear the crowd on Wall Street sharing their feelings. In fact, this classic tune by Southside Johnny and the Asbury Jukes is playing on Wall Street right about now. ~ LD
Related Sense on Cents Commentary:
“Bernanke Promises to Keep ‘Punch Bowl’ Filled” (July 21, 2009)
Tags: Ben Bernanke, does fed see economy improving, Fed discussions to utilize reverse repos, Fed May Signal U.S. Economic Recovery Has Started, Fed statement on September 23 2009, Federal Reserve policy, Federal Reserve programs to monitor monetary policy, how will Fed react to imrpoving economy, how will Wall Street sober up?, Jeffrey lacker of Richmond Fed James Bullard of St. Louis Fed Dennis Lockhart of Atlanta Fed, Laurence Meyer comments on Fed's buying of mortgages, Tim Geithner, Wall Street cops protect the partygoers, will Fed change its quantitative easiing program in purchasing mortgages, will the Fed change policy to drain liquidity, will Wall Street be forced to sober up
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