Sunday, March 16, 2008

It's a bird, its' a plane, no it's the Fed rushing in to make some more history and bail out a brokerage.

- Futures are down, no up, no down. Market whipsaws on every news story but the sellers win out another session.
- It's a bird, its' a plane, no it's the Fed rushing in to make some more history and bail out a brokerage.
- CPI is not bad, showing no increase, but again you have to wonder where this data is coming from.
- Michigan sentiment improves, showing more resiliency than investor sentiment.
- Many are talking about a bottom, and while there are definitely positives, VIX, $110 oil are standing in the way.
- Worries about the next shoe to fall after BSC slaps the pavement. Maybe the market can finally test the lows and try a bottom.

Market sells off to end the week, but it started out Friday as a tennis match.

We were up early to get a fix on just how the market was going to react to the up and down week and the Thursday reversal. Futures were down 10 points plus on S&P, not chicken feed. Then the CPI pulled off a pair of flat readings for the overall and the core, and that reversed the losses and futures were solidly higher, indeed higher than they were lower before the inflation number.

Then a story hit about the Fed authorizing BSC to go to the discount window via member bank JPM. That has not been done since the 1960's and before that in the 1930's. The story is that so many rumors were flying about BSC's solvency that no one wanted to do business with it. From solvent to teetering on bankruptcy in 48 hours. Thus the Fed action to backstop it just so it could do business. Similar to allow the primary lenders to come to the discount window, the Fed authorized BSC, a broker/dealer, to do the same. History making week for sure.

That story did not initially impact the positive reaction to futures, and indeed at the open NASDAQ was looking at a 20+ point gain and DJ30 over 50 points. They did not open that strong, however. As the Dow stocks opened, things did not improve. Indeed they started to turn south. The BSC news and the implications of what the Fed had to do weighed heavily, and within 20 minutes the market was negative and it was going negative in a big way.

The indices did not plow any new ground, but DJ30 was down over 300 points in a quick 15 minute run lower. The indices were all red and sporting 2+% losses. There was a rather quick bounce that suggested maybe the quick selloff was too much. Stocks rallied back sharply with DJ30 cutting its losses in half. Not bad. Then the sellers came back, however, and that was it. The indices resumed selling and started a long, steady decline into the last hour, surpassing the early session lows.

It was Friday, however, and a 300 point loss begs some short covering, particularly when the feds told major banks and brokerages to huddle over the weekend and fix the BSC problem. In short, there may be no BSC on Monday. The concern over potential good brought the shorts back to cover, worried that some good news might come out over the weekend. Again DJ30 and company cut the losses in half in a short but strong 40 minute surge. Even that was not immune to sellers. They came back to smack the indices around a bit before the close keeping the losses significant in the 2% range though still well off their lows. Even with a rebound the indices lost a lot of ground. Pretty tough selling.

TECHNICALLY the action was the bearish high to low as the early buyers were overrun. The late bounce was not much, just some covering ahead of the weekend and some potential good news (and of course, some potential bad news). Definitely a negative session.

INTERNALS: Not surprisingly the internals were skewed to the downside. Stronger, above average volume on NASDAQ. NYSE volume was lower, but just a hair so and still well above average on both. There was plenty of selling as financial stocks again took the brunt of the investor angst. -5:1 breadth on NYSE and -3.5:1 on NASDAQ speak for themselves. New lows did not ratchet much higher, however, on this next test lower. They didn't explode higher earlier in the week either, at least not to the extent in mid-January. A silver lining hiding in there.

CHARTS: SP500 touched down close to the prior lows, but NASDAQ and DJ30 didn't really test those levels. That doesn't mean the losses weren't significant, they just didn't have enough time before the weekend to really get ugly. That is not totally true; they sold hard early and bounced. Some are calling this action a bottom of some sort, and it may turn out that way. Each time the market tried to get there last week to make that full test and perhaps set a bottom the feds, either the Fed itself or Congress, issued a statement or held a conference about what needed to be done. The Fed upped its Taffy to $200B; selloff reversed. Barney Frank proposed the feds being the backstop for mortgages; another selloff reversed just in the nick of time, i.e. before it finally made its test. If no one comes out to save them and just let them sell maybe then we get the VIX spiking, the January lows tested, and enough capitulation to turn the market, at least for now.

LEADERSHIP: It didn't really matter where you were Friday, you got dinged a bit. Stocks tried to come back after that initial plunge lower, but they couldn't make it stick. Nonetheless, though down, energy, commodities and agriculture were still solid as they tested back but roundly held near support. There is, however, still a dearth of new leadership needed to come to the fore. A lot of these ag and commodities stocks have run for months and months and months; sure they are in a bull run, but even bull runs need to retrench from time to time. While they do that a new crop needs to show up. There are some possibilities in tech as one example, but a lot more work has to be done. Many tries at rebounds in the 2000 to 2002 selloff flared out and crashed because no leaders stepped up. And there is an old adage, when energy leads the market for any length of time, trouble tends to follow. That was underscored in red this past week as oil moved above $110/bbl (closed just under $110 Friday). That is an awful burden on the consumer and businesses, and it is only getting worse after a year of pressure already.


CPI takes a respite, but with oil and gasoline showing declines, you have to wonder about the data.

Both the overall and core CPI were flat for February, a nice respite from the monthly increases and the 0.3% and 0.2% expected. It was the first reading below 0.3% since August 2007 and its flat reading. That lowered the annual core to 2.3% from 2.4% in January. After big gains in January, February basically offset them. Apparel fell 0.3% after rising 0.4%; transportation -0.7%. Gasoline was reported as a 2% decline.

After showing a 2% year over year gain in August, the overall rate of increase has doubled thanks to energy costs and rising food prices. We won't go into the whys and what for's; we have done that before. The question is, with prices doubling it is hard to believe that gasoline costs fell that much during the month.

Maybe they did, but that does not break the trend in higher prices a trend that is driven more by the decline in the dollar and our poor choices for use of our food supply than with any shortage of supply. Indeed, as seen Thursday, business inventories are on the rise as sales fall. No the issues for prices are poor policy decisions relating to the dollar and using food for fuel, and I don't mean fueling your body.

Thus while the pause in the overall rise in prices is welcome, it is dubious in fact and deceptive in practice. We are going to have to address the dollar and wasting our food supply in order to get prices, that were relatively nicely in control, back in control. Every time the dollar falls against other currencies our prices rise because we buy less and less with each dollar and thus the prices are raised by those controlling the products to make up for the loss.

Michigan Sentiment tops expectations but no barn burner.

Michigan sentiment for March was 70.5 and that topped the 69.5 expected. Moral victory. It did not reverse the trend as it slid in still lower than Februarys 70.8, and that was a substantial break from 78.4 the month prior. Getting to the point where it can become an issue, particularly with jobless claims rising the past two months, the jobs report falling, and those in the work pool shrinking. Worries about the paycheck are the biggest catalysts when the consumer pulls back. The sentiment reports show how worried, and while not at a panic stage they are not growing in strength.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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