A faint crunching sound could be heard from across the pond today. Something strange was happening in the credit crunch realm in the U.K., something that was barely noticed on our shores. Not paying attention to that development might be a mistake, but I'll discuss that later in the Wrap.
Of more concern to many market participants were the afternoon technical problems in the CBOT that shut down electronic trading on that exchange for a time and the halting of shares of Nasdaq (NDAQ) pending news. The news was that the Bourse of Dubai will take the Nasdaq's stake in the London Stock Exchange (LSE), leaving open the possibility that the Nasdaq can then move forward with plans to acquire a stake in the OMX.
Today we saw the typical type of day that follows a large-range day. Morning follow-through was followed by afternoon pullbacks, leaving long upper shadows. Volume was okay, but not spectacular, but advancers and up volume soundly beat decliners and down volume. Bears will study charts and discover potential reversal signals: bulls, just a pause to digest gains.
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Dow:
The upper shadow on the DOW's chart wasn't as pronounced as on the SPX's, so my conclusion about resistance mostly holding is a bit dicey. Still, that's how it looks to me, particularly as it's entirely possible to draw that upper trendline so that it's a little higher.
The Nasdaq's chart proved to be the most technically interesting of all the charts. It has a classic doji sitting at the top of a climb, at long-term resistance, with a gap between yesterday's close and today's open. That's a setup for a three-candle reversal signal. If the Nasdaq should gap lower tomorrow, anywhere near yesterday's close, the setup continues. We've all seen potential reversal signals fail to produce reversals. It happens all the time, so we can't count on any reversal being a given, even if the Nasdaq does gap lower tomorrow. A gap lower tomorrow is just something that bulls don't want to see.
Annotated Daily Chart of the Nasdaq:
Unlike some other indices, the Nasdaq has not yet touched the top of its rising channel. Such a touch can't be ruled out, but do be careful about any gap down tomorrow morning or any morning high that's quickly sold.
Annotated Daily Chart of the SOX:
Yesterday's SOX failure to break out of congestion with other indices was followed by today's doji that was produced by its fall back from its 50-sma test. The SOX has been so difficult to pinpoint lately that I'm not posting it here to predict where the SOX will go, but rather using it as an indicator of whether moves in the Nasdaq are corroborated.
Annotated Daily Chart of the RUT:
Although the TRAN gained strongly yesterday along with many other indices, it is not keeping up relative to some key benchmarks. The chart shows what I mean.
Annotated Daily Chart of the TRAN:
At 7:00, the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending September 14. The Market Composite Index, an index that measures the volume of mortgage loan applications, rose 2.4 percent on a seasonally adjusted basis from the holiday-shortened previous week. Seasonally adjusted refinance, purchase, conventional and government indices rose 4.6, 0.9, 2.4 and 2.4 percent, respectively.
The four-week moving averages also rose as did the refinance share of mortgage activity. The average contract interest rate for a 30-year fixed-rate mortgage rose to 6.29 percent and points increased slightly, too. The average interest rate for a one-year ARM rose to 6.39 percent with points increasing slightly there, too. Although a gain in weekly figures was great to see, other numbers released today resulted in a different outlook on the housing situation.
The August Consumer Price Index and New Residential Construction (housing starts and permits) numbers both appeared at 8:30, with the New Residential Construction number giving us another needed picture of the residential industry. That picture wasn't a cheery one. Housing starts and permits fell to a 12-year low, a Marketwatch.com headline noted. The Commerce Department reported that starts of new homes declined 2.6 percent in August to a seasonally adjusted annual rate of 1.331 million. Authorized building permits fell even harder, by 5.9 percent to a seasonally adjusted annual rate of 1.307 million. Both were the lowest produced since June 1995. Economists that predicted that both starts and permits would fall near 1.35 million, so both were slightly below expectations and well below the recent trend of about 1.42-1.45 million.
For the year, starts have dropped 19.1 percent, and permits, 24.5 percent. If broken down into categories, single family housing was weaker even than the overall number, with starts dropping 7.1 percent and permits 8.1 percent. Yesterday, we had received data that showed that foreclosures were rising.
The numbers were grim and were portrayed by one industry analyst as showing acceleration in the worsening of the housing crisis. It seemed that this report alone would have been enough to trigger some ebbing of the post-FOMC euphoria, but it didn't immediately do so. Perhaps that's because more attention was focused on the CPI, released concurrently, or perhaps it's because many know that these particular housing numbers can be subject to big statistical errors. Most want to see a trend rather than reacting to a single month's number. None, however, want to see a trend in today's direction, unless it's those hoping, on a contrarian basis, that starts and permits drop low enough that the situation can only get better.
A related development involved Freddie Mac (FRE) and Fannie Mae (FNM). The two have long been campaigning to have their portfolio caps raised, and it looks as if they may succeed, at least temporarily. Today, the Office of Federal Housing Enterprise Oversight said that FNM would be allowed an increase of 0.5 percent each quarter, allowing its portfolio growth to increase up to 2 percent a year. FRE's agreement is said to be similar.
FNM's director of communications avowed that the increase was not enough and needed to be at least 10 percent, and at least one Democratic senator agrees. However, the regulating agency claims that the flexibility will allow the two to buy or secure up to $20 billion in mortgages, including some subprime ones.
I heard on CNBC that FOMC Chairman Ben Bernanke agrees with the idea of lifting the cap, but only temporarily. I was not able to confirm this information through any written source.
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In a related development, the Senate Banking Committee approved a bill that will increase the loan limits for Federal Housing Administration insurance eligibility. That could increase the number of those who can avail themselves of FHA loans.
The two developments provided some hope for homebuilders. I checked a number of charts, however, and found that builders such as TOL were pulling back from yesterday's big gains and today's early morning follow-through of those gains.
Lower energy prices in August produced good news in the CPI for that month, at least if you looked only at the headline number. Consumer prices fell 0.1 percent. The core number rose 0.2 percent, however, with both numbers hitting expectations. For the year, the CPI has risen 2 percent, and core prices, 2.1 percent. That's still slightly above the perceived comfort level for the Fed and likely to be higher next month if energy prices hold anywhere near current levels. Food prices rose 0.4 percent, but energy prices had dropped 3.2 percent.
Last night on CNBC Europe, one of the regular commentators noted that he expected that the FOMC would have had access to estimates for the CPI. He couldn't imagine, he said, that the rates would have been lowered as they were yesterday if the CPI had been high. Perhaps that's true, and perhaps not, but with the core number still slightly above the 2.0 percent and the rise in energy prices since August, I can't imagine that this number proved entirely comforting to the Fed. It certainly didn't discomfort market participants too much, though, as futures climbed afterward and prices did, too, after the cash open.
Moody's August's Risk of Recession, as reported on Economy.com, was released at 10:00. That number has risen sharply to 40 percent, its highest level since 2001.
Expectations for crude inventories were not met. When the Energy Department released inventories numbers at 10:30, the decline in crude was sharper than anticipated. Crude supplies dropped 3.8 million barrels with the expectation for a drop of about 1.5 million barrels. Distillates climbed 1.5 million barrels, roughly in line with expectations. Gasoline supplies unexpectedly showed a build, however, of 400,000 barrels. Industry watchers had anticipated that refinery utilization would drop again this week, and it did, to 89.6 percent. That is of some concern, some industry watchers agree, but I'm sure Jim will get us up to date on this in his weekend review in his Leaps column. Last week's Category 1 hurricane disrupted production at several Port Arthur area refineries, shutting them down before they could be safely shut down according to the processes that leach the product from lines and containers first. That makes the process of powering up again slower. That may be all that was behind the lower utilization numbers.
The American Petroleum Institute's numbers differed, of course. The API reported a decline of 1.6 million barrels in crude, a climb of 241,000 barrels in distillates and decline of 2.1 million barrels in gasoline supplies.
The unexpected draw in the Energy Department's calculation, the action in the currency markets (lower dollar equals more dollars required to buy this dollar-denominated commodity), and volatility surrounding the expiration of the front-month crude contract all combined to punch crude prices above $82.00 today, again into new highs. As this report is prepared, crude was at $81.93, pulling well back from its $82.50 high on the expiring contract, but certainly not comforting those who were short the contract.
Other economic developments questioned whether we can consider the credit crunch kaput, its impact contained as our Fed and other central banks take care of any problems that might arise, dusting their hands off after yesterday's action. Not all the information is reassuring. Today, the American Institute of Architects reported that nonresidential, commercial construction is being affected. The AIA's chief economist was quoted as saying that the subprime mess is causing difficulties in securing credit for nonresidential construction projects.
The problem is being discussed--and dealt with--in other countries, too. One difficulty showing up is that the BBA LIBOR, the benchmark three-month rate established daily by the British Bankers' Association and used in many countries, has been gapping further above the Bank of England's benchmark rate than it typically does. This causes all kind of problems, problems that I'll cover in my Trader's Corner this weekend. The BBA LIBOR is supposedly the rate at which banks lend to each other, but it hasn't been working that way lately.
What this gap did today was prompt the Bank of England to pump more money into the system to try to bring the rates back in line. Last week, the Bank of England head Mervyn King had asserted that making such moves would amount to risky behavior that he deemed excessive. Mr. King has been late to the party, with other central banks making numerous cash injections during the worst of the crisis. One article said that both Mr. King and our Fed had lost credibility this week.
The BOE's move was intended to bring the BBA LIBOR more in line with the central bank's targeted benchmark rate. The Bank of England's rate is 5.75 percent and Monday, the LIBOR jumped to 6.5 percent. After pulling back yesterday, today it jumped to 6.55125 percent, according to an article in THE LONDON TIMES. Typically, the LIBOR is only about 0.41-0.45 percentage points above the BOE's rate, and this jump was considered extreme. Today's gap was prompted at least in part by problems with Northern Rock, and that bank was in the news again today. As many will remember, last week Northern Rock was forced to go to the Bank of England, the Financial Services Authority (FSA) and the Treasury for a bailout. Last night, the head of the FSA asserted that other banks would get similar bailouts only if there existed "the danger of contagion" to the rest of the financial system, according to an article in THE LONDON TIMES, similar to what had happened with Northern Rock. Only the Treasury's guarantee stopped a run on the bank's branches by customers pulling out their life savings. I was traveling to a funeral last Friday, listening to a BBC station on the radio as I did, listening to interviews with people standing in line to pull their money out of Northern Rock. They wanted to do everything from spread their money out among several institutions so that no account topped insured limits to just hide it in their houses. My grandmother, a young married woman in Depression-era times, literally kept her money under her mattress. It isn't a laughing matter to hear customers express such sentiments again.
Today, the bank's shares dropped when news that a potential rescuer would be offering a heavily discounted bid for the bank. None of this, including the implication that the Northern Rock's troubles could have spread contagion across the financials, appears reassuring.
There's some fear and some evidence, too, that all these actions by central banks are not providing more liquidity, but rather more cash for banks to hoard. An article in The LONDON TIMES today mentioned this as a possibility. Keene Little has mentioned this in his writing. The Trader's Corner article for this weekend will touch on this trend, too.
One of the worries is that the difference between the rates that central banks set as their target rates and the rates at which banks are actually willing to lend to one another are far different, and banks' profits will suffer as a result. Today, Wall Street investment bank and broker Morgan Stanley reported earnings. Third-quarter net income fell 17 percent with the firm characterized as missing expectations. Some industry watchers hadn't expected MS to take such a hit. Articles repeated the expectation that this was a one-time thing for this quarter, and said that the easing of the credit crunch would ameliorate such damage in future quarters.
Investors in Bear Stearns (BSC), which reports tomorrow, weren't so sure. Neither are some industry specialists. Without the economic background to evaluate their concerns effectively, I can only report that not all the globe's economists are yet convinced that central banks can effectively bring lending rates down close enough to their own benchmark rates to encourage banks to quit hoarding cash and loan it out. One industry analyst said that financials' 2008 earnings could take a hit of at least 10 percent if central banks are not successful in lowering the gaps between BBA LIBOR and their targets for their benchmark rates.
I'm not writing this to scare anyone or to claim that financial markets are going to crash. I'm merely reporting what I read and don't claim to have the economic background to evaluate the worries that others are expressing. I do have the common sense to be cautious about automatically believing anything either too bullish or too bearish while doing all I can to protect my money. That doesn't require me to be frightened, and it doesn't require that you be, either, but do be aware of the possible forces out there and make appropriate just-in-case plans.
Other news impacted GM, Ford and Chrysler. Industry news hit the automakers as they bargain with the UAW over new labor contracts.
Tomorrow's Economic and Earnings Releases
Today Art Cashin said on CNBC that Fed Chairman Ben Bernanke will be testifying tomorrow before Congress at 10:00. I can't find any information about that on the FOMC's website. If it's true, you can bet his testimony could move markets and might be a primary market-mover. In addition, earnings from BSC and GS may upstage most economic releases, with the possible exception being the Philly Fed at noon. Other companies reporting earnings include FDX and ORCL.
Other economic releases include the 8:30 weekly initial and continuing claims, the 10:00 Conference Board Leading Indicators, and the 10:30 weekly natural gas inventories.
What about Tomorrow?
Yesterday, if the day had been normal, I would have predicted exactly the kind of day we got today. We can usually predict some sort of digest-the-games candle on daily charts after such a big-range day.
I started the day out warning short-term bulls to set up plans for how they would deal with a day that produced a doji or a digesting-the-gains type candle. The trouble was that times aren't normal. The Fed doesn't usually do what it did yesterday. The Bank of England doesn't normally have to rescue a bank seeing customers stand in long lines outside its branches to withdraw their life savings.
It's not normal, but today we got the normal reaction anyway at the normal places where you would expect such reactions. We just got to those levels a little quicker than might be anticipated earlier in the week! The normal reaction to expect now is either a pullback or else sideways-to-sideways up reaction while support catches up.
Remember that if Fed head Bernanke really is speaking tomorrow or if BSC lands a stink bomb of an earnings report tomorrow morning, these intraday charts are going to be worthless. Let's look at what a few of the charts show anyway.
Annotated 30-Minute Chart of the SPX:
The TRAN's daily chart is signaling that something isn't quite right with the SPX, OEX and Dow gains, so use it as a barometer tomorrow.
Annotated 30-Minute Chart of the TRAN:
The RUT is a good index to watch for short-term guidance, too, as it tends to be another momentum index that leads.
Annotated 30-Minute Chart of the RUT:
Once again, the Nasdaq's chart may prove the most interesting of them all.
Annotated 30-Minute Chart of the Nasdaq: