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Market Wrap

Reset Reprieve

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Stocks continued their rally that began on Wednesday as traders and investors contemplate a reprieve for adjustable rate mortgage lenders and borrowers alike.

Having rebounded 13.2% last week on the heels of a mortgage relief packaged that could help more than one million homeowners avert foreclosure in the next two years, the Dow Jones Home Construction Index (DJUSHB) was atop today's list of sector winners.

Monthly Mortgage Rate Resets -

Thursday's outlining of what some are calling the "5-year Freeze" on adjustable rate mortgages (ARMs) sent shockwaves through the financial markets. Suddenly, the onslaught of ARMs that are about to reset may be delayed, allowing homeowners with ARMs that are about to be ratcheted higher, additional time to improve credit ratings (if need be), but also allowing some additional time for housing prices to stabilize, if not rebound.

Lenders, also faced with millions of refinancing applications, could benefit from an additional five-years time to process applications.

I would encourage everyone to read the U.S. Treasury's press release from Thursday at this link.

At a MINIMUM, I (Jeff Bailey) would think that Thursday's news brought in a strong wave of short-covering by those that may have been counting on millions of ARMs forcing borrowers into foreclosure.

Also helping improve sentiment toward homebuilders was the National Association of Realtors (NAR) saying the battered housing market is on the verge of stabilizing and inched-up its outlook for 2007 and 2008 home sales.


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The NAR said it now sees existing home sales falling 12.5% this year to 5.67 million, which is up slightly from last month's prediction of 5.66 million existing home sales this year. The NAR also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million.

While the NAR's revisions hardly suggested a sharp rebound in sales, after nine straight months of downward revisions, the report was viewed as a sign of stabilization.

On the mortgage front, after being halted prior to today's open with news pending, shares of mortgage insurer MBIA, Inc. (NYSE:MBI) $33.95 +13.16% reversed last week's losses and traded as high as $38.19 intra-day after the company said it had secured a $1 billion funding commitment from Warburg Pincus, the US private equity group, in a sign that buy-out investors are finding some value in the troubled mortgage arena.

Terms of the deal have Warburg initially investing $500 million into MBIA by purchasing 16.1 million of the company's shares at $31 each, a small premium to Friday's closing price of $30.00/share.

Warburg will then back a $500 million rights issue which MBIA expects to complete early next year. Warburg will have the right to nominate two board members, and will receive warrants to purchase additional MBIA shares at $40.00, allowing it to bolser its profit if the share price rises.

Daily Internals - 12/10/07

The major averages jumped at the open on early CNBC reports of MBIA's cash infusion.

But just as MBIA was released for trade at 11:00 AM EST, shares of banking giant Bank of America (NYSE:BAC) $46.64 +2.79% gave back gains at 11:15 AM EST from the $46.71 level, slipping to as low as $45.74 on CNBC's report that it had frozen one of its SIV-related money market funds.

The stock rebounded to close back near its high of the session after the company said it was closing a privately placed money-market fund (Columbia Strategic Cash Portfolio fund) for institutional investors.

BAC's spokesman Jon Goldstein denied CNBC's report that the fund had been frozen, saying that clients were being offered the option of cash redemptions or of switching their assets into other Columbia-managed funds.

Who said CNBC was a cheerleading network for the bulls?

Despite today's turmoil, advancers held the upper hand over decliners at both exchanges and for the first time since October 31, new highs outnumber new lows at both exchanges, suggesting to me that we're just starting to see some sign that bullish leadership (new highs) is starting to overcome bearish leadership (new lows).

I should also alert traders and investors that Dorsey/Wright and Associates' VERY BROAD NYSE Bullish % (BPNYSE) reversed back up into a column of X at 40.20% on Wednesday of last week and at tonight's close has risen to 46.00% bullish. This indicates that the demand (X) is really starting to outstrip supply (O) and the offensive (bullish) team is on the field. On 11/27/07, this major market bullish % reached an inflection low of 32.82%.

In essence, on 11/27/07, 32.82% of roughly 3,000 point and figure charts (985) were showing "buy signal" associated with their charts. At tonight's measure of 46%, we would now envision roughly 1,380 NYSE-listed stocks showing PnF buy signals.

Standard & Poors also chimed in today by cutting its ratings and outlook on 14 SIVs. S&P said it was cutting its ratings on some SIVs to deepest junk from investment grade, and assigned a negative outlook to most other SIVs. S&P didn't provide a dollar amount affected by the downgrades.

As if that wasn't enough, as I type, shares of Washington Mutual (NYSE:WM) $18.65 -1.99%, which diverged from today's bullish bid in banks, saw its shares fall to $18.12 in tonight's extended session after the mortgage lender said it would slash its dividend by 73% to $0.15/share and eliminate 2,600 mortgage and 550 corporate support jobs as it looks to close 190 of its 336 mortgage offices as it stops making loans to borrowers with subprime, or poor credit.

Also after today's close, handset chipmaker Texas Instruments (NYSE:TXN) $32.67 +0.58% ticks higher at $34.25 after the company said a stronger-than-expected end to the year for mobile handsets had it raising the lower end of its revenue estimates for the fourth quarter.

Texas Instruments said it now expects revenues to come in between $3.5 billion and $3.66 billion in the fourth quarter, compared to previous guidance of $3.4 to $3.6 billion.

Nokia (NYSE:NOK) $39.98 +1.24% is TI's biggest customer. Its shares were quiet at $40.00 in the extended session.

While WaMu was getting ready to cut its dividend, fast-food giant McDonalds (NYSE:MCD) $61.90 +2.89% closed at another all-time high after it said global same-store sales rose 8.2% in November, while U.S. sales were up 4.4%, boosted in part by it premium roast coffee and breakfast menu sales.

Shares of Starbucks (NYSE:SBUX) $22.73 +0.48% edged up 11-cents.

Energy prices were mixed with fractional losses across the complex.

Energy secretary Bodman called on OPEC to increase oil supplies as low global oil inventories kept prices high. Mr. Bodman added that he thought speculators were adding to oil's volatility, but not higher prices.

January Crude (cl08f) settled down $0.42, or -0.48% at $87.86, while January Unleaded (rb07f) finished down $0.0189, or -0.82% at $2.2501.

Gold as depicted by the StreetTracks Gold (NYSE:GLD) $80.00 +1.78% (~$800.00 spot) traded strong. Ahead of tomorrow's FOMC decision on interest rates, the U.S. Dollar Index (DXY) 76.06 was marginally soft.

A quick look at Jan Fed Fund futures (ff08f) 95.82 has market participants forecasting a 100% probability of a 25 basis point cut for the federal funds rate, and just over 25% probability of a 50 basis point cut.

The FOMC's current target is 4.5%.

Not much of a "dip," but a little bit of "rip"

S&P 500 Index (SPX) - 10-point box

In last Monday's market wrap I was looking for a "dip" and then a "rip" higher.

Needless to say, we didn't see much of a dip, or a 3-box reversal back lower to 1,450, and Thursday's trade at 1,500 has the SPX back on a "buy signal."

I'm seeing GREAT SIMILARITY from the OUTWARD appearance of the SPX as to late August PRICE action, but INTERNAL indicators are also VERY SIMILAR.

On the above chart, I've drawn in PINK our institutional mathematically derived MONTHLY Pivot levels, where I would look to have a BULLISH stance above 1,475.

On 11/28/2007, Dorsey/Wright's broad S&P 500 Bullish % (BPSPX) did reversed back up to "bull confirmed" status at 42% (47% actual) as the SPX itself closed 1,469.

At tonight's close, it has risen to 54.82% bullish (54% on chart) as 274 of the 500 stocks comprising the SPX now show a point and figure buy signal associated with their chart.

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