As we move into Fed watch mode ahead of our FOMC decision next week, other central banks have been making decisions. Australia and Canada were among those banks making decisions earlier in the week. This morning, the Bank of England and the ECB announced rate decisions.
As expected the Bank of England held its target interest rates steady. Economists had predicted that when the Bank's Monetary Policy Committee weighed rising inflation concerns against potential economic weakness, the committee would not ease rates. Six out of nine members voted against a cut.
Rocketing commodity prices have pushed prices higher in the U.K. Although the Libor rate remains high, too, and a rate cut might have helped with this fallout from the credit crunch, the MPC was too worried about inflation worries to risk lowering rates.
The European Central Bank made the same decision. The ECB's mandate does not ask the central bank to prop up the economy, but rather to maintain price stability, so it's no surprise that the ECB would vote as it did. Eurozone inflation remains well above the ECB's comfort zone. The ECB has not voted to ease rates any of the times when the FOMC or Bank of England was doing so. This has had the effect of sending the euro to higher highs against the dollar, and that hurts Eurozone exporters. It also hurts U.S. importers who are importing items from the Eurozone.
ECB President Jean-Claude Trichet has spoken in favor of a strong U.S. dollar, but economists question what he can do to support the dollar if the ECB is not easing while the FOMC continues to do so. President Trichet showed little penchant for lowering rates in Europe during his post-decision press conference. He says that inflation may be more protracted than the ECB had judged a few months ago. He believes that inflation will remain above the ECB's comfort zone of 2 percent in the next months.
The potential for big currency moves has not ended. The Bank of Japan concludes a two-day meeting tonight. If the bank follows predictions, it will not ease, either. This meeting will be the last for Governor Toshihiko Fukui. With his successor not yet chosen, the direction of the U.S. dollar against the yen, important in the yen carry trade, remains uncertain. Some believe that Governor's Fukui's successor could be announced during this meeting. Others point to continued uncertainty after the Prime Minister's party fell out of favor in July when the upper house of the parliament went to the Democratic Party of Japan.
While it seems that we in the U.S. should be little impacted by the choice of a Bank of Japan governor, that view would likely prove a nave one. For years, the shapes of U.S. equity charts have correlated rather nicely with the shape of the USDJPY, the U.S. dollar against the Japanese yen. While such inter-market relationships do not always hold true and haven't, in fact, always been as reliable lately, we shouldn't underestimate the effect of currency moves on equity moves. February 2007 showed otherwise.
That February, a strengthening of the yen against the dollar led to a sudden dumping of U.S. equities as yen carry trades were unwound . . . in a hurry. Even now, the USDJPY has been trending down as equities appear to inexorably dragged down with the currency pair.
Market watchers want this matter of Governor Fukui's successor settled and settled quickly, well before his last work day next month, for the health of the Japanese economy and, to some degree, that of the globe's. In recent months, central banks across the globe have needed to work cooperatively and smoothly to keep the globe's financial system stable.
Investors also want financials to show them the money--the money at risk--with Swiss bank UBS being chief among those. Today we learned that UBS sold its entire portfolio of Alt-A securities to Pimco. Analysts speculated that UBS had sold the securities at a fire-sale value of 70 cents on the dollar. Analysts conclude that UBS may now mark-to-market record losses in the current quarter, resurrecting a fear that the subprime mess may spill over and become an Alt-A mess, too.
As Jim Brown and others detailed months ago, Alt-A mortgages are provided to borrowers whose credit is better than those seeking subprime loans. They were expected to hold up better, too, as more documentation was required for these loans. However, delinquencies and foreclosures in these loans have been rising faster than had been anticipated.
UBS wasn't to be the only financial asked to show someone the money. Thornburg and Carlyle figured in margin-call stories today. Other financials suffered as analysts or rating agencies downgraded them.
Equity traders took it all badly, sending indices lower. Let's look at how much lower.
Annotated Daily Chart of the SPX:
Perhaps you think that if I'd just include RSI or some other indicator, the matter would be cleared up and we'd know whether there would be a bounce or a decline tomorrow morning. RSI is indeed in territory that often marks oversold conditions. On the daily chart, it measured 22.10. However, as many new and enthusiastic chartists have learned to their dismay, some of the sharpest declines come out of times when RSI is already low, when downside momentum has already been proven strong. I once did a study of breakout and breakdown moves, and they tended to perform best when RSI was already below 30 or above 70. I recently saw a study in a trading-related magazine that showed the same result. I do look at these other indicators, but only to alert me as to when it's time to update a trade, not for entries or exits. RSI currently alerts us that it's time for bears to have their profit-protecting plan sitting beside their computers (or, better yet, their profit-protecting stops entered on their trading platforms), but it doesn't prove that they'll need to look it any time soon.
We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!
As dire as the day seemed, the SPX ended the day right at potential support, support that has held since late January. Whoever "they" are, they have a habit of parking indices at potential support or potential resistance just before a big announcement. It's the support version today ahead of tonight's Bank of Japan announcement and tomorrow's Non-Farm payrolls. The SPX is clearly ready to rally up from that support or violate it and move down to stronger support, but we won't know which it will be until we see how the market reacts to overnight and pre-market developments. Think about your positions tonight and make some what-if plans for either direction. Nothing on that chart precludes either a bounce or a violation of that potential support. You can't control what those overnight developments are or how markets will react to them, but you can control how you react to what happens.
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the SOX:
Annotated Daily Chart of the RUT:
Because of the importance of currency moves in this week when several central banks have been meeting, I'm again substituting the USDJPY's chart for the Dow Jones Transportation Index's.
Annotated Daily Chart of the USDJPY:
Today began with two numbers relating to tomorrow's Non-Farm Payrolls and both offered some slight encouragement. One was the Monster Employment Index released at 6:00 am ET. The February Monster Employment Index rose 5 points, the first rise after a three-month decline in numbers. However, the Index is seven percent lower than in the year-ago period. As might be predictable, the greatest weaknesses when compared to the year-ago period appear in construction, finance, sales and manufacturing. For February, the largest gains were in farming, fishing and forestry; production and building; grounds cleaning; and maintenance occupations. Demand in the healthcare occupations remained strong, and public administration industry jobs gained. All nine U.S. Census Bureau regions showed gains in online job availability, but when comparing regions, California dragged down the Pacific region when compared to other regions.
The weekly initial and continuing claims had been expected to show initial claims dropping to 352,500-360,000, depending on the source. Initial claims fell to 351,000 instead, a 24,000 decline from the previous week's number. That cheered some waiting for tomorrow's Non-Farm Payrolls, but not enough to encourage futures traders in the pre-open trading period or prop up the markets today.
Market participants should note, however, that this was a decline from a revised-higher number from the previous week. Instead of the already-high 373,000 initial claims from the previous week, the number was revised to 375,000. We've seen a number of revised-higher figures, and perhaps next week, we'll see this week's number revised higher, too. In addition, year-ago levels stood at 327,000.
The four-week moving average of initial claims, deemed more accurate than the volatile weekly figures, fell 1,500 to 359,500. Continuing claims rose 29,000 to 2.83 million, however, the highest level in more than two years. The rise was made worse by the fact that this was also rising from a revised-higher figure from last week. Last week's initial figure for continuing claims was 2.78 million. Unless my math abilities have gone completely south, a rise to 2.83 million from a previously reported 2.78 million is a rise of about 50,000, not 29,000.
February's Chain Store Sales began flooding in before the market open. Before those figures were released, an industry analyst appearing on television had predicted that luxury retailers would begin to suffer the effects of a slowdown in the economy while warehouse-type retailers and those selling children's items would outperform. She was certainly right as concerned Wal-Mart Stores (WMT). WMT beat expectations. Furthermore, the company raised dividends. Target (TGT) also beat expectations.
Although I'm not sure that Limited Brands, Wet Seal and AnnTaylor Stores Corp. would be considered luxury retailers, they're certainly not warehouse type and they suffered the effects of a struggling consumer. Limited Brands and AnnTaylor did at least beat dismal expectations. Wet Seal did not, posting an 8.2 percent decline in same-store sales. Saks Inc. may at first glance have appeared to have invalidated that supposition about who would perform well and who would show weakness, with that retailer's 3.4-percent gain far better than the prediction that sales would be unchanged when compared to the year-ago level. The company did note, however, weakness in big-ticket items. Nordstrom's performance further confirmed worries about luxury goods.
January's Pending Home Sales at 10:00 am ET were flat month over month, but down almost 20 percent from the year-ago level. The National Association of Realtors (NAR) compiles these figures from sales contracts on previously owned U.S. homes. Regional sales rose in the West and Midwest, but fell in the Northeast and South.
The NAR's chief economist cast this as good news, a sign of a stabilizing housing market. Not all analysts agreed. Even NAR believes that pending some sales will stay near an annualized 4.9 million for the first half of the year, and then rise to 5.38 million for the whole year.
They'd better rise. According to the Mortgage Bankers Association, a bunch of homes are somewhere in the process of being dumped on the market. About 2.04 percent of U.S. mortgages were at some stage of the foreclosure process by the end of 2007, the association said. Mortgage delinquencies were at a 23-year record by the end of the year, and foreclosures were hitting a record high.
Some relief could be had from lowered benchmark mortgage rates for 30-year, fixed-rate mortgages. Freddie Mac reported that the average rate dropped to 6.03 percent from the previous week's 6.24 percent. It dropped back below the year-ago level. Interest rates on other categories of loans, including 15-year, fixed-rate ones and ARMs, also declined.
No relief is in sight yet from household net worth. The Federal Reserve pointed out today that in the fourth quarter of 2007, household net worth fell at a 3.6 percent annualized rate. This is the first decline in total wealth since late 2002, just before 2003's springtime equity rally began. Household borrowing slowed to an annualized 5.6 percent, the slowest growth in a decade. Borrowing for mortgages declined to an annualized 5 percent, and borrowing for consumer credit fell to an annualized 4 percent growth rate.
During the morning, the Federal Reserve released weekly figures on outstanding commercial paper. Outstanding commercial paper, a measure of how easy or tough it is for businesses to place short-term paper for lower rates than they could obtain through bank loans, jumped again after last week's rise. It rose $19.4 billion on a seasonally adjusted rate, with non-financials appearing to have a little more trouble than financials, as more categories dropped among the non-financials. Not seasonally adjusted, outstanding commercial paper dropped $4.5 billion. Still, when every sign of a tightening credit market is being watched, two weeks in a row of gains in outstanding commercial paper offers at least slight cheer.
At 10:30 am ET, the EIA's report showed that weekly natural gas inventories dropped 135 billion cubic feet. Natural gas rose to $9.815 intraday but closed near the flat-line level at $9.742. Not so, crude. Today, crude closed above $105 a barrel, settling at $105.47.
Not all commodity issues benefited from the dropping dollar. Gold dropped precipitously, declining $11.40.
The biggest developments of the day may have occurred in financials such as UBS, Thornburg Mortgage (TMA), Washington Mutual (WM) and others. Thornburg apparently failed to meet a $28 million margin call and received a letter from JPMorgan Chase on February 28. That letter stated that JPMorgan would exercise its rights under a Master Repurchase Agreement dated August 3, 2006. The letter constituted a notice of an event of default according to the documents Thornburg Mortgage (TMA) submitted to the SEC. JPMorgan's action activates defaults under all of Thornburg's reverse repurchase agreements and secured loan agreements.
Repurchase agreements are forms of short-term borrowing. For the company selling the security, it's a repurchase agreement, and they're agreeing to repurchase it at a later date for a higher price; for the company buying it, it's a reverse repurchase agreement. The repurchaser buys them with the agreement to sell them at a higher price at some specific date. Companies might use the borrowed money they receive under the repurchase agreement to finance the purchase of other securities, such as portfolios of residential-mortgage-backed securities backed by Fannie Mae and Freddie Mac. See where this is going? When the value of those asset-backed securities drops too far, the financial counterparties to that agreement send out a margin call. That's what JPMorgan did, and what Thornburg failed to pay.
Thornburg wasn't the only entity that failed to make margin payments. An affiliate of Carlyle Capital, Carlyle Capital Corp., also received a notice of default after receiving margin calls from seven out of the 13 financing counterparties. Carlyle met margin calls from some but has received a notice from one of the four in which the margin call was not met. Some of the other financials figuring in the news today (UBS and Merrill Lynch) were among the financial counterparties.
Merrill Lynch & Co. said it would exit the subprime mortgage market. It will no longer originate such loans through First Franklin. It will consider selling the subsidiary, taking a charge to do so. The company also announced that it would adjust the terms of its liquid yield option notes or LYONs. These are convertible securities in which the holders of the notes would receive shares of MER when the notes mature. MER will increase the number of shares the holders of the notes receive when they mature and will extend the deadline for distributions, among other changes. According to a MarketWatch.com article, Chief Executive John Thain also told investors that the company will not need to go back to the markets to raise further capital.
Bear Stears' and Standard & Poors Rating Services' actions hit Washington Mutual (WM). Bear Stearns said WM's loss could a wider-than-previously-anticipated $0.90 a share for 2008. The Bears Stearns' analysts listened at JPMorgan's investor conference last week and concluded that financials like WM, with more home-equity exposure, could suffer even more than JPMorgan had. S&P cut WM's rating to BBB from its previous BBB+ rating, and cut its long-term counterparty credit rating to BBB+ from its former A-. S&P noted that it expected the housing market to be weak for longer than previously anticipated and that WM's losses on residential mortgages could be wider than anticipated. S&P also said it had put all of WM's ratings on CreditWatch with negative implications. Bear Stearns believes that WM might be acquired.
Bear Stearns didn't single WM out. The firm also lowered profit predictions for Wells Fargo (WFC), SunTrust (STI) and National City (NCC).
Another financial weighed in after the close. Citigroup (C) announced a planned $45 billion reduction in its mortgage assets. It will also take other measures to reduce expenses by $200 million, with both actions occurring over the next year. It will integrate three units into one under the CitiMortgage name.
Some techs had originally fared well today, including Apple (AAPL) and Oracle (ORCL). AAPL had announced a push to take on RIM's Blackberry. ORCL received an upgrade. By the close, AAPL had turned negative.
After the close, another tech, National Semiconductor (NSM) beat expectations. The company did say that shipments of chips used in mobile devices were lower than predicted, but it was up in after-hours trading as this report was prepared. That could change by tomorrow, of course. It could all change by tomorrow.
Tomorrow's Economic and Earnings Releases
Tomorrow debuts with one of the week's most awaited releases: February's Non-Farm Payrolls.
February's ECRI Future Inflation Gauge follows at 9:40 am ET, with the ECRI Weekly Leading Index following at 10:30. At 3:00 pm ET, January's Consumer Credit numbers will be released.
What about Tomorrow?
Today, indices set up a pattern of finding resistance on 30-minute closes at their 30-minute 9-ema's. As the close neared, they were approaching or had, in one case, exceeded their downside targets on these charts. This tells us what we already know, unfortunately, and not much more: depending on what is learned tonight and tomorrow morning, markets are ready to bounce from support or perhaps cascade lower beneath it. At least these short-term charts provide us with some benchmarks to watch tomorrow morning.
Annotated 15-Minute Chart of the SPX:
No Keltner support or resistance is so strong that it can't be breached, as the Russell 2000's 30-minute chart is going to prove. No setup is so foolproof that it can't be undone. However, the SPX doesn't usually break through this 30-minute support gathering below it, at least not on 30-minute closes, and the support is now looking somewhat firmer than the resistance.
A caution: even if the support is going to hold, as this setup currently suggests it's most likely to do, nothing precludes a dip down to and perhaps through the line currently at 1301.24, as long as the SPX then bounces strongly enough to bounce back above it or near it by the close of the first 30-minute period.
What does this mean? It means that if you're in bearish positions, you should be careful if there's an early decline that gets quickly reversed.
Similarly, if futures are higher tomorrow morning and the SPX climbs, watch for the possibility that resistance now at 1311.66 will hold on 30-minute closes. If the SPX should gap higher, above that line, you would then look to see if it then serves as support on 30-minute closes.
Annotated 15-Minute Chart of the Dow:
Annotated 15-Minute Chart of the Nasdaq:
Annotated 15-Minute Chart of the RUT:
So, what do I think? I think we need to wait until tomorrow morning to decide. If the SPX gaps lower, then I would watch out for the possibility of a quick bounce if I had bearish profits to protect. If that bounce can't get past the gathered support levels shown above, then we may get a trend-down day tomorrow, but I'd certainly watch each support level mentioned for bounce potential. If the indices should gap above their 30-minute 9-ema's tomorrow morning, then you want to watch to see whether those levels will hold as support on 30-minute closes. If so, then indices may be ready to move up through the consolidation formations they've been setting up on their daily charts.
If my feet were held to a flame again this week, I'd have to say that my best guess--barring a strong gap up tomorrow morning, a possibility if the USDJPY makes strong gains overnight and the non-farm payrolls pleases--is that we might get a punch down toward lower support sometime during the morning and then a bounce attempt from that. With our own FOMC meeting looming next week, I'm not sure how far a bounce will get.
To think that no bounce will appear, either after a minor violation or after a retest of January lows, is to think there's a chance that markets are just going to fall apart. Actually, I do think that's a chance we all must consider when we're allocating our money, when we're setting up the trades in our portfolio. I've been worried that the central bankers who have been juggling everything so furiously might eventually fail in their efforts. The dollar might crash, credit markets might freeze, and we might get a 1987-type reaction.
That's a possibility you and I must face, but it's the less-likely event for tomorrow. It could happen, and I know every night when I go to bed exactly how much money I'll lose the next morning if I wake up and it's begun, but I haven't stopped trading. I just govern my risk as best I know how, and you should, too. I want to face the possibility, but it doesn't keep me from looking at the signs that a bounce could happen tomorrow. In fact, if we weren't being bombarded with such dire news, if we were just looking at the charts, we might even judge a bounce, perhaps after a morning dip, to be the most likely outcome.
So, watch the USDJPY tomorrow, especially after the non-farm payrolls number is announced. The moves after the Japanese market closes and before ours opens are a little less trustworthy than those while either of our markets is open, but that doesn't mean that the whole overnight trading history should be ignored. After the markets open, keep the RUT on your radar screen. The RUT is the closest to testing the January low and it has broken through support on the daily chart that held on daily closes until now.
If you're an equity bull and hoping for a rally that begins tomorrow, then
you'll want to see a higher USDJPY; if you're a bear and want more downside
you'll want to see it weaken. You'll also want the RUT below the January low.