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Market Wrap

"Complexity Is Exacerbated by Opacity"

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Oh, yeah?

This quote was taken from Treasury Secretary Henry Paulson's address before the Press Club in Washington, D.C. today. Market participants desperately needed another "ity" word: clarity. They wanted clarity about the steps our government would or could take to support the U.S. dollar.


Amid uncertainty about the selection of a new head of the Bank of Japan, the USDJPY (U.S. dollar against the Japanese yen) dropped below 100 last night. The currency pair dropped to an overnight low of 99.76. This is the first time that the USDJPY currency pair has fallen below 100 since November, 1995.

Our futures followed the currency pair lower. Financial channels covering the Asian and European markets last night scrambled to include guest panelists to speculate on the causes and probable outcome of the decline. One speculated the dollar would eventually fall to the mid 90's against the yen.

Several currency specialists on two separate channels said concerted global action was needed to steady the dollar. Some said no actions taken now would be effective. Others said our Fed needed to limit any further easing, perhaps easing only 25 basis points next week and then stopping. Our Fed needed to let the recession, which a survey of economists today said is now a reality, play out as it will. That wouldn't go over so well, would it?

Although the topic is not discussed as much in our daytime financial coverage, neither is a falling dollar going over so well. As outlined in last Thursday's Wrap, even if our powers-that-be decided to act to support the dollar, the direction of the USDJPY is not entirely ours to decide. The actions taken by the Bank of Japan's governor will also impact the direction taken by this currency pair. Not only do we not know what those actions will be; at this point, we don't even know the identity of the new governor or that governor's stance on inflation, the economy and currencies.

The Japanese government this week rejected Deputy Governor Muto's nomination for the post. Governor Fukui leaves next week. Once the government decides on a replacement, how hawkish or dovish a stance will the central bank take under the new leadership? How much damage will be done in the meantime, with that central bank perhaps making decisions by committee rather than working under a strong and trusted governor?

No one knows at the moment. In addition, Japanese Finance Minister Nakaga's statements overnight were interpreted to suggest that Japan was not going to intervene in currencies by selling yen. Their equities and businesses also take a hit when the yen strengthens against the dollar, so our market participants are not the only ones calling out for something to be done.

Those hoping for a focus on the dollar during Treasury Secretary Henry Paulson's address this morning were disappointed. Many market watchers hoped that his address would go beyond the usual "I support a strong dollar" statements to a detailing of the measures that would be implemented to strengthen the dollar.

His address focused instead on the recommendations of the PWG, the President's Working Group. The PWG has listed its recommendations to resolve the current market turmoil and ensure that it does not occur again, at least in this particular form. The PWG feels that the current situation results from liquidity challenges and nonfunctioning credit markets.

Oh, yeah? We all know that by now and want something more. He said what we knew, though. These challenges resulted from the decline in value of complex mortgage derivates, derivatives so complex and layered that even Paulson himself admitted difficulty in deciphering them. Well, perhaps we didn't know that Treasury Secretary Paulson also finds them too complex to be easily understood. Actually, I took a little comfort in that revelation. I've been struggling for weeks to puzzle out all the implications of those complex and layered securities, especially as they relate to the various repurchase agreements and all the other fallout from them. However, I would have taken more comfort if he'd suggested what to do to protect the dollars I have in my savings from sinking in value.

We want more from our Treasury Secretary, especially when we're trying to figure out where markets are going next, what we need to do to protect our personal portfolios and whether the Treasury Department or any other government entity will be doing anything to provide succor for these weakened markets.

It was during Treasury Secretary Paulson's discussion of the PWG's recommendations that he uttered the "complexity is exacerbated by opacity" statement, going on to say that transparency and maybe even clarity and simplicity were antidotes. I was losing track of the "ity" words as I took notes. He did suggest several fixes for the current situation, too, including an "industry cooperative," a "differentiation in derivatives and corporate bond ratings," and a revision of dividend policies.

Neither equity nor currency traders seemed much assured. While he was still speaking, as soon as his focus became clear, the USDJPY briefly dipped below 100 again. As soon as he finished speaking, equities stuttered lower again, hitting what was to be the day's low. Those who would like to read his complete prepared statement can find it at this link.

The show-me-the-money impact doesn't end with the USDJPY, either. This time last week, Carlyle Capital Corporation was among several that had received margin calls on portfolios of mortgage-backed securities used as collateral in repurchase agreements with the financial counterparties. Carlyle, listed in Amsterdam and managed by the U.S.-based Carlyle Group, had at the time received margin calls from 7 out of the 13 financing counterparties after the values of those securities fell. Carlyle Capital had received one notice of default after not meeting some of those margin calls. Carlyle has since been negotiating with the banks holding its securities, attempting to avoid the liquidation of the fund's remaining $16 billion.

Now the fund is expected to default on all its debt. Carlyle Group was reportedly ready to add additional capital if Carlyle Capital could negotiate acceptable and sustainable terms with the financial counterparties. However, those counterparties then called for even more funds amid fears that the portfolio's value had further decreased.

As the open approached today, Carlyle said it expected the financial counterparties to seize its assets. Headlines on articles about Carlyle employing language such as "on verge of collapse" did nothing to improve the performance of our equity futures.

Another name from last Thursday's nightly OIN report, Thornburg Mortgage, said today that it had received a default notice from Morgan Stanley when it failed to meet a $9 million margin call. The information appeared in an 8-K regulatory SEC form. It was just last week that Thornburg was reporting in another SEC document that it had received a letter of default from JPMorgan.

Information like that had pushed prices lower this morning. It was into this climate that Standard & Poor's provided the hope that so many desperately wanted and Treasury Secretary Henry Paulson had failed to provide. S&P claimed that large financial institutions were probably approaching the end of the period that had seen so many write downs.

However, S&P estimates that subprime write downs might be $285 billion, a figure $20 billion higher than S&P's previous estimate about six months ago. S&P's credit analyst also warned that the crisis could spread into other portions of the credit markets.

Market participants seemed to feel that something hopeful had been offered them. If government officials and central banks weren't going to solve the problem, perhaps it would solve itself. They hung on the hopeful part of the S&P's report, not the warnings, and equities took off to the upside. Let's see how far they went.


Annotated Daily Chart of the SPX:

The SPX's 200-week exponential moving average is now at about 1322.50. That moving average did play a part in weekly support over several months, so it may now play a part in resistance on weekly closes. If the SPX should climb toward that moving average and even punch through it, be aware of the potential for it to drop back below it by the close.

The potential to rise into a 30-sma test would have been stronger if the SPX had ended the day above its 10-sma, but since last fall, that 10-sma has been less of a benchmark than it was previously. Because the SPX found resistance there at the close today, however, the potential to roll down immediately must be considered. If that should occur, watch for support at the green trendline and the bottom of the blue channel.

Another possibility exists: the SPX could again be coiling, this time ahead of next week's FOMC meeting. Intraday charts at the end of the article will mention large potential inverse (or reverse) head-and-shoulders formations that have been building the last ten trading days. Such formations, normally considered bullish when occurring near a recent bottom, can sometimes reform into triangles, recasting a bullish formation into a neutral one. Be aware of this possibility.

Annotated Daily Chart of the Dow:

A daily Keltner chart suggest that as long as the Dow can hang onto daily closes above about 12,135, it has the potential to rise toward about 12,430, which would be about the midline of that declining channel. A drop below that would open up the possibility of a decline down to March's low or, if that failed as support on a daily close, perhaps even about 11,600.

Annotated Daily Chart of the Nasdaq:

Nothing seen on this chart provides much of a prediction for next direction. For legibility reasons, I haven't included RSI, but it lingers near 50.27, a neutral level. This week's low was accompanied by bullish price/RSI divergence, but sometimes all that suggests is that it's time to bounce up within a declining formation, which the Nasdaq has done.

A climb toward the 30-sma, up toward 2310, and maybe even as high as 2346, look possible but not yet probable. Nothing has happened yet that precludes another rollover.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Because the decline of the dollar, especially against the yen, gains so much importance these days, I'm including a chart for tonight's Wrap.

Annotated Daily chart of the USDJPY:

Equity bulls want to see the USDJPY climb while bears want further declines. If it keeps declining, however, we're all going to have to turn out studies to alchemy, figuring out how to convert our greenbacks to gold bars.

Today's Developments

Initial and continuing jobless claims started off today's releases. Analysts had anticipated 357,500 initial claims, up from the original 351,000 figure from last week. Those claims are now listed as "unchanged" at 353,000. There's been a pattern the last few weeks of each previous figure being revised higher the next week. That apparently happened again this week, but the net effect this time is to see a decrease in the number of initial claims over what had been anticipated for this two-week period. The four-week moving average fell 1,250 to 358,500.

Continuing claims continue to rise, too. They climbed by 7,000. The four-week moving average of continuing claims still rises, this time by 24,500 to 2.81 million.

Also at 8:30 am ET, February's Retail Sales disappointed. Industry watchers had predicted a rise of 0.2 percent, a slight decrease from the previous growth of 0.3 percent, but instead sales dropped 0.6 percent. Moreover, November and December sales figures were revised lower. However, retail sales did increase 2.6 percent when compared with the year-ago level, the Commerce Department reported.

Digging underneath the headline figures showed that declining auto sales helped drive the retail sales figures lower. So did declining gasoline sales. Gasoline sales will be unlikely to decline this month, unless the higher prices have already driven consumers to cut back on driving.

In a climate in which many watch for confirmation or refutation that our economy has entered a recession, retail sales garner much attention. This report did little to negate fears that consumers have slowed spending.


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During the same 8:30 am ET time slot, the Labor Department reported February's Import and Export Prices. In what is now old news amid newly soaring crude costs, prices for petroleum imports sank 1.5 percent. That meant that February's Import Prices rose only 0.2 percent. We all know what crude has done since.

Import prices have risen 13.6 percent year over year, driven higher in part by petroleum prices that have risen 60.9 percent in the same period. In the climate of currently rising crude prices, February's decline in crude import prices is likely to provide little cheer or little assurance that increases in import prices will be tempered.

U.S. export prices rose 0.9 percent, with higher prices on agricultural products being behind that strong rise. Agricultural exports rose 4.4 percent in February.

The 10:00 am ET time slot also produced a couple of reports. One was January's Business Inventories. Those inventories rose 0.8 percent, higher than December's 0.7 percent and higher than the predicted 0.5 percent.

At 10:30, the Energy Information Administration (EIA) released the last report of the day, the weekly natural gas inventories. Supplies fell 86 billion cubic feet in the week that ended March 7. This is the sixteenth consecutive week of declines, a MarketWatch.com article reported. Natural gas soared, breaching the $10.00 mark. Another energy complex futures contract, crude, hit an all-time high of $111.00 a barrel, although it was to end the day at lower levels.

Other news released during the day brought the attention back to mortgage and credit-crunch issues. Those included RealtyTrac's figures on February U.S. foreclosure figures. Those fell 4 percent in February but have risen almost 60 percent over the last year. RealtyTrac's CEO said that the peak of foreclosures had not yet been reached.

During the day, Representative Barney Frank offered his solution to help trim the number of foreclosures. He wants the government to set aside up to $300 billion in loan guarantees.

In addition to RealtyTrac's report, Freddie Mac released its weekly survey. The average interest rate for a 30-year, fixed-rate loan was 6.13 percent last week, higher than the previous week's 6.03 percent. It inched just under the year-ago level of 6.14 percent. All mortgage products showed higher rates. If the information from RealtyTrac was mixed, so was this. Freddie Mac's president and chief economist pointed out that the average interest rate for 30-year fixed-rate mortgages for the first 11 weeks of the year was still lower than 5.9 percent.

As occurs each Thursday, the Federal Reserve also provided information on outstanding commercial paper for the preceding week. This outstanding commercial paper gives us insight into the ease or difficulty that corporations have placing this short-term paper. These notes are typically utilized to avoid going to banks and pay higher fees. When the number decreases, as it did this week, we can surmise that corporations are finding difficulty placing that paper.

Last week, the outstanding paper decreased $15.1 billion on a seasonally adjusted basis. It's fallen now for three weeks out of the last five, with this week reversing a two-week trend of increasing outstanding paper. More disturbing, the decline was prompted by financials, both domestic and foreign. We need to see financials finding ready markets for their short-term paper (30 to 180 days) before we can feel any assurance that the credit crunch is easing.

Other developments today included a 99-to-1 Senate vote to include $341 billion in tax cuts in the new five-year budget plan. That's enough to continue some of the tax cuts President Bush enacted in his first term. The Senate could not agree on additional funds that would have been required to keep all of those tax cuts. The vote on extending the tax cuts will not occur until after the inauguration of a new president.

Bear Stearns (BSC) continued to suffer from persistent concerns about its future. Those concerns persist despite the company's and the SEC's offered assurances. Perhaps it's appropriate to note that BSC is one of the financial counterparties involved in Carlyle Capital's problems. Today, BSC was pushed to an intraday low of $50.48 before it began rebounding off that low. It closed at $57.35. Volume was huge, showing some institutional involvement in the bounce.

Tomorrow's Economic and Earnings Releases

Tomorrow unveils one of the most important numbers of the week, the February Consumer Price Index. That number will be released before the market open, at 8:30 am ET.

Across the globe, central banks have been worried about inflation trickling through to the consumer. Jim Brown noted this weekend that our FOMC members had been employing language that was a bit more hawkish the last week or two, too, coming down a bit more strongly when discussing inflation. Equity bulls still want the Fed to provide hefty rate cuts, and too much inflation may not allow them to do so.

Actually, equity bulls are in a bit of a quandary right now when debating the topic of how much of a cut is expected, appropriate or desirable. If today has done anything, it's alerted savvy bulls to the damage that the weakening dollar is doing. Do we now want hefty rate cuts or do we want our Fed to be a bit more judicious? I don't think anyone wants to see consumer prices too high, however.

I would watch tomorrow's March Consumer Sentiment, too, with that released after the market opens, at 10:00 am ET. I believe that consumer spending habits will become ever more important in this climate when everyone is worried about recession.

What about Tomorrow?

Most 15-minute charts show potential inverse (or reverse) H&S formations setting up beginning 2/29 when prices began dipping to form the left shoulders. The confirmation levels for those formations are setting up near potentially strong Keltner resistance levels, providing benchmarks to watch.

About inverse H&S formations: they're considered potentially bullish, and when they come at the bottom of a decline, they're generally considered more credible. However, they have a nasty habit of sometimes morphing from something bullish to something less so: a triangle. With an FOMC meeting coming up next week, such a process of morphing into a triangle would not be surprising.

Therefore, observe them, know what you're seeing, but don't count on confirmations or on upside targets being met if they are confirmed. Do watch whether they're confirmed or invalidated. Such actions provide you with vital information about the relative strength of bears and bulls at a particular moment.

Annotated 15-Minute Chart of the SPX:

If the SPX should test that 1308-1310 level first thing tomorrow morning, the current setup suggests that support should be strong enough to prompt at least a bounce attempt, if not more. If the SPX gaps below that aqua-colored Keltner line, however, as it did this morning, that converts it into probable resistance and all bets are off.

If you scan these 15-minute Keltner lines on this chart, you see that upper and lower boundaries and the aqua-colored midline often do serve as support or resistance, even in these crazy market conditions. In more normal times, the black-channel boundaries usually serve as strong support and resistance, too, and you can see that they might as well not exist in the current environment.

What does that mean for you and your trades? It signifies how crazy the trading conditions are. Try not to count on any target or prediction being met in this kind of environment. Take profits too early rather than too late.

Annotated 15-Minute Chart of the Dow:

Annotated 15-Minute Chart of the Nasdaq:

Annotated 15-Minute Chart of the RUT:

If futures indicate that indices will gap higher tomorrow morning, perhaps above the confirmation levels of their inverse H&S formations, realize that such action will create breakout modes on these 15-minute charts. Such breakout modes mean that momentum is strong, of course, and can sometimes continue for up to a day or so, but eventually momentum will wane, and bulls must be prepared for that eventuality. Typical oscillators such as RSI or others prove of little use, so the bears among you can not rely on bearish signals for entries.

We know this is an environment in which prices can reverse quickly, and that's particularly true of breakouts created in the first 15 minutes or so of trading. If such breakouts occur during the early minutes of trading tomorrow, be especially careful with your bullish profits and watch for signs of a pop-and-drop situation. You and I will not be the only people who have noted those inverse H&S's forming over the last ten days, and if buyers can't maintain early breakout attempts, be especially careful of your bullish profits. As soon as any such breakout has been well enough established, begin watching the 15-minute 9-ema's (or perhaps, the 30-minute version if you have a longer time frame and deeper pockets) as a benchmark for whether the climb is being sustained. You'll want 15-minute closes above or at that benchmark if bullish.

If indices instead turn down tomorrow, expect bounce attempts from the levels indicated--unless they're violated with an early gap down, at which time they would be support. After that, you'll just have to watch the setups, as Keltner signals will be reset.

Intermediate term? I don't know. I was feeling fairly optimistic about the prospects for at least a week or two of rallies when I began writing this article. I still think that's possible. However, upon reflection, I'm a little fearful that the current chart formation on the SPX may be morphing into a large right triangle (flattish bottom, descending highs) forming since late January. (Note: this is different than a much smaller and less important triangle that could form on the intraday charts, mentioned earlier.) I think it's possible we'll get a pop up through that triangle on the daily charts, if that's what it is, before any breakdown through its support, if that's going to happen.

However, in what may or may not be an option-related event, both the VIX and VXO gained today. Although their daily charts show the move to have created a doji in the middle of a congestion zone, rendering that climb somewhat less important, that's still weighing on the back of my mind, too, and there's all the uncertainty about dollar weakness.

I would want the SPX to be producing daily closes above the 72-ema, now at 1381.50 but still descending, before I consider that possible triangle formation invalidated. Next week, with option-expiration shenanigans, an FOMC decision, and lots of possible Carlyle-type announcements possible, could provide lots of excitement or a narrowing down into choppy price patterns.

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