Keene and I are switching writing assignments this week but will be back to our normal schedule next week.
That wasn't the only switching going on today. Early morning headlines touted the great performance of reporting financials along with other news. Indices started off with gains. Morgan Stanley (MS) had beat expectations, joining others that had done so this week. Financials helped lead indices to those early gains.
Equities then rolled over and dropped. By the end of the day, one source was blaming the "poor showings" by those same financials it had touted earlier in the day as reporting better-than-expected earnings. The source had switched sides with the markets. Technical traders watching for the awaited 30-sma tests and the likely resistance on daily closes at those averages might not have been so ready to switch sides. They might have expected such a possibility all along.
However, technical traders or not, we must understand economic developments to put what we're seeing into context. Today, we got the news Jim discussed last night: Fannie Mae (FNM) and Freddie Mac (FRE) will be allowed to purchase more home loans. In addition, they've been allowed to lower their cash cushion to 20 percent. In last night's Wrap, Jim Brown discussed the implications of this anticipated change, including an increase in liquidity for mortgage-backed assets.
This morning, the Office of Federal Housing Enterprise Oversight (OFHEO) confirmed that it would allow FNM and FRE to purchase more loans. The rumored development was happening. One article this morning speculated that $200 billion would be added in immediate liquidity to the market for mortgage-backed assets. The OFHEO predicted that because of the February decision to remove the then-in-place limits on FNM and FRE's portfolios and today's action, the pair could now guarantee or acquire mortgages worth $2 trillion this year. That speculation was repeated this afternoon after the close when Director James Lockhart appeared on CNBC. He quoted a FNM or FRE spokesperson, saying that FNM and FRE "need to be a bid in the marketplace." He thought that FNM and FRE might be active in jumbo mortgages when they're able to do so in a couple of weeks and also in refinancing or restructuring some subprime loans.
When asked "Why now?" by a CNBC commentator, referencing whether the steps had been taken as a result of the Bear Stearns debacle, Lockhart said the changes had actually been in the works a long time, denying that it had anything to do with BSC. He said that FNM and FRE had met qualifications needed to take these steps, including reporting earnings on a timely basis and employing proper risk management.
Some asked, "Why now and not a week ago?" That question has been asked in connection with the Fed's weekend actions, too. Could BSC have been saved if those steps had been taken then, some question? Could it still be if shareholders revolt? Those are questions still to be answered.
That news concerning FNM and FRE, along with those Morgan Stanley (MS) earnings that beat expectations in the morning but were "poor showings" by the afternoon, initially sent financials higher. The Visa (V) IPO added to the excitement. The dollar was strengthening against the yen after hitting the mid 90's level that one currency expert had predicted might be the USDJPY's short-term target. Those events contributed to early gains, but couldn't maintain them.
The dollar's strengthening contributed to something else, too, another big switch. The other big story revolved around commodities. Front month-crude futures were expiring. Some market watchers theorized that with the recent steps taken to increase liquidity, some traders were rolling out of commodities and back into equities.
Weak hands speculating in commodities were quick to bail. Commodities plunged, although many had cut their losses by the end of the day. Crude for April delivery closed at $104.48 a barrel on the New York Mercantile Exchange. Gold futures closed at $945.30 an ounce, a $59 loss. I do note that it ended the day just above its 10-sma, however.
Today isn't the only day prices have switched around, nor is this week the only week that prices have switched several times. Unfortunately, that results in choppy price action inside consolidation zones that sometimes shift shape. If you're looking for an exact prediction of where prices are going to go next, you're not going to get it from these charts or my keyboard. What I can say definitely is that price action is volatile, gains are soon reversed and losses are sometimes followed by astounding gains. These markets are cranky. By this afternoon, rumors were circulating that the selling was due to margin calls on hedge funds or that hedge funds had used the early rise to de-leverage and reduce risk. That may or may not be true, but the action appeared consistent with the recent inconsistent volatility, if such a thing makes sense. As I'm typing, I'm hearing someone on television in the other room saying, "There's confusion everywhere," and that about sums it up.
Annotated Daily Chart of the SPX:
As these charts progress, you'll see a progression in their outlooks, too, with the move lower within consolidation patterns looking gradually more likely than the move higher within them.
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the SOX:
Annotated Daily Chart of the RUT:
Annotated Weekly Chart of the TRAN:
Today's economic slate was light. Even the Mortgage Banker's Association's (MBAA) weekly figures on mortgage rates appeared to have been released yesterday, a day earlier than its usual Wednesday release. Since I thought the patterns might be important to consider, I'm including the figures in today's Wrap. The composite index, a gauge of loan application volume, dropped 2.9 percent week over week on a seasonally adjusted basis and was 3.7 percent lower than the same week a year ago. The refinance index dropped even more week over week, 4.6 percent. However, the government purchase index, mostly FHA, and government refinance index rose 7.7 percent and 11.4 percent, respectively.
The only other announcement on the economic calendar was the weekly crude inventories figures from the Energy Information Association. Although the industry watchers had predicted a rise of 2.25 million barrels in crude supplies, they climbed only 133,000 barrels. Gasoline supplies dropped 3.44 million barrels. Distillates dropped 2.91 million barrels. The lighter-than-expected inventory build certainly did not play out with increased crude prices today, but Jim has been commenting on the inexplicable rise in crude costs despite a general pattern of building supplies with a few exceptions over a number of weeks. Those seemed to be more important today as speculators fled.
Since the economic slate was so light, the focus turned to earnings, the change in rules for Fannie Mae and Freddie Mac, and Visa's IPO (V). As noted earlier, Morgan Stanley (MS) reported earnings this morning. Following the lead of Lehman and Goldman Sachs yesterday, Morgan Stanley beat expectations. The company reported earnings of $1.45 a share after preferred dividends on revenue of $8.3 billion. That beat expectations of $1.03 a share on revenue of $7.19 billion. Of course, those are well below year-ago levels. Year-ago earnings were $2.51 in a share.
Morgan Stanley's chairman and chief executive, John Mack, mentioned the challenging environment. During the conference call, the company's CFO mentioned it, too, saying that markets were de-leveraging.
However, Mack praised the company's ability to capitalize on the market opportunities, with the company reporting that stock and bond trading gains helped it beat those expectations. The institutional securities unit, including investment banking and trading, showed a record $6.2 billion in revenue. The bond trading produced its second-best record or $2.9 billion in revenue.
What wasn't worth crowing about, however, were write-downs amounting to $2.3 billion. Out of that, $1.1 billion was from loans and $1.2 billion from mortgage-backed securities. Last year, Morgan Stanley's write-downs amounted to $9.4 billion.
In addition, its asset management business suffered a pretax loss of $161 million. This loss was produced by off-balance sheet structured investment instruments.
Other companies reporting earnings included Adobe Systems (ADBE), Darden Restaurants (DRI) and General Mills (GIS). All those earnings reports were considered better than expected, too, at least in the early morning period before everything was reexamined. Companies reporting earnings after the close included Guess Inc. (GES) and Nike (NKE). GES earnings were above year-ago levels and revenue increased, beating expectations for this quarter, too. The shares were up sharply after hours. NKE was also up sharply as the company reported earnings with top-line figures better than year-ago levels and better than estimates for this quarter. Remember that these reactions can change by tomorrow morning.
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Visa's long-hailed IPO was the largest yet. After the requisite volatility in the initial moments of trading, V settled in around the $58.60 level, trading a little above it and a little below it most of the day until the afternoon switch took it down, too. It closed at $56.50. V was priced at $44.00 a share, raising $17.86 billion for the company. According to my feed source, the opening price today was $59.50 with a high those first three minutes of $69.00, certainly trapping some buyers who might have expected old-style IPO action due to all the excitement about this IPO.
J.P. Morgan collected 29 million shares, about $1.28 billion worth, in its role as a lead underwriter. Maybe it can go buy another beleaguered financial or two? Goldman Sachs was also a lead underwriter.
Tomorrow's Economic and Earnings Releases
Tomorrow, weekly initial claims will be released in its usual 8:30 am ET time slot. February's Leading Indicators follow at 10:00 am ET, but this number usually garners little attention unless the numbers move widely enough away from expectations that they're expected to impact GDP estimates. Despite the "leading" in the name, this number usually proves easy to predict because of the way it's compiled.
Another release at the same time might have far more impact, although perhaps not as much as it would have had if it had been released prior to yesterday's Fed decision. The March Philadelphia Fed's take on manufacturing will be released at 10:00 am, too. This number is one that tends to be predictive of the ISM's survey on manufacturing. Do be aware of this number's impending release when you make early morning trading decisions.
Natural gas inventories follow at 10:30 am ET.
SteinMart (SMRT), Barnes & Noble (BKS), FedEx (FDX), Palm (PALM), and Winnebago (WGO) report earnings tomorrow, among others.
What about Tomorrow?
If you've been reading my articles or Market Monitor comments on the live portion of the site, you know that I've long watched the USDJPY (U.S. dollar versus the Japanese yen) as a gauge of what might happen with U.S. equities. In the weeks ahead of the FOMC decision, the dollar was driven lower as currency traders priced in an easing by the FOMC. The USDJPY began bouncing off its low Monday as currency traders began unwinding trades ahead of the decision. Similar dollar weakness was seen against other currencies when other central banks around the globe did not follow our rate-easing track but instead voiced stanch opposition to doing so when inflation measure were rising.
However, it's the USDJPY that has proven the most predictive or at least corroborative of U.S. equity behavior. It's that currency pair and the EURJPY to some degree that determine if traders are going to borrow cheap yen. They use the borrowed funds to buy something else they think might escalate in price faster than their costs to carry the yen.
Uncertainty about the direction of the yen brews in Japan. Japan's central bank is now being run by committee, with Governor Fukui having served his last day in office Wednesday and no successor named. Articles on Nikkei Net speak with alarm of the "leadership vacuum at the central bank even as concern over a financial crisis is escalating around the globe." I find that a bit alarming, too.
As I've mentioned through the last couple of weeks, no one knows whether Governor Fukui's successor will be more or less inclined to intervene in currency markets, more hawkish or more dovish about rates, more or less able to work cooperatively with the globe's other central banks.
That means we don't know what's going to happen with the USDJPY. With the feeling that our Fed might be nearly through and the better-than-expected performance of some of the reporting financials this week, there might be at least some temporary strengthening. Do note that Japan has a national holiday tomorrow and we do, of course, on Friday, so the USDJPY might be a bit rudderless even if there weren't that uncertainty. Volume might be less than normal, swinging it back and forth.
As I've pointed out for more than a year, since the debacle that occurred in Feb 2007 with yen carry trades suddenly unwinding, the direction of the USDJPY has impacted our equities for years. Whether or not that inter-market relationship will continue to be as strong in the future, I don't know. This week, be aware that many forces are working on that currency pair, many of which we can't predict at this time. So, in addition to working with the usual opex shenanigans tomorrow, there could be some currency-related shenanigans, too. I urge you to keep the USDJPY on your radar screen. If you don't have quotes, CNBC includes in it the crawl across the top of the screen, listing it as "yen."
If the charts below show an index likely to go one way, but the USDJPY or "yen" on CNBC is headed quickly the other direction, be forewarned that something is wrong. All the ducks aren't in the row for the expected movement of equities.
Annotated 15-Minute Chart of the SPX:
If the SPX does not manage that climb above 1306.30 tomorrow or quickly loses that level if it does, of course be aware of potential support in the 1274 level. Many times, however, I've been sure that a Keltner target can't be right. I just know of certain strong support or resistance between the current price level and that target. Sometimes the Keltner charts know better than I do, however.
Be aware of the vulnerability to that 1252-1253 level if the SPX loses the post-FOMC low and can't scramble back above it. If bearish, think about your profit-protecting plan if that level should be hit, as it's near the bottom of the large descending price channel on the daily chart, but don't count on it being hit. If bullish, stare at the chart for a moment and then think about where your stops should be and absolutely adhere to them if hit. This is a time when you should expect to be whipsawed out of trades, but when you also must absolutely adhere to good trade and account management practices.
Remember that 10:00 release tomorrow morning, factoring that into your early trading decisions. For example, if you're in bullish trades and the SPX bounces up to 1314 or so before the 10:00 release, are you going to hold on through that release or close out all or part of your position? If you're thinking about entering a trade, do you want to wait until after the release to see how the market reacts?
Annotated 15-Minute Chart of the Dow:
Annotated 15-Minute Chart of the Nasdaq:
Annotated 15-Minute Chart of the Russell 2000: