The Capitol Hill testimony on the Bear Stearns situation continued today. Today's hearing was led by Senator Chris Dodd, chairman of the Senate Banking Committee. All day, the financial press released bullet points from that testimony and interviews before the testimony began. Someone forgot to give the participants the advice that our mothers gave us: if you can't say something nice, don't say anything at all.
The Democrats on the committee wanted to know if the current administration had applied any pressure to bring about the ultimate solution to the Bear Stearns situation. They wanted to know the track the discussions had taken during the period of March 15-16, leading up to that Sunday's revelations that announced that JP Morgan would be buying Bear Stearns for $2.00 a share. In particular, Dodd wanted to know whether the attempted rescue was justified when normal people had trouble paying their mortgages.
Dodd appeared to have answered his own question in an interview before the hearing opened today. In that interview, he concluded that a failure to make the right decision could have led to a "global meltdown." In other statements, he mentioned the imperative to keep panic from overwhelming other firms, as it threatened to do the end of that fateful week. With all those statements taken into account, I'm not sure whether our mothers would have concluded that Dodd wasn't being "nice" when questioning the justifiability of the action or was just providing the witnesses with an opportunity to convince others that they had acted rightly.
Alan Schwartz, the head of Bear Stearns, certainly believes that some should have adhered to that old adage, "If you don't have anything good to say, don't say anything at all." He blames unfounded market rumors for creating what was characterized as a run on the bank the end of that week. Fearing that Bear Stearns would collapse after hearing those rumors, creditors began calling, asking for payments.
The New York Federal Reserve's president, Timothy Geithner, warned that the Bear Stearns plan might have carried risks and perhaps verged on the "moral hazard" risk, but that a Bear Stearns collapse would have severely impacted the financial system. He believes a tenuous calm has now been established in the globe's financial markets. He warned that the losses that Bear Stearns' shareholders incurred should serve as a lesson to all investors, but exactly what lessons are we to take from this, Mr. Geithner, other than that big-money people are going to take risks we wish they wouldn't have taken but couldn't have controlled?
The Treasury undersecretary for domestic finance, Robert Steel, noted that he had participated in 96 hours of discussions that produced the Bear Stearns solution. His conclusion was that such a solution was necessary to avoid harm to the American economy.
The SEC's chairman, Christopher Cox, defended the SEC, saying that Bear Stearns had maintained adequate capital and its customers had remained fully protected during the crisis. He did acknowledge that even an adequately capitalized bank can suffer massive liquidity problems, a thought reiterated by Bear Stearns' chief executive, Alan Schwartz. Schwartz said that problem had been a lack of confidence that reached a "tipping point" despite the bank's adequate capital cushion.
Senator Charles Grassley questioned why the SEC's enforcement division has not charged Bear Stearns for improper valuations of mortgage-backed assets. Accusing the SEC of "missing the boat," Senator Richard Shelby led Cox to admit that the swiftness of Bear Stearns' unraveling caught the SEC and others by surprise. Cox said that the events questioned the way liquidity is assessed by every regulatory measure and in every region of the world.
When Federal Reserve Chairman Ben Bernanke spoke, he warned, "Pressures in short-term bank funding markets, which had abated somewhat late last year, have increased again." Before discussing Bear Stearns specifically, he addressed the steps the Fed had taken to increase liquidity.
When discussing Bear Stearns, the chairman mentioned our "extremely complex and interconnected" financial system. That interconnectivity "would have led to a chaotic unwinding of positions" if the Fed and others had not taken the action they did. A Bear Stearns default could have produced damage that was "severe and extremely difficult to contain." The Fed did not engage in determining a price for Bear Stearns' stock and only wanted to ensure that the company acquiring Bear Stearns be a strong one.
He obliquely answered those who have questioned why the central bank got involved in a rescue of Bear Stearns, something some people have argued is beyond the purpose of the central bank. Apparently answering that complaint, he said the intention had been to provide stability, limit any undesirable effects on the broader economy, and improve the way financial markets function. He ended his prepared speech by reminding listeners of the adaptability of the U.S. economy, an adaptability that allows it to "respond to diverse challenges."
Meanwhile, John Mauldin's weekly newsletter was adding some dire words to the mix today. He talked about having "skirt[ed] complete systemic collapse" with the Bear Stearns situation. He warned of the need to address "the deep structural cracks" in a system that had resulted in "a firm . . . too interconnected as a Wall Street counterparty and prime broker to be permitted to fail."
With all these dire words bandied about, was Geithner perhaps warning us investors that we should be burying our money in our back yards or under our mattresses? I've got an acre of flat Texas prairie. Perhaps I should rent out space. Any takers?
I'm not doing that, and I do agree with others about the adaptability of our economy. However, adaptability doesn't equate to invincibility. I've long been counseling that you can make sound decisions that ensure you're able to sleep at night. While it's not a time for complacency and a blas "it will work out" attitude, it's not a case for panic, either. Make your decisions. Reallocate funds and investments, if necessary. Collar long stock positions that you intend to hold or just buy insurance puts as a wise long-trade investor I know is doing. Do what you need to do, talking to a money manager if you doubt your ability to make rationed decisions. Then be confident that, if you can't trust the markets, you can at least trust yourself.
After everyone failed to be nice today, the markets at least attempted to reassure. Despite a potential reversal signal on many indices, today resulted in small gains and steady, if somewhat choppy and frustrating, trading. Tomorrow may be different, but let's look at what the charts show.
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the SOX:
Maintain some skepticism about this breakout, despite the good looking candle today. I can't tell you how many times I have redrawn formations on the SOX after a breakout or breakdown was soon reversed and the formation just morphed into something else.
Annotated Daily Chart of the RUT:
Annotated Weekly Chart of the TRAN:
I don't have room to include all the charts I'd like to include, but I do want to mention that while I was pointing out all those 38.2 percent retracement levels on these daily charts, I noted that the USDJPY, the U.S. dollar as compared to the Japanese yen, is also consolidating at its 38.2 percent retracement of its long slide lower. That's near 102.40 for the USDJPY. The shape of the USDJPY's climb off its mid-90's low is choppy and indicative of a possible bear flag climb, and most experts in Europe and Asia believe that it will turn down again. That will likely carry U.S. equities lower from their then-current levels, if that happens, so I don't believe equities have necessarily hit "the" bottom. Maybe "a" bottom if markets can burst higher now and a relief rally could be maintained, but I'll remain protective of my portfolio until I have better evidence.
Japan's central bank still does not have a new leader, but pressure grows for the government to choose or at least nominate one before next week's G-7 meeting. That choice could also impact our markets because it could change the USDJPY, depending on the dovish versus hawkish stance of any new governor, that governor's perceived likelihood of intervening in currency markets and other matters. Keep the USDJPY on your radar screens, too.
One of the week's big economic numbers--the non-farms payrolls--looms, so anything related to the employment picture gained exaggerated importance. Today's numbers included two that referenced the job market: the March Monster Employment Index and the weekly initial jobless claims.
The Monster Employment Index inched higher by two points, to 167. That's still well below the March 2007 level of 185, but the trend has been higher for the last three months, bringing a small degree of hope. Online job demand increased in 16 of 20 industries and 15 of 23 occupations. However, continued weakness in the insurance and finance industry "reflects continued turmoil in the U.S. financial sector," Monster concluded.
Monster pointed to another disturbing trend. Although the warehousing and transportation category showed growth in online job availability, it produced a year-over-year decline. That's the first time that has happened since Monster began the index in 2004. As we on this site understand, transportation proves sensitive to fuel costs and the economy, and it's troubling to see that year-over-year decline.
Economists had predicted that initial jobless claims would drop to 360,000 from last week's 366,000. Instead, claims rose 38,000 from a revised higher 369,000, bringing this week's total to 407,000. Worse, the four-week moving average rose 15,750 to 374,500.
This continues a trend of initial claims above 350,000, a benchmark number. That signals that the job market weakens enough to impact the economy. It's the weakest number in about two and a half years. Continuing claims rose 97,000 to 2.94 million.
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That number and other developments weakened already weak futures, but the possibility of a drop-and-pop day existed, a second day of consolidation to follow yesterday's. The potentially market-moving ISM non-manufacturing index might steady declining indices if it proved cheering or at least not too alarming, I suggested in an early morning post on the live portion of the site.
After the market opened, the Institute of Supply Management released its March Non-Manufacturing Index. Depending on which source you read, economists had either predicted that it would rise to 50.0 from its previous 49.3 or that it would drop to 48.5 percent.
The headline number rose to 49.6 percent. That's still under the contraction/expansion benchmark of 50, but it was at least a gain. In addition, new orders rose to 50.2 percent. Business activity also broke above 50 percent. Employment was flat and below 50 percent.
The Energy Information Administration, the EIA, released inventories for natural gas at 10:30 am ET. Inventories dropped 29 billion cubic feet. Industry watchers had expected a slightly larger drawdown. Natural gas futures dropped heavily from their high of the day but stayed within yesterday's range.
Crude futures also dropped off their high of the day but stayed within what looks to be a narrowing triangle on the daily chart, with its apex at about 103.50. As I prepared this report, crude futures were 103.85, near that apex. Whether crude futures will break to the upside or downside through that triangle is not predictable yet.
When speaking before the Senate Banking Committee, Fed Chairman Bernanke's prepared speech had referenced the renewed tightening of credit. During the morning, the Federal Reserve also released its weekly figures on outstanding commercial paper. As noted in other Wraps, this figure can provide an outlook on the credit crunch. Shrinking amounts of outstanding commercial paper probably means that corporations are having difficulty finding anyone to take their paper. They typically use these short-term paper placements to fund operations and to avoid going to banks for more expensive loans.
Last week, outstanding commercial paper fell again, by $5.1 billion. Although in a somewhat strange reversal, outstanding asset-backed paper climbed $8.3 billion, financials and non-financials alike showed decreasing outstanding paper for both domestic and foreign companies. This was the third week out of the last four to produce a decline in outstanding commercial paper.
Another look at credit-related and liquidity issues was provided by this afternoon's second TSLF or Term Securities Lending Facility auction. The bid-to-cover rate for this auction, at 1.88, was higher than last week's rate, but the stop-out rate was lower. Last week's was 0.33 percent and this week's was 0.16 percent, which means that the Fed was willing to accept a lower minimum rate when it lends highly liquid Treasury securities for less liquid assets as collateral. Some interpreted this as meaning that the Fed is becoming more aggressive in its efforts to increase liquidity.
Would-be homeowners aren't finding much relief. Bankrate.com announced the results of its weekly national survey. That survey showed that after two weeks of declines, national mortgage rates for the average 30-year fixed-rate mortgage climbed to 6.12 percent. Other fixed-rate mortgages rose, too.
One homebuilder, Meritage (MTH), said that it would report about $370 million closing revenue on 1320 homes, compared to $576 million closing revenue on 1796 homes in the year-ago quarter. The company has been taking aggressive steps to lower inventory of unsold homes, reducing prices among other tactics, and its backlog for the quarter ending March 31 is expected to be $720 million as compared to $1.3 billion a year ago. The company will take about $60-65 million in charges related to those aggressive tactics, however.
Company-related news was mixed today. Schering-Plough (SGP) announced that it would cut costs and gained, closing at this week's high; MEMC Electronic Materials (WFR) cut expectations for revenue for its first quarter, and it declined at first, but then rose the rest of the day.
Part of the early morning decline was blamed on Cisco Systems Inc. (CSCO). UBS downgraded CSCO today. The firm pointed to worries about order growth when downgrading its recommendation to neutral from its previous buy rating. CSCO closed at 24.20, well below Wednesday's 24.96 close. Merrill Lynch was kinder to EBay (EBAY), upgrading the company to a buy rating from its former neutral rating, but EBAY couldn't hold onto its early morning pop.
In other news with impact beyond that on a single stock, ATA Airlines discontinued operations today and filed for bankruptcy. This is the second U.S. airline this week to file for Chapter 11 protection. Aloha Airlines was the previous one. ATA lost a previous arrangement with FedEx as well as a military charter contract. That military charter contract had been necessary for the airline as it struggled with spiking fuel costs, a spokesperson for the airline noted.
Jim Brown has covered the changes we can anticipate in the airline industry. He has been counseling anyone who wants to take a trip by airline and has been putting it off to take that trip soon.
Tomorrow's Economic and Earnings Releases
Tomorrow morning brings one of the week's most important numbers: March's U.S. non-farm payrolls. As Jim discussed earlier in the week, many had expected the payrolls to drop 25,000. When the ADP showed an unexpected rise mid-week, some began being more hopeful about the outlook, and I've seen estimates ranging up to a gain of 50,000 jobs. The persistent 350,000+ numbers in initial claims don't point to good things from the payrolls number, and the ADP can be off, but there's mixed evidence here.
ECRI releases its March Future Inflation Gauge at 9:40 am ET and its weekly Leading Index at 10:30.
Family Dollar (FDO) is about the only company that I see with earnings important enough to impact markets. It reports before the market opens and it may not have much impact with the more important jobs numbers on tap.
We of course must be alert to the possibility of upside or downside guidance from other companies now.
What about Tomorrow?
Subscribers wrote today noting that prices on some indices seemed to turn around in the middle of nowhere. That was certainly true of the SPX when viewed on a 15-minute Keltner chart. The SPX has adhered a little better to the evidence on the 30-minute chart, but only a little better.
Annotated 30-Minute Chart of the SPX:
Today, the SPX kept setting potential targets and not meeting them, as confusion and indecision ruled.
On breakouts above or below the nearest resistance or support indicated on that chart, next resistance and support levels may be stronger. Those next levels are currently at 1384.64 and 1344.50-1346, respectively, but they'll move a bit in the direction of price action.
Barring a strong momentum move, plan for any gains to be reversed or perhaps slowed by approaches or test of that resistance. Downside moves, as demonstrated at the left side of the chart, can sometimes overrun support, but bears should still have profit-protecting plans in place if that deeper support is tested.
A good test, at least for the upside, might be to draw a descending trendline off this week's highs but then be wary of any breakout that can't maintain values above that nearest upside Keltner potential resistance on 30-minute closes.
The same is true of all these charts.
Annotated 30-Minute Chart of the Dow:
Annotated 30-Minute Chart of the Nasdaq:
Annotated 30-Minute Chart of the RUT:
I could and did give subscribers to the live portion of the site a likely scenario for Wednesday: consolidation. I could and did give those subscribers two likely possibilities for today: more consolidation or an actual downturn. Moreover, I was able to tell them that there would possibly be a sharp downturn early in the morning but that prices might steady after the 10:00 am ET release and that could result in a consolidation day.
Tomorrow, though? That's tougher. If markets are truly bullish, we'd likely see a continuation of the sideways-to-sideways-down movement we've seen over the last few days. Eventually, we'd expect the rising 10-sma on the daily charts to rise just beneath prices, for prices to dip down and then attempt a bounce from those averages, and then we'd see if bulls had gathered enough strength to push up through those 38.2 percent retracement levels on the daily charts.
Unless a reversal signal is confirmed, which was avoided today, we usually see consolidation last two to five days before the next move. Typically during a normal trending time, the longer period might eclipse, while during chaotic or choppy periods, the shorter one might be all we see.
We know what these times are like, don't we? That big move could happen at any time now, and the non-farm payrolls tomorrow morning has the capacity to quick-start it.
If my feet were being held to a fire, I'd say that it's likely that we're going to get an SPX retest of 1355-1356 or maybe even 1344-1346 on the SPX sometime over the next few trading days, maybe even tomorrow. However, I'm not sure whether it would happen right away or after a punch higher first. Especially if the 1344 level is tested, I'd expect a bounce attempt and I don't have a clue what would happen next. The point would be to watch what happens next as that 38.2 percent retracement is approached again.
I can't even vouch for that my-feet-held-to-the-fire guess. These are not normal
times and markets are not reacting normally. In my ongoing attempt to educate
myself, I listened to another long-time floor trader who admitted that he had
never seen such a crazy market in his entire trading life. Art Cashin sometimes
makes similar statements. What should happen is never guaranteed to happen in
any market, but there's not even a whiff of certainty these days. I give you my
when there's any to give, but it's just that: a guess.