I'm looking forward to the day we don't unveil a new government bail out, spending program, or piece of legislation, but saving the homeowner is the government's flavor of the week and on Wednesday Obama gave the markets his plan to save 9-million foreclosures at a cost of $75 billion plus another $200 billion of "just in case" money for Fannie and Freddie.
Wall St. didn't like the plan too much. The Dow managed to close just three points above last November 20th's closing low but it spent a good portion of the day moving towards the intraday low of 7,449 and within striking distance of 5-year lows. The S&P 500 closed in the red while the futures were hammered most of the trade day. Crude stalled out and gold surged with the help of more panic money.
Mortgage nationalization:
It's estimated at least 28% of all mortgage holders in the US own a home worth less than what they owe. The upside-down crowd is the group of homeowners Obama is targeting. Under the Obama foreclosure plan the banks are offered special incentives to cut the mortgage payments to a level that is no higher than 31% of the homeowner's income. In non smoke-and-mirrors terms, this is called government price fixing.
There's other convoluted aspects to this plan that won't work but this part is the most troubling. How can the government put a value on a home that's in foreclosure when home prices still have to fall at least another 5%? Many homes in foreclosure have been sitting vacant for months, infested with rats and mold, and the banks are supposed to trust the government to fix the price on that home and negotiate a reduction in principle and interest? This sounds like insanity thinking to me.
It shouldn't be any surprise financial stocks fell after Obama released his plan. This is a terrible deal for banks and only really good for homeowners with mortgages held by one of the GSE's. Fannie and Freddie have zero risk here, folks who used their homes like ATM machines will catch a break, and in the end the markets get screwed because this is a form of nationalization I believe will begin catching on like a virus in other sovereign nations.
Bear market rally due:
If Obama, Bernanke, and Geithner will shut up for a few days I would expect to see another bear market rally on Wall St. in the near future. I believe the idiots in DC and people like that Japanese finance minister who was drunk out of his mind at the G7 are the ones causing most of the fear and panic in the global markets.
When the politicians and central bankers go back to doing what they do best like chasing interns and lobbyists, maybe Wall St. will finally calm down and some of the beaten down equities will squeeze the shorts and go back on one of those 350-point bear market rallies we used to see a few months ago.
I think a bear market rally is due on Wall St. and should this occur the EUR/USD, EUR/JPY, crude, and S&P 500 futures would benefit while the USD, JPY, USD Index, and Treasuries would fall. Unless we have mega moves in S&P 500 and Dow futures overnight, those markets should open Thursday back near key support levels.
Obviously if support is tested and continues to hold there's only one other way Wall St. can go. If you're not familiar with bear market rallies, they can be extremely volatile with sharp price swings, extended moves and heavy stoploss triggering. It's not something you want to be on the wrong side of even though they often come back.
Thursday or Friday would be a great time for the bulls to short squeeze the bears. Reason being, the bears have been short and in command of the markets for the past 72-hours. At some point the shorts will want to start covering their positions before the end of the week. That's a perfect opportunity for the bulls to throw liquidity into the market to catch the upside volatility created by short-covering.
So as more shorts cover this would cause the markets to continue to bid up, then stops start getting triggered and as those positions are liquidated it causes further bids to hit the markets meanwhile the bulls are pouring liquidity into the markets and buying into the rises... it can go on for several hours or several days. Eventually the markets overshoot to the upside, run out of momentum, then begin to retrace their gains.
That's the essence of a bear market rally, I think Wall St. is due to see one and this means I adjust my trade plan and risk plan for the rest of the trade week. If it doesn't happen I don't care, I'll keep shorting the euro rises, but I'm ready for it.
Bernanke and FOMC:
Bernanke did a great job talking from both sides of his mouth today -- his message to those who fear a return of inflation: "With global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time".
His message to those who don't fear inflation: "At some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate, unwind some of its credit-easing programs and allow its balance sheet to shrink".
When Bernanke's dovish and hawkish at the exact same time it doesn't help the markets make sense of anything. In an effort to be more "transparent" the FOMC updated their economic forecasts and the Fed is now predicting the economy will contract between 1.3% and 0.5% this year and grow 2.5% to 3.3% in 2010.
The Fed also said the unemployment rate would likely rise to 8.5% to 8.8% in 2009 before gradually declining over the next two years; consumer prices would likely rise 0.3% to 1% this year; and the economic outlook is considerably worse than in October when the FOMC thought the economy would grow by 1.1% in 2009. Wrong.
EUR/USD:
My overall view on the euro remains bearish but it's certainly due for a bounce back up after failing to break my 1.2507 key level during the NY session. As the price action in the EUR/USD and all correlated markets continues to evolve the rest of this week my trade plan will allow euro longs when conditions show a higher probability of this being the proper trade. No trader wants to be caught short below 1.2550 should the bear market rally take shape and these beaten down markets go on a run.
Fundamentally we have PPI, Core PPI, Initial Claims, Philly Fed Index, and Crude Inventories. I'm not expecting a negative print on PPI and I think Initial Claims will print lower than last week. Atlanta Fed Lockhart speaks about economic conditions on Thursday at 1315 EST.
At this point Asia is just getting into the game and Tokyo's yet to make its presence felt so I will have more EUR/USD and overall market commentary as conditions warrant. I don't expect too much volatility until after London opens. It could be more on the quietside until NY even.
The S&P 500 futures are trying to recover right now and gold continues to climb back towards resistance levels. Keep your eye on these two during Tokyo if you are trading. There will be euro stops set above the 1.2624 level so it's possible we see the euro move up there to knock out those stops sometime in the next 12-hours.
The Forex market and all markets for that matter took an interesting turn at the start of the week. It was also a historic day as the US taxpayer became officially burdened with the biggest debt-funded spending plan in American history.
Just before signing the spending bill, Obama remarked, "This is the beginning of the end..." Of course he was referring to his stimulus plan and how it was going to fix Wall St. and Main St. but I have a feeling his words will be prophetic for other reasons. It may take ten or more years to all play out but I fear adding several trillion dollars of debt in this kind of way and under these types of conditions will come back to haunt us in the end.
Equities test lows:
As we suspected would be the case this week, the Dow tested it's November 20th closing low of 7,552 and closed exactly on that level. On November 21st the Dow made an intraday low of 7,449 and this level now comes into view over the next 72-hours.
The S&P 500 isn't quite near it's November lows but quickly approaching those levels. The S&P 500 futures have been weak since last Friday and fell all the way into the 780's before recovering late Tuesday. As you know I've been bearish on equities but now I'll look for the bulls to make some sort of stand against the Dow and S&P 500 breaking to new intraday or closing lows.
There is genuine panic on Wall St. and even more so on the European bourses. European equities were hammered on Tuesday as more concern is raised about the health of Europe's banking system. I'm finally starting to feel justified for my negative views on Europe's banking and financial system. It's been at least six months in the making but the negative sentiment on Euro banks is picking up steam and will serve to keep continued downside pressure on Euro stocks and European currencies.
Wall St. will be tested again tomorrow as Obama unveils a new spending package for homeowners in addition to key economic data for housing, production, inflation, growth, the FOMC meeting minutes, and then a speech by Bernanke.
Commodity price action reveals fear in markets:
Gold has gone mental the past 48-hours as market participants gripped by fear and anxiety pile into the commodity. Gold hit 7-month highs and is positioned to continue its extended move towards the $1,000 level. For gold I will be watching two levels: $1,000 and $1,035. Should the market take spot gold above that $1,035 level it could easily soar to places not seen in a number of years.
On Tuesday we had a repeat of the USD/Gold anomaly -- both the dollar and spot gold made simultaneous gains. This is such a rarity and such an impossible correlation it can only signal participants have little faith in seeing normally functioning markets in the near-future. The surge in gold, USD, and the USD Index indicates market participants are concerned about more than the economy and equities.
There is real fear of currency collapses in weaker markets and this too is driving gold prices. Moody's is ready to drop the hatchet on Eastern European banks and this would have a terribly negative affect on bigger players in Germany, Sweden, and France who will suffer losses from ratings and debt downgrades made by the likes of Moody's.
Crude's price action is more inline with the normal USD/Crude correlation and I remain nothing but bearish on crude in the near-term. Fundamentally and economically there's nothing to push crude past $50 any time soon in my opinion. Crude will surge up again one day but we're not ready for that yet. Crude's continued downside weakness will weigh on the S&P 500 futures which will weigh on the EUR/USD. Spot crude led the S&P 500 futures lower, it pushed them below the 800 level and was extremely helpful as a trade indicator on Tuesday.
More bailouts coming:
If you believe the passage of Obama's $1 trillion spending package was the last of the taxpayer funded government bailouts, think again...
Chrysler said it needs another $5 billion in taxpayer funds to keep going. Chrysler's already borrowed $4 billion. Chrysler was insolvent when it borrowed the first $4 billion and it will be insolvent after it borrows the next $5 billion. Either Chrysler or the government needs to stop the company from keeping its employees on an emotional roller coaster... take it to the field, shoot it and lets move on.
GM is in as big a mess as Chrysler and should be merged with Ford to form one automaker where each company keeps its profitable product lines and works towards producing better products that people will actually buy. GM's asking for another $17 billion in taxpayer money to keep the lights on... what a mess... more job cuts will be forthcoming from all three automakers.
And what about the commercial real estate market? We hear very little about this real estate sector but troubles here should begin to emerge sooner rather than later in my view. The post office will probably need a bailout, the states of California and Kansas will need more bailouts, home builders, steel producers, and the service and hospitality industries will all likely need bailouts.
These are the types of reasons why equities can't gain any upside traction and why risk aversion money-flows should continue pushing gold higher and crude lower in the near-term.
EUR/USD:
Overall I maintain the same bearish view on the euro. As we said, should a sustained break of the 1.2692 level occurr the euro would drop another 100-points from there and we've seen this already play out on Tuesday. Traders who are attempting to buy the euro are making their lives much harder than they need to be. I've had quite a few emails this week already and all I can say is, if you've been adding new positions in the 1.2800's and 1.2700's you're peeing in the wind. I don't see the need for traders to have the stress of euro longs in 300-points of DD under these chaotic conditions.
My trading bias remains to short the euro on the rises. To make it simple, here's why:
Gold: EUR-
Crude: EUR-
EUR/USD price action: EUR-
USD Index: EUR-
S&P 500: EUR-
Dow: EUR-
EUR/USD fundamentals: EUR-
S&P 500 futures: EUR-
European banking and sovereign debt: EUR-
"Gurus" saying to buy the euro: EUR-
Those are just ten fast reasons I can think of to keep me shorting the euro rises. Obviously it can move back to the 1.2850 level and higher should equities recover but risk is clearly on the euro at this stage and I see no point to fight against the trend, the price action, and the market sentiment. My 1.2692 level is key for any potential euro upside recovery. In my view as long as we stay below that level the doors to the 1.2480 level remain open.
Fundamentals--
On Wednesday the market has to contend with: Housing Starts, Building Permits, Industrial Production, Import Price Index, the FOMC meeting minutes and a speech by Bernanke. Obama will speak tomorrow and unveil his homeowner rescue plan. Overall the data should have limited market interference and I would suspect market participants stay focused on their fears and what's happening with the government, Fed, and market correlated variables.
The 10-year yield has moved back down and is headed for a return to the sub 2.50% level should current conditions persist in the short-term. As far as Wall St. is concerned, I really cannot predict how they will react tomorrow.
The Frankfurt and London sessions will be critical for the EUR/USD as we see how those markets react to more bad news out of the Eurozone and more fears about Euro bank downgrades. As far as trading goes, my bias and plan is clear and I'm sticking with it until the market shows me otherwise.
I expect the price action in all markets to remain choppy with times of sharp price swings when the liquidity picks up during London and NY. These are not "buy-and-hold" conditions by any stretch of the imagination, that is a losing strategy in this game right now and I do not recommend traders hold euro longs above the 1.2760 level into heavy DD, this makes no sense when longs can be taken 200-points lower right now.
The EUR/USD, crude, and the S&P 500 futures are due for a bit of a bounce and upside retracement but I'll use a euro rise to short it again mostly on a scalp and intraday basis. It can go back up as high as it wants to, when it's exhausted and overextended, I'll short it down again.
More updates will be posted later as market conditions warrant.
With about 2-hours to go before Wall St. opens we can see all markets under a considerable amount of pressure early this morning. After the break of the 1.2700 level we've seen the euro drop 100-points and is now moving back towards a test of the 1.2600 level as I write this commentary.
My overall view remains bearish on the euro and my price levels remain the same -- as long as wemaintain a sustained break below the 1.2692 level I see more downside and I'm expecting a sustained downside break of 1.2600 and we should see points lower.
German and Eurozone ZEW printed much better than expected but this is mostly due to speculation Trichet will cut rates by 50bps in a few weeks. The euro gained back zero ground on the back of strong ZEW because what we're seeing right now has zero to do with those numbers, there is panic in these markets today.
The S&P 500 futures are at low levels I've never seen before. They've made a few runs at breaking 800, failing each time but the momentum to go lower is certainly there. Should spot crude decide to take another run at the $32 level or lower we could see some slaughter with the S&P 500 futures. Both of these EUR/USD market correlated variables keep downside pressure on the euro.
Spot gold has gone mental so far today trading at the $963 level. I saw gold blow through resistance at $950 and $955 and yet again we see clear evidence of how panicked and freaked the global financial markets are. Market particpants have little faith in the future right now because in reality conditions continue to deteriorate, this cannot be denied by any.
Trading risk will be extremely high today because it's very likely Wall St. will open with the Dow and S&P trading near dangerous downside levels. Should those November 2008 lows break down and support gives way on the Dow and S&P 500 there's really no predicting what could happen. I imagine we'd see some kind of freefall situation while stops are knocked out and a stoploss run of apocalyptic proportion unfolds in Forex, equities, and commodities. The futures market will go nuts if Wall St. breaks solid support.
Last week I said my gut feeling tells me those November lows will be tested and today could be the day. If not today, in the short-term I believe.
Trade smart today. If your risk appetite is low, sit on the sidelines and pick up the crumbs later on this evening.
