The housing collapse most likely will be a grinding down in the bubble markets over a period of perhaps as long as a decade
for another view, I don't think Lance Lewis thinks it'll take a decade. He's not always right, but he's a good read tonight. in the past he hasn't minded if his stuff was posted occasionally.
dailymarketsummary.com
Bonds And Stocks are Dumped… Again
Asia was mostly lower overnight. China’s Shanghai Comp was the big loser, as it fell 2 percent. Japan, Taiwan, and Hong Kong all fell less than a percent. Europe was flat this morning, and the US futures were higher. The February PPI was a yawn, and that set up a slightly higher opening.
We gapped up slightly and began the usual pre-FOMC walk up. We slowly worked our way higher into “Fed time” and then got what we all knew would be coming, meaning of course our 25 bp dosage. The wrinkle this time was that although “measured pace” was left in the FOMC statement, a new couple of sentences were added. Those sentences read:
Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.
In other words, if you squinted really hard, you could read this statement as a bit more hawkish. And that’s all the excuse the bond market needed to fall out of bed, which it did. Yields quickly shot up to new highs for the move all across the curve in the wake of the statement. The dollar jumped across the board, which in turn hit the gold shares. Crude slumped $1.50, and a trap door opened underneath stocks.
The remainder of the day was a steady slide lower in stocks that took the S&Ps and NASDAQ futures out at their very worst levels of the session and a new low for the move. Volume was extra chunky on the big board but not quite as robust on the OTC market (2.1 bil on the NYSE and 1.9 bil on the NASDAQ). Breadth was over 2 to 1 negative on the NYSE and just shy of that on the NASDAQ.
The chips were mostly lower by 1 to 2 percent. The equips were also heavy and generally off 1 to 3 percent. The SOX fell a percent and back to just shy of its low for the week.
The rest of tech was mostly lower. DELL slipped a percent and back to its low for the year. MSFT fell a percent to a new low for the year. The Internuts were also beat up once again. TZOO fell another 3 percent to a new low. GOOG fell over a percent. AMZN and YHOO both fell 2 percent.
Financials were beat with the ugly stick. The BKX fell 2 percent to a new low for the year, and the XBD also fell 2 percent. The derivative king slumped 2 percent to a new low for the year. BAC fell over a percent, and C fell 3 percent to a new low for the year. GE fell over a percent, and GM fell half a percent. Spreads on GM’s debt also widened once again today to a new high. So that situation is by no means “put to bed” just yet. AIG also fell 3 percent to another new low for the year and is now approaching its 2004 lows.
Financials are obviously heavy as a group due to rising interest rates, but anything with any sort of high degree of derivative risk appears to be under extra pressure at the moment, which is fairly rational given the fact that periods of leveraged speculation often end with a “bang” of sorts.
Mortgage lenders were lower across the board. NFI led the way with a 4 percent decline, while AHM and IMH followed a close second with a 3 percent decline. FRE fell over a percent, and FNM fell 2 percent to a marginal new low.
Retailers were lower, with the RTH falling half a percent. WMT notably fell another half a percent and back to its recent 52-week low.
The homebuilders began the day sharply higher after both KBH and LEN blew away numbers as usual. That changed in the afternoon, however, as interest rates soared. By the close, the homebuilders went out on their very worst levels of the session, which in most cases was down a touch or up less than a percent.
Crude oil slumped $1.43 to $56.03. With the CRB appearing to have topped, interest rates rising sharply, and a top already in place in the oil shares, a similar top in crude can’t be far away and may already be in. The XOI fell 2 percent and back to just shy of last week’s lows. The XNG fell over a percent, and the OSX was up half a percent.
The CRB fell just a touch, but most commodity markets, outside of oil, were closed when the post-FOMC market gyrations began. The CRX fell over a percent to a new low for the recent move.
Gold opened basically flat in the US, and after a brief attempt at a rally, the metal rolled over and went out near the lows of the day’s tight trading range, up 20 cents to $431.60. Obviously, the regular COMEX session was closed by the time the FOMC statement hit, but gold on the electronic exchange fell nearly $5 as interest rates spiked and the dollar rallied in the afternoon.
The HUI plunged over 2 percent to a new low for the move and the month. Again, if interest rates are about to rise significantly, and take down stocks and commodities, I do not think gold or its shares will go unscathed, no matter what the dollar does.
Gold bulls probably don’t want to hear this, but if the broader equity market breaks here, I fear the gold shares may experience a plunge not unlike what they saw last April and May. As for the metal, the worst-case scenario for downside is probably $350, so continuing to hold the physical metal no matter what it does makes sense to me. The shares, however, are leveraged to the metal and much more volatile, and I continue to fear that the HUI could take out 2004’s lows before this whole corrective process is over. As far as the shares are concerned, I still think it’s time to remain defensive and wait for the right environment in order to begin stepping back in again and making long-term purchases.
For those that care, I continue to lug a small bit of GLD around, but I am short base metals shares like PD, PCU, RTP, AA, XLB etc as a hedge. Normally, I might even be short the gold shares based on last week’s failure, but this time around there is a risk that something wild could still happen in the currency markets, which might spike gold and its shares for a brief period if we enter some sort of financial crisis, which is very plausible going forward in my opinion. It wouldn’t be a move in the metals or the shares that would stick, but it could be extremely painful if one was caught short. Consequently, I have chosen to do what I have done. My way of doing things is by no means the “right way”, but that’s the way I am approaching things in my managed gold accounts for those that care.
The US dollar index soared over half a percent to a new high for the week and is once again approaching its 3-year downtrend line on the charts. That downtrend line served as significant resistance back in February and turned the dollar index back down. Will it again? Time will tell. The yen and euro both reversed early gains to end down a touch to a new low for the move. Emerging market currencies like the rand and peso were hit even harder, as were their equity markets incidentally as well (Brazil and Argentina both fell 2 percent today).
The “flight to risk” that we’ve seen over the past two years into every nondollar piece of confetti on the planet continues to reverse, and the turns in the emerging market currencies appear to be the “real thing.” But the higher quality G7 currencies could still have another run to the upside left in them if things begin to turn ugly in US financial markets. With Asian central banks still waiting overhead to sell into a rally, there’s the distinct possibility that the dollar index (comprised primarily of the euro and then secondly the other G7 currencies) has one last final plunge before it puts in a low and can begin some sort of bear market rally. Another failure at the US dollar index’s 3-year downtrend line would likely set up that plunge (See the weekly chart of the dollar index HERE).
So, what the dollar does over the next several days will probably be key. A breakout through that trend line, would likely signal that the dollar has indeed already formed a low, and some sort of bear market rally has begun, but I am still leaning toward a failure and a further plunge myself. Either way, the consequences for gold and its shares, which is all I am really concerned about regarding the dollar, should be the same.
Treasuries were gutted once again. The yield on the 2yr rose to a new high of 3.82%. The yield on the 5-yr rose to a new high of 4.27%, and the yield on the 10yr rose to a new high for the year at 4.61%. While most journalists will blame today’s break in the bond market on the FOMC statement, I tend to view it as more of a catalyst for a move that was already destined to happen anyway. But, given that the break took place on this FOMC statement, it could make tomorrow’s CPI all that more important.
Go back and read the two new sentences that the FOMC added today. In light of those two sentences, which everyone is focusing on now (no matter how silly that seems), it makes tomorrow’s CPI potentially a major catalyst for further selling in fixed income. Thus, if the “core” is inflationary tomorrow, psychology is likely to turn extremely negative on treasuries given the Fed’s new verbiage today.
Let’s not forget that we have a bond market with already fairly weak fundamentals: a crippled currency, tremendous commodity inflation, rising bond supply due to increasing government deficits, and large carry and flattener trades that have been put on by the leveraged speculator community. So, it’s all a matter of psychology flipping over. We all know there has been a tremendous amount of inflation. We don’t need a cooked up government number like the CPI to tell us that, but given the timing of tomorrow’s report, it could shift psychology soundly into the negative camp if it happens to come in more inflationary.
The NASDAQ made another new low for the year today and continues to drag the S&Ps and Dow towards their respective lows, which now aren’t too far away. We should now begin to see some acceleration to the downside, especially once the S&Ps take out their February lows. And the breach of those lows could come as soon as tomorrow, especially if we get a further break in the bond market.
At some point, the bond market is probably going to turn and rally in a flight to quality as stocks start to really come apart, and stocks may even have some sort of snapback rally when and if that happens. But that bounce in stocks should also be the setup for an even larger move down yet to come. In the very short-term though (meaning the next several days), we’ve likely got further downside to go before that bounce appears in my opinion.
That’s obviously just a guess at how things are going to unfold. There’s no way to really know, but that’s the typical pattern for the way one of these speculative episodes ends. The only thing we can probably be sure of is that if the “great reflation” experiment is finally over (and I think it is), it’s likely going to end with a violent bang, in which stocks, commodities, real estate prices, and other asset classes that have benefited from the Fed’s attempts at “reflation” over the past two years all fall in price together. |
