Optnqueen Newsletter for December 9, 2007
“As the world turns” something sinister is brewing under the surface of the market. This little talked about problem could send the markets reeling, and the Fed floundering without sufficient ammunition to ward off a major problem. Might we remind you that the FOMC (Federal Open Market Committee) can only tinker with short term rates, not long term rates. Further, should a catastrophe befall this market the FOMC will be shooting rubber bullets. So what is this problem? The major problem that we see (there are many that we see but this one takes the lead) is the possible downgrading of MBIA and AMBAC by Moody’s investment research.
MBIA and AMBAC are two of the leading insurers of municipal bonds. Should they be found to be light of capital, this could send a shudder through the bond desks that could only be classified as a bond tsunami. This is no small problem. As insurers, there is a need for these groups to have capital “on hand” at all times. Should this amount become inadequate or perceived as such, the insurance these outfits render would be without enough funds to cover losses. Moody’s, a rating agency, will likely reduce their ratings on this pair and thus cause shudders thought the bond world. Remember, municipal bonds pay for insurance on some of their issues so that they can sell the issue and pay lower interest rates and obtain an AAA rating. Without the insurance it is possible that these bonds might have much lower ratings and, perhaps low enough ratings that they will no longer be allowed in some funds. This could put further pressure on an already shaky bond market and force liquidations of some of these bonds, not because they are bad but because they might no longer be allowed in the fund. If the insuring agency is viewed as unable to payout on a failure, then the rating of that bond and all other bonds insured by that agency will be called into question. MBIA and AMBAC insure 50% of municipals as well as other bonds. Get the picture?
As to the governments “fix” for the ARMS, this suggestion will have a future finger-print on every contract ever written in the past, and those to be written in the future. This sort of voiding of contracts will cause legal battles, the likes of which the world has never seen, calling into question the validity of all contracts from business to divorce. This is nothing short of a legal windfall, fees for attorneys, and a legal nightmare, a plethora of suits being brought to an already overloaded court system. If two parties to a contract agree to void that contract it is fine, but when the government strong arms the resolution it is not fine. Further, we note that this fix penalized those who have steadfastly paid their bills, encouraging these responsible citizens to do otherwise.
“Over the objections of those who complained the speculators profited from the misery of the patriots who suffered as the result their support of the Revolution, Hamilton said the original contracts had to be honored, and the bonds were funded. By that act, the credit of the new United States of America was established.
The current Treasury Secretary would abrogate Hamilton’s promise. In so doing, he would imperil one of America’s greatest comparative advantages in the global economy: its money and capital markets.” Barrons.com “What would Alexander Hamilton Do?” written by Randall W. Forsyth in the December 4th edition of Barron’s “Up and Down Wall Street Daily” on line edition.
Kudos to Andrew Cuomo, the attorney general of New York State, who has voiced interest in prosecuting those companies who inflated home appraisals, those who did not do due diligence on loans and those who packaged these loans into securities. The latter seems to be away from the problem, but one that might have helped inspire it. Those mortgage companies who “gave away money” to the home owners should be punished much as the broker who sells penny stocks to the little old lady who wants capital preservation and income as her goal. This would be an overt violation of the “Know your Customer” rule. In the mortgage business it was “know your customer’s” greed and satisfies that need for more of everything. There is a need for enforcement of rules in the mortgage industry. This is why rules are written because they are abused in advance of and causing the penning or rules to prevent this in the future.
It was clear during the mortgage mania and housing bubble that real-estate values were inflated. There were TV and radio ads offering “No Money Down” financing. Offers to refinance the homestead and remove excess values from the homes were common. Many times we have stated loud and clear that the consumer was using the homestead as an ATM machine. This behavior was wrong and irresponsible on both the lender and the borrower’s part. Today, we are being asked to forgive both the lenders and the borrowers for reckless behavior.
Many of the ARMS payments in arrears today are not at the new reset rate. Those homes that are on the way to foreclosure will go to foreclosure regardless of the reset at a continued low rate. If the home owners can’t make payments now at the teaser rate, do you suppose they will be able to do so at a somewhat higher or the same rate? We think not!
Just in case that isn’t enough excitement for the week, this week is roll over week and we have the December futures contracts in the financial indices rolling into the March expiry on Wednesday. Thursday, the front month will be……March of 2008!
Tuesday: October wholesales inventories are released at 10:00 and the FOMC releases its interest rate decision with a short statement at 2:15.
Wednesday: October international trade is released at 8:30, November import prices paid is released at 8:30 and mortgage refinancing numbers will be released.
Thursday: November PPI is released at 8:30, and November retail sales are released at 8:30.
Friday: November CPI is released at 8:30, and November industrial production and capacity utilization is released at 9:15.
The US Dollar index ended the week with a small two-day retreat. It is very important for the US Dollar index to remain above the uptrend line at 76.34, for the Monday session. The market looks as though it is rolling over at to the downside. Unless and until the US Dollar index closes above 76.82 we will expect to see a retreat. The indicators are all pointing lower. The 5-period exponential moving average is at 78.135. The top of the Bollinger band is at 78.905 and the lower edge is seen at 77.670. The weekly chart looks somewhat better than does the daily chart. The market looks as though it is forming a rounding bottom which should lead to a rally to 77.58, at a minimum and possibly up to 78.16. The indicators on the weekly chart are positive and have plenty of room to the upside. The monthly chart also has a positive look to it. On a short term basis, we would expect to see the US Dollar index retreat a bit further. We would caution that this retreat looks as though it will not take more than a few days and so long as the recent low of 74.65 is not removed, we will continue to remain friendly to this market. Naturally, once the FOMC makes its move on Tuesday, we will see some adjustments causing momentary volatility.
The Euro continues to remain below the downtrend line at 146.482 for the Monday session. All the indicators that we follow herein are positive issuing a continued buy-signal. The 5-period exponential moving average is at 141.592. The top of the Bollinger band is at 143.278 and the lower edge is seen at 145.162. The weekly chart is a bit more confused than is that of the daily chart. The stochastic indicator, the RSI and our own indicator are curling to the upside, the Thomas DeMark Expert indicator going flat. The weekly chart continues to show signs of exhaustion and indicates a likely return to the 142.708 area. On the monthly time-frame, the RSI is overbought and pointing higher, the Thomas DeMark Expert indicator is issuing a sell-signal and both the stochastic indicator and our own indicator issuing a muted sell-signal. Confusing isn’t it! So long as the market remains above 145.600 we will give it to the bulls, however; once that level is removed, on a closing basis, we have to become bearish the Euro. Remember, at the moment we will give it to the bulls to try to defend these levels, but should they loose the battle, the bears will come out of hibernation.
The Canadian Dollar looks as though it is trying to defend the 98.23 level. Friday’s session left a doji candle on the chart which indicates that we are in a period of transition, and, could change directions. The indicators are uniformly issuing a buy-signal. The 5-period exponential moving average is at 99.13. The top of the Bollinger band is at 105.23 and the lower edge is seen at 97.46. The 20 period moving average is at 101.35. The weekly chart looks like the dome on the Chrysler Building in New York City. There is a ledge of support at 95.00, an area of previous consolidation. The retreat on the weekly chart has been as steep as the rally leading to the high was. The monthly chart remains overbought. The indicators on the monthly time-frame are issuing a uniform mild sell-signal. We would look for the market to retreat somewhat further, if it looses control at the 98.23 level. The daily chart looks as though this market would like to rally but the longer time-frames discourage that view.
The British Pound Sterling gapped lower in the Wednesday session dragging the market lower for the week. The Thomas DeMark Expert indicator is issuing a buy-signal. Our own indicator is also issuing a buy-signal. The stochastic indicator is oversold and likely will issue a buy-signal within a day or so, the RSI continues to point lower. The 5-period exponential moving average is at 204.01. The top of the Bollinger band is at 208.87 and the lower edge is seen at 202.36. The gap left on the chart is from 203.55 to 205.62. On a retreat, there will be support at 201.00 and further support in the 199.00 area. Below that, we will have some support at 198.64 and at198.05. All the indicators on the weekly chart are negative issuing a continued sell-signal. The uptrend line for this coming Friday is at 201.98. The indicators on the monthly chart are overbought, for the most part, and all, with the exception of the Thomas DeMark Expert indicator, are pointing lower.
The S&P 500 futures contract rolls into March on Wednesday, thus on Thursday the front month will be March of 2008. Usually this event gives a slight boost to the markets as the December shorts cover their positions. Friday’s session left a doji candle on the chart. This indicates that we could back and fill before further advances are seen. The market felt very heavy in the Friday session, and was obviously having difficulty making progress to the upside. We are overbought as measured by the stochastic indicator and our own indicator. The stochastic indicator has issued a sell-signal and our own indicator will issue a sell-signal within a day or so. The RSI is going flat near overbought levels and the Thomas DeMark is in agreement with that finding. The 5-period exponential moving average is at 1488.10. The top of the Bollinger band is at 1514.00 and the lower edge is seen at 1407.95. The weekly chart for the S&P 500 shows that the index has remained below the downtrend line of 1518.32, for this past Friday’s session. The downtrend line for this coming Friday is at 1506.93. All of the indicators that we follow herein are uniformly issuing a continued buy-signal. The indicators on the monthly chart are not as clear and indicate that it could go either way. Remember too, that this Tuesday; the market will enjoy increased volatility with the FOMC’s 2:15 announcement and statement. The market will not like a do-nothing response and demands, at the very least, a 25 basis point cut and a 50 basis point cut on the funds. Anything less than that and the market will drop like a rock. If the FOMC does decide to go for a twin 50 basis point cut, the initial response will be exuberance to the upside. Naturally a 50 basis point cut indicates that the FOMC is in real fear of a recession and that they see the risk of the economy failing far greater than the inflation that this sort of rate cut would ensure. Is the FOMC going to please Wall Street or perhaps become free thinkers…..nay, not happening, they will please Wall Street.
The NASDAQ 100 continues to plod to the upside. The market has now regained more than 50% of the loss from the November sell-off and is at the 61.8% retracement level. The stochastic indicator is overbought and curling over to the downside, but has not issued a sell-signal. Our own indicator is mirroring that finding. The RSI and the Thomas DeMark Expert indicator are going flat near overbought levels. The 5-period exponential moving average is at 2099.30. The top of the Bollinger band is at 2137.36 and the lower edge is seen at 1979.15. The weekly chart has a very positive look to it. Although we have signs of exhaustion, the indicators uniformly are issuing a continued buy-signal. The monthly chart is somewhat confused with signs of exhaustion and indicators going in opposite directions.
The Russell 2000 joined with the NASDAQ 100 closing positive in the Friday session. We did see a rejection of the high on Friday but also a rejection of the low closing the day not far from where it started. The indicators that we follow are curling over to the downside and will, within a day or so, issue a sell-signal. The 5-period exponential moving average is at 770.76. The top of the Bollinger band is at 795.62 and the lower edge is seen at 733.35. The uptrend line for the Monday session is at 766.65. The weekly chart is positive and shows that all the indicators that we follow are issuing a buy-signal. This is the second up week this index has seen in the past six weeks. The monthly chart is not confirming the findings of the weekly chart. This chart seems to be showing lower highs on both the index and the indicators measuring the action in the index. Again, we believe that Tuesday’s release of the interest rate decision and statement and Wednesday’s roll-over will both act in concert to increase the volatility of this market. Fasten your seat belts! This should be a wild ride!
The Continuous Commodity Index enjoyed a five-day rally taking it to within a whisker of the high of 461.06 seen on November 7, 2007. All the indicators that we follow herein are issuing a continued buy-signal near or at overbought levels. The 5-period exponential moving average is at 456.56. The top of the Bollinger band is at 460.14 and the lower edge is seen at 446.16. Naturally, the weekly chart shows that this index is exhausted. The indicators continue to issue a buy-signal albeit at overbought levels. We seem to be hitting a roof which, at the moment, is holding this market down. Remember, if we do close above the November high, there is no resistance overhead for quite a while. The monthly chart has a real scary 17-count, yikes. The indicators for this time-frame are mixed.
March sugar had a good week rallying four out of the five trading days ending the week near the highs of the day. We are forming a possible “W” formation. We need to see a close above 9.97 to project a run to a minimum of 10.20. On the other hand, we can not close below 9.66 or the formation will be voided. The indicators are uniformly issuing a continued buy-signal. The 5-period exponential moving average is at 9.82. The top of the Bollinger band is at 10.08 and the lower edge is seen at 9.62. The weekly chart is confirming the findings of the daily chart. Both view sugar as a buy.
March cocoa retreated in the Friday session printing a lower high and a lower low. This retreat did nothing to void the bullish direction of this chart. It is likely that we will see a return to 19.85 before the next run to the upside begins. All the indicators that we follow herein are uniformly issuing a sell-signal. The 5-period exponential moving average is at 20.58. The top of the Bollinger band is at 20.79 and the lower edge is seen at 18.63. The weekly chart is showing signs of stress and exhaustion. The indicators for this time frame are mixed. We believe that this market needs to back and fill further before another run to the upside is seen.
March coffee has been range-bound for the past seven trading days. Friday’s session closed near the highs of the session but failed to break above the previous range. The Thomas DeMark Expert indicator is issuing a sell-signal. The stochastic indicator, our own indicator and the RSI are all issuing a buy-signal but all are at or near overbought levels. The 5-period exponential moving average is at 130.35. The top of the Bollinger band is at 131.72 and the lower edge is seen at 124.33. The weekly charts look as though this market wants to go higher. The indicators are all pointing higher with plenty of room to the upside. We will remain constructive on March coffee until the chart indicates otherwise.
January Frozen Concentrated Orange Juice rallied higher in the Friday session closing near the highs of that session. We do have signs of exhaustion as a result of the burst to the upside. All the indicators that we follow herein are issuing a continued buy-signal; all of the indicators are at an overbought level. The 5-period exponential moving average is at 140.85. The top of the Bollinger band is at 143.33 and the lower edge is seen at 128.86. The uptrend line for the Monday session is at 140.17. The weekly chart is very positive and shows that FCOJ is trying to break to the upside and looks as though it want to go back to the 150 and 158 areas. The indicators are all pointing higher with plenty of room to the upside. All we need is a good frost, or fear of one, to get this product moving to the upside!
March cotton seems to be forming a base but needs to stay above 63.99, on closing bases, for the Monday session. All the indicators that we follow are uniformly issuing a continued buy-signal. The 5-period exponential moving average is at 63.76. The top of the Bollinger band is at 69.28 and the lower edge is seen at 62.05. We would use the 5-period exponential moving average number as a sell-stop, if long or going long. The weekly chart indicates that we have retraced 50% of the move from the top to the bottom of the chart. Our own indicator and the RSI are both issuing a fresh buy-signal. The stochastic indicator continues to issue a sell-signal approaching oversold levels. We would not like to see a close below62.95. If we do see a close below that level, we will retest the August lows of 60.00.
January Crude Oil looks like it is trying to form a bottom and defend the 85.82 low of the Thursday session. The 5-period moving average is at 88.72, a level we closed below. The top of the Bollinger band is at 99.42 and the lower edge is seen at 85.77. The stochastic indicator is oversold and continues to issuing a sell-signal. The RSI is also pointing lower. We remain above the Ichimuko clouds, although we did see a probe into the clouds in the Thursday session. The weekly chart has a doji-like candle illustrating a probe to the downside. We have a ledge of support at 81.30 and at 78.44. Should we close below that level, we will open the door to the 68 level. The indicators are bending upwards but not giving us any good signals on the weekly chart.
February gold spent the majority of the week in a tight trading range between 783.00 and 813.00. The uptrend line for the Monday session is at 799.70. The 5-period moving average is at 802.66. The top of the Bollinger band is at 837.876 and the lower edge is seen at 778.084. The stochastic indicator and the RSI are both issuing a continued sell-signal at or near oversold levels. We remain above the clouds on the daily chart and need to see a close above 813.00 to reignite the bulls. Right now, we see a very dull market that will turn lively this week with the FOMC’s interest rate decision and statement. Remember, if the FOMC is viewed a dovish and soft on inflation then gold will rally. On the other hand a rally in crude or a decline in the US Dollar will also be viewed as an excuse to buy gold. The weekly chart shows that we are forming a bull flag. The indicators are becoming positive for the weekly chart. We are also positive for the monthly chart.