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Dallas, TX
May 11, 2010, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Day 2: Not A Good Start Ahead
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What's Hot Today: |  |
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U.S. stock index futures are falling after a big bounce on Monday.
The Euro has broken below 1.27. Asian and European markets dove overnight.
News For Thought
Fannie Mae (NYSE: FNM) admits that it may never again become profitable. According
to The Washington Pos: "Fannie Mae, the government-controlled mortgage
finance giant, said Monday that it cannot imagine a day when it would
turn a profit, as the firm announced a $11.5 billion loss and said it
would request $8.4 billion from taxpayers to stay afloat. The new demand
for taxpayer aid brings the total bill for Fannie and its sister company
Freddie Mac to $145 billion." Yet, Fannie and Freddie continue to buy
defaulted mortgages from banks and mortgage companies. Freddie Mac's
latest earnings report noted that Freddie has bought some $56 billion
worth of defaulted mortgages, over 120 days delinquent, since February.
These toxic assets are not expected to ever come off of the balance sheets
from these two companies, for all intents and purposes.
According to The Post: "In total, Fannie lost $13.1 billion in the first three
months of the year, taking into accounting a $1.5 billion dividend to the Treasury
in exchange for aid. Fannie lost $23.2 billion in the same period a year ago.
Fannie executives stressed that they continue to rework mortgages for borrowers
struggling to afford monthly payments and to fund new home loans. But executives
said they were being careful not to offer new loans to people who can't afford
them." That's new, and it's a bit late for this tactic, since that's what got
the world into the pickle it's in now thanks to Clinton-Bush-Congressional mandates
of housing for everyone at any cost.
The never to be profitable again, by its own admission, institution, according
to The Post noted: '"Promoting sustainable homeownership and maintaining ready
access to liquidity are our guiding principles in serving the residential markets," said
Fannie chief executive Michael Williams. "The strong credit characteristics of
our acquisitions during the quarter are evidence that we continue to strike an
appropriate balance in providing liquidity while also applying the lessons of
the recent credit cycle."'
And here's the really scary thing. This will never end. As The Post points out: "The
Obama administration has pledged to provide an unlimited amount of funds to Fannie
and Freddie to keep them solvent. The government has pledged to pump money into
the firms whenever their net worth -- assets minus liabilities -- dips into negative
territory." We suspect that whomever is the next president won't want to, and
probably won't be able to change a thing. |
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Day 2: Not A Good Start Ahead
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Few Are Buying The Eurozone's Trillion Dollar Solution
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The Eurozone must feel as someone who just spent a trillion
dollars promoting a brand new movie only to have no one show up at the
theater after the promotional parties were over.
In fact, if day two of the "post Eurozone bailout" is any sign of what lies ahead,
investors should head for a cave somewhere and pull a Rip Van Winkle, because
20 years of avoiding the markets may be the best solution to the current investment
dilemma.
To be sure, we're only jesting. But think about it. The Eurozone wasted a lot
of time as the market was telling them that they weren't stepping up to the plate
fast enough, even as people were getting killed in Greece. Now, they came up
with a big number solution, but the details may or may not be good enough, at
least for fixing the fundamental problems that countries like Greece, Spain,
Portugal, and others seem to have: too much debt, and not enough ability to come
up with some sort of semblance of solvency.
In fact, if you look at what's happening in Greece and elsewhere, you can probably
blame two major developments over the last 20 years for what we're seeing now.
One is that increased mechanization of production has steadily taken people off
of the work roles. We're not talking about technical support jobs from the U.S.
going to India. We're talking about German, Greek, and French jobs that have
disappeared forever, with workers having been replaced by machines. It's happened
in California, New Jersey, and all over the world.
When workers are replaced by machines, and people are instead given "benefits," they
eventually lose the willingness to work, and turn to other pursuits, such as
crime and gaming the system. A recent report from Michigan pointed out that U.S.
workers in that state are turning down landscaping jobs in order to continue
to receive government employment checks. Those that are taking the job are demanding
cash, so that they won't have to report the income and pay taxes.
In other words, what is being pushed as productivity, and increased efficiency,
is leading to higher corporate profits, but is creating a new class of people,
the unemployed masses, whose ranks continue to swell, and whose livelihood is
now dependent on government handouts and alternative "off the books" enterprises.
What does this have to do with the markets rolling over on Tuesday? The Eurozone's
bailout is a band-aid. It doesn't solve the long term problem, which is that
fewer and fewer people are working, and those that are working are being asked
to support the governments and those that aren't working. The system can't go
on like this forever, and Greece is an example of what happens when the system
goes beyond its capacity.
There are many states in the U.S. which are heading that way: California, Nevada,
and Florida come to mind. But Illinois and other states in the Midwest may also
be vulnerable.
Conclusion
The markets are headed for significant volatility. Trendless trading with huge
moves in the next few days are the most likely scenario for stocks. The big moves,
though, seem to be in the currency markets, where the Euro seems headed for new
lows, despite the recent attempts at a solution.
It's difficult to trade these markets. And it's difficult to envision any kind
of longer term strategy, once you understand what the structural problems are,
and you note that there are no credible solutions, beyond the bailouts that are
being put forth.
In other words, with each successive crash, and each successive bailout/recovery,
fewer people participate. The fewer the number of people participating, the more
the difference is between the haves and the have nots. And governments are only
likely to increase the safety net, financed by the haves.
In the short term, we watch to see if any kind of tradeable trend appears. In
the long term, we have no way of knowing which way things will turn out, other
than it seems as if will turn out badly.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Currency Shares Eurotrust ETF (NYSE: ETF) Set To Test Bottom
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The Currency
Shares Eurotrust ETF (NYSE: ETF) looks set to test its
recent bottom.
Chart Courtesy of StockCharts.com
The Eurozone's trillion dollar bailout got rave reviews
on Monday. But by Tuesday, the bloom was off the rose,
and the Euro, which found support at 1.25 to the dollar
took a tumble prior to U.S. trading.
Last week, the Euro found support at 1.25. But in early pre-U.S. trading on Tuesday,
the Euro was losing steam and was heading for a test of 1.25, in a hurry.
If past experience is any clue of what lies ahead, and the Euro breaks to a new
low, there is support at the 1.15-1.20 area. Then there is support at 1.10.
If things get to the point where the Euro is near parity with the dollar, we
suspect that there will be a major dislocation of capital around the world, and
that gold and the dollar are likely to be the beneficiaries.
What should be of concern to investors, and everyone around the world, though,
is that the U.S. Federal Reserve has nowhere to go with interest rates, as they
are effectively at zero. The European Central Bank can lower rates, and other
central banks around the world can lower rates as well.
That, though, would put us back into the realm of major potential inflation down
the road. Even worse would be a scenario where the the world is flooded with
money and it doesn't do any good. This may never come to pass, but at this point,
to ignore the possibility that it could happen would be folly.
This is a good opportunity for investors to evaluate each and every position
very carefully and weigh its potential role in a portfolio. If you use a trading
plan that involves the use of sell stops, it's likely that the recent activity
has raised your cash levels. That's not a bad thing. Stay patient here.
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