Volatility Still Reigns
- Earnings and European bank borrowing rattle traders, but the market, most of it at least, recovers.
- European banks borrowing more than thought, following the US model.
- Mortgage applications fall but November existing home sales rise. Is the housing market really recovering?
- Volatility still reigns but stocks continue trying higher.
Volatile but after a weaker start stocks recover to positive almost.
Volatility remains the hallmark of this stock market. Stocks are bouncing up and down inside and out of the eurozone trading range. Overall it appears that the market still wants to rise at least toward the end of the year. The SP500 is trading in the range from August-October. It broke out and fell back in during November, and then it broke back out in December just to trip back down. Now it is out of it again, and it is showing higher lows. As noted over the last couple of weeks, many stocks remain in very good position to move higher. They were doing that today, although it took a bit of time to get there. Why? There was a huge move on Tuesday. When stocks have a big move the day before, they tend to backtrack a bit before deciding whether they want to move higher or not.
Futures were up very early in the morning, but then they fell off their highs and turned negative with some news out of Europe. The ECB released information on the amount of money that banks in Europe were borrowing. It was expected that they were borrowing roughly 293B euro, but it turns out they are borrowing 489B euros. Nothing like a huge percentage increase to rattle the markets. It led investors to wonder what the heck they are doing with all this money.
Why isn’t it showing up in the system? Apparently because Tim Giethner and maybe some of the other bankers in the U.S. are sharing the secret of what they are doing with all the money they get from the Federal Reserve for nothing. They are taking that money and then investing it in bonds and getting a guaranteed return or as guaranteed as you can get in this world environment. It is relatively safe, easy money, and apparently that is what a bunch of these banks are doing. That is why there is not much liquidity in Europe, just as there is a problem in the U.S. with liquidity in terms of loans. Our banks are still operating a form of a carry trade. They are being carried by the Federal Reserve. It is great work if you can get it. Borrowing money for nothing, and then turn around and buy bonds that yield 4-5%. I would do that all day long, at least with the safety part of my portfolio. It turns out there is a new facility in Europe, but it did not seem to help much. There is a three-year lending facility from the ECB at 1%. It is even better. They can still borrow and then buy bonds. We have that problem in the U.S., but I will get into that later.
There were other problems in the morning. Earnings out from ORCL were bad. It missed on the bottom and top line, and the stock gapped down. Of course that put a tremendous anchor on the NASDAQ because ORCL is a heavily-weighted stock in that index. When ORCL gapped down and stayed at the bottom of its range all day, NASDAQ had an anchor around its neck that it had to fight for the entire session. That was another downside impetus in the market. WAG also missed and gapped lower, but it did manage to recover. Looking at the intraday chart of SPY, SP500 managed to recover as well. A selloff into lunch, but then a bottoming and a rebound into the afternoon that actually took the NYSE back into the green.
SP500, +0.2%; NASDAQ, -1%; Dow, +0.03%; SP600, +0.5%; SOX, -1.2%
NASDAQ was bearing the ORCL albatross around its neck. Of course there was collateral damage; it took out other system software companies and related tech stocks. They had a hard time coming back off the lows, although they did recover. NASDAQ hit a low of 2544 and managed to close out at 2577. It moved up over 30 points to the close.
Was there a catalyst for recovery? Maybe. The Existing Home Sales came out in the first half hour of trade, and they were much better than expected. They came in with a 4% gain in November, and they reached a 10 month high. Great. But it turns out that, since 2007, the federal government has been massively understating the amounting of home sales. They were written down 14% a year on average. Existing Home Sales were much, much weaker than originally reported, making the decline in the housing market much steeper than originally thought. I guess that makes the recovery a bit sweeter as well. Is there really a recovery ongoing? That is the question. You could say that there was.
Mortgage Applications struggled. They fell -2.6% versus a gain of 4.1% the prior week. Existing Home Sales were stronger than expected, and that creates some tension in what we have seen in the numbers of late. The Housing Starts are running higher, but the Mortgage Applications are falling. Then there is that issue about what the banks are doing with the money. We have a lot of money in the system, but not much is being lent out. At least not to the smaller businesses and to individuals. It is very hard to qualify for a loan now. You have to be perfect. In that case, why are Existing Home Sales rising? Not that they were that great. They did miss expectations. Why are many people saying it looks like the housing market has turned?
It is hard to say that the housing market has turned when you look at the people who are buying. A high percentage of these sales are still distress sales. It is much higher than normal. People are not buying distressed properties with mortgages. In most cases they are paying some form of cash to pick them up on the cheap. Speculators come in and buy them because they think the market may have turned and is moving higher. It is totally normal in a recovery to see a higher percentage of distress sales going for cash. We have seen that for month and months. No recovery yet, but it is part of process. I am not saying that the housing market has not bottomed or even that is not picking up. I am saying that we should not get too far ahead of ourselves and say that things are fine. It could be a lot better.
I posit again that it could be much better if we did not have such stringent lending requirements after the cows have already left the barn. The bust has happened and we are trying to get out of the toilet. Getting out of this jam is difficult and we need money to do it. People have to be able to get loans and move into these houses. If you cannot get the loans, then you cannot move into them and the recovery takes that much longer. In Washington, DC they are bickering over a few months or a year’s worth of payroll tax cuts that only blow a hole in Social Security that we will have to make up later. It is not going to help the economy that much. We need to cut spending more than anything else. We need to take the burden of all this massive debt off the consumer and get rid of it. Or restructure it and restructure the future in how we are going to approach the entitlements in order to give some fresh air, light, and breathing room to the economy. Then people can look forward to the future again instead of dreading it. Dreading the loss of their job, getting a pay you tell cut, or losing their house or business. We are still not in great times. This economic recovery is one of the weakest in history. Do not let the GDP numbers fool you; they are being pumped up by the big companies who are really the only ones making the money.
If you are not an exporter, you are having a tough time. Demand is tough in the U.S. Things are better this holiday because people have the “Risky Business” stance of saying what the heck (I am using the father’s version) and just buying something for a change. They are tired of being frugal, and they are tired of times being bad. They just want to have a good Christmas. After that I do not know what will happen, and I do not think anyone else does either. Maybe this housing market is improving. I sure hope so. We could all stand to have the store of value in our houses appreciate again. Maybe that could bring some confidence back into the housing mark, the stock market, and all of our markets.
We have had our faith rattled. We have found out, once again, that it is not about a lack of regulation or government. We have all the big government and massive amounts of regulation we could ever need. The problem is that we do not enforce the rules. When the sharks show up to take advantage of the situation, those who are supposed to watch the sharks and keep them back were not there. Now we are paying the price. Capitalism is not inherently bad. It is the same with any other system (Communism, Socialism, or whatever “ism” you want): If you do not watch out for the bad guys, you will have a problem. At least our system is designed to have a government that is supposed to help us out.
It would be great to see things turning around, but I have no confidence that it is. I am not holding my breath. This is not a great recovery, and it will not be a great recovery. History says it cannot be. We have a huge government that interferes in everything we do and taxes everything we do. More people do not pay taxes than those that do. Historically, that is a system that fails. We can stick our heads in the sand, deny it, and just say that we are the U.S. so we are great. But we are not as great as we used to be are we? If we continue down the path we are on, we will not be a third as great as we used to be. We will be relegated to the trash heap of history as was the Soviet Union.
Dire predictions at the end of 2011, but we will not be the same country. When we turn the keys to the country over to our kids and grandkids, it will not be the same country that we got the keys to when we were young. But I digress.
THURSDAY
There is a lot more data. Initial claims, Continuing claims, and the third estimate of the Q3 GDP report. The final Michigan Sentiment reading for December is out. There are Leading Economic Indicators as well. Friday we have Durable Goods, Personal Income and Spending, and New Home Sales as well. The pre- Christmas week will go out with a lot of data coming to the table, and that may contribute to continued volatility.
This is a volatile market, but it still looks like the market wants to move higher. Higher lows are building on one another. SP500 is breaking out of its eurozone. The DJ30 is holding above that level and looking good. Even the small caps are holding above their October eurozone range and breaking to the upside, bouncing off of that level. That is very positive action. It is hamstrung by the continuing troubles in Europe, no doubt. Not to mention the problems here in the U.S.
The Senate and Congress are having troubles. It is principle; these people were elected in the Congress not to go up and roll over. Frankly, it is asinine to see how these people act. The House passes their version, and then the Senate passes what they want and they leave. They say “You need to pass what we did.” How is that compromise? It is not conducive to people saying these are sage individuals great statesmen, all who are just there to do the best they can for us back at home. It is a bunch of nonsense, and that is what people are tired of. The inability of these people to work together is about the Republicans as much as it is the Democrats. It is childish for the Senate to look at what the House passed, pass something different, and then leave. Supposedly the House is the people’s body. It is the voice of the people, so maybe the Senate should listen to the people. I tell you, they are an arrogant group. I have yet to meet a senator who was not an arrogant person. And that is the nicest thing I can say.
In any event, we have volatility, and it is right here in River City. The stock market is going up and down, but we have great patterns that are moving higher. The SP600, the Dow, and the SP500 are fighting off the doldrums and moving higher. I do love what we are seeing. I am not enthusiastically quivering with excitement about it, but it is good to see some things move higher and fight off the negatives. We will continue to look to the upside and take those stocks that present themselves. There are still downside plays, do not get me wrong. There are groups that have rallied too far and are coming back. Or they have come back and tested, and now they want to sell some more. Money is moving out of some sectors and is moving toward other sectors. That is normal in the market. Not everything goes up at once, but these indices are trying to trend higher off of higher lows. If they break over this December and October-November range, then they have room to play up to the April and July peak. That is exactly what we have been looking for, and we will see if it can deliver some gains. It will if they make that move.
These stocks are in great shape. We have been buying, and we will continue to do so. But the volatility is tough. In the mornings things will move, they will come back and test, and then they either continue on or they will reverse course. Today we saw them reverse course, and we were able to get some buys. We also picked up some early downside. It bounced back on us, but it still looks weak. If you notice, on the downside we are trying to play the very weak stocks. Not necessarily the ones that are just coming off of a high, although those can be great plays even in times such as these. But we are trying to play those that are weak and will not break back. Or if they do, it will take a great move to do so. If the entire market runs higher and those stocks break higher as a result, we can live with that. We will close them out and play the upside. We would not feel bad about that at all.
We will continue to look for some more upside. We will see if this market, despite the volatility, can continue to make the moves higher as it appears it wants to do.
Stock Splits & IH Alerts, Editor
InvestmentHouse.com
