The Squeeze Is On

Mortgage Insurer Blood Is Running In The Streets

The last time I saw stocks trade like this. It was during the late summer stock market plunge, and it was lenders who eventually went out of business.

Here is a chart of NEW (Formerly New Century Financial) before it went bankrupt.



The similarities between the charts of NEW, MTG -2.13 (-10.23%), and PMI -1.84 (-9.07%) are uncanny. The question that many have is: Why are these companies suffering so much today?

MTG released earnings 5 days ago, and the stock can not seem to gain any ground.The pain in these lenders over the last few days is likely coming from the fact that all of the brokerages could not exit their positions at the same time. So they have been forced to bleed these stocks down. Also, the pain in recent days is likely coming from devaluation of the company bonds (speculation, but more than likely considering the recent deterioration of subprime bonds)

PMI has upcoming earnings on October 30th before the market open. Will the stock have plummeted enough by then to stave off anymore pain? That is anyones guess, but I wouldn't bet on it.

These charts are scary to say the least, but short squeezes are more likely than not at this point. Here is a recent example of one:

(Don't get caught off guard if the insurers squeeze like this)

I am not a "perma bear" on the market. I do think that China is on its way to taking America's lunch. I just do not see any point in trying to catch falling knives. Why would you when you could own solid companies like AAPL +11.12 (6.38%), GOOG +13.95 (2.14%), ISRG +12.94 (4.53%), BIDU +19.93 (6.30%), or AMZN +5.79 (6.34%)?

The oil price zombie.

Many of those on CNBC and around the financial universe have been chanting, praying, and doing rain dances in hope that oil prices decline. I decided to consult the best possible source when it comes to oil prices. Why not go with the man batting 1,000 on converting supply and demand data into great trading information (in more categories than just oil). He was the man taking the other side of the Amaranth trades (now that is guts!). For many it seems that oil is a zombie that just keeps rising from the grave rather than a commodity in a prolonged uptrend. Oil is going to $100 just based on supply and demand. Adjusted for inflation oil should cost around $102.97 per barrel (Inflation Calculator)

The current support in oil is at 85. As this chart shows, there is support everywhere.

Maybe it is time to think about conservation of energy rather than driving H3's

Kudlow Gets His Wish

The dollar is rallying huge against the euro.




I wonder how coincidental it is that Kudlow was begging the fed to do something on Friday. I guess that wishes can come true.

Who is to blame?

Current World Market Activity

S&P 500 Futures 1493.75 12.00
Euro/USD 1.3150 .00210
Nikkei 225 16,277.10 537.27 (3.20%)

Asian Markets

This week is shaping up to be one of the most volatile weeks we have had all year. It has come to the point where the average investor is starting to wonder why they should believe the HB&B's (Humongous Banks and Brokers) anymore.

Fingers will start to be pointed and capitol hill is likely to start calling people to testify in the coming weeks and months. When Enron collapsed it was a few billion dollars ($70 billion at its peak). We are now talking about many orders of magnitude greater. Some estimate $300-$400 trillion dollars (with a T) of OTC derivatives outstanding. I know what you are thinking. Dollars are not worth much any more in the world market. Isn't that just a few hundred euros?

Nope, "that's roughly 8.5 times the world's gross domestic product" -Tim Colebatch

The same sleazy tricks are being played with balance sheets, but this time they are allowed to get away with it.

"So much for the worst of this crisis being over. Just a few weeks back, there was some optimism building in the marketplace that the end of this bumpy road was near. Those upbeat views now look like they were just wishful thinking.

Why else would a consortium of banks — including Citigroup, JPMorgan Chase and Bank of America — be uniting with a plan to keep the housing-related debt crisis from worsening. If they thought conditions in the credit market were about to improve, would they be gathering for this group hug?

The banks have proposed creating a fund that will buy around $100 billion (€70 billion) in debt from structured investment vehicles, or SIVs, in an attempt to break the logjam in the market for short-term debt instruments that hold mortgage-related assets."

Below is a short video of who is partially responsible for this mess

Quarterly Housing Data

Everyone knows that this mess has stemmed from the current housing market bubble bursting. The data are showing that the housing price data are just starting to show signs of a top. A trend is usually defined as 3 data points. According to the quarterly housing data, we have 2 out of three points. I created a chart showing where the median housing prices are now, and where I think they will be in 2009. The chart forecasts a 16.6% decrease in the median price of a home. In dollar terms, that is a pretty big decline, but in real percentage terms, it is not that much. In parts of the country (California, Florida) where homes have went up 100%-300% in the last few years, a decline of 16.6% wont make much of a dent.

(Click For a Better Image)

My point is that housing prices still need to decline and that the mortgage crisis will only be exacerbated by this. Eventually, this is going to bleed over into consumer spending.

As a German economist once told me: "The rest of the world freaks out when American's stop spending"

What Is the Emergency Number To the Fed?

On Friday, the market suffered terrible losses.



The question now is:

What is going to happen on Monday????

The market is going to open lower on Monday. How much lower is anyones guess. This current "dislocation" in the stock market is going to take a while to sort itself out. Expect trading to be choppy, rumors to be flying, and volatility to increase.

Expect these companies to go bankrupt in the next few weeks. The current pain in the market is coming from these companies.

MTG

TGIC

RDN

PMI

At some point in the coming couple of weeks, the fed is going to show up in a helicopter and start dropping money. The fed knows that if they do not start helping to restart the credit markets, the stock market will suffer further losses.

If you are short, you should be expecting the fed to intervene in the market at any time.

On Monday the 15th, the fed announced that is was creating an SIV fund. This fund would buy debt currently not on the balance sheets of the large banks. The whole point of the SIV fund is to make sure that the big banks like Citibank (C) do not go under.

The question I have is: How was Citibank allowed to pull an Enron and get away with it? Enron went under by shifting debt off balance sheet in SIV's. When that debt was called on, Enron could not afford to pay it. You may remember that the Enron execs brilliantly tied the debt to the price of the stock. Once the stock breached a certain level. It caused the company to implode.

If the fed does not do more, people will start asking why the fed did not do anything to step in. After all it was them who created this problem by keeping interest rates too low for too long.

Personally, I would like to see them do nothing and let the market work itself out. Isn't that the point of free markets? After all, the S&P 500 is still up on the year: SPX

All the data is showing that the current problem is too big for the fed to fix. They can only keep putting band aids on the severed limbs for so long. This whole thing is just a flesh wound.

Right?