1:18 pm EDT: The ES was able to marginally poke above 1098.00, but quickly fell back to 1096.25, then made a double top on the intraday charts before selling off to new lows. There is minor confluence support at 1089.00 to 1090.00, then stronger support from weekly S1 at 1087.25. 1095.50 to 1097.00 is now a short area. Longs are aggressive until 1097.00 serves as support, which is now unlikely.
Archives for the day Thursday, December 17th, 2009
17 Dec
Guest Post: Exclusive Interview: A Brief Update on Housing and Consumer Credit from Wall St. Cheat Sheet by Damien Hoffman
Posted in General Analysis & Commentary, Guest Post by Wall St. Cheat Sheet | Comments are offExclusive Interview: A Brief Update on Housing and Consumer Credit
David Proman is a Fixed Income Portfolio Manager for a boutique Investment Fund. Yesterday I caught up with him to get a brief update on housing and consumer credit …
Damien Hoffman: David, housing seems to be stabilizing and consumer credit is continuing to deleverage. Can you give us an update from your professional view?
David: I am scared to see there is virtually no non-government mortgage funding going on today. Non-agency loans now account for around only 1.5% of mortgages being originated. This means that unless a bank can turn around and sell a loan to Fannie or Freddie the day the loan is made, the bank will not make the loan. The banks cannot afford any more risk on their balance sheets.
This country will not experience any kind of real growth until we find a way to spur the private credit markets again. Securitization of mortgages, credit cards, small business loans, and just about any other type of debt, created an incredible expansion of credit over the last decade. Unfortunately, greed took its place and leverage ruined the game for everyone.
Now we are back to square one and taxpayers are carrying the burden. It is extremely painful to withstand the massive de-leveraging, but the government is doing as good a job as possible to ease the pain. The big question is how do we transition back to private lending?
Stricter lending guidelines will need to be set and enforced. Investors need to regain faith in lending money/buying loans. The only way that can happen is if lending is truly safe again. Lenders/investors will need to know that their rights are protected and they don’t need to fear hasty foreclosure proceedings, servicers not doing their jobs, cram downs, and the erosion of contract law in America. To achieve success, a high standard of servicing will need to be set in place and enforced, foreclosure procedures and time lines must be created, and a much more efficient and trustworthy loan underwriting process must be established.
In addition, demand for housing must catch up to supply. This could take a long time — especially in areas like California, Nevada, Arizona and South Florida. Until this happens, a very large quantity of housing values will still be below the loans held against them. High LTV (loan-to-value) ratios are eliminating any chances for refinancing and in turn creating a slew of homeowners that are just walking away from their obligations. Many people have little to no equity in their homes.
As it stands, the big banks are hoarding government money and finding any way to screw customers. Interest rates on credit cards are soaring even though the banks can borrow money pretty much free of cost. This country needs to fight back and form a habit of saving money. Consumption is great for the growth of the economy, but only hurts if it is bankrupting citizens. For credit to work, it needs to be provided in a way that is not egregious.
In short, consumer credit cannot truly be restored until the housing crisis is fixed. This could take many years. In the meantime, we need to get back to basics. Save money, invest wisely, and figure out different ways to create organic growth from new ideas and technology.
10:25 am EDT: The ES opened above the weekly pivot of 1096.50, but could not rally more than 3 points to 1099.50 before selling off at VWAP, which had lowered at that point to 1099.00. It is important to protect any profits in this low volatility environment. Though it has found support now at two ticks below the 1093.75 confluence level, longs are now aggressive. A return to 1097 to 1098 will be met with early trapped longs exiting at break even and program selling at VWAP, so this makes a natural short area. The problem is reduced volatility will make gains on shorts limited and the projected downside target for a range day has already been reached. If the ES can trade above 11098 and use that area as support, longs are no longer aggressive and move to 1102 to 1105 is likely. The 1105 to 1108 area is a place where new swing shorts will enter, so it is unlikely the ES will manage to trade above there today.
The Precise Take – ES back to bottom of range ahead of Quadruple Witching Friday
Leaders Analysis: Once again the major move has been overnight, with the US Dollar Index reaching its first upside target of 77.82 to the cent, which is the 50% retracement from the June 8 interim high. The 61.8% retracement is 78.68, and it will be important to monitor price action in this Fib box. The EuroYen had been consolidating in a wedge just under its 50 day moving average and sold off overnight, and 30 Year T-Bond futures are now advancing off support. The current trends will likely last until T-Bonds advance to moving average resistance in the mid 119 to mid 120 area. Until then, equities will probably continue to chop sideways to down. If there is a high in the USD Index for a day, then equities could climb back up toward the top of their range. If 77.82 is materially exceeded, the ES will probably slide down further.
Medium Term Analysis: As expected, the FOMC did not make any waves yesterday, though they did shorten the time frame for winding down Agency and Agency MBS purchases (QE) from the end of March 2010 to the beginning of February. How the mortgage markets will function without the Fed as market maker remains to be seen; however, that is beyond the scope of the medium term. We still expect an end of year rally, but it looks like weak longs need to be shaken out first. After the ES failed to take out weekly R1 three days in a row, it was a good bet that there would be a return to at least the weekly pivot at 1096.50, which was why we picked this as a downside target yesterday afternoon.
Trading Today: The preferred early trade is to be long with a target of overnight VWAP at 1100.25 to the daily S1’s at 1101.75, where we may…
