SubPrime Worries Persist
Sally Limantour
Last week the main focus was on the subprime mortgage mess, hedge fund blowups and widening credit spreads. The contagion effect is making folks nervous and the S&P closed under the 50-day moving average for the first time since March. Whether this is a pause, a consolidation or the beginning of a big correction remains to be seen, but higher interest rates are definitely not supportive. As the technical analyst John Roque recently wrote when looking at the 10 year yield and seeing that it has moved above the 50 and 200-day moving average, “It’s a trite line, but if the yield were a stock we’d be getting long.” A black cloud hanging over the bond market creates a vicious circle – more subprime downgrades increased counterparty risk, potential belly up hedge funds and liquidation which can feed on itself.
Bank stocks are vulnerable as Bank of America is breaking an important trend line and has been under the 200 day moving average since May. Wells Fargo, Wachovia and JPMorgan are also technically weak and looking as if they are struggling under the 200 and 50 day moving averages. This does not bode well for the market in general. Adding to the list of negatives Friday 14 Democrats from the US House of Rep. proposed a bill that would raise taxes on “carried interest.” This would double the tax rate for this type of income and take billions away from private equity chiefs.
While everyone cheered the $4.1 billion Blackstone IPO, on Friday, Andrew Barry ponders in Barrons this weekend if it “could be a high water mark for the private equity business.” He is concerned with higher rates, more conservative lending standards, tax changes and increased competition for the buyout business.
The week coming up we will be focused on the FOMC meeting starting Wednesday and any hints as to the direction in interest rates. The bulls are hoping they will remove that annoying inflation language, but I doubt we will hear that. Friday will report the core personal consumption expenditure deflator which is an inflation gauge the Fed likes to watch and the consensus is for an advance of 0.2%.
Speaking of inflation, Pizza Hut is forced to raise its prices on our favorite American food due to a 55% increase in the price of cheese. The signs are everywhere and I am afraid that producers cannot contain price increases and it is popping up in the food you buy and the places you dine.. Now, when you go to order your large cheese pie they will charge what it costs to purchase a large cheese and pepperoni pizza, but you won’t get the pepperoni.
It will be interesting to see what ConAgra Foods and General Mills has to say about commodity prices this week as they report earnings.
The week is full of economic reports with Friday being the most active day. Traders will be watching oil prices, subprime news, hedge fund fall outs and interest rate wording from the meeting. Technicians will be paying attention to the 50-day moving average, the percentage of Dow stocks above their 50-day moving average and the number of new highs at the NYSE which has been constricting lately. We will also be monitoring volume which was large on this last downdraft. In market profile terms 1528.00 is an important level and if we are unable to capture that early the market should stay on the defensive. Trades that worked well last week were shorting opportunities as failures at the previous day’s value area low were rewarding. Once the market failed there it was typically a fast run down.
This morning we are coming in with the Shanghai market off 3.7 % and most commodities down with gold off $4.00.
Finally, A psychologist/trader I admire has this to share about a health crisis and trading lessons: http://traderfeed.blogspot.com/2007/06/three-life-and-trading-lessons-from.html