1) Marketwatch: Fannie Mae (FNM) and Freddie Mac (FRE) are checking files for underwriting flaws and forcing banks to repurchase those loans. The biggest losers are likely to be BofA (BAC), JPMorgan (JPM), and the mortgage giants themselves, who will still be stuck with billions of dollars in properly-documented delinquent mortgages. More bad news for BofA and JPM is not what the market needs right now.
2) China tightening means lower than expected construction. It means lower than expected growth. This means lower than expected demand for industrial metals, wood, etc. China tightening also means fewer loans will be given to buy big ticket items. This includes houses and cars. Tightening means China will have to export more industrial metals, etc., or it will face big layoffs. It will likely face some amount of deflation in industrial metals, and in real estate (both commercial and residential). When the China stimulus package ends (more layoffs), these problems will be exacerbated, especially in industrial metals. The extra export of industrial metals by China (especially to avoid layoffs) will likely have a negative impact on world industrial metals prices and margins throughout 2010 (and possibly beyond). This may lead to depressed prices on base metals a little later.
3) The USD Index has been generally rising for the last two months. It has risen from approx. 74 to almost 80 at the close Friday Jan 29, 2010. This is putting a lot of pressure on the USD carry trade. Many are already selling things to repay their borrowed USD’s before they go up more. One of the things they are selling is stock. This often means they are selling the “hot stocks” because those are the stocks these “risk on” traders own. When you see these “hot stocks” go down, it may not mean there is something wrong with them, it may only mean they are heavily owned by some very serious investors. The recent heavy drop in technology issues may be an example of this. The downtrend in the Hang Seng Index is evidence that money is getting tighter there.
4) The Fed is inching closer to stopping its buying of MBSs in order to support the real estate market. The home buyer tax credit is edging closer to expiring. This is definitive tightening by the Fed. Governor Hoenig has even come out in favor of raising rates soon. Plus we all know Fisher is a hawk. This would be another negative for the market. These things all make analysts think that the real estate market is in for more trouble in the immediate future. As the real estate market goes, so go the US credit markets, so go the equities markets.
5) The financial trouble in Greece has put the focus on possible sovereign debt defaults. The EU has said they will bail Greece out if need be. However, many people think Greece is just the tip of the iceberg. There are many other European countries that are in trouble such as Spain, Portugal, Ireland, Italy, etc. S&P even warned the UK about possibly downgrading their debt rating. After you get done with Europe, many also point to California and other states that are in terrible financial shape. Whatever ultimately happens, the CDSs for sovereign debt have already gone up dramatically since early January. This means the cost of borrowing has gone up. This is a very negative thing in countries trying to recover from a recession. It means the recovery time will be longer. It means the possibility of slipping back into a recession is higher.
6) Many think US equities are over priced. They are temporarily oversold in the near term, but that still may not mean they will not go down. If they are over priced in a worsening environment, then they are very over priced. Some think the S&P500 Index only rates a value of about 900. If the analysts’ outlooks for 2010 and beyond are worsening, the pundits may push the market down drastically from its current value. Commodities will likely fall too.
7) Obama’s bashing of top US banks is making people feel uncertain about even these stalwarts’ future. Are they going to be broken up? Are parts going to be required to be split off? How much is all of this going to cost? All of these are worries for the markets. All of these tend to pressure banks, which already face real estate and credit card problems, with still further negatives. Changes necessitated by new US or even worldwide regulations seem likely to hurt banks profits in the near term.This is bad for the equities markets.
8) The price of oil may be a problem again in the near future. The phrase “peak oil” is being mentioned with increasing frequency. 2009 levels were very comparable to 2007 levels of use (less by the US but more by emerging economies). The worldwide demand is supposed to grow by approx. 1M bpd in 2010. Further growth is expected in 2011. Many are now suggesting $100+/barrel oil in 2011. This will be a big negative for a US recovery. High oil was one of the principal reasons for a US recession.
9) Now that the recession is perhaps over, many are turning their attention to the US budget deficit. Worries are proliferating about the US having trouble selling its bonds in the near future. It seems fairly certain that the US will have to give buyers higher yields soon. This in turn will make it harder for the US economy to thrive.
10) The US equities markets rallied in early Jan. before earnings, when they had no really valid reason to do so. This may have pushed them farther into over bought territory. It may partially explain the recent quick drop.
11) With the first real sign of weakness in the markets since March 2009, people who have made 60% profits since then may be anxious to take some profits, especially if the outlook seems to be in danger of changing.
12) Much of the reason for the great +5.7% GDP number on Friday is purported to be inventory restocking. With a lot of stimulus spending due to take place in 1H 2010, GDP numbers may stay up, especially with some inventory restocking still to come. However, looking out beyond 1H, there will be little stimulus and little inventory restocking. Many are worried the US economy will flounder, especially if there is a significant credit collapse due to further real estate problems. Further we have not seen job growth yet. This is needed for the recovery to take a firm hold.
12) I am sure I have neglected to mention many items. Please feel free to add these in the comments if you wish.
In all of this one should not lose sight of the fact that earnings have improved. In Q4 results we are seeing significant revenue growth from a number of companies. This bodes well for the future. The balance between this and other factors may make for a very choppy market. Just when you think it is headed down for sure, it may head back up (or vice versa).
The chart of the SPY ETF gives us a good picture of recent market action. The market has fallen swiftly from approx. $115 on the SPY to Friday’s close of $107.39.
Good luck trading.
Disclosure: no positions in SPY
