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Rico Kastilani
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I am an independent trader. I like to seek value and buy things that are cheap :)
  • Market On The Brink. 12 comments
    Jun 23, 2013 6:05 AM | about stocks: DIA, GLD, SLV, SPY

    The market closed relatively flat Friday 6/21/13. The market is currently in a holding position after a 2-day drop of some 500 points on the DIA. And it looks like there is still further decline to come. Interest rates continues to go up, the 10 year US treasury note closed at 2.51% from 1.4% July last year. The 30-year FHA mortgage rate is now at 3.93% up from 3.16% just a couple of weeks ago.

    (click to enlarge)Here you can see what I mean by "We are in a holding position" in the market.

    In the chart above, you can see that we pierced through our major trendline and 1,600 Fibonacci support. I have also pointed out with the blue arrow, that the market actually tried to rally but failed to push and break through 1,600 level which is now resistance. Thus, we are now in a holding position in the market which I think poses a lot of down side risk.

    (click to enlarge)S&P 500 Weekly MACD

    In the above chart of SPY, the MACD made a cross in the overbought territory and looks like it is about to roll over.

    Moving on to Treasuries..... Usually when there is fear in the market, investors run to treasuries to find safety. However, in recent days, despite fear and the market plunging, rates continue to climb; indicating that there is little/no demand for treasuries. Investors no longer find treasuries as a safe haven because the rates continue to climb. It seems like the market has lost confidence in Fed Chairman Bernanke has somewhat lost control of the bond and equity market. Could this be the start that triggers a bond market sell-off?

    (click to enlarge)

    In the picture above, you can see the rate on the 10 year note has gone parabolic in last few weeks....

    (click to enlarge)

    The picture above is bond ETFs (NYSEARCA:AGG). AGG is an ETF, Barclays Bond Fund.

    I have circled in red the 2008 bloodbath capitulation in the bond market. The red arrow is where we are now. Do you believe Bernanke can come out and calm the markets and stop this bloodbath from continuing? I personally don't know or not sure Bernanke can if the panic really sets in. You decide.

    Earnings season is coming in July, and the bulk of S&P earnings comes from Europe. However, many European countries economy have been contracting and if we add the US Dollar which has been relatively strong since March 2013, there is a big chance that earnings could disappoint and drive equities lower. Domestically speaking, we should also by now experience the effects of the Sequester, tax hikes, and relatively high gas prices. All of this combined will ultimately add burden to companies earnings. The rise in interest rates also puts a lot of downward pressure in equities.

    Moving on to mortgage rates.... The sharp rise in FHA mortgage rates in a short period of time is also very worrying and should not be ignored. This could potentially collapse the already fragile housing market in a fragile economy. I see people on (CNBC, CNN, Bloomberg) saying that back in the 2008 housing collapse, mortgage rates were in the 6%-7% range. They say that even after the sharp rise, the 30 year FHA mortgage rate now at 3.93% is still relatively low. All I have to say is that they are either misleading or completely missed the point. The issue here is not how high or low the percentage is but where the percentage point starts and by how much it increases; and how the increase in mortgage rates affect home buyers. I can also argue that the economy in 2005, 2006 was in a lot better shape than it is today. Meaning that the economy back then can handle higher rates as a starting point on both the mortgage rates and treasury rates.

    (click to enlarge)30 Year FHA mortgage rate

    In the picture above, you can see the sharp parabolic rise in 30-year FHA mortgage rate within a few weeks.

    Is this 2008 all over again?

    As far as I'm concerned the US economy is finished without the injection of QE of $85 Billion/month. Look at the PMI, ISM and GDP numbers going down and now Bernanke, in his speech 2 days ago wants to taper starting early 2014 and ending by summer 2014? He actually said that the economy is getting better, Oh really? Then why did the market tanked? Because it's not! Bernanke expects us to believe the US economy is getting better, the market certainly doesn't think so. There are close to 50 million people on food stamps now, how is the economy getting better?! He also said in his speech that he will stop QE when unemployment reaches 7% up from his 6.5% target previously. Did Bernanke just lowered the bar? We all know that the real unemployment numbers are a lot higher and how the unemployment numbers are manipulated to look good. It is 7.5% now according to Bernanke, that means we are not that far away from his 7% target. If just rumors of tapering can do this kind of damage to the market, imagine what it will do when the REAL tapering occurs........

    Bottom Line: There are so many uncertainties such as civil unrest in many parts of the world, credit crunch in China, rising interest rates (putting pressure on equities and possibly bond market sell-off), rising mortgage rates (possibly imploding housing) and earnings that have a big chance of dissapointing. All combined, there is great downside risks in all asset classes in the market in my opinion, for the near term.

    Could the drop in GLD and SLV also signaling deflation to come?

    We are in uncharted territories in a very artificial time. Perhaps, it is wise to take a step back and be on the sidelines with cash. Time to think folks.....

    Please comment and share your thoughts. What do you think about the market?

    Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in DIA, SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: DIA, GLD, SLV, SPY
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Comments (12)
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  • George Kesarios
    , contributor
    Comments (794) | Send Message
    Good article, you should have submitted it as premium.
    23 Jun 2013, 10:55 AM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
    Author’s reply » Thank you :) This is my first article on Seeking Alpha, so I wasn't sure if I should submit it as a premium or not.
    23 Jun 2013, 01:02 PM Reply Like
  • fgrandra
    , contributor
    Comments (23) | Send Message
    What would you do if you are sitting on a portfolio of short and long term bonds? 0 to 4%
    27 Jun 2013, 06:13 PM Reply Like
  • oneinfiniteloop
    , contributor
    Comments (632) | Send Message
    I agree with George you should have submitted it as a premium. You have a good presentation style.


    I do have disagreement on some pieces of your article. In particular, GLD, SLV correction was long overdue and, IMO, the factors affecting it are not solely related to US economy (causing Dollar to go up) but also to do with the Yen. What deflationary forces are you referring to? In fact the reason why GLD and SLV went up in the first place was because markets were of the opinion that US will see major deflation after the post 2009 housing market debacle.


    Second, the unusually low mortgage rates are not sustainable and also not healthy for a economy. For an economy of the size of United States this gap out in mortgage interest rate is good not bad and was long overdue. The housing market in a number of key areas is heating up and you now see multiple bids on a house with folks (interested buyers who are being again coerced by the brokers) unduly bidding up house prices. It is clear that the Fed has a vise like grip on the rates and in the short term, IMO, they will keep the rates between 3% to 5%. As we all know, in general, the government has access to lot more data than any individual or corporation can manage to gather; in this respect, I think, Bernenke's actions are in line with what he sees happening with the economy.


    The high long term unemployment rate is a worrying factor and there is a lot of activity going on in the background to help create new jobs. The price one has to pay for such high innovation rate is that one has to be constantly on the move and keep upgrading their skills. Currently, employers are cutting on cost by not investing in their employees to train them for the new economy. Such companies are not only doing a disservice to their employees but, in the long run, are also doing a disservice to themselves.


    IMO, the market was long overdue for a correction/pause in several areas and, "helicopter" Ben was just an excuse and not the primary cause of the recent drop in markets.
    23 Jun 2013, 12:36 PM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
    Author’s reply » Thank you. I will next time, this is my first article on Seeking Alpha :)


    I did not mention in my article anywhere that GLD and SLV correction is un-justified. In fact I agree with you that it was long overdue. I also think GLD and SLV was a crowded trade and there were too much speculative money in it. Deflationary forces meaning asset classes coming down. I think Gold and Silver went up because of 2 combinations:


    1) The devaluation USD since 2000 until today.


    2) Fear in the markets and overall economy back in 2010 and 2011.


    Housing is heating up, perhaps too much as there are many hedge funds and big money institutions speculating on housing just like gold and silver. Buying but only to flip and sell it for a profit. Bernanke is perhaps trying to cool off the markets just like you said. But how will the market react? As we have seen, its not pretty. Remember when Bernanke replaced Greenspan and he raised rates? We saw how that ended in 2008 right? So he could be doing the right thing, but will the outcome be good? I think you get my message.


    If the economy is so good then why are companies hoarding cash and not investing it back into their businesses and expanding? New jobs? Sure, but are those jobs created, high paying jobs or people flipping burgers at McDonald's and janitors cleaning toilets?


    That is why GDP, ISM and PMI numbers are weak. Because they are low paying jobs that do not contribute to the economy in any meaningful way.


    We could just have a correction like you said. I am not saying that we will crash here, but there are warning signs. So if it happens, do not be surprised and perhaps it is prudent to be careful when markets are at all time highs which have run longer than the 4 year bull cycle.


    I hope I cleared things up and addressed your questions appropriately.
    23 Jun 2013, 02:20 PM Reply Like
  • oneinfiniteloop
    , contributor
    Comments (632) | Send Message
    With regards to GLD and SLV I was referring to your statement:
    "Could the drop in GLD and SLV also signaling deflation to come?"
    I interpreted it to mean deflationary forces affecting US economy.


    About the reason for businesses hoarding cash - the reason they are not creating jobs over here is because most of this money is currently parked outside the country - look at IBM, Apple. Google, Cisco and the list goes on... - all these companies are trying to muscle the government to give them one time waiver to get their money into the country at a reduced rate and they are making promises about hiring. If you remember (probably you were very young then) during Clinton's time some of these companies made similar promises only to go back on their word later. Congress may still relent but Obama might try to score some more points before his govt. tries to workout a deal with the congress.


    Thanks for taking time to respond - sincerely appreciate it.
    23 Jun 2013, 10:19 PM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
    Author’s reply » This is somewhat an old picture. But I will take your comment about my young looking face as a compliment :-)
    23 Jun 2013, 11:00 PM Reply Like
  • Interesting Times
    , contributor
    Comments (15285) | Send Message
    You make a valid argument and feel free to comment on my blog and drop your link in the comment section as well.


    Interest rates are going ballistic all over. Mexico has gone up 1% in a week..So post away if you'd like.


    You most likely will get some followers..




    All are welcomed as well to take a peek and see if anything interest you. Were a TOP 5 BLOG within 2 months.
    23 Jun 2013, 04:53 PM Reply Like
  • Interesting Times
    , contributor
    Comments (15285) | Send Message


    People are questioning you post about cash being king. You might want to answer it !!
    23 Jun 2013, 10:22 PM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
    Author’s reply » I just did and directed them to read this article. Thanks for letting me know
    23 Jun 2013, 11:59 PM Reply Like
  • John Wilson
    , contributor
    Comments (2056) | Send Message
    "Investors no longer find treasuries as a safe haven because the rates continue to climb"
    Re-evaluate and rephrase the statement. Bernanke's speech last week was the trigger event that caused T-bond prices to fall (and therefore rates to rise)


    Bernanke shook the market's confidence by pulling the pins that underpinned the markets, by expressing his view that the economy is strengthening and by talking about tapering QE.as you pointed out. This is different from 2008-2009 where T-bonds ran up and were the safe haven.
    (do a chart comparison of TLT vs AGG in 2008-2009)


    Last week the trigger event was the fear of withdrawing Fed support of buying bonds and bonds led the decline. Will this continue? That is the question. How will the Fed do a turn around to stop the decline?


    Right now the markets are shaking like a drug user that is having his drug supply cut off. If you will notice, everything is going down except the dollar. You may very well be right that the drop in gold and silver are signaling deflation. The dollar has been up as everything else has been down.
    That is what deflation is.
    24 Jun 2013, 12:03 PM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
    Author’s reply » John,


    Deflation is a lot of things not just the Dollar, like low money velocity, low income in infation terms, etc.


    I am aware what caused the bond sell-off. I just thought its obvious, like you said its the market trying to front run the Fed; so why bother mentioning it. And to answer your question regarding the bond sell-off, I said in my article, "I personally don't know or not sure Bernanke can if the panic really sets in. You decide."


    If I have a crystal ball, I probably would know....
    24 Jun 2013, 05:39 PM Reply Like
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