The $51M a Day Write Off

Congratulations to HSBC who have so managed to mire themselves in the disaster of the US sub prime market that they are now forced to write off $51M per day in bad loans.

HSBC announced that they wrote off $11.7BN in bad loans last year, mainly from US sub prime defaults, and that this situation was still deteriorating.

Stephen Green, HSBC's chairman, said:

"We're not in a position to say we've turned the corner or passed the worst."

The greed, arrogance and stupidity of the banks have brought about this mess. Regrettably the people who will suffer the most are the poor saps who had these loans foisted on them in the first place, and those who are more financially sound who now seek to borrow money, as the banks retrench from the loans market.

Needless to say, the senior management of the banks do not intend to allow themselves to suffer. Without any hint of irony, HSBC released details of a new executive reward scheme which will allow bonus awards of up to 400%.

Michael Geoghegan, the chief executive, could in theory "earn" a bonus of up to £4M on top of his base salary of £1.07M. He earned £3.5M last year.

Another, unnamed, director of HSBC managed to earn £10M in pay and bonuses last year.

Nice work if you can get it!

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A Closer Look At the Industrials

The 5 year chart of the XLIs shows an average that is still above its long-term trend line. However, note the average is close to testing that line. Also note the possibility of a double top in late 2007.



Above is a year chart of the XLIs in daily increments. I found this chart to be very perplexing because I couldn't find clear patterns. However, I do think the descending triangle (the first shape on the chart) followed by the consolidation sector over the last month are pretty much on target. Also note the decreasing volume over the last month or so. This is a sign the consolidation is coming to and end and the chart will move in one or the other direction.



With the SMAs, notice the following:

-- Prices are just below the 200 day SMA, indicating a bear market. But prices aren't that far below.

-- The rest of the SMAs are bunched together, indicating a clear lack of direction. Also note that prices have been bouncing around between the SMAs for the last month or so.

The bottom line with this chart is it's looking for where to go.

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A Closer Look At the Consumer Discretionary Sector

As I mentioned yesterday, I'm going to spend some time this week looking at each sector of the market to see that the charts say. Remember, I'm working on the assumption the economy is either in or very close to beginning a recession.



The XLYs rose from 2003-2004 then consolidated for 2005-2006. They went higher in 2007 forming a double top in the first half of the year and have since fallen to 2005-2006 levels on higher volume,



The chart for the last year shows a clear pattern of lower lows and lower highs -- a classic bearish chart.



The SMA picture is interesting. This is similar to a lot of charts we're seeing right now.

-- The 50 and 200 day SMAs are heading lower, while

-- The short SMAs (10 and 20 SMAs) are headed higher.

-- Prices are below the 200 day SMA

-- Prices have recently broken below the moving averages. If this continues, the SMA s -- all of them -- will continue to move lower.

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Today's Markets

I'm going to use 5-day charts to show how the markets are doing.



Starting on Wednesday afternoon, the SPYs saw a lot of bear market pennant patterns. It's as though prices were falling down a set of stairs. However, it looks as though the market might be thinking about rallying. Today ended on a high-volume price spike. There is also the possibility of a double bottom today as well.



After forming an ascending triangle on Tuesday through Thursday last week, the QQQQs dropped hard, following the SPYs and IWMs lower. However, the QQQQs broke the downward trend in the last few minutes of trading on high volume, indicating a reversal might be in order.



The comments from the SPYs apply here, although without the double bottom comments.

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A Closer Look At the Financial Sector

From IBD:

Global losses from mortgage and other credit problems will likely top $600 billion, UBS said. That's four times higher than the $150 billion or so that financial companies have marked down since the subprime debacle unfolded.

A separate study presented at a University of Chicago event forecast losses will hit $400 billion.

.....

AIG said Friday that the subprime housing debacle had thrown it into "uncharted waters" that were likely to remain choppy through 2008.

The insurance giant lost a surprise $5.29 billion in the fourth quarter, AIG said late Thursday. It also wrote down $11.1 billion worth of credit swaps.

.....

Huge losses from home loan finance giants Fannie Mae (FNM) and Freddie Mac (FRE) earlier in the week added to concerns, says Stanley.

.....

Rescue plans have been floated for MBIA (MBI) and Ambac Financial (ABK) amid fears they'll be unable to pay claims on subprime-related debt.

Loss estimates for the financial sector have been between roughly $300 - $500 billion. Now UBS is projecting a heftier amount of losses. This is in line with the news that commercial real estate may be the next shoe to drop:

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

William Tanona, a Goldman analyst, expects total write-downs of $7.2 billion by Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley in the first quarter. Those firms had combined commercial-real-estate exposure of $141 billion at the end of the fourth quarter.

The news for the financial sector has been terrible for the last 9 months. It started with Bear Stearns announcing two hedge funds lost $6 billion and simply progressed from there. This seems like a good time to take a closer look at the XLFs -- the financial sector tracking stock.



The 5-year chart shows the following:

-- The index formed a clear double top in early and mid-2007.

-- The index clearly broke this trend in mid-3Q 2007.

-- The index has dropped about 27% since then.

-- The drop occurred on extremely heavy volume.



Above is the same chart with the daily SMAs. Notice prices are clearly below the 200 day SMA by about 20%. That is a serious bear market.



Assuming the last 5 years comprise one long rally, here are the Fibonacci levels. Notice we are trading right at the lowest level.



Above is a three month daily chart to see the SMAs close-up. Notice:

-- Prices are below the 200 day SMA (see above)

-- The shorter SMAs are below the longer SMAs

-- The 200 and 50 day SMA are both headed lower.

-- The 10 and 20 day SMA are neutral as both are heading sideways right now.

The bottom line is this chart looks terrible. There are plenty of technical and fundamental reasons to stay away for the foreseeable future.

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Personal Consumption Expenditures Flat

From the WSJ:

In the latest worrisome signs for the economy, consumer spending stalled in January, after adjusting for rising prices, and income growth slowed.

The Commerce Department said personal spending rose 0.4%, but was unchanged after adjusting for inflation. Such spending was also flat in December and October.

"Households limped into 2008 reeling from higher energy costs, falling home values, less credit availability and weakening employment," said Bank of America senior economist Peter Kretzmer in a note to clients.

.....

The price index for personal consumption expenditures, an inflation gauge watched closely by Federal Reserve policymakers, rose 0.4% in January from the previous month and was up 3.7% from a year ago. Excluding food and energy, prices rose 0.3% and increased 2.2% from January 2007 -- above the Fed's preferred range of 1.5% to 2%.

As IBD stated:

"People are spending all they earn and more just to keep up with inflation," said Joel Naroff, chief economist at Naroff Economic Advisors. "When you adjust for inflation, all that households did was run in place."

Above is a chart from Econoday of real disposable personal income -- income adjusted for inflation. Notice it has been trending down for the last 6 months on a year over year basis.



Above is a chart of real personal consumption expenditures -- consumption adjusted for inflation. Notice it too has been decreasing for the last 4-6 months and is not negative on a year over year basis.



The above chart -- also from Econoday -- shows the University of Michigan consumer sentiment indicator. Notice this indicator has been dropping for the better part of the last year. Dropping income contributes to lower consumer sentiment.

So -- 70% of the economy is clearly slowing. That does not bode well for overall economic growth.

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FSA Rebuked Again

The much maligned Financial Services Authority (FSA) has been given another rebuke today in a report, issued by the Commons Treasury Select Committee, that says that the FSA must develop a better plan for warning banks and investors of high risks.

The Committee criticised the FSA and Bank of England for failing to ensure that financial companies were prepared for credit crunch.

The FSA and the Bank of England did warn many times that banks were lending too much and too easily. However, they did not match their words with actions.

The Committee wants the FSA, in future, to write a letter to financial companies highlighting two or three key risks. The FSA must then proactively confirm that the companies have considered the risks, and publish a commentary on the responses.

The Committee found that those in charge of the banks did not understand the products sold. No surprises there, as it was not logic or rationality that was guiding the banks' policies and product designs, but greed.

As to whether anything effective will actually get done, on the basis of this report, remains to be seen. The fundamental failing of the current tripartite regulatory system, created by Gordon Brown ten years ago, is that no one is actually in charge of it.

Until Brown goes, that situation will not change, and the tripartite system will continue to be ineffective.

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A Long-Term View of the Markets

Last week I posted a few article dealing with the overall macro-economic situation. here is a diary that uses Bernanke's Congressional testimony as a template for a discussion of the overall economy. Here is a diary on why housing is nowhere near bottom. Here is an article regarding the strong headwinds consumers face.

The short version of the above three articles is the economy is looking very bad right now. If we're not in a recession, we're really close to it. In addition, I think the situation in the financial industry will last for at least the next year adding further downward pressure on growth.

Let's assume that earnings are a big driver of the market. Considering that most traders use the S&P's overall PE ratio as a measure of value this seems a solid statement of fact. Therefore, if the economy is slowing, earnings will stand a good possibility of dropping which will lower share prices.

All of this means we can continue to expect the averages to under perform for the foreseeable future. So this week I'm going to look at a lot of charts of the indexes and industries to see what they say.



The 5 year SPYs chart shows the average has broken through two key upward sloping trend lines. In addition, the trend break occurred on high volume. Finally, prices settled around support from a price established in 2006. A move through that level would make 130 the next strong supper level (remember: the market's like round numbers).



The above chart assumes the last 5 years comprise one long upward sloping run. Therefore, use the Fibonacci levels as ideas for where support might be.



The SMAs paint a very confusing picture. The longer-term averages -- the 50 and 200 SMA -- are both heading lower. But the shorter term SMAs are bunched together with prices, indicating a clear lack of direction. Prices have been bouncing around the shorter SMAs for the last month or so.



The 5-year QQQQ chart shows the average has broken two key support lines. The upper channel line started in early 2004 and the upward trending support line started in mid-2006. Currently the QQQQs are consolidating.



Assuming the last 5 years is one ling uptrend, here are the Fibonacci levels for a pullback.



The SMA picture of the QQQQs is just as confusing as the SPYs. The shorter SMAs are below the longer SMAs. But the 10 and 20 day SMA are both heading sideways and both have been tangled up with the candles for the last month. This indicates a lack of direction in the market.



The IWMs have two possible support lines, but the average has clearly broken both.



Assuming the last 5 years has been one long uptrend, here are the Fibonacci retracement levels.



The SMA picture mirrors the SPYs. The longer SMAs (50 and 200 day) are clearly moving lower, but the shorter SMAs are heading sideways and are tangled up with price.



The NY advance/decline line shows the market's indecision. Notice this average is clearly in a trading range.



While the NY High/Low is heading lower, the angle has clearly moderated.



The NASDAQ advance/decline line is still moving lower, but again at a slightly smaller angle.



The NASDAQ new high/low line is heading lower, but at a slightly less severe angle.

So, what do all of these charts mean?

-- All of the major averages have clearly broken multi-year uptrends.

-- However, their current status is very unclear. The long-term SMAs say the markets are moving lower, while the shorter SMAs indicate a clear indecisiveness. My guess is the bad economic news is being trumped by the Fed's promises to continue cutting rates in the near future.

Next up, we'll take a look at some of the market sectors to see how their charts look.

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The Week Ahead

The big news next week is the employment picture, which comes out on Friday.

On Monday we get ISM manufacturing and Construction spending. These are also very important. The Empire State and Philly Fed numbers were very weak last month. ISM should give us a clearer idea of where manufacturing is.

With construction spending, pay particular attention to non-residential. That has helped to keep this number from seriously crashing. However, with credit tightening this number may start to take a hit.

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Last Week's Markets

The SPYs rose until late Wednesday when they clearly broke their uptrend. The SPYs dropped for the rest of the week. There were several gaps down and the market closed the week on a low point on heavy volume. This is a very bearish last few days to the trading week.



The QQQQs formed a triangle consolidation (technically this is an ascending triangle because the bottom is, well, ascending) on Tuesday through Thursday. Note the 45.50 provided a great deal of resistance to the rally. Once the QQQQs broke through support they dropped hard. Notice the large gaps down and the fact the market ended near the low point for the week on heavy volume. This is also a very bearish chart.



The IWMs formed a double top on Tuesday and Wednesday. Then they dropped hard for the rest of the week. Notice the gaps down and the fact the index closed near its weekly lows on heavy volume.

On the daily charts notice the following:





The SPYs and QQQQs are still stuck in a trading range.



But the IWMs have broken lower.

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