Weekend Weimar

It's the weekend. Because of the pretty extreme market action last week I'll probably be back late tomorrow to prep for the week.

Until then -- do anything except think about economics or the markets.

Today's Markets

This is what a bearish chart looks like. The market gapped down on the open on heavy volume, steadied a bit, than continued dropping in the afternoon on heavy volume. The market closed near lows of the day. Traders obviously didn't want to hold anything over the weekend for fear that some news item would come out over the next two days.



This is a 10-day 5 minute chart. Notice that the SPYs have had 5 big sell-offs on heavy volume since last Thursday. That is not a very good sign at all. The SPYs have a clear downward bias right now.



Here is the daily chart of the SPYs. Notice the average is now right at the 50 day SMA after having blown through the 10 and 20 day SMA in quick succession. And yes -- the SPYs have formed a double top (which I have been on the lookout for over the last wee). Notice that today's action occurred on higher volume, indicating the selling momentum is increasing.



The 10-day QQQQ chart shows a different story than the SPYs. The QQQQs have had four large sell-offs on large volume -- two of which occurred today. The sell-off in red didn't have a huge volume spike. In addition, the QQQQs have traded in a range. However, the QQQQs closed below that range today. They have done this over the last 10 days, however, so today's move is not a guarantee of a further drop. Also remember that tech is the market's golden child right now.



However, on the QQQQs daily chart we see a clear trend break. The close moved through the 10-day SMA and is now resting at the 20 day SMA. Plus we had heavy selling as indicated by the high volume.

Capital One Takes A Big Hit

From Reuters

Capital One Financial Corp (NYSE:COF - News), a credit card issuer and banking company, posted a third quarter net loss after taking more than $800 million of charges from shuttering its GreenPoint Mortgage business.

Delinquencies on U.S. credit card loans jumped, and the company's shares declined in thin after-hours trading.

The company is writing off more loans, particularly in its U.S. credit card business, but that is mainly because write-offs had previously been unusually low, CEO Richard Fairbank said on a conference call. Losses are normalizing rather than indicating serious underlying credit trouble, he added.

The company wrote off a total of $1.03 billion of loans on and off its balance sheet, for a managed loan charge-off rate of 2.86 percent, down from 2.92 percent the same quarter last year.

Fairbank said Capital One would likely write down $1.2 billion of loans in the fourth quarter.

Total managed loan write-offs in 2008 are expected to be about $4.9 billion, he said.

The delinquency rate in its U.S. credit card loans jumped to 4.46 percent on a managed basis, from 3.53 percent in the third quarter of 2006. Higher delinquencies typically imply higher write-offs in the future.

The company said that it expects to write off U.S. credit card loans at an annualized 5.25 percent rate in the fourth quarter, compared with a 4.13 percent rate in the third quarter and a 3.39 percent rate in the third quarter of last year.

This is some of the best spin control I have seen yet from the financial companies. Write-offs are obviously increasing, but earnings are "normalizing". That is sheer corporate brilliance.

Wal-Mart Cutting Prices

From USA Today:

Wal-Mart (WMT) is cutting prices on 15,000 more items this week — 20% more than last year — and plans to slash more prices in coming days to boost sales during the holiday season.

The world's biggest retailer cut prices earlier this month on some of the hottest holiday toys, hard-to-resist deals that could help counter concerns about toy safety.

"Discounting is starting early and often this year," says retail strategist John Champion of global consulting firm Kurt Salmon Associates. "Wal-Mart is anxious about the Christmas season and trying to get an early jump with the consumers. Other retailers are going to follow suit."

The latest cuts come as consumers face continued economic pressure from a shaky real estate market and high energy costs, making it an especially good move for Wal-Mart, says Phil Rist, executive vice president at consumer insights firm BIGresearch.

Remember this chart from This Week in Petroleum?



Wal-Mart things gas prices are a factor as well and they are doing something about it.

However, it is standard practice for retailers to issue concerned guidance before the holiday season. This is called "expectations management". By issuing concerned guidance it's easier for retail/holiday sales to over-perform, making an increase in stock price look more important.

In addition, counting out the US consumer is never a good idea. The US consumer has a penchant for spending -- and finding the money to spend especially during the holiday season.

Oil, the Dollar and Inflation

When the Federal Reserve recently lowered rates the dollar was already near all-time lows.



Since then the dollar has continued to drop in value:



At the same time, we have seen oil rally over the last few weeks.



While there are important geo-political reasons for oil's rally, there are also important fundamental reasons:

Oil prices held near an all-time high of $90 a barrel Friday, crossed for the first time in after-hours trading Thursday in New York, as a weakening U.S. dollar lifted prices.

Light, sweet crude for November delivery rose to $90.02 a barrel in Thursday evening electronic trading on the New York Mercantile Exchange. By midday Friday in Europe, the contract was trading at $89.92 a barrel.

Analysts said investors were buying more oil to hedge further losses in the currency. The dollar fell to a new low against the euro Friday and sagged against the yen.

Should oil maintain it's lofty price level we can expect more energy related inflation. But remember -- it's not part of core inflation, so it really doesn't matter.

Wachovia Increases Loan Loss Provision

From the WSJ:

Wachovia Corp.'s third-quarter net income dropped 10% as loan-loss provisions quadrupled and the company recorded $1.3 billion in losses and write-downs. Wachovia also signaled increasing credit troubles ahead.

.....

Loan-loss provisions surged to $408 million from $108 million amid growth in auto, commercial and consumer real estate lending. Net charge-offs were 0.19% of average net loans, compared with 0.16% a year earlier. Nonperforming assets, troubled loans that could turn into charge-offs, more than doubled to 0.63% of loans from 0.26%.

At the beginning of the earnings season, Citigroup held a conference call where they essentially ducked the issue of upcoming quarters. Since then several financial companies have stated the upcoming quarters will also be difficult. This shouldn't be surprising in any way; it's just good to get confirmation about he overall situation.

Today's Markets

The market's consolidated this morning and then rose in the afternoon. In addition, we now have a lower trend line for a possible move upward.




On the 5-day chart, notice the trend break that occurred with the upside move after today's triangle consolidation. For this to be a clear trend break, we'll have to have a clear upside move tomorrow.



However, on the daily chart the bar ran into clear upside resistance at the 20 day SMA.



On the QQQQs, we have a much wilder ride. Notice that after the three-day consolidation, we had another consolidation pattern -- the reverse head and shoulders. Then trading broke out with a strong move to the upside. My guess is this is Google related.



Finally, on the QQQQs daily chart we see a possible break of the flag consolidation pattern. Also notice that prices bounced off the 10 day SMA.

Gas Prices Still High

From This Week in Petroleum

The U.S. average retail price for regular gasoline was lower by 0.8 cent last week to 276.2 cents per gallon as of October 15, 2007, but is still 53.6 cents higher than last year. All regions were lower except the West Coast which grew by 4.5 cents to 297.9 cents per gallon, the highest price in the country. The average price for regular grade in California was 305.3 cents per gallon, up 5.7 cents from last week and 51.3 cents per gallon over the previous year. The East Coast price fell 1.5 cents to 273.1 cents per gallon while the Gulf Coast declined by 2.5 cents to 264.2 cents per gallon, the lowest regional price. The Midwest price dropped 2.0 cents to 273.5 cents per gallon this week, plunging 24.4 cents since September 10. The Rocky Mountain region price decreased 0.7 cent to 279.5 cents per gallon.

As we inch toward the holiday shopping season this could be a problem. It is definitely something to keep an eye on.

What Inflation?

From Bloomberg:

Hershey Co., the largest U.S. candy maker, said third-quarter profit plunged 66 percent and sales unexpectedly fell as it lost market share and dairy costs rose.

.....

Nonfat dry milk prices rose 20 percent from the first quarter and are more than double what they were a year ago, according to Katzman. He is one of 15 analysts who have a ``hold'' rating on the stock. Three others recommend buying Hershey, and two say ``sell.''

But remember -- according to the Federal Reserve, this chart doesn't count when looking at inflation:

More Mortgage Hits to Earnings

From Bloomberg:

PMI Group Inc., the second-largest U.S. mortgage insurer, estimated a third-quarter loss of $1.05 a share, as borrowers' ability to repay their home loans ``significantly worsened'' in September. The company fell as much as 7.3 percent in New York trading.

The cost to bail out lenders is expected to increase fivefold from the same period a year earlier to about $350 million, the Walnut Creek, California-based insurer said in a statement today. PMI also withdrew its earnings forecasts for the year.

Rival MGIC Investment Corp., the largest mortgage insurer, yesterday posted its first quarterly loss since it went public in 1991. The Milwaukee-based company said it won't be profitable in 2008 as foreclosures increase from a record and the housing market worsens in parts of California and Florida.

And the hits just keep coming, don't they?

Credit Crunch Claims Another Bank

From the WSJ:

Bank of America Corp. posted a 32% drop in third-quarter net income amid a dismal performance by its investment bank and higher reserves to cover potential bad loans.

The combination of more than $1.4 billion in trading losses in its investment bank and about $2 billion in provisions for credit losses pushed the Charlotte-based bank's third-quarter profits down to $3.7 billion, or 82 cents a share, from $5.42 billion, or $1.18 a share, a year earlier. Revenue fell 12% to $16.3 billion. It was the first time since late 2005 that Bank of America has failed to boost its year-over-year profits.

While other banks have been struggling with the fallout from this summer's credit crunch, and analysts were bracing for a bad quarter, Bank of America's results fell far short of Wall Street's expectations of earnings of $1.06 a share on revenue of $18.3 billion.

THis is more troubling news from the financial sector. The WSJ has a "cheat sheet" of the credit crunch/mortgage impact on earnings from a variety of companies. It's not a pretty sight. Merrill, IBM, UBS, Citigroup, WAMU are all on the list as are some of the other largest companies on the exchange.

The bottom line is the impact has been sweeping and wide. And with another 12-18 months of ARMS resets to go, we're just getting started with the problems in earnings.

Today's Markets

Can you say roller coaster? The market sold-off from the opening of 155 to a mid-day low of 152.60 -- a sell-off of 1.55%. Notice the gaps down on heavy volume. That means traders were looking to sell -- period. However, the market rebounded and closed near unchanged.



However, on the three day chart, we are clearly in a downtrend.



On the daily chart, notice the SPYs are clinging to the 20 day SMA. If the downward trend continues there isn't much technical support until 152.50 followed by the upper 151s. Also notice the increasing volume totals for the last three says. Although the market would up unchanged today, it appears that traders may be getting more and more nervous and are looking to book some profits.



The QQQQs also pulled one heck of a about face in the market today. Notice that incredible curve on the trading action.



On the QQQQs daily chart we're still in a triangle consolidation on top of a moving average.

The oil situation -- Turkey's Parliamentary approval of military action into Northern Iraq -- is a big problem for the market's overall. Traders are trying to weigh the where oil prices start to crimp consumer spending. In addition, the addition of another military into Iraq is deep cause for concern for understandable reasons.

A Deeper Look at CPI or Why the Federal Reserve is Out-Of-Touch

From Bloomberg:

Prices paid by U.S. consumers rose more than forecast in September as food and energy costs climbed, while core measures showed inflation remains contained.

The 0.3 percent increase followed a 0.1 percent decline in August prompted by falling oil prices, the Labor Department said today in Washington. So-called core producer prices, which exclude fuel and food costs, rose 0.2 percent for a second month in line with forecasts.

With inflation under control, Federal Reserve policy makers have leeway to consider cutting their benchmark rate again later this month to keep the economy growing in the face of a deepening housing recession. Fed Chairman Ben S. Bernanke this week reiterated the central bank would ``act as needed'' to foster sustainable growth along with price stability.

``A slower economy and additional slack in the labor market should help keep inflation under control,'' Ethan Harris, chief economist at Lehman Brothers Holdings Inc. in New York, said before the report. ``Tame inflation and weaker growth imply additional rate cuts.''

Economists had forecast consumer prices would rise 0.2 percent after a 0.1 percent decline the prior month, according to the median of 82 projections in a Bloomberg News survey. Estimates of the increase ranged from no change to a 0.5 percent gain.

Let's ignore the headline number and look at the following two paragraphs from the BLS release:

Consumer prices increased at a seasonally adjusted annual rate (SAAR) of 1.0 percent in the third quarter of 2007, following increases in the first and second quarters at annual rates of 4.7 and 5.2 percent, respectively. This brings the year-to-date annual rate to 3.6 percent and compares with an increase of 2.5 percent for all of 2006. The index for energy, which advanced at annual rates of 22.9 and 32.9 percent in the first two quarters, declined at a 14.8 percent rate in the third quarter of 2007. Thus far this year, energy costs have risen at an 11.7 percent SAAR after increasing 2.9 percent in all of 2006. In the first nine months of 2007, petroleum-based energy costs (energy commodities) advanced at a 20.6 percent rate and charges for energy services (gas and electricity) increased at a 1.3 percent rate. The food index rose at a 5.7 percent SAAR in the first nine months of 2007 after advancing 2.1 percent in all of 2006. Grocery store food prices increased at a 6.7 percent annual rate in the first nine months of 2007, reflecting acceleration over the last year in each of the six major groups. These increases ranged from annual rates of 4.0 percent in the index for other food at home to 17.7 percent in the index for dairy products.

The CPI-U excluding food and energy advanced at a 2.5 percent SAAR in the third quarter, following increases at rates of 2.3 percent in each of the first two quarters of 2007. The advance at a 2.3 percent SAAR for the first nine months of 2007 compares with a 2.6 percent rise in all of 2006. The deceleration largely reflects a smaller increase in the index for shelter and a downturn in the index for apparel. Shelter costs, which rose 4.2 percent in all of 2006, have risen at a 3.2 percent annual rate in the first nine months of 2007. The index for apparel, which last year registered its first annual increase since 1997, has declined at an annual rate of 1.7 percent thus far in 2007. The annual rates for selected groups for the last seven and three-quarter years are shown below.

So -- why am I focusing on these two paragraphs rather than the headline number? I am personally having a really difficult time believing the "headline" inflation number largely because my personal experience just isn't jibing with an "inflation is benign" scenario. Here's why. I go shopping every 4-5 days. Over the last year or so I have seen chicken increase from about $4-$5 to $7-$8. Milk is now almost $4/gallon when it use to be $2.99/gallon. Simply put, the numbers just aren't adding up. While I don't know what is wrong exactly with the BLS' calculations and/or methodology, it simply isn't tracking what I am seeing at the retail level. Now I realize that the prices above are for food which isn't part of "core" inflation. This also illustrates how incredibly stupid the Fed's reliance on "core" inflation is. Core inflation is a great measure if you don't consume food or energy. For that small minority of the population that actually does consume food and energy, total inflation is a hell of a lot more relevant to daily life.

Let's look at three sentences from the first indented paragraph from the BLS report:

This brings the year-to-date annual rate [of total consumer prices] to 3.6 percent and compares with an increase of 2.5 percent for all of 2006.

Thus far this year, energy costs have risen at an 11.7 percent SAAR after increasing 2.9 percent in all of 2006.

Grocery store food prices increased at a 6.7 percent annual rate in the first nine months of 2007, reflecting acceleration over the last year in each of the six major groups.

These three sentences -- which are part of the BLS report -- are not reported in the financial press. And they sure should be because they show some serious price acceleration for goods we have to buy in modern society.

Credit Woes Hit Banks

From IBD:

Wells Fargo's (WFC) Q3 profit rose 6% as revenue climbed 10%, but both missed analyst estimates. Ongoing home and loan woes would hurt its Q4 results. KeyCorp (KEY) also missed Q3 views and warned on Q4. US Bancorp (USB) topped EPS views by a penny as it lifted loan-loss reserves by 47%. Its shares edged down; KeyCorp fell 5% and Wells Fargo 4%.

It looks as though the market is paying attention to the increasing number of Q4 warnings.



The XLF ETF has broken its recent uptrend on higher volume. The ETF is still below the 200 day SMA and prices have fallen through the 50 day SMA.



The regional bankshares ETF is also falling, and has been since early October. The ETF is still below the 200 day SMA and prices are below the 50 day SMA.

Remember that financial shares represent about 20% o the S%P 500. That means this action will make it harder for the SPYs to advance.

Housing News Update

All of the news continues to be pretty bad.

First, homebuilder confidence hit a new all-time low:

The confidence of U.S. home builders has been shaken to its lowest point since records began 22 years ago, a housing trade group said Tuesday.

The National Association of Home Builders' index for sales of new, single-family homes decreased to 18 this month from 20 in September. Builders are worried about mortgage market problems and bloated inventory. The reading was the lowest since the series began in January 1985, the NAHB said.

"Builders in the field are reporting that, while their special sales incentives are attracting interest among consumers, many potential buyers are either holding out for even better deals or hesitating due to concerns about negative and confusing media reports on home values," said NAHB President Brian Catalde, a home builder from El Segundo, Calif.

And DR Horton reported a terrible quarter:

D.R. Horton Inc (NYSE:DHI - News), the largest U.S. home builder, said on Tuesday quarterly net orders for new homes plunged 39 percent and cancellations spiked as the U.S. housing market continued to deteriorate.

......

D.R. Horton said net orders for its fiscal fourth quarter that ended September 30 fell to 6,374 from 10,430 a year earlier. The value of the orders dropped 48 percent to $1.3 billion from $2.5 billion.

"The 48 percent year over year decline in orders is very weak, especially considering it is off of an easy comparison with last year's fourth quarter orders down 33 percent," Wachovia analyst Carl Reichardt wrote in a research note.

Prospective buyers canceled outstanding orders at a rate of 48 percent during the quarter, up from 40 percent a year ago.

And the Mortgage Banker's Association said mortgage originations will fall to an 8-year low next year:

Mortgage originations will fall next year to the lowest levels since 2000, forcing job losses for at least 30,000 more home finance professionals, according to a forecast released on Wednesday by the Mortgage Bankers Association.

Inventories of homes for sale will remain high as tighter lending standards across the industry reduce available credit for prospective home-buyers, said Doug Duncan, the MBA's chief economist. Foreclosures as a result of increasing payments on adjustable-rate loans or poor underwriting will exacerbate the problem, he said.

"We have not yet seen fully the impact of the credit shock to the U.S. and world economies, and the severity of that impact will depend on how long it takes for the markets to return to normal functioning," Duncan said at the annual meeting of the Mortgage Bankers Association.

Total mortgage originations will likely decline 18 percent to $1.89 trillion, the lowest volume of purchase and refinance loans since $1.14 trillion in 2000, according to the forecast. Loan volume will slide another 6 percent in 2009, it said.

None of this news should be surprising. The credit market is still having problems, home inventory is at incredibly high levels, subprime foreclosures are increasing and consumer's are already heavily indebted.

Today's Markets

The SPYs dropped again today. The market opened lower, rallied to the opening level and then retreated from those levels.



On the three day chart, notice

1.) We have a clear downtrend in place right now.

2.) Today's action could be a consolidation at the bottom of the sell-off



Notice that on the 5-day QQQQs, we have a nice triangle consolidation taking place.



On the daily SPYs, note the market has definitely backed-away from previous highs. In other words, the double top is looking more and more possible, although it is certainly not guaranteed right now. However, prices have dropped below the 10 and 20 day SMAs. If the market is going to maintain its upward momentum it will have to make a solid move back up over the next few days.



The daily QQQQs show the consolidation right before the SMAs.



Like the SPYs, the Russell 2000 has broken below the SMAs and prices are closing at uncomfortable levels. Traders are taking profits in this area and getting out of these more speculative shares.

No Kidding, Secretary Paulson

Secretary Paulson's remarks from the WSJ:

The ongoing housing correction is not ending as quickly as it might have appeared late last year.

And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet. Even so, I believe we have a healthy, diversified economy that will continue to grow.

OK -- a little self back-patting right now. I've been talking about housing being "nowhere near a bottom" for about a year now. Why, you may ask? Simple: the absolute number of existing homes for sale on the market is still at incredibly high levels. Excess supply = lower price and lack of demand. Secondly, there is the mortgage implosion that started at the end of last year. Then we had a second wave this summer. And there are still a ton of bad debts out there in the system right now. And things are going so swimmingly well in the mortgage market right now that the major banks are thinking of coughing up $80-$100 billion for a liquidity fund.

Of the approximately 50 million outstanding mortgages in the U.S. today, approximately 10 million are subprime loans. Many have cited the statistic that 2 million of those subprime mortgages will reset to higher rates in the next 18 months. That statistic is true, relevant, and troubling, but it is not the complete picture of the risk going forward. Many of those borrowers will be able to afford their new mortgage payment or they will be able to refinance into another more affordable mortgage. Yet, the problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing. And finally, the wide geographic variation in home price trends adds to the complexity of sizing this problem with any certainty.

You'll excuse me if I find this phrase troubling "happy talk": Many of those borrowers will be able to afford their new mortgage payment or they will be able to refinance into another more affordable mortgage. The Secretary is well-aware of the credit crunch going on right now -- which has been going on since the end of last year and which the recent news indicates is nowhere near over.

Now that I'm done ranting, Paulsen has a very unenviable job. He has to bolster confidence in the economy. That's part of his job description. But at the same time, at some point that issue becomes less important than telling people that there are some serious problems out there.

More Transports

One of the main concerns I have had with the current rally is the lack of confirmation from the Transportation average. This has been a huge sticking point with me because I still think Dow theory is incredibly relevant. Remember that Dow theory states the transportation average must confirm upward movements in the Dow and S&P 500. The underlying reason is pretty intuitive. If the broader averages are growing because the economy is expanding, then people will have to ship more and more stuff across the country.

As the chart above shows, the Transports are still in a trading range while the rest of the market has rallied. If business is so good, why aren't business and people shipping more stuff?

However, recent news items from the trucking industry has not been encouraging.

Slumping demand and higher fuel costs continued to weigh on truckload carriers throughout the third quarter, and analysts suggest that earnings may fall below expectations as a result.

Truckload carriers typically dedicate an entire trailer to one customer and move the freight directly from the shipper to the receiver.

Morgan Keegan & Co. analyst Art W. Hatfield said the market is continuing to slow at a time when demand usually ramps up toward a pre-holiday peak.

"Generally speaking, the demand environment has been marked by inconsistency week to week and has yet to show signs of any building momentum," he said.

In fact, Hatfield said current conditions may be as severe as those seen in 2001, when the market was hit by the effects of an economic recession.

Another factor that hurt the sector in the third quarter is the price of fuel, with a gallon of diesel climbing 7.7 percent over the quarter to as high as $3.05, from $2.83 per gallon last year.

And that's not all:

Forward Air Corp., a contractor to the air cargo industry, on Wednesday issued third-quarter profit guidance below Wall Street estimates, citing a slumping economy.

The news sent Forward Air shares down $2.32, or 7.9 percent, to $27 in aftermarket trading. Earlier, they fell 27 cents to $29.32 in the regular session.

Forward Air said it expects to post a profit of 35 cents to 37 cents per share for the quarter, while analysts polled by Thomson Financial expect a profit of 42 cents per share.

And there's more:

Trucking and logistics company Werner Enterprises Inc. on Monday said its third-quarter profit fell 11 percent, but still beat Wall Street estimates.

Net income for the three months ended Sept. 30 fell to $21.9 million, or 30 cents per share, from $24.6 million, or 31 cents per share, during the same period a year earlier.

And yet more:

J.B. Hunt Transport Services Inc., which provides truckload and intermodal shipping services, said Thursday its third quarter profit fell 12 percent because of higher interest expenses and lower revenue in its trucking division.

For the quarter ended Sept. 30, net income fell to $50.8 million, or 38 cents per share, from $57.8 million, or 39 cents per share, in the prior year quarter. The company had about 133.7 million shares outstanding at the end of the quarter compared with 148.7 million at the end of the same quarter last year.

SPY Notes

Assuming the double top thesis of the SPYs, let's look at retracement levels. Here are three charts that show possible Fibonacci levels. These are levels that traders will be looking at as possible reversal or stabilization levels if the the market continues to retreat.

QQQQ notes

Let's play out the scenario that the SPYs are hitting a double top and will sell-off over the next market period. Here are two charts of the QQQQs. Assuming they sell-off in sympathy notice the Fibonacci levels from the beginning of this run are either at or slightly below previous highs. Those are the kind of downward moves that could unnerve traders.

Mortgage Execs Predict Slow Housing Recovery

From CNBC:

U.S. housing prices will continue to decline at least through the end of next year and may not begin creeping upward again until 2010, executives from the biggest mortgage financiers said Monday.

Officials with government-sponsored mortgage companies Fannie Mae and Freddie Mac and CEOs from two major mortgage banks told the Mortgage Bankers Association's annual convention that the continuing spike in foreclosures and a glut of unsold homes will prevent any quick price rebound.

"It's going to be a long time before we see it bottom out and recover," said David Lowman, chief executive of JPMorgan Chase. "There's too much inventory already in the marketplace."

This shouldn't surprise anyone. However, it should surprise people that it has taken this long for the industry to begin issuing statements that are closer to reality. Inventory of existing homes is sky high, delinquencies are spiking and the credit markets are still experiencing serious problems.

Oil Hits Record

This chart is pretty straightforward. Oil started to rise in mid-August, and broke through resistance in mid-September. At this time, resistance turned into support. The market sold-off to near the 38.2% Fibonacci retracement level of $77.98, and then started rising again. Now oil is at an all time high.

Here are some of the reasons why:

A weakening U.S. dollar, low U.S. crude inventories and increased buying by investment funds also supported prices, counterbalancing expectations of higher inventories in the weekly U.S. supply report.

Iraq's Vice President Tareq al-Hashemi arrived in Ankara Tuesday in an apparent attempt to convince Turkey not to stage a cross-border offensive to fight separatist Kurdish rebels based in Iraq. Mr. Hashemi, a Sunni Arab, was scheduled to meet with Prime Minister Recep Tayyip Erdogan and other senior officials. The Turkish Parliament was expected to approve a motion Wednesday allowing the government to order a cross-border attack over the next year.

The Turkish government's decision Monday to ask Parliament for permission to pursue Kurdish rebels into Iraq stoked the worries about potential interruptions to oil supplies. "Whenever there is any escalation in political tensions in the Middle East, oil markets become concerned," said David Moore, a commodity strategist at the Commonwealth Bank of Australia in Sydney. "There is production and there are pipelines that people worry may be affected if there are any issues in Iraq."

There have been several skirmishes along the Turkey-Iraq border already. Although oil coming out of the region has been erratic, a total disruption would send prices higher, analysts said.

Regarding oil stocks, here is a chart of US oil inventory from last week's This Week in Petroleum:



While US inventories are high by historical standards, they have been dropping since mid-summer. Now oil stocks have to be replenished at higher prices -- not a good signs.

Then there is the weak dollar. Because oil is priced in dollars, a lower dollar means high oil prices. Here is the dollar's weekly chart.



Then we have the geo-political element of oil prices:

Nov. oil futures shot up $2.44 to $86.13 a barrel as Turkey appeared to move close to military action vs. Kurdish guerrillas in northern Iraq. That threatens the Kirkuk-Ceyhan pipeline, which supplies half-a-million barrels a day. Meanwhile, OPEC said noncartel output would be less than expected. That comes as rich-world inventories have declined in recent weeks.

Finally we have increased institutional buying as traders simply chase some profits.

In other words we have a lot really important fundamental reasons why oil is moving higher.

Today's Markets

Over the last week or so I have expressed concern about the possibility of the SPYs forming a double top. That concern is increasing, especially after today's action.



First, notice the markets started to move lower early, then continued with their downward trajectory for the rest of the trading day. That's never a good sign. Citigroup's news was obviously bearish, but oil closing at a record high certainly didn't help.



Here's the three-day chart. Notice that twice in the last three days we've had big sell-offs. That means traders are looking for a reason to sell, and certain news or technical events are giving them the impetus to sell.



On the 10-day chart, the trend line is from a few days before the Fed cut rates. The markets have clearly broken that trend.



Here's a 3-month SPY chart. We still have an uptrend in place, but the markets are very close to it. To maintain the trend, the markets will have to rally over the next few days.



Here's another culprit of today's sell-off -- oil. The USO ETF tracks the oil market. Notice this market is rallying quite well.



The QQQQs are still in positive territory, but are also approaching the trend line. However, remember the markets have diverged somewhat. the QQQQs have broken into new technical ground while the SPYs are getting hung up at previous resistance.



The Russell 2000 broke trend today. If this action is confirmed over the next few days we'll know that traders are shunning the riskier parts of the market, which could be a bad sign for the more conservative stocks.



The mid-cap's are still in good technical shape -- their trendline is still firmly intact.



Finally, here's a 6-month SPY chart. Notice the average is running into strong technical resistance at previous highs.

Citigroup Reports Big Loss

From Bloomberg:

Citigroup Inc., the biggest U.S. bank, said mortgage delinquencies and consumer lending will deteriorate for the rest of the year after earnings fell 57 percent in the third quarter.

Citigroup had its biggest drop in two months in New York trading after Chief Financial Officer Gary Crittenden said on a conference call that borrower defaults are ``accelerating.''

Chief Executive Officer Charles Prince, who has overseen a 17 percent drop in the company's stock this year, said momentum ``continues very strong'' in most of the company's businesses. Since Prince became CEO in 2003, Citigroup shares are virtually unchanged, compared with a 29 percent jump at Bank of America Corp., the second-largest U.S. bank by assets.

``They certainly had a lot of troubles and to some extent have been tripping over themselves the last couple of years,'' Jeffery Harte, an analyst at Sandler O'Neill & Partners LP in Chicago, said in an interview. Prince is ``doing the right things strategically. It's become more of an execution problem lately.''

A key to this announcement is the phrase for the rest of the year. That's a tacit admission that the fourth quarter is not going to be good. I'm not sure what other financial companies have reported for their future projections so far, but most big financial companies have reported very large losses for the 3Q, so this news shouldn't be surprising.

Another key to this release is that "borrower defaults are accelerating." Again, this shouldn't be surprising to anyone, but it's another tacit admission that the credit crunch is far from over.

However, I find it odd that this news is sending the market lower today when other companies have reported a ton of losses. The last I counted, big financial companies had reported over $20 billion in 3Q losses.

Treasury Works With Large Banks to Ease Credit Crisis

OK -- this story is a bit complicated. So let's take this piece by piece.

First what is a structured investment vehicle?

A managed investment vehicle that holds mainly highly rated asset-backed securities and funds itself using the short-term commercial paper market as well as the medium-term note (MTN) market. Because of the rolling nature of its funding, an SIV is highly dependent on maintaining the highest possible short-term and long-term credit ratings. SIVs differ from cash CDOs of asset-backed securities in that their portfolios are marked-to-market, with their ratings based on capital models agreed with the rating agencies. SIVs also have simpler capital structures than CDOs, usually comprising a junior tranche of capital notes beneath a block of senior liabilities with the same seniority. They have smaller liquidity facilities than commercial-paper conduits - which also invest in high grade ABS. SIV managers include both commercial banks such as Citigroup and Bank of Montreal, and investment managers such as Gordian Knot.

So what we're looking at here is a short-term money management fund. They pool assets and sell commercial paper, making a difference on the interest rate spread between the two products. The fund issues different types of commercial paper with different credit profiles. This all looks like a pretty standard investment situation to me.

Now, let's get some background:

Encouraging the talks that led to the creation of the fund is the latest effort by officials to help restore liquidity to credit markets, a campaign started by the Federal Reserve in August, when it cut the interest rate on direct loans from the central bank. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.

``Some markets have been experiencing illiquidity,'' San Francisco Fed President Janet Yellen said in an Oct. 9 speech in Los Angeles, referring to mortgage-backed securities and asset- backed commercial paper. ``This illiquidity has become an enormous problem for companies that specialize in originating mortgages and then bundling them to sell as securities.''

As losses in securities linked to subprime mortgages started to spread in July, investors retreated from high-risk assets. SIVs that issued commercial paper to buy the securities found they could no longer roll over the debt, forcing them to sell about $75 billion of their assets.

From the WSJ:

The popularity of SIVs has boomed since two Citigroup bankers, Nicholas J. Sossidis and Stephen Partridge-Hicks, invented the strategy in London in the late 1980s. (They later left to form their own company, London-based Gordian Knot, which operates the world's largest SIV.)

Behind Treasury's concern were banks like Citigroup, whose affiliates owned $80 billion in assets backed by mortgages and other securities. The world's biggest bank, by market value, held the assets off its balance sheet and was facing the prospect of either having to unload them in a disorderly fire-sale fashion or moving them onto its books.

Either scenario would have hurt financial markets and could have damped the economy by curtailing banks' ability to make new loans to consumers and corporations. Treasury envisioned a potentially "disorderly" unwinding of assets that could worsen the credit crunch, said a person familiar with the matter.

These funds have a big problem on the horizon. They have to sell a ton of debt within the next few months. Because the credit markets still haven't fully recovered, this massive selling could lead to the following situation.

1.) A large amount of mortgage-related paper hits the market. The market is already troubled.

2.) Because a large amount of paper hits the market, prices are already going to be lower (excess supply = lower price).

3.) Because the market is already troubled, bidders are offering lower prices for the paper

4.) This leads to a downward trajectory for certain assets' prices.

In other words, a situation that previously would have been akin of a normal position situation (standard selling of securities at normal times) could in fact lead to a situation that resembles panic selling.

First -- I am personally all for this action. It is highly doubtful the big banks would get together without some type of effort from a neutral third party. Hank Paulson's prior Wall Street experience is probably a key to this situation. I have maintained a position that the Treasury Secretary should come from Wall Street, and this situation illustrates the reason why.

Some people quoted in a few articles expressed concern the Citigroup would be a primary beneficiary of this program. This is true. Citigroup is heavily invested in the SIV market and faces the possibility of some big possible losses over the next few months if this situation isn't resolved. This is one of the primary problems of having large banks at the middle of the financial world. On the good side they provide liquidity. On the bad side, the concentration of assets means that a screw-up can lead of a pseudo bail-out.

So -- will this work? I have no idea. It's good that parties are trying to find an answer to this problem. However, most solutions are going to have their own problems built in.