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The Financials Pit Review

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For the week of July 14th, 2008

Tue, Jul 15 2008, 05:59 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

Friday was a news filled day providing a lot of volatility. After withdrawals by panicked depositors, California based Indy Mac, which specialized in a type of mortgage that often required minimal documents from borrowers, became the 5th U.S. bank to fail this year. This was also the third largest banking failure in U.S history. However the FDIC ensured that the takeover of IndyMac is going to cause no disruption for most customers. The market seems to agree at least early in the session. The S&P is trading higher. The Federal Reserve is preparing to announce final rules overhauling mortgage lending. There has been uproar from consumer groups arguing that the regulations proposed back in December are full of loopholes clearly allowing the irresponsible lending to continue. Industry executives are complaining that the proposals place too great a burden on lenders and will make them further restrict credit. Even though the proposals offer no help and mean nothing to existing homeowners who have already fallen behind in their mortgages, the Fed’s goal is to prevent another crisis by tightening lending standards particularly for sub prime mortgages. A bear market is defined as a drop of 20% from peak to trough. This was achieved by both the S&P and the Dow last week. The question now is how long will this bear continue? One of the worst drops started in ‘73 and reached a 46% drop and lasted until December of ‘74. The average bear stretch is a 29% decline usually lasting over a year. I don’t expect the news to continue to get better but it seems clear that there will be intervention on every trip towards the 1200 mark. This market is showing great opportunity to day traders. Keep your stops close and try not to get emotional as this market opens the doors up to clip some nice profits.

Currencies

In Canada, the unemployment numbers were reported by Statistics Canada last week and there was an increase from 6.1% to 6.2% in June, this showed a net loss of 5,000 jobs which was weaker than expected. The Canadian has been heading towards the 1.00 mark again and it is not hard to see why with crude hitting 145 a barrel and gold above 960 providing most of the help. If these markets continue to climb we will test the $1 mark very soon.

After continued weakness, the US dollar will need a lot of optimistic news to gain against the euro. The Feds efforts to help seem like putting a band aid on an amputated leg with the continued climb in energy costs it will be very difficult for the dollar to gain any strength. Inflation continues to remain a very big concern. I believe that there is still a good chance were going to test the lows in the US dollar and maybe make new ones.

Published on  Tue, Jul 15 2008, 06:04 GMT