Oct 26th market Update

Market Commentary:

Earnings news was extremely upbeat today, as giants Microsoft, Amazon and Capital One easily out performed expectations on all fronts, posting higher top line and bottom line figures (revenues and profits) and with positive outlooks, to boot.

For the day Microsoft was up 5.38%, Capital One was up 6.84%, and Amazon was up an astounding 26.8%.

To go along with today’s unbelievable earnings releases the existing home sales numbers released earlier today came in much better than expected, surging 9.4% versus a consensus of 4.9%, with the National Association of Realtors noting that the jump in sales was mostly due to first-time homebuyers entering the market via the government’s $8,000 rebate program, a program that congress is now considering to extend and expand.

In addition to the improving headline home sales numbers, distressed properties, which has accounted for around 50% of all home sales this year declined significantly – now representing only 29% of total sales.

Yet despite all this very good news, stocks gave up yesterday’s gains on selling that started early and continued to increase all day long.

Why?

When there is finally some good news to trump, you would expect the market interventionists to use this good news to ramp the markets to new heights … it has happened so many other times this year.

I think many of you know the answer. After all, I have been harping on this subject for a number of weeks now. Check out the following chart. It represents the trading in the dollar today, with each candlestick representing a 15 minute period.

As you can clearly see, today was the dollar’s day again. The dollar was supported steadily all day long. If the dollar gains a footing here the equity market is going to be in real trouble.

I suspect there are a huge number of dollar short positions that have grown steadily over the last 6-7 months. Many investors have been long the market and short the dollar.

Should the dollar gain a bit more support those who have seen dramatic gains by being short the dollar will be forced to cover short positions to pocket the gains. This means that to book their profits they must do the equivalent of shorting a stock. They must buy the shorted security and essentially go long to benefit from the previous short position(s).

If too many dollar shorts head for the exit at the same time you will see the dollar rocket skyward, as it did last year, when it jumped from the low 70’s to the 90’s.

Guess what that will do to the equity market?

A huge amount of money will move from equities over to the dollar side in hopes of gaining on a new rally in the dollar. And the stock market rally that investors have come to love and appreciate will vaporize overnight.

What leads me to believe that this represent a real risk?

Since I base much of my analysis on technical perspectives, the dollar appears to be carving out a bottom and crude oil appears to be carving out a top. But there are some fundamental reasons that give me concern as well.

Several banks have issued credit card change notices in the last few weeks, stating that their APRs are shooting up to 30% in November. This means that despite the impressive re-capitalization that has occurred with many big banks, there is still a huge credit crisis hidden under the cover of mark-to-whatever-the-banks-want.

These banks must know that a huge number of credit card accounts are about to default and so they are taking this action to create new capital as either (1) irritated customers decide to pay off these absurdly high interest rate debts or (2) uninformed customers will continue paying their payments, unaware that 30% APR is being applied to their balance, thus generating a huge increase in interest earnings for the banks.

I have also read that a large number of home sales in the distressed category are being done under strange circumstances. Many foreclosed properties have multiple offers at the asking price, but with caveat of pending new financing.

In lieu of the banks accepting these offers (with financing) for the asking price, the banks are accepting cash offers at prices significantly below the asking price. Accepting prices much lower suggest to me that the banks know that new financing will become very hard to come by … maybe not at all!

Both of these recent steps taken by the banks suggest to me that the bank insiders know that another big credit crunch is on the horizon and there is no way in @#$* that new financing is going to become available – nor is credit going to be available on credit cards even with astronomical interest rates being tacked on.

Another financial scare will lift the dollar into a safe haven for cash and will create huge short covering in the dollar – the likes of which has only been seen when this last bear market hammered home in October, 2008.

Today was unnerving in the sense that economic news and housing data were about as good as any bull could have ordered up. And yet, the markets sold off on what appeared to be minor support for the dollar.

Caution is the by-word. Watch the dollar and crude oil like a hawk over the next couple of weeks. They are your canary to the stock market.