Week in Review: Dip Buyers Weakening

This is week #2 at attempted bullish reversal. The bulls appear to be running out of strength and conviction. The longer this bear phase lasts, the more tired the dip buyers will become. Having said that this week saw the Dow ending lower 1.4%, Nasdaq lower 0.6%, and the S&P 500 lost 1.1%. Not the type of action you want to see if you are bullish or believe that this is the bottom of the down trend.

Today, the markets started promising but then began to deteriorate through the mid day and tried to regain some of the losses but ended up down 0.3% for Nasdaq, 0.4% for Dow, 0.4% for S&P 500. Strong start and weak finish is the hall mark of bear market action. Also, even though today was quadruple witching, the high volume associated with this three times a year event is significant based on the context of price action. Thus the rally attempt that started on Wednesday and showed much promise on Thursday, lost all momentum on Friday. Next week promises to be continuation of volatility with the FED meeting that is scheduled to take place on March 21 Wednesday at 2:15 PM EST. On Tuesday March 20, 8:30 AM EST, the housing starts and building permits will be released and should further fan the flames of current issues with subprime mortgage fall out. On Friday March 22 Friday, existing home sales will be reported at 10:00 AM EST with market expectation of 6.35 million from prior 6.46 million.

Traders have become jittery to say the least, especially those who are chasing bottoms. Mondays have not been very kind and a lot of traders are looking for another shoe to drop to precipitate a sell off in the markets. This is the extent of the market deterioration of psychology and it will continue to decline. Historically speaking, down trends whether significant or a blip does not recover in a matter of weeks. So we should have a bit of down side pressure to go.

I watch in amazement in the rapid recovery of Accredited Home Lenders (LEND) the lows of $3.77 on 3/13/2007 an finishing at $10.90 on 3/16/2007. What could possibly be the good news? Certainly, the company has found someone to buy their existing subprime debt at pennies on the dollar to infuse badly needed liquidity into the company to meet margin calls. So what does that prove? Accredited Home Lenders (LEND) is a subprime lender. After meeting their margin calls, can they continue to generate business when they can't originate loans? What purpose does this serve? So they get to survive for another week. Then what? They still have to meet securities filing dead lines and still need waivers of covenants that place restrictions on the company's ability to lend. That seems like a bit too much bullets to dodge. There have been possible buy out rumors circulating around Accredited Home Lenders (LEND) from such respected organizations such as Goldman Sachs (GS). If I had to guess, this may have been a dirty hedge fund scheme to drive up prices while they hedged on a quick options trade that brought up the price from the dead to $10.90. That may explain such a huge put volume on this stock currently as traders now bet that it will sink again.

As for Fremont General Corp (FMT), it was able to obtain a $1 billion credit line to sustain this company on life support. Then what for this company? The same quagmire as Accredited. I do understand that the investment banking community and the economy needs these subprime lenders to stay afloat long enough for them to figure out what the fall outs will be from this debacle. Additionally, many bullish upgrades recently on Accredited Home Lenders (LEND) by FBR, Merril Lynch, and others may be a ploy for the greater equity markets to figure out what to do. What pray tell can be so bullish about these sub prime lenders who are on its last leg? What value can be derived from a business that cannot conduct business even if their credit obligations are met? Who in their right mind would want a loan, if that was possible, from these highly publicized sub prime lenders? All the while, I am getting tired to listening to the spin placed by CNBC and the main stream media.

Then there was Alan Greenspan, who has the knack from appearing out of the retirement and proves that he still can affect the US and global equity markets. That he is, while old as dirt, intelligent, able, and significant. His artful speak about him not seeing the subprime meltdown extending into other financial segments of the economy if and only if the housing markets can appreciate 10% this year. In essence when you read between the lines (somethings never change), Mr. Greenspan effectively concluded that this market is basically headed for the recession. How can housing markets appreciate by 10% this year? Based on what demand? Am I the only one reading his statement this way?

Then there is Counrywide Financial (CFC) who is busy doing major PR efforts to curtail the company's image being linked to subprime lenders who are in trouble. The CEO Angelo Mozillo has appeared on CNBC to strongly defend his company's ability to weather any mortgage related storm, and yet, did a double speak and said that only the FED can save this industry with a interest rate cut. Real strong endorsement if you ask me. All the while, when you dig deeper, the company states that their subprime exposure is only 7% of their entire outstanding loan portfolio yet a recent marketwatch.com article shows that they are in fact #3 in subprime lending based on volume. Additionally, their over exposure to ALT-A Option ARMS are at a staggering 45 to 50%. ALT-A Option ARMS are even more toxic as they drove borrowers with good credits into homes that would soon become unaffordable once interest rates rise. Perhaps this is why Mozillo publically called for the FEDS to cut interest rates now. All the while, the CEO who is the champion of his mighty company has been dumping his stock like it is going out of fashion. Herb Greenberg from marketwatch.com has been on him for over a year for his activities and it raises an eye brow or two when the CEO says one thing about his company but his actions are contrary. Is Enron like ending possible for the American market darling Countrywide? This soap opera gets better and better.

In sum, the drama in the mortgage sector bears (no pun intended) close scrutiny. Despite constant noise that this is a contained event and not likely to affect the entire financial markets, the domino effect is definitely possible. Loss of liquidity and wealth from the housing fall out will directly correlate into further reduction in US economic growth while triggering rising inflationary pressures. I am short but it is okay to stay out of this fray in cash, which I wished I had the courage to do. But please be careful out there and trust no one but yourself.