Goodbye 7,000?
Fundamentals
Dow futures have fallen below 7,000 in overnight trading on unrest in Eastern Europe and more dismal news from the banking sector. HSBC, Europe's largest bank, plans to generate more capital by making an additional equity offering at a discount to existing shareholders. In addition to reporting a huge drop in earnings, the bank also slashed its dividend and plans to shut down its US banking branches, but retaining its credit card business. American insurer AIG has also asked for an additional $30 billion in aid from the government and is expected to report a quarterly loss of $60 billion today. Following Citigroup's deal with the government last week, the news adds the uncertainty surrounding the banking and financial sectors. There seems to be no end in sight, despite the government's best efforts and, in hindsight, the banking bailout seems to be a disastrous proposition undertaken by the Bush administration and continued under President Obama. It now looks as though the American taxpayer will be on the hook for upwards of a trillion dollars if the experiment fails. Letting the free market do what it does and letting the banking sector take its lumps may have been the best course of action. Many regional banks are, in fact, healthy, but the heavyweights have garnered the media attention, leading the public to believe all banks are in dire straits. Investors have stayed away from the troubled derivatives that got the banks into hot water like the plague, causing further devaluations. Not all of these assets are worthless - in fact most would probably be valued much higher had the government not added to the panic. There is a good portion of the toxic debt that is truly toxic, but many of the pass-through certificates on prime mortgages have been devalued to a point that defies reason. Savvy investors may be waiting in the wings for a good bank/bad bank plan to be undertaken so they can pick-up some of these distressed assets at bargain basement prices.
The sage has spoken. Warren Buffet, in his annual letter to investors, indicated that he sees the US economy "in shambles" through 2009. The legendary investor has not stated anything that the public has not already heard a thousand times, but what is troubling is that he does not see an end in sight to the current crisis. Mr. Buffet is known to pepper in good news with the bad, but there was no good news in this year's letter. Manufacturing stocks have also taken a hit this morning ahead of the ISM Index report, which is expected to show further declines in manufacturing sentiment. January construction spending is also due out later this morning and is expected to show further weakness.
Technicals
Technically, the March Mini Dow chart continues to lose ground after taking out November lows a week and a half ago. The market looked as though it was close to confirming a short term reversal last week, which did not pan out. The next area of significant support for the cash Dow does not come in until the 5,800 level. The only positives that technicians can take from the current situation are that the market is oversold and that momentum is outpacing RSI to the upside.
Rob Kurzatkowski, Senior Commodity Analyst
