Housing Woes Continue
By Colin Twiggs
June 26, 2008 6:00 a.m. ET (8:00 p.m. AET)
The Dow is testing primary support at 11750. Volume is light and Twiggs Money Flow falling — both warning of weak support. Expect primary support to fail, offering a target of 11000.
The FTSE 100 index is consolidating between 5700 and 5600; a continuation signal. A fall below 5600 would test primary support at 5400. Twiggs Money Flow holding below zero signals selling pressure. In the longer term, failure of primary support would offer a target of 5400-(6400-5400)=4400.
The Nikkei 225 index is the most bullish of the indices reviewed, with Twiggs Money Flow holding above zero to signal buying pressure. A word of caution: despite the accumulation, losses in other major markets could drag the Nikkei lower.
Financial markets remain relatively stable, with the spread between the fed funds rate and 3-month T-bills close to zero. The gap would widen if institutional investors become fearful of lending to banks and resort to the safety of treasury-bills, driving the yield lower.
Ten-year treasury yields have started a primary up-trend. Respect of the first (short-term) support level at 4.10 percent would signal trend strength; failure of the second level at 3.90 percent would indicate weakness. The yield differential shows that bank margins are relatively healthy (their troubles lie elsewhere: rising default rates and falling collateral values).
Inflation expectations (as indicated by the spread between 10-year treasurys and the equivalent TIPS rate) remain subdued. A rise above 2.7% (right scale) would be cause for concern.
The Fed kept rates on hold at the latest FOMC meeting. Continuing dips of the effective fed funds rate below its 2 percent target indicate that downside pressure remains and a rate hike is not imminent. Rising yields on asset-backed commercial paper indicate continued pressure on banks off-balance sheet funding. Citigroup banking analysts estimate that banks will have to restore up to $5 trillion of assets to their balance sheets, according to the WSJ, exacerbating the existing credit squeeze.
Total asset-backed commercial paper in issue continues to shrink.
Corporate bond yields are rising in line with long-term treasury yields, slowing new investment.
Fixed mortgage rates are rising in sympathy with long-term treasury yields, increasing downward pressure on the housing market.
Credit growth continues to fall as banks shore up their balance sheets. This will in turn affect consumption and new investment, slowing the economy.
Fed term auction credit facilities total $150 billion. A fall in this figure would indicate that the credit squeeze is easing, but don't hold your breath. I expect facilities to increase over the next 6 to 12 months.
Consumer confidence is taking a pounding from falling housing prices and rising crude oil prices. Expect a cut back in spending, further slowing the economy.
Jonathan Wright's recession prediction model remains at zero. The model looks four quarters ahead and does not reflect that we are currently in (or about to enter) a recession.
About 40 percent of the 7 million subprime loans outstanding will default in the next two years.
The defaults of option-adjustable-rate mortgages and other mortgages subject to rate reset will be of the same order of magnitude
but over a somewhat longer period of time.
This will maintain the downward pressure on house prices.
~ George Soros: The New Paradigm For Financial Markets: The Credit Crisis Of 2008 And What It Means
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