Terrific Tuesday Morning

Welcome back everybody!

It's been a very exciting weekend with hurricanes and crazy political stuff but that's not all that's turbulent in today's market:  Japan's Prime Minister Fukuda suddenly stepped down, throwing that country into turmoil as there is no clear succession, the browser wars are in turmoil as Google announces it's own challenge to Internet Explorer and the oil markets are in chaos as prices plunge $7 overnight to $108 (7am) – now that's a change we CAN believe in!

We had a really tough time on Friday sticking to our guns and sucking up our losses but we steadfastly refused to change direction during the low-volume sell-off and it looks like we will be rewarded for our faith with a very nice open.  At 9:57 on Friday I had said to members: "Wow, Consumer Sentiment at 63, just over expectations but Chicago PMI was a blowout at 57 (50 expected) .  I now declare any selling to be silly!"  As is usual when the market is silly, we stuck to our plan and we cashed our our USO calls at the top and positioned ourselves for the turn.  Members who missed it should review my end of day comments at 3:34 and 3:43 as that pretty much tells the weekend story and is a good lesson for watching holiday market action. 

My 1:30 comment on crude was: "I am having so much fun watching oil!  They are going to need some pump to get this thing going into he close, there’s pretty good volume on this sell-off.  I think the risk of $110 oil on Tuesday outweighs the reward of $120, especially with the possibility that the SPR will be used."  It was a tough weekend to sit through and my last comment of the market day was: "Financials well off their lows… going to be a tough one over the weekend but I have to go with my gut…"  It's going to be a party today as oil finally breaks our $110 target to the downside – a level we haven't seen since March, when the Dow was roughly 2,000 points higher than it is right now.

In one of the biggest stories you may never hear about because it's too damned complicated to explain, the Bank for International Settlements (BIS) reports that the widely used ABX index that tracks the value of securities backed by sub-prime loans may be OVERSTATING losses on sub-prime loans causing as much as 60% more write-downs than were necessary. 

According to the WSJ: "The ABX is an index that tracks the value of securities backed by subprime loans. Because such securities barely trade, the ABX gets direction from actively traded instruments that insure against default on the securities, called credit-default swaps.  The ABX often is used as a proxy for the value of mortgage-backed securities.  Housing-market factors including the likelihood that borrowers could default on mortgages have contributed to sharp declines in the ABX since last summer. But the BIS report also says that "declining risk appetite and rising concerns about market illiquidity have provided a sizable contribution to the observed collapse in ABX prices."

Other market observers have said ABX prices have been driven down largely by bearish traders. The BIS found that ABX indexes tracking highly rated securities, such as those with triple-A ratings, were particularly sensitive to investor fears that had little to do with default risk.  That could suggest investors are using the indexes "as a macro hedge or to express negative trading views on the U.S. housing market," according to the BIS.  Gee, 60% of over $500Bn in tax-deductible write-downs may have been overstated – who'd have thought?

Asian markets were flat but the Nikkei plunged 400 points on the Prime Minister's resignation, recovering slightly into the close.  The Hang Seng gained half a point and the Shanghai lost half a point as oil and commodity plays collapsed along with the POO.  China banks also had a rough day as the PBOC suggested they were unlikely to be easing monetary policy as had been widely rumored and, in fact, China's banking regulator is drafting new rules to prevent bank clients from misusing loans to invest in the stock and real estate markets. 

SOX alert:  Global semiconductor sales are now reported to have climbed 7.6% in July as strong consumer electronics, personal computers and cellphone results continued to boost sales.  Isn't it funny how this is almost the exact opposite of what they've been telling us all of last month?  Without the rapidly falling prices that are great for consumers and a relief to inflation and a boost to productivity, semi sales would have increased a whopping 11.6% according to the Semiconductor Industry Association.

Europe is generally positive with airlines and autos leading the charge but commodity pushers are plunging so it's a nice study in sector rotation that is keeping the markets in check this morning.  The British government unveiled a package of tax cuts to stimulate the housing market so wave bye-bye to the pound as Chancellor of the Exchequer Alistair Darling said the U.K. could be facing the worst economic conditions in 60 years (and, at that time they were being bombed every day). "We have a credit crunch the like of which we haven't seen in generations. We have it at the same time as oil and food prices are going up. But I also am clear that the fundamentals of our economy are strong," he said. "We will do whatever is necessary to help people and to help the economy through what are undoubtedly unique circumstances."

So – Japan in turmoil, China still a mess, Germany depressed, England as bad as WWII and the situation continues in Georgia – looks like the good old USA is looking PRETTY darned good to international investors right about now, especially as the dollar is still 15% down from it's late '05-early '06 levels.  The S&P is still priced over 20% below its 2006 levels when priced in Euros, even though we seem even with that level priced in dollars – this is something we have been tracking for quite some time and leaves us with the possibility of some real upside as international investors begin to look for the double returns of US equities priced in still-cheap US currency.

Speaking of cheap US currency – Membership to PSW will be closing on 9/20 as we shut down our Q3 Virtual Portfolios (looking very good at the moment) and begin some new ones and, of course, prices will be going up when we reopen so don't say I didn't warn you (current members can lock in pricing for up to one year before then).  We are near our limit for Premium Membeships but we expect to be able to accomodate more Basic members under the new system that is being rolled out – more on that later.  We will also be bringing the referral program on-line so lots of fun in the fall quarter ahead!