US New Home Sales Misses/ Possible SRS long trade

This was from 10 a.m., here's consensus and actual from Bloomberg

SRS is a long time/long term favorite for playing a weak housing market, since giving a long signal it has pulled back, as usual, to the 10-day moving average, an area I often like to be a buyer. Prior Consensus Consensus Range Actual New Home Sales - Level - SAAR 313 K 310 K 300 K to 320 K 307 K

Consensus for a print of 313k with the actual missing at 307k, but as usual, the devil is in the details. The New Home Sales print is an annualized print, the actual number of new homes sold was only 25k! The average new home sale price dropped to a 8+ year low, or in other words, new homes are selling for roughly the same amount as they did before the housing bubble began. Furthermore in the $750k+ category, less then 500 new homes sold in the US for the 3rd consecutive month in a row. This just validates my long term bullishness on the Ultrashort real estate ETF SRS above.

Egan Jones Downgrades Italy

The Downgrades are coming in fast and furious and Egan Jones has seemingly been ahead of the curve compared to their peers (S&P, Fitch, Dagong and Moody's).

Italy has been downgraded from BB+ to BB citing, "the country’s debt is ”growing, while GDP is not.”, according to the Wall Street Journal


Italian BTP yields are trading around their earlier highs at 7.21% which is a level that is clearly not sustainable as far as debt maintenance goes and this is the level at which Greece, Ireland and Portugal all sought bailouts.


With the IMF rumor being denied from last night, it is estimated that Spain and Italy will need between $500 and $800 billion Euros to operate within the next 18-24 months. As Barclay's pointed out early today, the IMF is unlikely to have the resources. As I pointed out last night, the IMF in 2010 voted to double member/donor nation quotas from $375 billion to $750 billion, the problem being only 17 of the 187 donor nations have passed the new quotas through parliament or in the US, Congress (Congress has not taken up the issue and given the fact we are the biggest donor by far, it is not likely that Congress will pass the issue with the Super Committee failing to reach an agreement last week and automatic, across the board spending cuts coming and all of this as we approach an election year-I don't think it would be a politically smart vote given the trouble here at home). 


I can't remember a time in which ratings downgrades came in so fast and furious, it seems the ratings agencies are trying to re-establish their credibility given their lack of foresight during the housing bubble.

ES Diverges Even More

I'm still working with my 3C template, but I'm glad I added some positions here and shortly I will reload the Risk basket template, for now, the early trend we spotted with risk assets diverging negatively from ES (synonymous with the S&P-500 for our purposes) has continued and widened. This is what I have been calling dislocation and these have been the opportunities that I have showed you with the credit/risk basket template that have made for excellent entry points as the market reacts emotionally, but credit and other risk assets show what the heavy hitters on Wall Street really think.

If you are very nimble, there may even be a day trade here worthwhile and I may play one in the options model portfolio.

For now, compare the CONTEXT model now vs the last update.

 This s the most recent CONTEXT update showing the negative divergence between the risk model and ES (S&P-500). Notice how much more it has diverged compared to the earlier chart below that was in my market update.

The start of the divergence earlier this morning.

Model Portfolio trade

Here's the most recent SPY/3C charts

 SPY 1 min hitting a new leading negative low

 Here's a close up view.

The 2 min is negative and leading negative.

I'd rather have a very serious dislocation in the Risk Models, but based on the early action thus far, I will be adding some shorts (via puts) in the WOWS Options Portfolio. I'm not swinging for the fences right now, just adding a few positions in the market (SPY, DIA, QQQ). I'll be leaving room to add if we get higher prices.

The reason I'm using the options portfolio is because I don't have any dry powder left in the equities portfolio.

Credit Indicators starting to diverge.

In what is turning out to be excellent confirmation of our new credit/risk basket indicators, they are diverging and in doing so, confirming their usefulness to do what they were designed to do.

 As you can see, all indicators showed early confirmation, cut as with commodities above, they are diverging negatively with the S&P-500 recently this morning. The idea is that these are all risk assets, but credit leads equities, you could say the smarter money is in credit, so knowing what they are doing tells us about the health of the market and gives us excellent timing of entries when the S&P diverges too far away from the credit and other risk related assets, it's the stock market's emotional pendulum effect that we seek to take advantage of, when the market overreacts in an emotional outburst and the risk basket doesn't follow, we know we have a great, high probability entry.

 Here the Euro shows broad confirmation, when broken down this morning, earlier it was more bullish then the S&P and the S&P went higher, now the S&P is over reacting compared to the Euro correlation.

 Financial Momentum indicator is broadly in line, but now showing signs of falling off while the financially heavily weighted S&P diverges higher.

 High Yield Credit moved up, but refuses to follow the S&P higher recently.

 High Yield Corporate Credit is lagging the S&P.

 Here rates initially were more bullish this morning (in white) and now they have started to diverge negatively. All of the indicators are showing the same theme, they are diverging negatively. The inspiration for these specific indicators came from the CONTEXT Model below which puts them all in one basket whereas we can look at each specifically.

I'm happy to see the CONTEXT model is confirming our indicators with the model or risk assets in green, diverging from ED (The S&P-500).

Early Market Update

Initial indications don't look good, this may be the kind of bounce we have been looking for. So far in early trade, there's no attempt at even confirmation.

 DIA looks worse then Friday

 The QQQ has moved a tiny bit, no where even close to confirmation.

The SPY is seeing 3 virtually ignore this gap up.

And We Still Have Our Gap

Almost immediately after the IMF story was shot down a new story came out of Germany last night, The ELITE BONDS issued by the 6 remaining countries with AAa Credit and used to protect those countries (Germany, France, Netherlands, Austria, Finland, and Luxembourg) and possibly lend to Italy and Spain under strict conditions.

There was no named source, just a "High level source". Whether the market is excited about this news that would create an elite Europe and a bunch of failures or whether traders are latching onto something else, maybe the refuted IMF story, although it seems unlikely, or more likely Black Friday sales (up 16-18%),  thankfully, we still have a great gap to work with.


However in the meantime, Italy issued $567 mm in inflation linked "linkers"(the target sale was $750 mm) at a yield of 7.3% which is much higher then the last issuance of Oct. 27 at 4.61%, it would seem the IMF story is NOT the cause considering the auction. The 10 year hit 7.3% and is now just over 7%-the unsustainable, bailout level.

Meanwhile the liquidity crisis in Europe is hitting multi-year (2008) highs in both dollars and Euros, despite the fact that the banks (so long as they have sufficient collateral) can borrow directly from the ECB, which raises the question, "Have they run out of collateral?" In the race to recapitalize and sell everything not nailed down, this could very well be the situation. Remember a liquidity freeze in the US was the start of the end.

From Moody's:

• The probability of multiple defaults (in addition to Greece's private sector involvement programme) by euro area countries is no longer negligible. In Moody's view, the longer the liquidity crisis continues, the more rapidly the probability of defaults will continue to rise.
• A series of defaults would also significantly increase the likelihood of one or more members not simply defaulting, but also leaving the euro area. Moody's believes that any multiple-exit scenario -- in other words, a fragmentation of the euro -- would have negative repercussions for the credit standing of all euro area and EU sovereigns.

Lets see where the opportunities will be...

Like Clockwork...

The negative divergence in ES is what you call, "Being behind the information curve". Here's the reason for the sell off in ES shown in the last post. Hopefully there will be some gap up left by the a.m.

Well they bought the rumor and now comes the sell-the-news/rumor/denial part of the evening as Dow Jones cites an official that 'No Discussion Within G-7 Of Reported Large Package For Italy".

Excellent 3C/ES signals

These are perfect signals of a mini cycle from accumulation, confirmation and distribution.

ES-present

Black Friday was a Success, Now for Black December...

If you didn't hear already, Black Friday was a 'smashing" success. I bought a new TV over the weekend and noticed that there were a ton of seemingly nice TVs for sale, all in boxes and not 1 on display. They were name brands and priced very cheap. Then I looked at the reviews, 2 of 5 stars, they were crap, but this is what people were buying.


In Europe, I talked to several people who aren't financially savvy or market savvy and the fear over there is palpable, you could literally see it on their faces (via Skype).  I had a lot of questions like this, "What should we do to protect our assets?"

Well Friday the Greeks threw aside the only thing that seemed to be a sure thing, the 40-50% bond holder haircut, they have bypassed the bank negotiators and are talking directly with the banks and are talking about a haircut that may look more like 25% of the face value or a 75% haircut... The negotiating entity, IIF has been bypassed completely!

This move would have significant side effects, starting with the capital banks in the EU are required to hold, it also makes the EU look like it has lost all control as Greece seems to be handling their own affairs, I guess this is exactly why the new G-Pap wouldn't sign the EU commitment letter, which seemed strange at the time, now we know why.

As you already know Belgium lost their Aaa by one notch from 2 rating's agencies.

There were a lot of rumors this weekend, some addressed here and some new, however one of the more significant is that the IMF may offer Italy between $400-$600 billion Euros at 4-5% Interest, giving Italy up to 16 months to let reforms take effect. The snag is still getting the US Congress to allow it, while the market is excited, in an election year or any other, it will be pretty hard to convince Congress to go along with this one. So we'll have the knee jerk reaction and then the thought out one, which may be a blessing for us.

The fast is becoming self-evident that Italy is the last domino before the EU falls. Austria and France are in danger of losing their Aaa and Germany, well you saw the results of the Bund auction last week, increasingly Italy is the fulcrum, that is if the bond vigilantes don't go after France next.

Remember in 2010 the IMF Board of Governors voted to increase the fund from $357 to $750 billion dollars, but, of the 187 counties that pay the quotas, only 17 have signed on or passed the increase, the biggest donor, the US and many others have yet to take up the issue, so it seems for now to be a nice gesture, but like the EFSF, lacks the logistical firepower.

After last week's market performance, it has become clear to the EU that everything that can be done, must be done (rumors included), even as Ireland runs out of rescue money, German Finance minister SCHAEUBLE says

SCHAEUBLE SAYS HE'S `CONFIDENT' 'EURO CAN BE SAVED

*SCHAEUBLE SAYS EURO WILL BE `THE STABLE WORLD CURRENCY'

Interesting...

Well it seems to have worked as the Euro and ES futures jumped, ES about 1%, however the risk basket in CONTEXT shows this to be an equity only move, we'll have more information when the market opens and we look at out own credit indicators, but this may just be the perfect bounce we have been looking for, all equity and rumor and no substance/no credit risk on.

Since we have had rumors that the Greek Drachma may be re-introduced, there were also rumors of Germany issuing their former Deutsche mark over the weekend as well, if there's any truth to any of this, it seems that it would point to resignation that the Euro and perhaps the EU have actually failed, only the death certificate hasn't been issued yet. Either way, it seems eventually that is the inevitable outcome, however it does remind me of SCHAEUBLE'S earlier statement and how it is probably fairly disingenuous, but after last week, they need whatever they can get to stop the bleeding.

It's ironic that we see the market “appearing” so strong right now when all indications point to this unravelling faster and more disorganized then anyone could predict. Like I said, once you hit the point of no return, markets move very fast, it seems we may have been at the P.O.N.R. For a while now.

Oh, and just for good measure, sanctions have been imposed on Syria by the Arab League, if we follow the Libyan template, a no fly-zone is next. I already commented on the naval (Russian/US) situation from late last week, but now Iran says they will attack NATO member Turkey's missiles if “provoked”.

I thought last week would be volatile and interesting, I think I was a week off.

 FX EUR/USD Sunday night open

 A wider view with the open in black

The ES open with a 3C negative divergence right now, volume is quite low for this kind of a move, it may be just what we were looking for to set up new positions or add to existing, especially if credit remains weak as it has thus far via the CONTEXT model.

 As you can see, ES (the S&P futures) are WAY ahead of the risk basket, indicating that equities are alone on this move, which makes it, thus far, a move with little underlying support from other risk assets such as credit. Of course the 3 a.m. open of Europe could change everything.