The US Treasury will announce auctions of 2-Year, 5-Year and 7-Year notes this Thursday for auction next Tuesday, Wednesday and Thursday. The FOMC meets next Tuesday and Wednesday and an unchanged Fed Statement has been hinted in recent Bernanke testimonies. Commodities slump as the dollar firms up. My market call remains; “Sell Strength”, raise cash to 75%, as the Dow is headed for 8,500 before 11,500.

10-Year Note – Yields tend to rise in anticipation of supply, then decline during the auction process, as demand remains strong for the international safety of US Treasuries. Next week the US Treasury will auction $44 billion in 2-Year notes on Tuesday, $42 billion in 5-Year notes on Wednesday, and $32 billion 7-Year notes next Thursday.

- The 2-Year shows a week’s pivot at 1.02 with semiannual support at 1.089. Quarterly resistance is 0.914.
- The 5-Year is under the influence of pivots at: 2.529 semiannual, 2.487 weekly and 2.464 quarterly.
- The 7-Year is cheaper than quarterly and semiannual pivots at 3.173 and 3.107.
- The 10-Year held 4% recently and this week’s resistance is 3.735 with that semiannual pivot still lurking at 3.675.

Courtesy of Thomson / Reuters
The Beige Book for next week’s FOMC meeting showed that many Districts reported increased activity in housing markets, but from low levels. Commercial real estate market activity remained very weak in most Districts. Activity in the banking and finance sector was mixed in a number of Districts, as loan volumes and credit quality decreased. While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff. Wage pressures were characterized as minimal or contained. Retail prices generally remained level, but some input prices increased. This backdrop will leave the federal funds rate at zero to .25% for an “extended period.”

Comex Gold – Annual, quarterly and annual supports are $1115.2, $1052.8 and $938.7 with weekly and semiannual pivots at $1131.3 and $1139.7, and daily, semiannual and monthly resistances at $1149.3, $1186.5 and $1202.5. Gold will stay in the trading range shown.

Courtesy of Thomson / Reuters
Nymex Crude Oil – Annual and quarterly supports are $77.05 and $58.41 with a daily pivot at $82.39, and weekly and monthly resistances at $84.30 and $84.54, and annual and semiannual resistances at $97.29 and $97.50. The trading range has been moved upward, but that annual pivot remains a magnet at $77.05.

Courtesy of Thomson / Reuters
The Euro – Quarterly support is 1.2450 with a weekly pivot at 1.3507 and daily, monthly and quarterly resistances at 1.3695, 1.4081, 1.4145 and 1.4478. The euro remains vulnerable versus the dollar.

Courtesy of Thomson / Reuters
The Major Equity Averages

Dow – Annual and quarterly supports are 10,379 and 7,490 with daily, weekly, monthly, annual, and semiannual resistances at 11,196, 11,169, 11,228, 11,235 and 11,442.

S&P 500 – Annual supports are 1179.0 and 1014.2 with semiannual and monthly pivots at 1194.6 and 1199.6, and daily and weekly resistances at 1214.0 and 1218.9. Quarterly support is 805.4 with semiannual resistance at 1281.1.

NASDAQ – Monthly and semiannual pivots are 2415 and 2392 with a monthly pivot at 2465, and daily and weekly resistances at 2519 and 2539. Semiannual, annual and quarterly supports are 2258, 2250 and 1833 with annual support at 1659.

Dow Utilities – Daily, weekly and monthly pivots are 381.27, 380.10 and 384.78 with monthly resistance at 394.36. Annual and quarterly supports are 315.38 and 307.70 with annual and semiannual resistances are 456.73, 471.95 and 492.05.

Dow Transports – Semiannual, monthly and annual supports are 4488, 4397 and 4324 with daily and weekly resistances at 4772 and 4731. Quarterly supports are 3447 and 3142 with annual and semiannual resistances at 4955 and 5218.

Russell 2000 – Semiannual and monthly pivots are 673.50 and 672.65 with an annual pivot at 717.69, and daily, annual, weekly and annual resistances at 722.48, 723.54, 732.87 and 748.99. Quarterly support is 509.08.

The SOX – Monthly and semiannual supports are 361.9 and 358.89 with weekly and daily pivots at 388.57 and 395.82. Quarterly, semiannual and annual supports are 278.30, 271.90, 259.45 and 241.05.

Dow Tracks – Weekly Chart

Weekly Dow: The Dow tested its 200-week simple moving average at 11,134, but ended the week below it with overbought momentum. The weekly chart remains positive but overbought on a close this week above its 5-week modified moving average at 10,824. My annual and semiannual resistances are 11,235 and 11,442. I still predict Dow 8,500 before Dow 11,500. The 61.8% Fibonacci Retracement of the October 2007 high to March 2009 low at 11,246.


Courtesy of Thomson / Reuters
That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com

Mortgage Modifications lag Foreclosures. JP Morgan tops estimates! My Guess is that the Congressional Oversight Panel would have liked my “Mortgage Mulligan”. Bernanke re-iterates low rates for an “extended period”. The President wants tighter control of derivatives. The Federal Reserve Beige Book! The Dow approaches major resistance on overbought weekly MOJO.

Mortgage Modifications lag Foreclosures - As I discussed in Wednesday’s “Four In Four” lower appraised values for homes will take a bite out of mortgage modifications as more homeowners sink underwater, and those that are already underwater submerge below being 25% below appraised values.

With so much over-leverage still weighing on the banking system, with tighter lending standards, and with tougher regulatory guidelines looming, banks will be less willing to lend and make mortgage modifications.

Some banking industry executives are starting to frame this dilemma with the fairness statement. There are many homeowners who are underwater on their mortgages, but are making their monthly payments, so it’s unfair to give neighbors who default a break. This is why my “Mortgage Mulligan” plan I proposed back in February 2008 would have worked. Every homeowner would have had the opportunity for a “Mortgage Mulligan”. By the end of 2008 the yield on the 10-Year approached 2%, which would have had a 30-Year fixed rate mulligan rate near 3%. That would have stopped the deterioration, by putting the burden where it belongs, on the investors in mortgages and mortgage backed securities around the world.

In Congressional hearings Chase told lawmakers that large-scale mortgage principal reduction “could be harmful to consumers, investors and future mortgage market conditions.” Chase estimated the cost of reducing all home loan balances to appraised values would cost up to $900 billion with $150 billion cost to the government. This sounds cheap to me given all the monies wasted to date.

JP Morgan tops estimates! When do we start to look at bank earnings excluding trading profits? Do we need to anticipate a ban on proprietary trading?

At JM Morgan, consumer and real estate delinquencies remain high, and when lower appraised values for homes start to hit in the second half of 2010, the pause in the near term leveling of delinquencies will end.

My Guess is that the Congressional Oversight Panel would have liked my “Mortgage Mulligan”

The COP describes the Obama plans to ease foreclosures as too little, too late. There are too many homeowners being left out, as six million families are more than two month’s in default, and the pace of foreclosure notices are averaging 200,000 per month. Elizabeth Warren the “Top COP” says that after launching the program, a year and a half later, “Treasury is still fighting to get its foreclosure programs off the ground."

Even with help, many mortgage payments are too expensive for many Americans to afford. Re-defaults are too high and billions of taxpayer money is spent as families strike out in trying to save their homes.

As an indication of mortgage stress, Mortgage Applications declined 9.6% last week with purchases down 10.5% and Refi’s down 9.0%. Despite the tax incentives for first time and existing home buyers, the four-week moving average is declining. Part of the cause the fact that the FHA has raised the down payment for new loans it guarantees. FHA loans had been 50% of the volume and that declined 19%.

The Cost of Living is on the rise – The CPI is up 2.4% year over year, and was up 2.7% in 2009. I do not describe this as stable inflation given that inflation-adjusted weekly wages fell by 1.6% in 2009, the sharpest drop since 1990.

Bernanke re-iterates low rates for an “extended period” - With the Fed chief saying that economic growth will just be moderate, the federal funds rate will stay low for a long time. He argued that inflation is not an issue and will stay low. Bernanke also stated that economic growth was still being weighed down by weakness in the construction industry, and struggling state and city budgets.

The President wants tighter control of derivatives – Something I can agree with! More than two years after “The Great Credit Crunch” began the notional amount of derivative contracts continue to rise in the banking system, and stood at $213 trillion at the end of 2009. Mortgage related derivatives were the most problematic in 2008 and 2009, and it’s hard to determine what this exposure is today. These exposures need to be on bank balance sheets and marked to market.

The Federal Reserve Beige Book - When I look at the Beige Book I focus on housing and banking. Stocks in these industries have provided upside leadership year to date, but the gossip from the Beige Book does not jive with that market strength.
Many Districts reported increased activity in housing markets from low levels.
Commercial real estate market activity remained very weak in most Districts.
Activity in the banking and finance sector was mixed in a number of Districts, as loan volumes and credit quality decreased.
While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff. Wage pressures were characterized as minimal or contained.
Retail prices generally remained level, but some input prices increased.

Dow 11,000 and weekly MOJO is strong. Holding today’s pivot at 11,081 targets my “Wall of Resistances”; monthly resistance at 11,228, annual resistance at 11,235, weekly resistance at 11,330, and semiannual resistance at 11,442.

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com

The impact of lower home appraisals! The FDIC wants to change the rules for Deposit Insurance Fund assessments. Intel scores better than expected earnings for a third consecutive quarter. The Dow continues to grind higher on strong MOJO on its daily chart.

My son and I are homeowners who bought a home a year ago and have no intention to sell. We welcome a lower home appraisal, as that reduces the property taxes we will pay in 2011. The State of Florida also has a Homestead Act, where a home’s tax base is $50,000 below the home appraisal. In 2010 we were not eligible for this benefit. In the 2011 tax year the appraised value of our home is down 20% from a year ago, and our tax base is down 40% after the Homestead Act benefit. Tax rates may be higher, but it’s reasonable to assume that our property taxes will be lower in 2011 from 2010.

When we bought the home we estimated that we purchased down 40% from the housing peak of mid-2006. We knew that there would be risk of lower prices, but a deal is a deal, and we have a 4.5% 30-Year fixed rate mortgage.

Those who get hurt by lower appraisals are the sellers, who become underwater or even more than 25% underwater, which appears to be the threshold for mortgage mitigation programs. The lower the appraised value, the less likely a servicer will be willing to offer a Short Sale and the more likely that the homeowner will default and then foreclose. This could propagate into even lower home prices exacerbating the problems in the housing market.

This will also hurt the homebuilders because new homes may become unprofitably to built and sold given higher costs of building materials. In a market where new homes are being sold, the same model can be appraised at a lower price do to defaults up the block from the builder’s site.

I do not have a suggested way to avoid this problem, but it will likely lead to 3.5 to 4.0 million foreclosures this year, up from 2.8 million in 2009. Also keep in mind that the Case Shiller Housing Market Index is 50% higher than in 2000, so home prices have room for another leg down.

The FDIC wants to have a three-tiered Deposit Insurance Fund - Under a proposal being considered by the FDIC, small banks with less than $10 billion in assets would pay the same fee structure, or have reduced fees. Deposit insurance fees would rise for banks with more than $10 billion in assets. Finally banks considered “highly complex institutions” with $50 billion or more, and a holding company with $500 billion would have yet a higher fee schedule. I do not know how this will effect the Deposit Insurance Fund will be affected in 2010 through 2012, as these fees have been pre-paid.

The FDIC thinks that banking regulators should be allowed to apply these new standards based upon their judgment of a bank’s risk profile. How do they dream up these ridiculous notions, when our banking regulators ignored guidelines for C&D and CRE loans set at the end of 2006?

Will Intel be the earnings tell for the second quarter? Subscribers to the ValuEngine Morning Briefing know that Intel was my Stock of the Day on Tuesday. Here’s how I framed the profile:

Intel Inc (INTC) – has been rated a BUY according to ValuEngine, with fair value at $25.00, which makes the stock 9.9% under. Intel is expected to earn 38 cents per share after the close today. The stock has been in the ValuTrader model portfolio since February 8th. Intel Corporation develops integrated digital technology products, primarily integrated circuits, for industries, such as computing and communications. The company also develops platforms, which define as integrated suites of digital computing technologies that are designed and configured to work together to provide an optimized user computing solution.

Analysis – The daily chart for Intel shows declining MOJO with the stock above its 21-day, 50-day and 200-day simple moving averages at $22.24, $21.14 and $19.93. My annual value level is $16.47 with a monthly pivot at $21.44 and weekly risky level at $22.93. Assuming the stock holds after hours gains Wednesday morning, profits will be booked at Wednesday’s open. A GTC order to sell at $22.93 will be executed at the open. At my monthly risky level at $23.47 the gain will be 21% since the stock entered the ValuTrader model portfolio on February 8th.

Dow 11,000, but major resistances loom. The strength of earnings from Intel should have the Dow challenging today’s resistance at 11,085, but remember that “Wall of Resistance”; monthly resistance at 11,228, annual resistance at 11,235, weekly resistance at 11,330, and semiannual resistance at 11,442.

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com

NBER is Reluctant to Say that Recession is over. Home Equity Losses Remain an Issue. The Government uses Fuzzy Math on the Bailouts. Are the Financial Media Coaxing Investors back into Stocks? Dow 11,000, as major resistances loom.

NBER is Reluctant to Say that Recession is over - Most economists have stated that the Recession ended somewhere between last July and September. Now the National Bureau of Economic Research (NBER) says not so fast, the evidence is not easy to decipher.

In my opinion this graph reflects the major reason that the Recession is not over – Unemployment. Unemployment was just 4.6% when the Recession was declared in December 2009, now it’s more than twice that at 9.7%.

The NBER seems to be concerned about a Double-Dip, but they think that scenario is unlikely. With this uncertainty the NBER cannot time stamp an end to this Recession given the severity of the contraction, which I have called, “The Great Credit Crunch”! GDP may have rebounded for three consecutive quarters in Q1 2010, but employment trends and consumer confidence indicate that this GDP gain may not be sustained. The NBER does not want to risk calling an end to Recession after the beginning of a second one, which would be called the Double-Dip.

Home Equity Losses Remain an Issue at big banks including Bank of America, JP Morgan and Wells Fargo. A report by CreditSights indicates that the big banks face potential losses of $30 billion.

Based upon my analysis of FDIC data Home Equity Loans are up 258.9% since the end of 2001, and 2009 was the first year over year decline, which was 18.3%. There was a Home Equity Loan balance of $661 billion at the end of 2009, and with 25% of homeowners underwater, the future writedowns could be much larger than $30 billion.

The growth rates for home equity loans were mind-boggling in 2002 through 2004 with annual increases of 39.1%, 35.0% and 41.8% as homeowners tapped their equity in their homes as piggy banks. I say the losses in home equity loans could exceed $150 billion before “The Great Credit Crunch” ends in 2012 into 2013 at the earliest.

The Government’s Fuzzy Math on the Bailouts - The US Treasury now suggests that the bank bailout will only cost taxpayers $89 billion. Don’t listen to the Fuzzy Math:

The Status of the Bailout according to ProPublica.org:
Outflows - $514 billion including only $60 million for foreclosure relief – Banks $244.9 billion, Fannie & Freddie $125.9 billion, auto companies $79.9 billion, AIG $47.5 billion and Toxic Asset Purchases just $15.9 billion, when that was the original intent of the TARP.
Inflows - $207.1 billion – Refunded $180.7 billion with revenues of $26.4 billion.
Net Outstanding - $306.8 billion.

Are the Financial Media Coaxing Investors back into Stocks?

I have seen it happen almost every time in my career. Investors shy away from stocks in a bear market fearing that price declines lead to more price declines. Based upon an on-line survey when I appeared as a blogger on Fox Business Live in early March 2009, 88% disagreed with my call that stocks would rise 40% to 50% from the March 5th low. Investors did not want to buy undervalued stocks with single-digit P/E ratios.

Investors tend to follow the herd at market tops such as October 2007 ignoring overvalued fundamentals and high P/E ratios, as the financial media usher in strategist after strategist with those P/E multiple expansion market calls.

At Dow 14K we were going to 18K. At 6,500 we were going to Dow 5,000. The better strategy is to book profits at highs and accumulate longs at the lows. Sell 50% at 14K and another 50% at 18K if that were to have occurred. Put the cash raised at 14K back in at 6.5K and add more money if the decline went to 5K. Learn how to buy weakness to a Value Level and to sell strength to Risky Level.

It seems to me that the same investors than got burned in October 2007 were afraid in March 2009, which was the same as at the highs in March 2000 and the lows in the second half or 2002 and in March 2003. Capture a portion of the up trends and down trends, in a Buy and Trade Strategy.

Dow 11,000, but major resistances loom. There’s only another 4% to my semiannual resistance at 11,422. The risk to my quarterly support at 7,490 is 31.9%. Not a favorable risk / reward. I am not saying that you can’t capture another 4%, but make sure to have a sell stop given this risky profile. The “Wall of Resistance” stretches from my monthly resistance at 11,228, my annual resistance at 11,235, my weekly resistance at 11,330, and my semiannual resistance at 11,442.

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com

Back in March 2007 I predicted Recession in 2008 / 2009, with GDP at the end of 2009 below that of 2008 for the first time since 1948 / 1949. Today I am in the Double-Dip camp. The Housing Market remains weak, Bad Consumer and Real Estate Loans are still rising, and the “too big to fail” banks have gotten bigger. The housing and banking stocks have been out-performing so far in 2010, but this MOJO is for short-term traders only.

Back in March 2007 I predicted Recession in 2008 / 2009, with GDP at the end of 2009 below that of 2008 for the first time since 1948 / 1949. This proved correct as current dollar GDP declined 1.3% in 2009. I also predicted that the stock market would enter a bear market in 2007 and from its October 2007 high of 14,198 declined 54.4% to 6,470 at the beginning of March 2009, when I predicted a 40% to 50% rally. The Dow is up 4.8% year to date and up 69.8% from the year ago low, so the rally has been larger than I expected. Even so, the Dow is still 23% below 14,198.

I based my predictions on ValuEngine metrics and data from the FDIC Quarterly Banking Profile, which to me is the single most important leading indicator for the US economy.
In March 2007, I saw that data from the FDIC was clearly starting to deteriorate. This was after the peak in home builders in July 2005, Community Banks in December 2006, and Regional Banks in February 2007. This weakness continues to surface quarter after quarter.
In October 2007, all eleven sectors were overvalued according to ValuEngine. Today, all eleven sectors are overvalued.

The Housing Market remains weak – After some improvement in the second half of 2009, home prices will decline again in the second half of 2010, as tax incentives sunset, and foreclosures rise on difficulty with mortgage mitigations from the numerous government-sponsored programs.

Bad Consumer and Real Estate Loans are still rising – Subprime loans were viewed as isolated in 2007, but obviously the problems spread to the broader mortgage market and dragged down the economy. Defaults and foreclosures continue to rise in 2010 with four million possible by year’s end, up from 2.8 million in 2009. Many bad loans were pushed off balance sheet, and FASB rules now state that mark-to-market account has returned. The FDIC is allowing insured institutions until the end of 2012 to accomplish this. Our regulators are playing Kick the Can.

The “too big to fail” banks have gotten bigger and will likely get hit by the Wall Street “greed tax”, which is supported by regulators in Great Britain and in Euroland.

The smaller community and regional banks still have some suffering to do as they wind down exposures to C&D and CRE loans, with tougher guidelines looming around the corner.

In sum, housing and banking stocks have been out-performing so far in 2010, but this MOJO is for short-term traders only. Investors should be paring back positions on strength.

Housing Sector Index (HGX) is up 9.6% year to date, but down 61.7% since its July 2005 high. The short term uptrend continues given weekly closes above my monthly pivot at $109.85. The upside is to the 200-week simple moving average at $144.64.

The America’s Community Bankers’ Index (ABAQ) is up 16.4% year to date, but is down 45.3% from their December 2006 highs. The short term uptrend continues given weekly closes above my monthly pivot at $156.80. The upside is to my annual resistance at $197.07 and to the 200-week simple moving average at $220.32.

The Regional Bankers Index (BKX) is up 28.9% year to date, but is down 54.6% from their February 2007 highs. The short term uptrend continues given weekly closes above my monthly pivot at $53.31. The upside is to my annual resistance at $73.12 and to the 200-week simple moving average at $76.30. My semiannual support is $40.76.

All of the “smart” testimonies recently from CEO’s, Directors, Fed Speakers and others in the regulatory community are from those who did not see “The Great Credit Crunch” in the making. The testimonies in Congress and various speeches have the theme that “The Great Credit Crunch” has been resolved. I disagree! I am one of the few independent strategists that saw it coming, warned about recession and the bear market for stocks well in advance.

Next week the ValuEngine monthly FDIC report will compare key asset categories on an annual basis since the end of 2001. Subscribe to this report and find out why “The Great Credit Crunch” will continue right through 2012 and into 2013 if not longer. It will be tough to unwind all of those bad loans and there are many unknown time bombs ticking in $213.6 trillion in unregulated notional amount of derivative contracts. The can is being kicked down the road, and there appears to be a cliff at the end of the road. Subscribe to this report at www.ValuEngine.com.

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com