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We End With the Worst of Both Worlds
By James J. Cramer
This was originally published on RealMoney on March 2 at 3:41 p.m. ET.
Pathetic by both bulls and bears. We didn't take out the lows of the week. But we couldn't rally either. No man's land means nothing ventured.
It is possible that you could argue that we had the V-bottom yesterday and a successful retest of the convoluted lows of Tuesday.
I wonder whether, though, the crescendo on Thursday was a false one, a machine-orchestrated crescendo, this time positively unlike Tuesday.
I am putting the odds of that being the case at 50-50. Believe me, it would be higher if we were more oversold.
I think that we will be oversold enough by the middle of next week to form a more important bottom than anything that the machines could pull off.
Until then, expect more of this whippy action. And batten down the hatches.
Top 10 Myths of Tuesday's Correction
By Barry Ritholtz
This was originally published on RealMoney on March 2 at 3:38 p.m. ET.
On Tuesday, a long overdue market correction took place. At its worst, the
Dow Jones Industrial Average
was down well over 500 points. As has been recounted endlessly by the media, this was the worst single day since Sept. 17, 2001.
It didn't take very long for the spinmeisters to get busy. Numerous reasons were spun out as to why stocks fell -- ranging from merely uninformed to misleading to utterly false. I have seen, read or heard each of the following reasons offered either on the major networks, in the business press, or on the radio. While you have likely seen most of these, I doubt you have seen the facts figures and analyses that follow each.
My top 10 myths of the Great Correction of 2007:
1. Chinese regulators caused the meltdown.
The timing of the Chinese news release makes this statement suspect: On Sunday, China's main stock exchanges (in Shanghai and Shenzhen) issued new guidelines regulating member securities companies.
An article on the subject "China tightens regulation of securities dealers with new rules" was posted at
on Monday. Here is an excerpt:
China's Shanghai and Shenzhen stock exchanges issued on Sunday the new rules of regulating their member securities companies in a bid to ward off risks in stock trading. The rules, which will come into effect on May 1, set limits to the varieties, methods and scales of stock trading that dealers are allowed to conduct, preventing them from engaging in high-risk business beyond their capacity.
Note that these details were released on Sunday, and on Monday Chinese markets set new all-time record highs! Indeed, despite recent official discussions of new capital gains taxes, increased regulation and the government's desire to reduce speculation in China, their indices had advanced 13% in the prior six sessions -- all setting records.
2. It was Greenspan's fault.
I've given Easy Al
a lot of grief over the years. His answer to most any problem is "more liquidity."
However, he doesn't deserve the blame for this one. Given the specifics of what the former
Chair said, as well as the timing of his commentary, it is doubtful he had much impact.
First off, Greenspan didn't say anything that was off consensus. His damaging quote?
"While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown."
Those ain't exactly fightin' words.
Then there's the timing issue. His comments were made early Monday morning over satellite to a group of Hong Kong investors. It was subsequently reported by Bloomberg and others. By 6:49 am on Monday morning, I had already
, noting tongue in cheek that "Greenspan Forecasts Recession (Market Expected to Rally)."
As noted above, Chinese markets rallied, and the US markets were flat on Monday. So to blame what happened Tuesday on Greenspan's comments hardly makes sense.
3. Blame China's market crash.
On Tuesday, China's main indices were off 8.8%. However, it is doubtful this is what led to the cascading selloff in the US.
Why? Most local markets in Asia were off only modestly. The Hang Seng (-1.76%), the Kospi (-1.05%) and the Nikkei (0.52%) all had minor losses. (Note that some Asian markets close earlier than China's.)
Second, consider this fact: The combined value of China's Shanghai and Shenzhen stock markets -- the total market capitalization -- was $400 billion at the end of 2005. Over the next 14 months, it nearly tripled. Gains over the past six months were especially strong. After Tuesday's 8.8% plunge, the combined market cap was a mere $1.4 trillion, vs. $400 billion at the end of 2005.
To put that into some context, the
cap is $22.3 trillion, and the
cap is $4.2 trillion. Add in the
and other markets and the total US market cap is north of $27 trillion dollars.
By my back-of-the-envelope calculations, our 3.5% correction wiped out nearly a trillion dollars in US market capitalization, or more than two-thirds of the entire capitalization of both of China's exchanges
I doubt Communist China's relatively small public markets alone are responsible for what happened here.
4. A Dow Jones Glitch caused the plunge
An absurdly false statement. By 2:55 p.m. EST, the Dow was off 295 points, the Nasdaq was down 95 and the S&P 500 was off over 3%. Indeed, trades in the Dow Diamonds and all 30 individual Dow Components were being reported correctly. Only the index (".INDU" on ILX or Bloomberg) was lagging.
Once the glitch kicked in around 3:00 p.m., most of the damage had already been done. Indeed, until that time, the glitch actually made trading look more orderly then it was. When Dow Jones switched to its back-up server, it rammed nearly an hour's worth of lagging reports through in just a few moments, moving the selloff from mild to wild in 60 seconds.
5. We got fluctuated!
On "Kudlow & Company" Tuesday evening, and then again in a
Wall Street Journal
, my pal Larry Kudlow went to the infamous J.P. Morgan quote, saying "Prices fluctuate."
Maybe, but prior to Tuesday, volatility had been nearly abolished and markets had only moved one direction -- higher. I mentioned this market was challenging J.P. Morgan's notions with its lack of volatility. When Kudlow corrected me -- "Morgan said Fluctuate, not Volatility" -- I replied "We got fluctuated pretty good on Tuesday."
And as I am writing this on Friday, we seem to be getting fluctuated pretty good again today.
6. Stock prices will be higher six months from now.
This one is only half wrong: Based on prior one-day selloffs of 3% and 4%, what is most likely is that we will see higher
lower prices over the next six months to a year. So unless you plan on buying stock and then hiding on a desert island, prepare yourself for some big price moves.
Consider 1997: From Oct. 16 to Oct. 24, the market suffered three days where prices were down between 2.5% to 3%. The next trading day (Oct. 27), the Nasdaq dropped about 100 points (-6.2%). The day after saw a gap down of another 75 points, but then the market rallied, closing up over 9%! Some more upward progress was followed by an 11% setback. The washed-out markets set up a 30% rally by April 1998.
A similar pattern occurred in 1998. April 6 and 7 saw 1.7% and 2% drops, respectively, followed by oversold conditions, leading to a 10-day rally of about 7%. That set up some wild market swings over the next six months: a 10.7% selloff, an 18.2% rally, a 27.2% selloff. From there, we saw a near 20% snapback, leading to a 23.6% correction, and by Oct. 8, 1998, the markets had erased the gains for the entire year and then some. The deeply oversold conditions led to a rally that was up about 60% by the end of 1998, and tagged an 86.7% gain on by Feb. 1, 1999.
December 1999 and January 2000 saw several 3% down days. The market peaked on March 10, and two days later suffered a 6% (peak-to-trough intraday) whack. The next day was another hit of near 4%. These moves set 2000 up for what would turn out to be one of the wildest years in market history. From that March peak to the beginning of April, the Nasdaq dropped 29%. A 22% bounce by April 10 was followed by a 27% drop, a 23% gain and a 23% selloff. And that was all before May was over!
From the lows in May, the Nasdaq subsequently rallied 41% by mid-July. Between then and Sept. 1, the Nazz dropped 17.9% and rallied 21.0%. From September to December, the Nasdaq markets then dropped over 40%, to just about 2,300.
Here we are nearly seven years later, and we are less than 100 points above the levels of December 2000.
7. Selloffs such as this are healthy.
Moderate selloffs of 0.5% to 1% might be healthy, but the plunge this week was anything but.
What was unusual about the selloff this week were the volume and market internals. Volume on the NYSE and Nasdaq were record setting. The
traded well over 300 million shares alone. Advance/decline ratios and up/down volumes were off the chart.
This looked like the kind of panic selling we see
at the end
of a long decline. Indeed, if we had been selling off for the prior six months, I would have been advising everyone and their mother to be in there buying hand-over-fist.
What makes this situation potentially dangerous is that this was the first day of the selloff, not the last.
The enormous distributive volume and the horrific market internals were anything but healthy. It suggests a major change in underlying metrics and psychology.
8. The Fed stands by ready to cut if this gets much worse.
It's become the rallying cry of the bulls: The Fed is cutting! The Fed is cutting!
The problem is that card has already been played and we know how that turned out. The Fed did this during the last recession/market crash (2001-03), and the resulting rampant inflation, unaffordable housing boom, $75 Oil and $750 Gold is what they have to show for it.
Inflation, though moderating, still remains elevated. I suspect the Fed will be somewhat reluctant to open the spigots again anytime soon. Ben Bernanke knows all too well that there is no free lunch. He is well aware that inflation is above all a monetary phenomena.
Hopes for rate cuts are misplaced. If we are to believe the Fed's jawboning, it is inflation, and not stock prices, that has the Fed most worried. That concern is warranted, going by the recent Core CPI and PCE data. Oil, medical care and food prices all remain quite lofty.
9. The market is not forecasting a weakening economy.
For the past six months, I have heard repeatedly that the markets are forecasting economic growth, and that the rally was proof that the economy was not slowing.
Apparently this is part of the "ratchet wrench approach to analysis." It only works in one direction -- e.g., oil is disinflationary coming down, but somehow not inflationary going up, or lower gold prices are proof of low inflation, while higher prices are proof of speculation.
The lack of symmetry is revealing of bias. If you believe that markets discount the future, then it's all but impossible to say that a 500-point intraday drop has no economic significance.
10. This had nothing to do with anything fundamental!
A long string of punk economic data was finally broken by a marginal ISM report Thursday. But that was cold comfort to those who track the economy and have noted the ongoing deceleration in growth.
Probably the most overlooked story from Tuesday was the live interview with
early Tuesday morning. Freddie Mac essentially announced that they would "stop purchasing subprime loans or any securities with high risks of default."
In 2006, about 15% of new mortgage originations (not refis) were sub prime. Add in the various "liar loans" where there is no income check and no documentation is required, and other flavors of exotic fare such as interest-only loans, and piggyback mortgages that allow 100% loan to value, and you have as many as 30% of new mortgages.
With one fell swoop, Freddie just eliminated between 15% and 25% of home purchasers from the credit pool, and that just set the housing bottom-callers back another year.
Drawing Fact From Fiction
Since the summer, the rampaging bulls have had their way with just about every market on earth. Volatility had been subdued and risks ignored.
That era is likely over now. Indeed, the general commentary ("buy the dip, hold for the long term") may be ignoring a developing shift in psychology. It reeks of complacency.
In a note to clients after the plunge, we said to expect three things:
1) Increased volatility;
2) attempt(s) to return to prior market highs;
3) deeply oversold conditions that will eventually create great entry points.
Traders are likely better off waiting for these conditions prior to jumping into long-side trades.
Finding the Next Shoe to Drop
By Doug Kass
This was originally published on RealMoney on March 2 at 12:32 p.m. ET.
, the largest originator of home loans in the U.S.,
in its prime mortgage loans.
At year-end 2006, Countrywide's subprime delinquencies were approaching 20%. That's nearly twice the rate reported by the subprime industry in November and it suggests that the upward spiral in subprime-industy late payments will rise dramatically in 2007. (New data from First American Loan Performance, a San Francisco-based research firm, confirmed this likely trend, reporting that nearly 14% of packaged subprime loans were delinquent.)
More importantly, these results confirm that credit problems will not be contained to the subprime mortgage market. At Countrywide, prime mortgage-lending delinquencies doubled to nearly 3% year over year, indicating that that sector is experiencing the same contagion that subprime experienced over the last 12 months.
On Tuesday, in response to the subprime carnage,
tougher subprime lending standards.
and other regulators of banks are expected to release new subprime lending guidance, which will incorporate the impact of mortgage interest rate resets.
As a result of new lending standards and self-imposed reductions in mortgage lending, the availability of mortgages is going to be severely crimped -- and with it, personal consumption expenditures will soon take a dive.
It is no wonder that bullish commentators are getting bored with subprime lending problems. Larry Kudlow's
, who, like Dante, Dostoevsky, Nietzsche and Proust, view the world through the lens of a single defining idea ("the greatest story never told"), are about to be outwitted by the foxes who, like Shakespeare, Aristotle, Balzac and Joyce, draw on a variety of experiences in creating their investment mosaic and refuse to believe that the world can be boiled down to a single idea.
The Next Shoe to Drop?
With the contagion that started in subprime mortgage lending now spreading to other mortgage tranches,
, the next shoe to drop might well be in the broader securitization market.
Not only will older, less-protected packaged securitizations and other derivatives decline in price in a readjustment, but the entire credit securitization chain will become less profitable to industrial companies, mortgage lenders, banks and brokerages.
Consider what has occurred and is now occurring in subprime. The prices of mortgages are rising as the originations become less profitable for the financial intermediaries that serve the market. In turn, housing affordability worsens, delinquencies and foreclosures rise, housing inventories build further, and home prices drop in the second leg down for residential real estate.
This is the vicious cycle and contagion in credit markets.
Now I am hearing stories of plunging demand for CDO tranches and sponsors taking large fee-haircuts before deals can be sold. It is in the mixed asset class of CDOs where the contagion of subprime might soon spread as buyers recoil from sharper-than-anticipated losses in the mortgage market.
Credit spreads are flying open and the vicious cycle of credit has begun as the evaluation of risk is reassessed.
Given the sheer size and significance of the unregulated credit derivative markets, this is the kind of stuff that capital market crashes are made of.
At time of publication, Kass and/or his funds were short CFC, although holdings can change at any time.
Upcoming Rally Won't Last Long
By Helene Meisler
This was originally published on RealMoney on March 2 at 8:31 a.m. ET.
It must be killing the perma-bulls that we aren't just turning around and zooming upward. After all, that has been the case for the past six or seven months. But I suppose that's why they call it complacency.
We are heading toward an oversold reading, which will occur sometime next week between Monday and Wednesday. It will not be a great oversold reading because the negative numbers being dropped on the 10-day moving average are rather puny.
For example, we'll drop -17 Monday. Tuesday is a positive reading. Wednesday is -320, and that is the biggest negative number to be dropped next week.
As a reminder, to be oversold, a long string of negative numbers must be dropped. For a good oversold reading, a long string of "big" negative numbers needs to be dropped. Next week's numbers are not "big."
The next thing to notice is that the oscillator has now made a lower low. Remember, an oversold reading usually leads to an oversold rally, but it takes positive divergences (i.e., a higher low in the oscillator) to get a rally with some staying power. Just notice the three lows of last spring and summer, with the latter two being higher lows. That is what a positive divergence looks like. What we have now is at best an upcoming oversold reading.
Then there's the put/call ratio. For weeks on end, I put the put/call ratio on the bullish side of the ledger, but last Thursday,
I warned that at some point, a constantly high put/call ratio becomes a negative, not a positive. On Monday,
I showed the chart of the index put/call ratio's 21-day moving average as it surged over 180%, which turned it from bullish to bearish.
However, for the past few days, I haven't mentioned the put/call ratio, despite its higher readings. For each of the past seven trading days, the total put/call ratio has been over 100%. I use a 10-day moving average on the total put/call ratio for shorter-term moves. That means within three trading days, this indicator is likely to peak.
Heading into last Memorial Day, the put/call ratio had nine consecutive days of 100% or greater readings. The market rallied, but it lasted only a few days before heading back down again. To me, this confirms that the upcoming oversold reading isn't a great one. These two indicators say that we should get some kind of rally next week, but it probably won't last long.
Away from stocks, has anyone noticed that oil has rallied a lot lately? Oh, it's been quiet in its rise, but yesterday's high was $62.49. I
had been looking for something around $62.50, I'd say it's in the area now.
I wouldn't look for much more upside on oil now and would consider it vulnerable to a move back down below $60.
Also on the commodity side, it's time to revisit silver, which I
last covered on Feb. 16. At the time, I said I'd like to see silver break out, get people excited and give the gain right back. That is exactly what it has done, yet I haven't seen anyone discuss its collapse. I believe silver is due to test that $12.50-$13 level now.
For more explanation, check out The Chartist's
Radical Change Cannot Be Ignored
By Dick Arms
This was originally published on RealMoney on March 2 at 8:15 a.m. ET.
The big decline at the market's open yesterday took the
down to just about where some support would be expected. As you can see, the support of November seemed to come back into play yesterday. That also suggests the rally is likely to go further. In fact, there even may be room for nimble traders to make some money on the long side.
But more important is the larger picture. The upward move that began last July was a well-defined trend. That trend started to lose momentum in November, but the narrow channel continued. Now the uptrend has been decisively destroyed.
There has been a radical change that cannot be ignored, or passed off as just a correction, as seems to be the song being sung by both the government and the media. This was an important break, and one that was warned about repeatedly in this column. I am willing to try to play a rally here, because it is such an oversold short-term situation. But longer term, I do not believe the decline is over.
To view a larger version of these charts (in some browsers), after clicking on the "larger image" link below the chart, mouse over the lower-right area of the chart until the icon with four arrows appears. Then click on that icon.
November Support's in Play on Dow
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for
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Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody.
Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information,
. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill.
Richard Arms is a renowned stock market technician who invented the Arms Index (often referred to as the TRIN), which has become a mainstay of market analysis, appearing in
The Wall Street Journal
. Arms also developed the widely used technical method Equivolume Charting. Since 1996, he has been publishing the Arms Advisory newsletter for money managers and financial institutions. He also has been honored with the Market Technicians' Award for Lifetime Contribution to Technical Analysis