Dallas, TX
March 17, 2008, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Report: U.S. Gets Margin Call. Can It Get Worse?

What's Hot Today:
Global markets are likely to be very volatile over the next few days. Watching from the sidelines seems to be good advice in the near term.

Today's Economic Calendar: 8:30a.m. Mar NY Fed Manufacturing Report. Expected: -7.4. Previous: -11.72. 8:30a.m. 4Q Current Account Balance. Expected: -$184B. Previous: -$178.5B. 9:00a.m. Jan Treasury International Capital Flows. Previous: $45.2B. 9:15a.m. Feb Industrial Production. Expected: -0.1%. Previous: +0.1%. 9:15a.m. Feb Capacity Utilization. Expected: 81.3%. Previous: 81.5%. 12:00p.m. Jan Chicago Fed Midwest Mfg Index. Previous: +0.1%. 1:00p.m. Mar NAHB Housing Market Index. Previous: 20. Sources: The Wall Street Journal and Marketwatch.com.

News For Thought

J.P. Morgan bought Bear Stearns for $236 million over the weekend. Prior to Friday's plunge the investment bank and broker had been valued at over $3.5 billion.

The Federal Reserve cut the Discount rate to 3.25% on Sunday. Fed Funds futures traders in Chicago are now betting on a full point cut in the Fed Funds rate when the Federal Reserve meets on Tuesday.


Report: U.S. Gets Margin Call
Can It Get Worse?

The current situation in the global financial markets is clearly reaching a make or break moment, which means that anyone with a contrarian bent has to be itching to start buying stocks.

Yet, history shows that it's best to wait until a bottom is for at least a few days before anyone with any sense starts buying.

Here's a perfect example of how the gloom and doom is starting to stack up to Leviathan proportions. According to the Wall Street Journal, the entire U.S. has been issued a margin call.

According to the Journal: "The U.S. is at the receiving end of a massive margin call: Across the economy, wary lenders are demanding that borrowers put up more collateral or sell assets to reduce debts." Yet, as we drove around the city of Dallas last week, we saw one bank advertising for home equity lines of credit one point below prime.

That doesn't sound like a country wide margin call to us. It sounds like a bank that's trying to bring in customers, and to lend money.

To be sure, the devil is in the details, and it may indeed be quite difficult to get the loan once you walk through the door.

Yet, the Journal is focusing on the action taking place on Wall Street, noting "Global investors are pulling money from the U.S., steepening the decline of the U.S. dollar."

So where is all the money going to go? China, in case anyone has been able to do anything but worry about Obama's reverend problems and Spitzer's call girl issues, is facing a big dose of social unrest, which theoretically could develop into a Tiannenman Square situation, although there are no signs that at this point it's doing so.

Other areas of Asia are not in much better shape as political and economic unrest is also starting to surface in places like Japan where they can't make up their minds about who's going to run the central bank and Malaysia, where the government is going through a very rough patch.

And Europe is not much better since U.K., German,and Swiss firms also got caught in the subprime mortgage crisis. According to Bloomberg: "European Central Bank president Jean-Claude Trichet and Japanese Prime Minister Yasuo Fukuda said last week in interviews the plunge is ``concerning'' and ``undesirable'' for growth. Goldman Sachs Group Inc. and Morgan Stanley strategists say that coordinated action by policy makers to stem the currency's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates."

So where does that leave us? At a time where those that are watchful, patient, and keep their eyes and ears open, are likely to do well over the next few weeks to months.

Conclusion

From a trading standpoint, this feels as if we've reached the edge of the abyss, which leaves two possible outcomes.

One is that the U.S. will fall into a major recession, and that the markets will predict such an event beyond a doubt. If that happens, we'll likely see a break below the recent lows in the markets, and a new down leg in prices in stocks.

More margin calls will hit the big guys who live on leverage, and the bottom could fall out of everything.

The other possible outcome is that this is that period known in technical parlance as the "Panic Bottom," where it feels as if the world is coming to an end and it proves to be nothing more than the ending throes of a bear market.

The Fed is certainly impressed with what it saw on Bear Stearns' books,or it wouldn't have engineered a bail out of the firm, which was followed by a buy out by J.P. Morgan.

Yet, this Fed is not the Greenspan Fed, and there is no evidence that Mr. Bernanke has consulted the Maestro about the current circumstances.

Our point is this. It's commendable to be concerned about the current situation. But it's also wise to look at it with raised eyebrows.

Bad times, such as these, are eventually followed by excellent buying opportunities.

Those that can see through the hype, will eventually be rewarded. If you've followed our advice, you should be sitting on piles of cash.

And if you remain patient, you'll have a great opportunity to put it to work. Whether that comes this week or next year, then, is the real question.

All we can say is that we'll be watching.

Technical Summary:
Specialists Still Selling In 2008

The NYSE specialists were sellers of stock in the latest reporting period, ending on the week of 2-12. This has been a consistent pattern over the last several weeks. The CBOE Put/Call ratio closed at 1.48 on 3-10. This isn't a bad number, but it seems as if it should be bigger given the bad news that hit the market. The CBOE P/C ratio for indexes checked in at 2.09 on 3-10. These are moderately bullish numbers at best.

The VIX and VXN had readings of 29.38 and 31.38. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing.

Market Vane's Bullish Consensus was at 42% on March 7. This survey got to 40% on January 25th, and the market at least stopped falling for a while after it reached that key and often bullish number.

The UBS sentiment survey, which is fairly accurate in picking market tops and bottoms moved to 50% in its latest period after falling to 44.



Chart Courtesy of StockCharts.com




Chart Courtesy of StockCharts.com



Market Moves

Alcoa (NYSE: AA) Slept Through Friday Mini-Crash

Alcoa (NYSE: AA) avoided the market's wild and crazy gyrations on Friday, delivering some relative strength.



Chart Courtesy of StockCharts.com

If you want to know the truth, we're not sure why Alcoa behaved well during a market day when most things took a beating.

Maybe no one wants to bother with an aluminum company when you could sell sexier stocks short, or just avoid the market altogether.

Yet, there is no doubt about it, Alcoa looked pretty good in a major bad day for the markets, so there must be something to it.

We looked high and low, but could find nothing to remotely link to the serene performance of the stock.

So for now, we'll leave it as an unsolved enigma and keep our eye on the stock.


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