by Patrick Wood

Here is a link to an audio ver­sion of today’s Market Update that I recorded to go along with today’s written ver­sion. Listen to it if you desire, and let me know if it is of any value to you. This is just an exper­i­ment, and could be the last one.

Click here for today's Audio Update!

Economy

The BDI (Baltic Dry Index) has fallen another 4 per­cent in the last two weeks, fur­ther indi­cating that inter­na­tional ship­ping of raw mate­rials is declining. The means that any pos­i­tive man­u­fac­turing released num­bers today are short-lived. The BDI leads other eco­nomic activity by 2 – 4 months, and has already been drop­ping for sev­eral weeks.

The resulting after­math of Hur­ri­cane Kat­rina cost the gulf states bil­lions. The Gulf oil spill will be in the hun­dreds of bil­lions, if not over a tril­lion. The mild hur­ri­cane that is now working through the Gulf is pushing mas­sive floats of oil onshore, which will vir­tu­ally destroy the fishing and tourist indus­tries. The oil industry is still hop­ping right now, but if gov­ern­ment greens get their way, off­shore drilling will die as well.

The poten­tial exists for a wide­spread eco­nomic dead zone, the likes of which has never been seen in the United States. It could not come at a worse time. Because of toxic con­t­a­m­i­na­tion, some cities may have to be relo­cated in their entirety, much like com­mu­ni­ties around Cher­nobyl in the former USSR after the nuclear plant melt­down there.

The real estate industry is set for a total col­lapse. Of res­i­den­tial sales being logged (already down 33 per­cent in May), a full one-third are fore­clo­sures being dumped for what­ever the market will bear. In a normal market, only 1 – 2 per­cent of sales rep­re­sent foreclosures.

Fore­closed homes blight a neigh­bor­hood in weeks, espe­cially when they are not main­tained. They stand out like sore thumbs and clog the neigh­bor­hood market until they are somehow cleared off the books. Other legit sellers are just not able to sell their prop­erty at any price. On average, pur­chasers of a fore­clo­sure paid a whop­ping 27 to 34 per­cent less than a non-distressed home.

The end result of this will have to be the utter col­lapse of real estate, with all the fore­clo­sures cleared off. After such a flushing, the market has a chance to rebuild and restructure.

How­ever… Fannie and Freddie are up to their old tricks by allowing fore­clo­sure buyers to finance with low or no down pay­ment. Many are just as unqual­i­fied as before. Sta­tis­tics are showing that 40 per­cent of those who received government/bank help in mort­gage adjust­ment over the last 18 months, are AGAIN in trouble and still about to be fore­closed on.

It is also reported that up to 95 per­cent of all mort­gages cur­rently being gen­er­ated are being bought by gov­ern­ment enti­ties (including Fannie and Freddie), who are then fun­neling them off (as much as the market will bear) to the Goldman Sachs of the invest­ment banking world to package and sell to the world market. The gov­ern­ment has learned nothing from the past finan­cial crisis.

The financial/banking reform package before Con­gress is as bad as the health care bill. Two thou­sand pages, most of which nobody has read. It is guar­an­teed to give the banks a free pass, and instead put more reg­u­la­tions and bur­dens on the citizenry.

The head of the Con­gres­sional Budget Office (CBO), Dou­glas Elmen­dorf, is charged with mea­suring and ana­lyzing the effect of the long-term fed­eral budget. He calls the cur­rent sit­u­a­tion “daunting.” He under­stands that increased debt saps eco­nomic activity, but he doesn’t under­stand that increased taxes do the same thing. His con­clu­sion: “If debt grows unchecked, it means declines in people’s stan­dards of living.”

The Con­gress pays no atten­tion at all to the CBO, which has been warning for at least 10 years that we are headed in the wrong direc­tion and will even­tu­ally face cat­a­strophic conditions.

Market

On the heels of yesterday’s 268 point rout, stocks tried to hold on today but gave in at the end to drop almost 100 points more, for a total loss of 364.56 points on the DJIA in just two days. Yes­terday was a solid 90 per­cent down day, with 98 per­cent of volume on the down­side and 11:1 stocks down on the NYSE. Yesterday’s volume increased sub­stan­tially to 1.5 bil­lion shares and the TRIN index jumped through the roof.

Here is the same chart of the DJIA shown on Wednesday. It is a pic­ture per­fect appli­ca­tion of Speed Resis­tance Lines. Note that the tri­angle peak touched the upper red SRL. Wednesday’s close was below the lower boundary of the tri­angle, poised to con­tinue down as I said it prob­ably would. It dropped in a free-fall yes­terday to the lower blue SRL, which is the 2/3 or .666 SRL. After bouncing, it fell back three more times to touch the red .618 SRL; then it found resis­tance on two tries at the middle .50 SRL. At the close, it is falling back to the lower red SRL.

Why more cre­dence is not given to SRL analysis is beyond me, but it is their loss and our gain, right?

The NASDAQ is leading the way lower, and closed at a new low for the year today, sig­nif­i­cantly below the pre­vious low. Enough time has elapsed to redraw the SRL from the Pri­mary Wave 1 low (March 6, 2009) to the Pri­mary Wave 2 top. Note that the upper SRL was per­fectly tested on June 8, and a bounce resulted. On the way down again, observe how it gapped through the SRL and con­tinues lower. The next sup­port could be seen at the .50 or .618 SRL’s.

The S&P 500 joined the NASDAQ is closing well below its 2010 lows.

No change on gold and silver, as both mean­dered side­ways today with little move­ment in either direction.