TODAY'S BREAKOUTS & BREAKDOWNS (10-9)

What we saw today was a continuation from the indecision signal that was given yesterday – the market was simply taking a breather before resuming its trend. You can’t blame it on the shorts because they just got started today and they wouldn’t cover today. I know I didn’t. What seems to be going on is that funds of all types have having trouble meeting redemptions and withdraws, now bought on a large-scale by disgruntled investors. People have lost nearly $3 trillion in a matter of days, and there is no question that people are demanding to have their money pulled out en masse. Fear produces panic, which is the start irrational hysteria, in this case, selling.

This will go on for quite a bit. When we do get a reactionary rally once we hit a major capitulation point, it will be sharp and dramatic, but longs will still be selling during the duration, because panic doesn’t subside in a few days or overnight. In order take advantage of this situation, identify the day with capitulatory volume (I hope it comes tomorrow – after all, which longs are crazy to hold over the weekend) and go long and don’t look back. This rally will be sharpest rally that anyone of us will have seen so far in this bear market. Once the rally is underway, the market must make a decision on whether we will start a 4^th primary leg down (this one will be even scarier than this one). We shall see in due time, but I’m still looking for my overdue rally.

When I reference “oversold”, it is only a technical term. The market’s true value, right now, indicates that the levels we're at, right now, are correct. I find it interesting that people who are aware of the catastrophe (which is everyone), are still expecting or wishing that their portfolios to go back up. Sorry, the market is always right.

No breakouts today. You can expect any on days like today. We had 13 new highs today and 2,862 new lows. On the NYSE, 90% of stocks declined and only 8% advanced. Declining volume on all exchanges are around 90% of total volume. These are signs of panic-driven selling and forced liquidation and this trend has gone on for a long time.

As for breakdowns, we have too many. I estimate that my article would be over 4,000 pages long full of breakdowns, but we’ll only over 10 today. The important lesson here is the same as it was on my past three articles: don’t let your stock end up on my list. Comb through your stocks and see if you see any of same patterns forming. Those are very clear warnings, and have provided dozens and dozens of examples with comments so far. Every single day matters – one day can reverse the entire trajectory of a stock. You’ll notice that the majority of major losses in anyone’s portfolio can be avoided. Capital preservation starts with prevention!










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FUNDAMENTAL FEATURE - PMI Group, Inc. (PMI)

Is PMI Out of Dangerous Waters or Will the US Mortgage Market Keep on Biting?

On Thursday, PMI Group, Inc. (PMI) announced that they are selling their Australian mortgage insurance subsidiary to QBE Insurance Group (QBE) for approximately $920 million. Steve Smith, Chairman & CEO, stated, “PMI Australia’s customers will benefit from the financial strength, expertise, and operational excellence of QBE, and PMI Australia’s employees will gain the scale and resources QBE will bring them to expand and grow their business in Australia.” Ok, it does make sense for a U.S.-based company with an Australian subsidiary to sell to an Australian-based company, but it’s important to know why they are selling and if the sale would benefit PMI.

The deal is being structured as 80% cash at closing and 20% in an interest-bearing note issued by QBE. According to PMI’s press release: “The promissory note matures and is payable in September 2011, and the actual amount payable on the note could be reduced to the extent that the performance of PMI Australia's existing insurance portfolio as of June 30, 2008 does not achieve specified targets”.

Although this amount is variable depending on the loan loss ratio over a three year period, currently based on my analysis, PMI stands to make approximately $200 million.

In addition, PMI will fund $46.5 million in premiums to cover reinsurance losses for PMI Australia. And not only that, they’ve agreed to sell PMI Asia, based in Hong Kong, with net tangible assets amounting to $55 million. Although there is no solid deal yet, this capital will be used to help shore up the balance sheet, according to management.

However, let’s not forget that PMI came out on May 12 to affirm its guidance on paid claims, which came out to be between $825 million - $975 million. That’s a lot of money. They also reported a Q2 loss of $246.3 million, $3.03 per share. $225.9 million of the total net loss figure amounted to increases in paid claims and loss adjustment expenses (LAEs) in addition to adding to the reserve for U.S. Mortgage Insurance Operations.

More updates (according to Q2 results):

• PMI Canada will cease operations and expects to transfer approximately $60 million in capital to the struggling U.S. Mortgage Insurance Operations.
• PMI Guaranty Co. paid approximately $144 million to PMI. PMI expects to reinvest 80% of its capital into U.S. Mortgage Insurance Operations.
• Reserves for losses and LAE (loss adjustment expenses) for U.S. Mortgage Insurance Operations totaled $2.1 billion by June 30, 2008. (Since there is usually a one year lag time, expect payouts in claims to begin in 2009)
• Payout claims increased from $72.3 million in Q2 2007 to $192.7 million for the Q2 2008.
• PMI Australia, PMI Europe, and PMI Asia have all recorded a net profit ($24 million, $5.8 million, and $2.5 million, respectively).

It’s pretty clear: As long as the housing, mortgage, and credit markets continue to deteriorate in the U.S., PMI will continue to struggle directly from high payouts resulting from the high level of mortgage defaults and wave of foreclosures. However, combining the favorable terms of sale (pending successful closings) and with $2.1 billion already in loss reserves, PMI will be in a much greater capital position going forward into 2009. Management has taken a proactive step toward eliminating risks related to Australia’s deteriorating mortgage market. They show that they are flexible enough to sell off or close down even profitable international subsidiaries to focus on domestic operations and to provide much needed liquidity to stabilize PMI’s capital position during this difficult time.

How difficult? The stock nearly lost over 95% of its value throughout the past 12 months before participating in the S&P financials rally. On Thursday, PMI gapped up and closed 49.46% higher on 18.64 million shares traded, or 6x the daily average volume. The announcement also helped lift PMI’s peers: MGIC Investment Corp. (MTG) surged 9.7% to $7.80, Radian Group, Inc. (RDN) lifted 13.4% to $3.65, LandAmerica Financial Group (LFG) climbed to 14.4% to $15.81, Ambac Financial Group, Inc. (ABK) jumped 15.7% to $4.56, and MBIA, Inc. (MBI) spiked 17.9% to $10.32.

Technically, PMI looks good. The most promising bullish move for PMI is the continuation gap on the highest daily volume, ever, for this year. The only downside is that PMI meets significant resistance from this year’s previous lows.

Full Disclosure: The author does not hold any positions in PMI, MTG, RDN, LFG, ABK, or MBI.