Forwarded exclusively by:

Anthony Hood

Equity Investment Capital

Office: 949-891-0067

Email: tony@equityinvestmentcapital.com

website: www.equityinvestmentcapital.com

Friday, May 21, 2010

No let up in selling in the equity markets early this morning, but a recovery at 10:00 is underway. Stock markets in Europe tried to improve but met with more selling as the markets moved into the afternoon session. Trading in US stock index futures also tried to gain ground but they too fell to the selling. Markets are now contending with huge margin calls forcing some selling to be able to meet some of the calls. US treasuries are now the lowest yields in over a year on increasing belief Europe's economy will suffer as the EU battles to head off debt defaults and political arguing that some think may permanently derail the European Union, whether or not that occurs it is the fact there is dissention growing between the heavy weights and light weights in the Union. Germany did approve the bailout package in its parliament but is also rattling the cage that it won't continue to do it.

At 9:30 the DJIA opened -105, the 10 yr note +26/32 at 3.12% -10 bp and mortgage prices being dragged along, up 9/32 (.28 bp).

The euro currency gained some ground yesterday against the dollar, was stronger overnight, backed off some into the 9:30 open of US stock markets but by 10:00 it is ganing again. The decline of the euro was the fueling factor for the initial selling in US equities but appears to be being surpassed by increasing belief Europe will drag the US recovery down. Then we turn to our US Senate, it passed the financial reform bill yesterday and now it moves to the House for reconciliation; another procedure that will likely hang more amendments on it and make it even more a mess that eventually we will find as time goes on. I am not taking the banks' side; banks need to be slapped down as once again the banking sector has shown it isn't capable of managing itself for the good of the country. Banks are too large, way too greedy, and are not manageable, every bank CEO Congress called to testify said they didn't know what was going on in their banks. This reform bill hasn't come close to stepping down hard enough, but the bill will hinder economic growth and eventually be a another hurdle for consumers.

No economic data today; hardly matters these days though. The entire focus now is on what impact Europe will have on US economic growth. After months of looking and expecting a correction in the equity markets, now that it is here there is panic. Margin calls are fueling the selling and now the market is so oversold that we expect some buying will begin to happen; maybe not enough to reverse the trend but enough to slow it and bring back some rational thinking; yes the EU is the trigger but for months markets were expecting a pullback but there had to be something to set it off. Now that the key indexes are over 10% off their recent highs, look for some stability top return; not a strong rally but not the deep daily declines we have seen this week and last. All that said, market volatility is going to remain for a few weeks as a possible base is built.

Already this morning we have volatility; at 9:30 the DJIA opened down 105, by 10:00 it is back to unchanged. Mortgage prices were +13/32 (.41 bp) at 9:30, at 10:00 mortgage prices back to +2/32 (.06 bp).