Bear Mountain Bull

I think it’s safe to say that I will never fully understand this market. Many areas of the country are dealing with gas prices above $3.00/gallon, oil prices are above $68/barrel, the bond market rallied today on bad economic news, sending yields lower in a clear belief that the economy is wobbly, the dollar got hammered in response to the news as well — and stocks somehow hang around the zero level much of the day, then put together a nice rally in the last couple hours of trading to finish up. Obviously I’m missing something here. More ammo for the belief that the markets will do the obvious thing in the most un-obvious manner…

The Dow Industrials finished up 69 points (+0.7%) at 10482. The S&P 500 gained 12 points (+1.0%) to 1220, bumping right back up to its 50-day moving average. The Nasdaq moved back above its 50-day by adding 22 points (+1.1%) to 2152. The Russell 2000 again fared better than the big boys, gaining 13 points (+2.0%) to 667. The Dow Transports were higher by 0.9% (with much higher gas prices - go figure), the Dow Utilities gained 1.1% (loving the lower interest rates), and the bond market soared, burying Treasury yields. The 5-year note is now yielding 3.87% and the 10-year 4.02%. Holy cow! Long live the conundrum!!

Market internals were quite positive on strong volume. Advances led declines by 3 to 1 on the NYSE and better than 2 to 1 on the Nasdaq. Up/down volume was better than 4 to 1 on the NYSE and better than 3 to 1 on the Nasdaq. New highs/lows were 201/37 on the NYSE and 114/41 on the Nasdaq. (Don’t forget that the NYSE is home to many closed-end funds and bond-related issues, so the advance/decline numbers do not reflect action only in stocks.)

It was a good day for many stocks, with most groups finishing in the green. The best were the oil services, up 4.8% . Housing stocks moved up 4.5%, both on rebuilding hopes and lower interest rates. Then came natural resources (+3.8%), oil stocks (+3.3%), biotechs (+2.5%), steel stocks (+2.5%), gold and silver stocks (+2.4%), REITs (+2.2%), disk drives (+2.0%), commodities (+1.9%), HMOs (+1.8%), and telecoms (+1.6%). Losing ground were the airlines yet again, dropping (1.6%).

Crude oil prices spent most of the morning above $70, but fell after the news came that some activity was in progress at Louisiana oil ports. It finished the day at $68.94/barrel, down 87 cents. The dollar was smashed on the weak US economic data, with the dollar index falling 0.9% to 87.60. Gold moved back up above $434/ounce.

BMB Note: So was today just some sort of relief (at $3 gasoline?!!?) rally, or the beginning of a bounce higher in the market? Impossible to say at this point. The market was a bit surprising with its strength today, but it can be seen how many companies could benefit from the massive rebuilding effort that must take place in the Gulf states. However, continued high energy prices will be sucking more and more money out of consumers’ wallets, and it’s going to get more and more difficult for the average American to maintain their spending habits to keep this economy going (we won’t even get into the whole debt thing…). The bond market seems to think there’s trouble on the horizon. The bulls have been wanting to see the economy slow to the point where the Fed stops raising rates. They may get what they want very soon. I’m just not so sure that’s a good thing. You know, be careful what you wish for…

The pervasive feeling washing over the bond market today is that the Fed may likely stop raising interest rates in light of the recent developments in the economy. I can not argue — if things don’t change much over the next few weeks, I can certainly see the Fed putting a stop to their rate hikes. Long rates have tumbled, and the yield curve has become extremely flat.

One loser in that scenario would be the dollar. Having rallied recently, it’s being pulled back pretty hard today as interest rates come down and the prospect for higher rates becomes less likely. The dollar’s fundamental story isn’t a pretty one, with the underlying federal and trade deficits. Many believe that the dollar will someday suffer another large move lower - we could be seeing a triggering of that action. Time will tell.

Incredibly enough, the market started higher this morning, dipped lower and is now hanging around near the unchanged level. Groups moving higher are oil stocks, oil services, natural resources and natural gas. Housing stocks are getting a bounce - they were due for one, and the dip in interest rates is helping the cause. The airlines are getting hit again as energy prices show no signs of easing.

The bond market is getting a boost from the morning’s weak economic numbers and the stock market’s poor performance, and the yield curve is being squashed as flat as a pancake. Remember the Fed funds rate is at 3.5%: this morning we see the 5-year note at 3.85% and the 10-year at 4.01%.

CNBC is reporting that the 2-year and 3-year rates actually were inverted for a time this morning, that is, the 2-year yield was above that of the 3-year.

The bond market thinks this economy is on shaky ground.

• Q2 GDP revised down to 3.3%
• U.S. factory orders down 1.9% in July, biggest drop in more than a year.

Update: Chicago Purchasing Managers Index shows midwest business activity contracted in August.

After the hurricane, it’s quite obvious that there are going to be issues with oil and gasoline prices. The punditry has been telling us for months that the economy can withstand it. I have my doubts.

Now, if the coffee imports were destroyed, we have a real disaster on our hands!

Some pretty lousy action in the disk drive group the last few days - take a look at HTCH, KOMG, STX and WDC.

So if business is as bad for the disk makers and their parts suppliers as HTCH would have us believe, can the rest of the tech sector realistically maintain its strength? It used to be that personal computers and servers were about the only devices that used disk drives - that’s really not the case any longer. Just a thought…

Charts courtesy of StockCharts.com

Might as well go fill up your tank ASAP. With gasoline futures up 20% today, the price at the pump is bound to go up pretty quickly.

Abercrombie & Fitch, a teen apparel retailer, was riding near all-time highs through July. But the month of August has not been kind to ANF, as has been the case with many retailers. The initial breakdown came in early August, followed by a weak earnings report in mid-month. Today’s move - another drop of nearly 7% - was a result of news that the company’s president and COO was leaving after only 15 months on the job. I hope those folks that bought in July had the sense to get out. (Disclosure: BMB holds a short position in ANF.)

Chart courtesy of StockCharts.com

As the pictures and reports of the damage brought about by Hurricane Katrina rolled in, the effects rolled through the market. Oil and gas prices took off, and the rest of the market headed down. Looking at the major indices, which did recover from their lows of the day, we find the Dow Industrials down 50 points (-0.5%) to 10413, the S&P 500 dropping 4 points (-0.3%) to 1208 and the Nasdaq falling 8 points (-0.4%). The Russell 2000 held up a little better, losing 2 points (-0.2%) to 654. The Dow Transports didn’t take kindly to the higher energy prices, losing 1.0%, while the Dow Utilities got a boost from the bond market and lower interest rates, gaining 0.1%. Bond did move higher, further flattening the yield curve, as 5-year yields ended the day at 3.96% and the 10-year all the way down at 4.09%.

The market internals tell a negative story, with volume again picking up on a down day. Advances trailed declines by 4 to 5 on the NYSE and by 2 to 3 on the Nasdaq. Up/down volume was about 2 to 3 on both exchanges, and new highs/lows came in at 115/46 on the NYSE and 66/44 on the Nasdaq.

The industry groups were split today, with some energy related areas doing well, namely oil services (+2.0%), oil stocks (+1.8%), natural resources (+1.6%) and natural gas stocks (+1.4). Other groups weren’t so lucky. Losing ground on the day were airlines (-3.0%), disk drives (-2.8%), retailers (-1.7%), gold & silver stocks (-1.2%) and steel stocks (-1.0%).

Crude oil prices finished the daytime session at a record closing level of $69.81, up $2.61 from yesterday. The dollar surged early in the day, but pulled back late to finish the day up slightly, moving the dollar index higher by 0.1% to 88.35. Gold prices remain rangebound, falling to under $432/ounce today.

BMB Note: Today just serves to reinforce the downward momentum that has been in place since the beginning of August. Energy stocks seem to be the only ones that can benefit from the current environment, but one has to wonder how far the ‘Katrina surge’ can go. Housing stocks got a little bump today, but they still look to be in trouble, and retailers just continue to crumble. Many tech stocks are still holding up well, but the warning from the disk drive folks today have got me wondering… Watch your step.

As far as energy prices go, the already high prices are going even higher. I’m having a hard time believing that there will not be an noticeable impact on the economy from these high prices in the near future.

The jitters concerning damage from Hurricane Katrina have pushed crude oil prices to $70.50/barrel. Considering the accompanying spike in gasoline prices today, you might want to fill up your tank today…before the gas stations hike their prices.

Initial action is rather negative. When an unexpectedly high August consumer confidence number was released, the market pretty much ignored it. All three major indices are in negative territory, and up/down volume is running about 1 to 2.

More bad news in energy prices, as unleaded gas futures have moved up to $2.24/gallon. Yikes. Crude oil currently at $69.45 and natural gas at $11.67.

Groups moving higher are oil services, natural gas stocks, natural resources and oil stocks. Moving lower are disk drives (earnings warning from HTCH the bad news there), gold & silver stocks (gold taking a big hit and dollar stronger), retailers, airlines, chemicals, steel and networkers.

Due to the storm - that’s 3.3 percent of their U.S. stores.

The day should be somewhat interesting as the reports on damage from Hurricane Katrina start rolling in.

Crude oil prices have risen as more information comes in, with trading this morning at $68.84/barrel, up $1.64 from yesterday’s close.

The market managed to shrug off the bad news of Hurrincane Katrina’s landfall and the morning pullback associated with the resulting higher oil prices. The major indices all gained ground as the day wore on: the Dow finished higher by 66 points (+0.6%) at 10463, the S&P 500 added 7 points (+0.6%) to 1212 and the Nasdaq gained 17 points (+0.8%) to 2138. The Russell 2000 also bounced higher by 7 points (+1.0%) to 655. The Dow Transports gained 0.5% and the Utilities gained 0.8%. Bonds also moved up, pushing yields down - the 5 year to 4.08% and the 10-year to 4.17%.

Market internals were positive, but on rather light volume. Advances led declines by 12 to 7 on the NYSE and 11 to 8 on the Nasdaq, with up/down volume running better than 2 to 1 on the NYSE and better than 3 to 1 on the Nasdaq. New highs/lows were 84/53 on the NYSE and nearly even at 60/51 on the Nasdaq.

Most of the industry groups gained back ground today, with steel stocks leading the way with a +2.7% move. Also moving up were biotechs (+1.6%), semiconductors (+1.3%), disk drives (+1.2%), oil stocks (+1.2%), commodities (+1.1%), transportation stocks (+1.1%), and drugs (+1.0%). The only real losers of the day were the airlines, falling 1.0%.

Crude oil prices fell well back from their record high levels near $71, finishing at $67.20, up $1.20 from Friday’s close. The dollar gained ground, moving the dollar index up 0.4% to 88.20. The price of gold finished just under $437/ounce.

BMB Note: Buyers stepped in this morning as the market dipped, and things held up pretty well considering the circumstances. That doesn’t change things much, however, as the market remains weak, with the major indices still at or below their 50-day moving averages.

CNBC is reporting that the LOOP - Louisiana Offshore Oil Port - has issued some sort of statement saying that they may have difficulty providing Midwest refineries with oil in the aftermath of Hurricane Katrina.

I’ll post a link to the info if I find one on the web.

As usual, good advice from Gary Kaltbaum — but first, he felt the need to get in his two cents worth on our buddy, Uncle Al. Can’t say I disagree with him.

Anyway, back to his market comments, it seems like we might be getting a little of that ‘B’ or ‘C’ grade bounce today after the morning dip.

As we ponder the effects of $70/barrel oil, it’s interesting to look back and see where we’ve been. From the book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” by Matthew Simmons:

Oil prices had stayed so low for so long that by the end of the 1960s no respected energy analyst thought they would ever rise. The majority of oil experts assumed the price would steadily fall. This assumption was vividly illustrated in the last days of the low oil price era. The Shah of Iran, a strong U.S. ally, attended President Eisenhower’s funeral in 1969. During this visit, he quietly offered the new President of the United States, Richard Nixon, a 10-year contract to supply the United States with oil for one dollar a barrel. According to Henry Kissinger’s memoirs about the Nixon administration, the United States politely declined the Shah’s offer because it was not clear to any senior government official that oil prices in a free market would stay as high as one dollar per barrel over this lengthy period of time.

The 1973 oil embargo, when Saudi Arabia cut its oil production by 10 percent and banned oil shipments to the U.S. in response to American support of Israel in the Yom Kippur War, changed all of that. By mid-1978, oil prices had stabilized in the $16-17 range.

Bill Fleckenstein says we’re seeing the top in the housing/real estate mania:

Joe Public is buying land sight-unseen without doing any due diligence. If that isn’t a top, I don’t know what one would look like.

The recent action in the housing and real estate stocks might indicate that the stock market agrees.

After an initial dip, the market is holding up quite well under the pressure of the storm impact and higher oil prices. The major indices have snuck into positive territory. Crude oil has pulled back a bit to $68.60.

At this hour, groups moving higher are oil services, oil stocks and gold & silver stocks. Moving lower are airlines, paper stocks and insurers.

The weekly look at technicals and sentiment from Schaeffer’s. Not a lot of encouraging signs yet.

This morning, we’re seeing crude oil trading at more than $69/barrel. Natural gas has made an even bigger jump, up more than 18%. From Reuters:

As Katrina plowed through the Gulf of Mexico, oil companies shut down production from many of the offshore platforms that provide a quarter of U.S. oil and gas production.

At least 42 percent of daily Gulf oil production, 20 percent of daily Gulf natural gas output and 8.5 percent of national refining capacity was shut on Sunday, producers and refiners said.

Dr. Joe Duarte thinks that the weakness in the Dow stocks is a sign of something, and it’s probably not good:

I’m not a prophet of doom, but, I am a trader. And to me, it looks as if the stealth bear markets in key components of the Dow Jones Industrial Average, as well as the mostly unnoticed slippage of the whole index below a key technical gauge, may be trying to tell us all something.

At the opening of NYMEX electronic trading, crude oil prices have zoomed above $70/barrel. Currently trading at $70.60.

Those traders that sold off their oil contracts late Friday might be a little sorry they did.