Bear Mountain Bull

It’s time again for a little BMB R&R, especially with the market behaving as bizarrely as it’s been. Maybe if we stop watching it start to behave a little better…

Posting will be very light and variable over the course of this week, but we’ll put up an open thread each market day for our readers to comment on the day’s market activity or to post any interesting links they might run across.

Check the space below for whatever the latest might be during this ‘off’ time, and please visit the various sites in the ‘Links’ and ‘Regular Stops’ for up-to-date market news and analysis.

BMB will be back in full swing by next weekend.

Ike Iossif asks a good question in his market wrap for today on Financial Sense:

If in July the $60 level for oil, and the 4.29% level for yield on the 10-year were able to put the brakes on the SP’s rally at 1245, what is the merit behind investors’ current conviction that the SP can continue its ascent towards the 1300 level with both the price of oil and bond yields at significantly higher levels than the ones which previously proved to be formidable obstacles to overcome by the equity markets?

Does it make sense for investors to harbor such expectations based upon their most recent experience with the same set of circumstances just 3 months ago? Probably not! However, we know too well that just because something doesn’t make sense, it doesn’t necessarily mean it can not happen. Also keep in mind that the assumptions we are making may prove to be incorrect, oil prices may come down, and interest rates may also come down, both of which will be supportive of higher equity prices.

So what is the point of the above exercise? Well, here it is: the equity market is giving a rather bullish account of itself, and if it is examined in a “vacuum” without taking into consideration its correlation to other asset classes, it is reasonable to expect the current rally to continue higher for several more weeks, especially if the energy and credit markets behave themselves. However, if all asset classes act the same way they did following the Spring lows, one ought to at least consider the possibility that higher energy prices and higher interest rates will kill the rally just like they did in mid-Summer.

Bottom line: For the time being the odds favor a short-term pullback to be followed by another leg to the upside. However, if sometime during the next 10 trading days oil closes above $65, and the yield on the 10-year treasuries goes above 4.75%, there may not be another leg to the upside!

Ahead of tomorrow’s oil inventory numbers, let’s take a look at the latest Gulf energy shut-in stats (GOM = Gulf of Mexico):

Today’s shut-in oil production is 738,617 BOPD. This shut-in oil production is equivalent to 49.24% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD.

Today’s shut-in gas production is 4.122 BCFPD. This shut-in gas production is equivalent to 41.23% of the daily gas production in the GOM, which is currently approximately 10 BCFPD.

The cumulative shut-in oil production for the period 8/26/05-11/08/05 is 81,262,479 bbls, which is equivalent to 14.842% of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-11/08/05 is 418.377 BCF, which is equivalent to 11.462% of the yearly production of gas in the GOM (approximately 3.65 TCF).

A rather uninspiring performance today, with not much enthusiasm to carry the current ‘rally’ higher. The Dow finished lower by 47 points (-0.4%) at 10540. The S&P 500 dropped 4 points (-0.4%) to 1219, and the Nasdaq lost 6 points (-0.3%) to 2172. The Russell 2000 lost a little more ground, falling 5 points (-0.8%) to 656. The Dow Transports lost 0.5% and the Utilities gave up 0.2%. Bonds were winners, pushing yields lower: the 5-year to 4.48% and the 10-year to 4.57%.

Market internals were negative, but volume eased back again. Advances/declines were about the same on both exchanges at about 2 to 3, but up/down volume was much worse on the NYSE, at just better than 1 to 2 than it was on the Nasdaq, at just below even. New highs/lows were 67/104 on the NYSE compared to 81/58 on the Nasdaq.

Not a lot in the way of winners, with oil stocks and disk drives leading the way at a measly +0.8%. On the down side, the housing stocks got smacked for 5.4%, followed by retailers (-1.5%), paper stocks (-1.3%) and airlines (-1.0%).

Crude oil prices crept a little higher today, $59.70/barrel. The dollar index snuck up by 0.1% to 91.42, and gold moved up to $460/ounce.

BMB Note: Not much to comment on. The market seems to be holding its own here, without any real danger signs as of yet. With the exception of the dive in the homebuilders today, there hasn’t been any real deterioration in the groups, and volume has backed off as the market has pulled back. We’ll see if the market is pausing here for another move higher - so far, that appears to be the case.

Another rather unspectacular day thus far, with the major indices mixed, but not too far from flat. Internals are leaning well to the negative side. Some recovery in the energies, with oil services, disk drives, oil stocks and natural resources moving higher, while housing stocks and retailers are slipping.

Bonds are higher pushing yields down. Crude oil prices holding pretty steady just below the $60 mark.

As BMB noted earlier today, the homebuilders are getting socked, with TOL down nearly 11%, and many other builders down between 4 and 8 percent.

BMB has been thinking that people have been foolish to jump in and bid the homebuilders’ stocks back up again. Looks like, at least for now, he may be right.

Look for the homebuilders to take a hit on Toll Brothers’ warning. If you’re looking to sell your TOL, get in contact with the analyst that was just on CNBC. She said this wasn’t bad news for the company, and that the stock was still cheap at “twice the price”. Maybe you can sell your shares to her — at twice the price — and double your money!

That’s the problem with analysts. They’ll tell you the stocks are cheap at twice the price. Then down the road, they no longer feel the stock is cheap when it’s half the price. Doesn’t make sense.