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.

A very good combo article from Peter Navarro & Matt Davio this week. In the first part, Peter talks about the “real fed conundrum”: whether or not the Fed funds rate can reach true “neutrality” without including energy in the core inflation data, now that we may have entered a new era of escalating energy prices:

The traditional logic of calculating the core rate “ex food and energy” is that both are characterized by volatility rather than persistence. That is, over any given economic cycle, food and energy prices are just as likely to go down as up – depending on whatever random shocks may be occurring at the time…

The important question the Fed is now confronting is whether future oil prices will be characterized not by volatility but rather by persistence. The argument for what is essentially a stunning “regime change” in the calculation of the core rate is one based on a threshold demand effect driven in large part by the emergence of both China and, to a lesser extent, India as large and growing consumers of energy.

In this “persistence scenario,” oil prices do not float back down to $20 or $30 dollars. Rather, they have already begun what is likely to be a decades-long trend up towards a $100 a barrel and perhaps well beyond. In this scenario, energy inflation clearly must be considered as part of the core rate because of its persistent effects on production costs and the supply side of the global economy.

In Matt’s section of the column, he points out that the Fed is being a little more active than you may be aware of (these things generally don’t make it to the evening news):

It seems that Ben “Helicopter Drop” Bernanke is getting a jump-start on expectations that he will be an ‘easy money’ Federal Reserve Chairman. The Fed undertook the largest one day open market operations since the week of September 11th, 2001 during this past Wednesday. This massive stimulus followed a heavy week of liquidity injections during the final week of 2005.

This massive liquidity injection partially explains the run-away stock and gold markets of the first two weeks of 2006. And it also explains the rapidly weakening dollar…

And don’t miss the chart of the “great bubbles of the last 50 years” either…

On a day when the market could have just packed it in and gone home, it actually held up pretty well. The major indices all took losses, but came back well off their worst levels. The Dow Industrials dropped 41 points (-0.4%) to 10855, the S&P 500 fell 5 points (-0.4%) to 1278 and the Nasdaq took the biggest hit, losing 23 points (-1.0%) to 2280. The Russell 2000 actually gained a fraction of a point, holding at 704. The Dow Transports bounced back by 1.0% on lower energy prices, and the Dow Utilities fell 0.1%. Bonds moved lower, pushing yields higher, but leaving the yield curve still on the verge of a 2 -10 year inversion: 6-month = 4.45%, 2-year = 4.33%, 5-year = 4.27%, 10-year = 4.33%.

Market internals were negative, and volume ticked up from recent sessions. Advance/declines were 5 to 6 on the NYSE and 9 to 10 on the Nasdaq, with up/down volume about 2 to 3 on each exchange. New highs/lows were 97/34 on the NYSE and 115/36 on the Nasdaq.

A bounce back in a couple of the recently weak groups, with airlines up 4.5% and HMOs getting back 1.9%. Also gaining ground were the networking stocks, up 1.0%. The losers were concentrated in energy, commodities, and some tech: gold & silver stocks (-3.1%), steel stocks (-2.0%), computer technology stocks (-1.9%), natural resources (-1.6%), oil stocks (-1.5%), computer hardware (-1.3%), internets (-1.3%), natural gas stocks (-1.2%), paper stocks (-1.0%) and oil services (-1.0%).

Energy prices pulled back, with crude oil falling to $65.73/barrel, gasoline dipping to $1.77/gallon, and natural gas sliding back below the $9 mark to $8.69/mBTU. The dollar index moved both up and down, getting nowhere to finish at 89.29. Gold prices slipped back to $543/ounce.

BMB Note: The bulls have to be somewhat pleased at how the market made it through the day after the bad earnings news from yesterday, and the poor opening today. No sign of real heavy selling yet. Sure, the Dow has tucked back into its recent trading range, but I don’t put much weight in the Dow’s movement. The S&P and the Nasdaq represent many more stocks, and so far, they’re still holding up above the breakout/support levels, even after the pullback of the past few days.

It’s impossible to say where this pullback takes us and how far it goes, but the picture should become somewhat clearer in time. The oil markets and earnings reports will likely continue to jerk us around for a few weeks yet. And over the longer term, the bond market is still forecasting problems…

Some of the big names in earnings after the bell today are AMD, AAPL and EBAY…

Update: Early take on EBAY earnings - earnings were ok but guidance might be a little short of expectations. Initial reaction in after-hours trading has EBAY down almost 2 bucks from their 44.44 close. AAPL is getting smacked after release of their numbers as well. In contrast, reaction to AMD’s earnings is quite positive.

It’s hard to argue with this assessment from Gary Kaltbaum.

I’m a little late getting things going this morning - it’s just awful when you turn on the computer and your internet access is down…AACK!

It looks like we’re back up and running now, but the market isn’t. A number of forces have combined to put the market on the defensive:

• Pressure from earnings reports: IBM, Intel, Yahoo, and JP Morgan among them.
• Another big slam - second consecutive day of 3% losses - in Japan.
• Re-inversion of the yield curve. The 2-year and 10-year have been dancing around each other since yesterday, and this morning, the 5-year dipped below the Fed funds rate of 4.25%. Rates have since moved higher, but the table is set for problems.

The major indices started off very poorly, but the losses have moderated somewhat, with the Dow down 37, the Naz down 22 and the S&P down 3. Looking at the groups, the airlines and HMOs are bouncing back, but that’s about it. Leading the losers are computer technology stocks, precious metals and oils.

In other news, the market got a bit of a gift from a relatively tame CPI report. The dollar is down only slightly, and gold is a hanging on at $547/ounce.