Bear Mountain Bull

Leave it to Jim Jubak to provide us with one of the more lucid and rational discussions on the Fed’s decision to stop publishing the M3 money supply data:

This monetarist view of the link between growth in the money supply and growth in inflation was once part of mainstream thinking at the U.S. Federal Reserve. The great monetarist economist Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” That view was echoed in policy at the U.S. Fed when then-chairman Paul Volcker starved the inflation of the late 1970s by tightening the money supply.

But the Fed — under Greenspan, and so far under Bernanke — has behaved as if money supply growth didn’t matter and as if price inflation were all that mattered. Even as they have raised interest rates in an effort to slow the economy and reduce demand, they’ve continued to let money supply grow at close to double-digit rates. M3, the most inclusive measure of the money supply, grew at a seasonally adjusted annual rate of 8.7% in the three months from November 2005 to February 2006. That’s faster than the annual rate — 8% — for the 12-month period beginning in February 2005.

In other words, as the Federal Reserve was fighting inflation by raising interest rates to 4.75%, from 4% in November 2005, it was letting the money supply grow by an inflationary 8.7%. While it was fighting inflation by raising interest rates to 4.75%, from 2.5% in February 2005, it was letting the money supply grow by 8%.

A rather unspectacular close to the week, as all three of the major indices gave up a little ground. The Dow closed down another 41 points (-0.4%) at 11109, giving the index its first losing week in the last 4. The S&P 500 dropped 5 points (-0.4%) to 1295, and the Nasdaq dropped a point to 2340. The Russell 2000 hit another new closing high with a gain of 3 points (+0.3%) to 765. The Dow Transports were higher by 0.4%, but the Utilities were lower by 0.9%. Bonds showed little change across the board, leaving yields on the 6-month at 4.81%, 2-year 4.82%, 5-year 4.82%, 10-year 4.86% and 30-year 4.90%.

Market internals were distorted a bit by a flurry of activity in the closing minutes of trading, where volume spiked on both exchanges, and there was a spike in the advance/decline line in the Nasdaq as well. I would assume that activity can be attributed to end-of-quarter action as well as index changes (how can we forget Google going into the S&P 500?). Volume still fell off a bit from yesterday on the Nasdaq, and was about flat on the NYSE. Advances/declines were 10/9 on the NYSE and 3 to 2 on the Nasdaq, but up/down volume was quite the opposite at 2 to 3 on both exchanges. New highs/lows were 158/38 on the NYSE and 239/24 on the Nasdaq.

Action in the groups leaned to the negative side, with only the airlines (+2.4%) managing decent gains. On the down side were oil services (-1.7%), steel stocks (-1.5%), natural resources (-1.4%), semiconductors (-1.2%), natural gas stocks (-1.2%), gold & silver stocks (-1.1%) and oil stocks (-1.0%).

Energy prices were mixed, with crude oil drifting down to $66.63/barrel, gasoline holding pretty steady at $1.99/gallon and natural gas falling to $7.21/mmBTU. The dollar recovered a bit from yesterday’s beating, and the dollar index moved up to 89.74. Gold fell back to $582/ounce, and silver slipped to $11.49/ounce.

BMB Note: Pretty much an uneventful day, but no relief from the high gas prices or the higher interest rates. The quarter is over, so maybe next week will paint a little clearer picture for the market, but I’m not counting on it. It won’t be an action packed week as far as economic reports are concerned, with the exception being the monthly payroll number on Friday.

Don’t forget to bump your clocks ahead this weekend, as we enter Daylight Saving Time.

Larry McMillan, in the Option Strategist Weekly Updater (sign up) has to admit that some of his indicators appear to be switching over to ‘buy’ signals, but he doesn’t sound all that convinced to me:

So, are we wildly bullish? No. There are problems, such as the fact that quarter-end window dressing has taken place and added some superfluous upward momentum to the market this week. Also, the nearly historic period of time since there was a 9% correction (1,140 days) is something that will eventually have to be dealt with as well. But, in the short term, it does appear that $SPX can fulfill our initial target of 1320- 1325.

Sometimes you just gotta go with your guts…

BMB will be out of the office much of the day, so if anything big pops up, I’ll miss it.

Update: Back at it, after a nice trip out, picking some 25 lbs. of fresh strawberries in about 40 minutes (two of us). Yum.

With yesterday’s divergent action and the end-of-month, end-of-quarter action, Deron Wagner advises caution here:

Note that today is the last day of the month and the first quarter of the calendar year. As such, don’t be surprised by erratic movement in stocks that is caused by the usual end of quarter jockeying from hedge and mutual funds. Its breakout to a new five-year high causes the Nasdaq to be the safest place to be long right now, while caution is warranted in the blue chips. While Wednesday’s action was positive overall, it appears we still may not be “out of the woods” with regard to moving full speed ahead on the buy side of the broad market.

At least, according to the government’s numbers.

I’m not sure what its chances for success are, but Congressman Ron Paul of Texas has introduced legislation to force the Federal Reserve to continue publishing data on the M3 money supply.

Here’s an article from a couple of weeks ago, with a transcript of a short interview with the Congressman. A couple of notable excerpts:

What’s your take on the fact that M3 is growing at roughly twice the pace of M2 recently? The Fed says that M3’s redundant in that M3 and M2 are comparable. But the trend in each series suggests otherwise. We’ve asked the central bank about this.

I’ll be they didn’t give you a good answer. I asked the same question to Bernanke, and he totally ignored it. I said, M3’s growing twice as fast as M2. And the change in the growth is important too. A couple of years ago M3 wasn’t growing quite as fast, and in the last eight or nine months it’s accelerated.

What about your colleagues in Congress? Is anyone else asking questions about M3?

Other members of Congress have no interest in it; there’s very little interest in monetary policy. I couldn’t get anyone to pay much attention to it. In fact, there are a lot of misconceptions. For example, one day I was talking to Greenspan, and one of the members in Congress came up and asked, “Isn’t the dollar backed by gold?” This was a member of Congress! That’s when I realized we have a lot of work to do. I argue that Congress, either deliberately or inadvertently, doesn’t think about [monetary policy] because the Fed irons out some of our problems when it comes to deficit spending.

Tonight, Martin Goldberg is thinking out loud about internet companies, and wondering out loud about Google:

Yet in spite of the cool and useful stuff available on Google, they do not make penny number 1 from M. Goldberg, and except for advertising, it remains unclear how Google plans to make money enough to support their valuation. Google generates cash in much the same manner as the South Sea Company – they are on their 3rd stock offering to the public. And it is amazing to me that Wall Street is not the least skeptical of this company in spite of the fact that they went to the public trough three times in less than two years.

In summary, there are four internet companies that make money from my family and me in various amounts – EBay, Comcast, Amazon, and Yahoo. There is one company, Google, which is valued at more than twice the value of any of the other four. 2006 Google is similar to 1999 AOL, only without the revenues. Maybe I’m not “everyman.” But I can’t figure out how this company is worth its current market value of $117 billion.

Can you?

Stocks seemed a little confused as to what to do today - some were up, but a few more were down. The result was a bit of a mess. The major indices never got a lot of traction either up or down, and finished with the Dow down 65 points (-0.6%) to 11151, the S&P 500 down 3 points (-0.2%) to 1300, but the Nasdaq up 3 points (+0.1%) to 2341. The Russell 2000 gave up about 2 points (-0.2%) to 763. The Dow Transports lost 0.5% and the Utilities gave up another 1.1%. Bonds continued their losing streak, and yields pushed up to near their highest levels since summer of ‘04: 6-month: 4.82%, 2-year: 4.83%, 5-year: 4.82%, 10-year: 4.86% and 30-year: 4.90%.

Market internals were mixed as well: there were more stocks down than up, but the volume leaned toward the winners. Volume ticked up a bit on the NYSE, but fell off on the Nasdaq. Advance/declines were 7 to 9 on the NYSE but flat on the Nasdaq, and up/down volume was just better than flat on the NYSE but 5 to 4 on the Nasdaq. New highs/lows were 258/54 on the NYSE and 234/28 on the Nasdaq.

Action in the groups was split. The only big winners of the day were the gold & silver stocks, racking up a 3.1% gain. Software stocks followed with a 1.0% gain. Losers were energy price and interest rate sensitive groups: airlines (-2.0%), REITs (-1.5%), transportation (-1.2%), utilities (-1.1%) and housing stocks (-1.1%).

Speaking of energy prices, they’re starting to get a little spooky again, with crude oil at $67.15/barrel and gasoline at $1.98/gallon. Natural gas is holding more reasonable levels, at $7.49/mmBTU. The dollar took a beating, pushing the dollar index down to 89.36. Gold and silver both had big days: gold moved up to $588/ounce and silver to $11.66/ounce. Gold and silver are both at multi-decade highs, and copper prices hit another new all-time high today.

BMB Note: The true issues facing the market and the economy are starting to make their way to the front again, those being inflation, higher energy and commodity prices, and the threat of higher interest rates. I’m not sure the market is quite ready to respond to those issues, and I don’t really expect stocks to sell off tomorrow, before all the funds have a chance to close the books on their quarter. It will be interesting to see what happens after the quarter is officially over, and earnings start to roll in.

This market has made it pretty clear that it won’t give up easily, and I suspect we could get more grinding higher over the next weeks/months, but I don’t think it will be smooth sailing. The bond market is looking like it’s in for some further pain, and that would send interest rates even higher. I not sure how this economy will react to a level of rates that it hasn’t seen in a few years now. We may get to find out down the road.

A bit of a different picture as we roll into the afternoon, as crude oil pushing up near $67, gasoline at near $2 a gallon, and the highest interest rates since the summer of ‘04 are starting to weigh on the market.

The Dow has taken a bigger tumble than the other two major indices, but all are now in the red, and advance/declines are also negative. We had more groups in the green this morning, but now there are very few “green” groups left - the gold & silver stocks still hold on to a pretty healthy gain. Leading the way down are the airlines, housing stocks, REITs and utilities.

What’s putting pressure on the dollar? It might have something to do with this:

The U.S. currency was also bid lower on concerns that Middle Eastern governments may shift reserves away from the American currency.

The United Arab Emirates central bank governor overnight reiterated comments that the country was looking to raise the euro’s weighting in its reserves to 10% of its total from 2%.

Read: “We’re selling dollars.”

The initial morning excitement that carried over from yesterday has now waned considerably, and the majors are hanging on to single-digit gains as the advance/declines lines have pulled back nearly to flat. More groups are higher than lower, and are being led by the gold & silver stocks, steel stocks and commodity stocks.

Bonds are lower yet again, and the yield on the 10-year is sitting at 4.83%. Energy prices are slightly lower. The dollar has taken a fall to its lowest levels of the week. Gold is enjoying a 10 dollar boost, and silver is closing in on the $11.50 mark at $11.44/ounce. Wow.

Deron Wagner thinks that yesterday’s action could signal an end to the choppy action and the beginning of a new uptrend in the Nasdaq:

The breakout in the Nasdaq means that all three of the major indices may finally be getting back in sync with one another. As such, stocks should stop chopping around and begin a new upward trend instead. At the very least, all bets on the short side of the market are now off. Now that weakness in the tech stocks appears to have abated, we will begin seeking new opportunities in ETFs that are poised to break out of sound bases of consolidation.

I’m not so sure. I’ll believe it when I see it.

Considering that it IS tax season, and realizing that this message may already be a little late for some folks, here’s a reminder that the proceeds from the sale of a precious metals ETF like the StreetTracks Gold Trust (GLD) or iShares COMEX Gold Trust (IAU), are not taxed the same as a stock sale. Rather, the gains realized from the sale of GLD or IAU, or gold or silver bullion for that matter, are taxed as the sale of a “collectible”, subject to a 28% long-term capital gains rate. This treatment will also be applicable to the soon-to-be silver ETF.

From the GLD FAQ:

How is GLD treated from a tax standpoint?

The United States Internal Revenue Service (IRS) treats gold as a collectible for long-term capital gains tax purposes. As such, gains recognized by individuals from the sale of streetTRACKS� Gold Shares are subject to a capital gains rate of 28% if held for more than one year. This rule extends to all gold held by the Trust. Although there are some restrictions applicable to retirement plans such as IRAs and 401ks investing in collectibles, streetTRACKS� Gold received a private letter ruling permitting investment by such retirement plans.

Yet another reading on 4th quarter GDP. You remember, the one we first started talking about back in January with the surprisingly low initial 1.1% figure. But don’t worry, I think this is the final, last, end-all reading. Honest.

Well, at least until the revisions come out.

You don’t hear much about the Treasury auctions in the media, so you have to dig up the articles on your own. As things turn out, the struggles in the bond market the past few days may have something to do with poor auctions in the 2-year on Tuesday, and in the 5-year today.

But of course, the reason for the poor auction isn’t that demand for treasuries is lacking. No, no, that can’t be. And of course, the media certainly knows the reason for the poor auction response. I’m certain that they did a poll of all the people who didn’t buy, right?

Since you’re dying to know, here’s the reason the media gave for the poor 2-year auction:

…an afternoon auction of 2-year notes got a rather tepid response due to investor wariness ahead of the Federal Reserve’s Tuesday interest rate decision.

And the reason for the poor 5-year auction was:

…investors wary of buying short-term notes until there is more clarity about the end of the rate-tightening cycle

What a bunch of crap. It certainly couldn’t have anything to do with our huge deficits, shaky dollar, creeping protectionism, or the fact that bonds have been in a downtrend for quite a few months now, could it?

Markets can be moody, can’t they? After the dim despair of yesterday’s post-Fed selloff, the window dressers got to work today and lit the market back up. Apparently the window into techland needed the most dressing up, as the Nasdaq got the most attention.

The Dow was unable to recover all of yesterday’s losses, gaining 61 points (+0.6%) to 11216. The S&P got back to where it was, finishing 10 points higher (+0.8%) at 1303. The Nasdaq was the star of the show today, gaining 33 points (+1.5%) to 2338, its highest close since early in 2001 - and oh yeah, it was at this level in January of 1999 too. That’s been a wild 7 years to get nowhere, eh? The Nasdaq 100 also had a big day, gaining 1.8%.

The Russell 2000 set another all-time high, gaining 13 points (+1.7%) to finish at 764. The Dow Transports and Utilities each added 0.8%. Bonds were lower again, and yields continue to make their way higher. As of now, we have the 6-month at 4.82%, 2-year at 4.80%, 5-year at 4.80%, 10-year at 4.80% and the 30-year at 4.84%. How’s that for flat? I thought it was supposed to be a yield “curve”…

Market internals were quite strong, with volume also strong on the Nasdaq. Volume on the NYSE ticked up from yesterday, but still remains below the 50-day average. Advance/declines were 14 to 5 on each exchange, with up/down volume 15 to 4 on the NYSE and 17 to 3 on the Nasdaq. New highs/lows were 238/51 on the NYSE and 228/32 on the Nasdaq.

No losers in the groups to speak of. The biggest winners were disk drives (+3.5%), gold & silver stocks (+3.5%), steel stocks (+3.2%), airlines (+3.0%), semiconductors (+2.5%), brokers (+2.1%), computer hardware (+2.1%), REITs (+1.9%), internets (+1.9%) and oil services (+1.7%).

The market pretty much ignored yet another move higher in energy prices, but I don’t think it can for too much longer as crude oil rose to $66.45/barrel. The killer seems to be coming in the gasoline market, where unleaded has moved to $1.96/gallon. Natural gas was up a few cents to $7.33/mmBTU. The dollar index trickled down to 90.22, but gold worked its way up to $573 an ounce, and silver cracked $11 at $11.11/ounce.

BMB Note: Ok, I don’t have a clue where this move in the Nasdaq came from - seems to me it came from left field. Welcome to the last few days of the quarter. They say that yesterday’s selloff was an over-reaction, but I didn’t think that yesterday’s reaction was all that extreme. If they’re going to play that game, I can say that today’s rally was an over-reaction to yesterday. How’s that?

So what to make of today? I have no idea. The Dow was unable to recover even to yesterday’s highs, but the S&P got it all back and the Nasdaq moved to new relative highs as people piled back into tech stocks. I must have missed the memo that told everybody to buy tech today. As I mentioned yesterday, the S&P breaking below 1295 apparently wasn’t a big deal just yet. The Nasdaq 100 continues to be the laggard, still well off its most recent highs.

On the negative front, you would think that the market will eventually face some tough sledding from the strong moves in energy prices and interest rates. Gasoline is now pushing up near 2 bucks in the futures market, and that translates to some pretty hefty prices at the pump - and it’s only the end of March. If that’s any indication of what summer prices will be like, I’m not looking forward to that. And bonds really look like they’re starting to get into trouble here. If that move doesn’t subside and stabilize interest rates, things could start changing all over the place. But I guess we’ll wait and see how it all shakes out.

Gary Kaltbaum says that there is plenty of bad going on in the market that you need to watch out for. But on the other hand, there is some good going on too.

A bit of a bounce back after yesterday’s selling. The major indices are showing modest gains, advance/decline figures are nicely in the green and most groups are higher. Leading the pack are the steel stocks, brokers, disk drives and REITs.

Bonds are pretty much unchanged on the day, yields are up only slightly. Energy prices are also showing little change, even after the morning’s inventory numbers, which showed a build in crude of 2.1m barrels, and drawdowns of 5.4m barrels in gasoline and 2.5m barrels in distillates. The dollar also hasn’t moved much from yesterday, gold has edged back up to $568/ounce, and silver has also moved higher, to $10.97/ounce.

That’s what they’re saying, maybe as early as next week.

Jon Friedman thinks that with its latest ploys of trading contests and Eisner talk shows, CNBC is skating on some rather thin ice where its reputation is concerned (that’s assuming they have any sort of reputation left, in my mind). And you just knew that a commentary on CNBC could not possibly go without an obligatory Cramer comment:

CNBC has diligently shuffled its anchors, created worthwhile and thoughtful documentaries and — heaven help us all — unleashed the volcanic Jim Cramer. In fact, Cramer’s “Mad Money” show appears on the air so often nowadays that you’d almost suspect the “C” in CNBC actually stands for “Cramer.”

BMB mentioned yesterday that the S&P had broken its very near-term support at 1295, but I wasn’t convinced that this break was meaningful just yet. Apparently Deron Wagner isn’t convinced either, although he’s hoping that yesterday’s move down might bring about a little more volatility:

It will be interesting to see if we get follow-through on yesterday’s bearish reversal because all recent attempts at both breakouts and sell-offs in the major indices have failed. However, it is probable that the Fed announcement provided the market with the impetus to break out of its volatility contraction. If we see further losses in the broad market, we are already well-positioned. But we certainly do not recommend being complacent on the short side given the market’s recent track record of erratic behavior. Honor those stops regardless of whether you are long or short. Remember you can always re-enter a position after it has confirmed its direction. Re-entries in positions you stopped out of are often very profitable.

If there isn’t a legitimate supply shortage of gasoline this summer, we’ll do our very best to create one.

Lemme see if I’ve got this straight:

…the U.S. Congress failed to include liability protection for MTBE makers in a broad energy bill enacted last year.

So, due to:

…fears of lawsuits for continuing to use MTBE, or methyl tertiary butyl ether, the industry is switching over to fuel ethanol, a move that oil refiners have said could boost prices and crimp supplies despite high commercial fuel stocks.

That means that:

…that New England states and Texas could see shortages this summer because there is not enough ethanol available to fill the gap left from phasing out MTBE.

Ever wonder what they mean when they say a stock is facing a lot of “overhead resistance”? Take a look at this chart of Broadcom (BRCM). As Dave Landry of TradingMarkets.com likes to say, technical analysis isn’t a bunch of mumbo jumbo. The lines on a stock chart mean something — they are a record of real trades by real people. After BRCM gapped up on Jan. 27th, it tracked sideways for a month, moved to new highs the first week of March, then fell back to the post-gap range. But the stock recently started sliding out the bottom of that range, and now everyone who has bought the stock (and still holds it) in the last two months is losing money. That’s what forms the resistance - every move upward in the stock price is likely to be met with sellers who are more than willing to get out at “break even” or at a small loss.

QLogic (QLGC), another semiconductor stock, finds itself in a very similar situation right now. Any owner of QLGC stock that has bought in the past two months is under water, and many of them would probably be happy to get out on any bounce at this point.

Charts courtesy of StockCharts.com

In case you haven’t heard, there have been widespread protests in France over a new labor law, which basically makes it easier for companies to fire young workers.

I sort of understand the somewhat twisted logic behind the law. But I’m just not sure that the best way to encourage companies to hire certain groups is to make it easier to fire them. There’s something a little backwards about that…