Bear Mountain Bull

The politicians are loose again, touting mandatory health insurance at the national level.

These guys scare the heck out of me. Of course, in this case, it’s only John Kerry, who should rarely never be taken seriously:

Kerry proposes to pay for the program by repealing tax cuts enacted during the Bush administration that benefit those earning over $200,000 annually. He did not immediately elaborate on how he would enact his insurance mandate, but one aid said he would do so with a requirement written into the legislation spelling out that the government covers anyone who is uninsured.

So, let me see if I’ve got this straight: everyone is required to pay for insurance, except for those who fail to do so. In those cases, those who pay for insurance will also be required to pay for those who don’t!

The insurance won’t do us any good. We’ll all be taxed to death.

Another Fed fool out yappin’ today. I don’t know if she said anything useful or not. From what I can tell, she said a little bit for everyone.

Today’s auction results have the 3-month T-bill at an investment yield of 5.108%, the same as last week, while the 6-month came out at 5.174%, down from last week’s 5.265%.

As long bond yields have come down, the short end T-bills have held up, but haven’t been able to move much higher.

Much of the market seemed like it was stuck in the mud today, although a few areas saw some action. But it all didn’t add up to much, and the indices came in a little mixed. The three majors all suffered slight losses, with the Dow down 34 points (-0.3%) to 11186, the S&P off 2 points (-0.2%) to 1277 and the Nasdaq down 3 points (-0.1%) to 2091. The Russell 2000 held its ground, gaining less than a point to hold between 700-701. The Dow Transports fell another 0.8% and the Utilities gave up 0.4%. Bonds were mixed, and yields held fairly steady: 6-month 5.15%, 2-year 4.96%, 5-year 4.91%, 10-year 4.98% and the 30-year 5.07%.

Market internals were pretty much flat, and volume was again unimpressive - lighter than Friday’s. We see advances/declines about flat on the NYSE and 10 to 9 on the Nasdaq, with up/down volume split on both exchanges. New highs/lows were 94/58 on the NYSE and 77/78 on the Nasdaq.

Looking at the groups, they were pretty evenly split, but some bigger moves up than down: metals and mining stocks up 4.2%, followed by oil services (+2.7%), HMOs (+1.8%), disk drives (+1.8%, but there was a 13% move up in FLSH on the SNDK buyout), natural gas stocks (+1.8%), natural resources (+1.4%), steel stocks (+1.3%), commodity stocks (+1.2%) and paper stocks (+1.1%). Airlines were the biggest losers, falling 3.0%.

Also of note, big moves in the coal stocks following on the big move up in natural gas, coal being an alternative energy source for the electric utilities: ACI up 9.3%, BTU up 8.5%, MEE up 6.7%.

Big moves in energy prices today: crude oil up more than a buck to $74.40/barrel, and gasoline up a penny to $2.23. But by far the biggest news was a 14% jump in the price of natural gas to $8.21/mmBTU, as summer heat puts pressure on electric utilities. The dollar index slipped slightly to 85.31. Gold was unchanged at $636/ounce, and silver up a dime to $11.38/ounce.

BMB Note: Not much to take away from today. The energy groups continue to surge on the higher prices, but these spikes can burn out quickly.

Lack of both price movement and volume make it pretty tough to get any sort of read on the market. The Dow and S&P remain at resistance levels, and the market pretty much priced in a Fed pause last week. If that pause fails to materialize, there could be trouble. Now that July is over, the market may be free of any end-of-month support. We’ll see how the rest of the week goes.

After the bell, another earnings blow-up: this time, Whole Foods (WFMI), closed at 57.51, trading around 53.00.

Volume is weak, price ranges are very tight. The battle between the bulls and bears today, so far, is pretty much a draw. Either that or no one is even bothering to fight…

New ETFs are coming out fast and furious these days, and it’s just about impossible to know about every single one of them the day they show up. A new offering from Barclays, the iShares® GSCI® Commodity-Indexed Trust (GSG), began trading last week. GSG is designed to track the performance of the GSCI® Total Return Index.

As of June 30, the GSCI reflected mainly energy, with the top weighted components being:
Crude Oil . . . . . . . . 31.45%
Brent Crude Oil . . . . 14.93%
Unleaded Gas . . . . . . 8.72%
Heating Oil . . . . . . . . 8.20%
Natural Gas . . . . . . . .6.35%

You can check out all the info on GSG at the iShares site.

The media is making a big deal of statements from St. Louis Fed president Poole this morning. When asked about the chances of a rate increase at the Fed meeting next week, he said:

“I am still 50-50, we still have important data yet to come,” Poole told reporters after a speech to the Southern Legislative Conference.

But BMB is wondering what that has to do with anything - I wouldn’t think that Mr. Poole’s opinion carries much weight, if any. You see, a little later, the same article states:

Poole is not a voting FOMC member this year.

Doh!!

A rather split tape so far this morning, as the major indices hover just below the zero line. Advance/declines are also just in the red, and the group picture is pretty evenly spllit. Metals and mining stocks, HMOs, disk drives and oil services lead the winners, while airlines, homebuilders and gold stocks lead the losers. Bonds have pulled back slightly, yields are up.

Energy prices are mixed - natgas up the most. The dollar lower, gold and silver also lower.

Chicago purchasing managers’ index rose to 57.9% from 56.5% in June.

After a discussion on the ‘profitless prosperity’ in the tech world, Bill Fleckenstein says he’s done being “clever” when it comes to trading the short side:

…I have decided to change my operating procedure, as to how I run my short portfolio. By that I mean: To avoid getting trampled during this bear-market rally, it’s been necessary to be clever and try to dance between the raindrops by always being quick to cover. I now think that being clever runs the risk of missing many moves. So, it’s time for me to be more of an investor on the short side. This is the first time I will have taken that tack since the 2000-2002 period.

I’m not sure that this means anyone else should do anything differently, but what I’m trying to convey is how serious our problems are and how strong I believe the undertow is liable to be. To position myself, therefore, I have sold a large number of stocks in the last week.

In some ways, it’s all one trade. The consumer is overleveraged. He has been able to live beyond his means, thanks to the housing bubble. Now that it has ended, we will see bad debt and weaker consumer spending. At some point, there will be corporate weakness as well. We’ll just have to see whether my reading of the tea leaves is correct.

Deron Wagner says the same thing we’ve been saying here at BMB - we need to see better volume to be convinced by any moves:

Looking purely at last week’s percentage gains in the market, one would understandably assume that stocks have recently been performing well. However, one major problem is that the market has yet to confirm its gains with higher volume. In Friday’s session, total volume in the Nasdaq declined by 14%, while turnover in the NYSE was 7% lighter than the previous day’s level. We don’t mean to keep harping on it, but the lack of volume on the “up” days should be a primary area of concern for the bulls. Within the past week, there have been two large gains in the broad market. On July 24, the S&P 500 rallied 1.6%, then followed it up with a 1.2% gain on July 28. However, volume declined on both days. This is of paramount importance because the stock market has never reversed from a primary downtrend without first having an “accumulation day,” defined by higher prices and higher volume. With institutions accounting for more nearly 75% of the market’s average daily volume, rallies simply cannot last if they are driven purely by retail buying.

A tech merger to get the week started.

‘Nuff said.

News like this just can’t be considered good.

Paul Van Eeden says that the bells are ringing, loud and clear:

It’s no surprise that economic growth is slowing down. It would have been surprising if it didn’t. The US real estate market is busy melting down and as I have said many times in the past, the real estate bubble kept the US economy afloat during the past five years.

What is surprising is that stocks are rallying upon the release of weak economic news. The reasoning is that slower economic growth will cause the Federal Reserve to stop raising interest rates and since lower interest rates are generally good for stocks, any news that could mean that interest rates will stop rising must therefore be good for stocks.

They say the stock exchange does not ring a bell at the top of the market. Well, I can hear all sorts of bells ringing: when investors buy stocks because they believe the economy is slowing down it is a sign that we have reached the top of the market.

The news that was widely ignored Friday was that while economic growth slowed in the second quarter, inflation (as measured by price increases) picked up. The government’s price index for personal consumption rose to 4.1% after rising 2% in the first quarter. I thought Ben Bernanke wanted to fight inflation — if inflation is increasing is he really going to stop raising interest rates?

It seems the economy is slowing while prices are rising and that means the Fed is caught between a rock and a hard place.

Items of note on the latest industry moves:

• Big moves up in many groups this week, only two in the red. The beaten down semiconductors and oil services got a reprieve. Even the homebuilders caught a bid.
• It’s normal that the hugely beaten down groups would bounce. Is this the beginning of something bigger, or just some end-of-month toying around?
• Utilities and health care still leading the way over the past month. REITs still hanging around as well.
• Banks are holding up well as interest rate hikes may slow.
• Telecoms have gone straight up in the last two weeks - the $XTC has climbed from 770 to 830.
• Divergence in the energies: oil and natural gas stocks have been strong, while oil services had been getting pounded and then bounced this week.
• Health care providers - HMOs and hospitals - were the ones that suffered the most this week. The HMOs have completely reversed over the past two weeks after running up since the end of April.
• Biotechs ($BTK) have been basing for two months now.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

John Mauldin smells the winds of stagflation blowing our way, but says the Fed has both reasons to pause in August and reasons to raise rates. Either way, it’s probably not good news for stocks:

The sacrifice ratio is high today. That means the dangers of rising inflation are such that you should risk a slower economy rather than allow inflation to gain a foothold. And at 4%, inflation has not only gotten a foothold, it has started to move into the living room. The sacrifice ratio, which Bernanke has written about and is a leading authority on, says the Fed will raise rates in August. Or at least should.

Last week, I was graciously invited by David Kotok of Cumberland Advisors to go on his annual fishing trip up in Maine. There were a number of financial types there, and the conversation naturally turned to Fed policy, among other things.

Kotok, who is one smart economist, thinks the Fed will raise rates in August and then pause, but inflation will not go away and then the Fed will have to get serious later in the year or early in 2007, even as the economy is weakening. That will be a real recession. He is not optimistic, to say the least.

I think the Fed will look at the inflation numbers that will come out in August and September and then make a decision. If inflation is still rising, they will have no choice but to raise. They are dealing with the problems of too much stimulation in the latter part of Greenspan’s years, which is just now catching up. (As an aside, much of the current board is composed of newer members.)

If the Fed pauses in August, it will only be because they think the economy is going to slow down much faster than it already is. I do not see how that can be good for the stock market. And if they raise rates yet again, they indicate that they are going to maintain the fight on inflation, until inflation and then the economy do in fact slow down. I just don’t see how that is a good environment for the stock market.

Or, more correctly, the recent lack thereof. From Gary Kaltbaum’s radio show yesterday, in reference to the latest move up off the bottom:

“We have NOT had a confirming follow-through measured by a big day on big volume — in fact, volume patterns, if anything, have been poor. And why is this important? Because the institutions control 75-80% of what goes on, and if they’re not showing they are backing a move, that move could be in question.”

	Utilities still leading the way, but held a bit back this week as investors backed off their defensive posture.
	Health care stocks look like they’re on the move for now. Definitely an area to keep an eye on.
	Consumer staples were also near the bottom of the list for the week, as buyers seemed to have a little more appetite for risk.
	Energy stocks had a big week, as the big oils set new highs and the oil services bounced off support.
	Tech stocks also bounced this week. They were due.

The numbers after one of the more positive weeks we’ve seen in a while:

Charts courtesy of StockCharts.com

Barry Ritholtz (The Big Picture), on today’s reaction to the morning GDP report:

First, the bad news: The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb.

The good news? You’ll have to ask equity traders, who gapped up the market strongly this morning. They apparently see a soft landing coming. The bond market, on the other hand, aggressively bought treasuries, driving the 10 year note below a 5% handle.

Quite frankly, bond traders are more like the adult supervision of markets, while stock jockeys can be likened to hormone addled teenagers. Whenever the markets send conflicting messages, my tendency is to give more weight to the adults than the children. (And I write this as a stock trader).

Read the rest on the Fed’s quandary. We all know they’re stuck between a rock and a hard place. I wouldn’t want to be in their shoes. Of course, I’ve thought that for months and months now.

A few excerpts from TheDOCument.com today:

The nature of the rally was especially supportive of financial, housing, and consumer shares, all of which have been under a bit of pressure from the recent widespread realization that the deflation of the housing market may have a broader impact than was generally anticipated. It’s quite ironic that people expect the Fed to step in and preserve their financial well-being when it is the very institution that has more likely ruined it.

Once again, every minute dip in the indices was immediately bought… a telltale sign of window dressing.

Last Friday I wrote about the markets being at a critical juncture where they could either bounce or crack wide open. Buyers managed to step it up and hold things together this week. With a Fed meeting 7 trading days away and widespread anticipation of at least a pause in rate hikes, it is hard to imagine there will be much motivation to sell between now and then. However, I can easily see how the Fed meeting could be a catalyst for the next round of selling no matter what comes out of it. A surprise hike would wreak despair upon the markets, while a pause could provide a classic sell-the-news setup.

	The S&P, along with the Dow, has worked its way back up to the top of the range that has confined it since early June.
	The Nasdaq is a different story. Before the close, CNBC put up the alert “Nasdaq heading for best week since January.” I guess that does sound a lot better than “Nasdaq still down 11.7% from April highs.”

Chart courtesy of StockCharts.com

The bulls seized onto the “good news” of a weaker GDP number and higher inflation and rejoiced with another “Fed is done” rally (that’s probably the 8th or 9th one by now), sending stocks higher today - I told you the market isn’t logical. The Dow picked up another 119 points (+1.1%) to 11220, the S&P 500 gained 15 points (+1.2%) to 1279 and the Nasdaq tacked on 40 points (+1.9%) to 2094. The Russell 2000 gained 14 points (+2.1%) to 700. The Dow Transports rebounded to the tune of 2.5% and the Utilities gained 0.6%. Bonds rallied as well, and have now turned the yield “curve” into a total joke: 6-month 5.14%, 2-year 4.98%, 5-year 4.92%, 10-year 4.99% and 30-year 5.07%.

Market internals were positive, but volume was quite unconvincing: lower than every day this week but Monday on the NYSE, and the lowest since July 17th on the Nasdaq. Advances/declines were nearly 4 to 1 on the NYSE and 11 to 5 on the Nasdaq, with up/down volume near 4 to 1 on both exchanges. New highs/lows were 119/66 on the NYSE and 82/101 on the Nasdaq.

Some big green numbers in the groups today, with transportation stocks leading the way, up 3.2%, followed by gold and silver stocks (+3.2%), semiconductors (+3.0%), paper stocks (+2.8%), homebuilders (+2.7%), airlines (+2.4%), brokers (+2.4%), computer hardware (+2.3%), networkers (+2.3%), steel stocks (+2.2%), disk drives (+2.1%), banks (+2.0%), computer tech (+1.9%), and internets (+1.8%). A very short list of losers was led by the HMOs, down another 2.3%.

Energy prices were mixed, as crude oil took a dive to $73.24/barrel and gasoline fell to $2.22/gallon, but natural gas moved higher for the fourth straight day, to $7.18/mmBTU. The dollar index fell to 85.44, gold was up a few bucks to $636/ounce and silver fell a few cents to $11.28/ounce.

BMB Note: Well, we sure weren’t expecting that, were we? After yesterday’s intra-day crumble, it didn’t seem that that market had much more “rally” left in it. But the good news of more economic bad news got another “Fed is done” rally going, and that, combined with some probable end-of-month tinkering, got things moving higher.

But does today’s move change things? Not really. The move up was on very light volume - as this whole move up off the bottom has been. Until we see some conviction in these moves, it’s hard to place much faith in them. And while the Dow and S&P are still holding up the best, teasing the tops of their 2-month ranges, the other indices, like the Nasdaq, the Transports, and the Russell, have a long, long way to go before they look healthy again.

So let’s not get too excited just yet. When things really change, we’ll let you know. Until then, be patient and remain defensive, for the bear market trends are still in place until proven otherwise.

Somebody needs to get hold of the person that keeps generating the damned CNBC “Alerts” and handcuff them to a bubbler somewhere.

Geez. The alerts are coming every 3 seconds today. “All 30 Dow stocks higher”. “Dow headed for biggest weekly gain since World War II”. “S&P heading for biggest weekly point gain since the Jurassic period.” Ok, maybe I’m exaggerating just a bit…

I can’t take it anymore. Then again, now and then, they’ll put up something stupid like:

“Stocks up on weak GDP growth.”

Yeah, that sounds good.

Update: Oops, now they had to change it. “Dow: 29 winners, 1 loser”. Heh.

From Phil Flynn’s Energy Report today:

One of the things that didn’t get talked about a lot with all the action in the market was the fact that the first half of 2006 marked a 20 year high for US drilling activity. Oil wells were completed at a pace not seen since the 1980’s. The last time that gas prices were at all time highs.

The real difference is the discrepancy between demand and supply and excess production and refining capacity. In an excellent piece in the IBD Robert Samuelson had some solid statistics that really illustrates the story The Energy Report has told so many times year after year. Mr. Samuelson points out that in 1985 the world used 60 million barrels of oil daily but the world could produce about 70 million barrels a day. In other words, we had a spare production cushion of approximately 10.0 million barrels a day. He also pointed out that we had excess refinery operations that ran at about 78% of capacity. Now we are running 92.2% of capacity. Now oil demand is running 85 million barrels of oil a day and growing! With demand at an all-time high in the US we are not surprised to find oil trading in the $70.00 region.

Standard and Poor’s says $100.00 a barrel oil won’t drive the economy into a recession! Now we can all sleep better!

Iran’s President has said that Israel has ordained its own destruction by invading Lebanon and has pushed the self destruct button. The recording of the Iranian President will self destruct in 5 seconds.