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.

John Mauldin, in his essay this week, compares the situation today to September of 2000, and says it’s “Déjà Vu all Over Again”:

To be a bull today, you have to think that this time it is different. You must believe that the inverted yield curve, which has yet to be wrong about a future recession, is giving us a false positive. Because if we do get a recession or even a “mere” serious slowdown, then the stock market is going to drop. It always has. Always.

To be a buyer today, you have to think that the housing market is not going to be all that big a problem, that consumers will be able to once again maintain their increase in spending.

I suggest you read the end of the fairy tale. Goldilocks, rested and comfortable in the moment, ended up fleeing for her life in the end.

So no, I don’t think Mr. Market, or at least the price action, can tell us when the economy is getting ready to turn over. Prior to every market drop and recession, the market has made new cycle highs. As more than a few commentators have noted, the market works diligently at creating the most pain for the most number of people. I sadly think there is some pain in the future as this economy slows down.

Is a recession a certainty? Is it locked in? No. It’s not. I could be wrong and this time it could be different. Someday it will be, I guess. But the probability of a recession is high and getting higher. I think a serious slowdown is a very high probability. And that is not a good environment for stocks in general, although there will certainly be exceptions.

And that is what I think the bond market is telling us. Why would rates be falling if the economy is going to go up?

	Health care, like nearly every other sector, up again this week. XLV is looking a little stretched here though.
	Utilities continue their slow trek upward.
	Tech stocks have been getting the most attention, and have had the best 4-week improvement, but remain at the bottom of the pack year-to-date.
	Consumer discretionary stocks put in the best week of all the sectors. Are the retailers and leisure stocks now out of the woods? Yeah, right.
	Energy stocks are now the most hated group. If patterns hold, that means they’ll be the next ones to get a big pop in this very fickle market.

The numbers as the market lifts on next-to-no volume:

Charts courtesy of StockCharts.com

BMWife here again, reporting on innovation. Taking something old and turning it into gold–my favorite kind of capitalism.

The brilliant British engineer, Nancy Abeiderrahmane decided to setup the first ever camel dairy in Africa to pasteurize camel’s milk.

Says Abeirderrahmane:

“Aid doesn’t aid. And neither does an economy forced on a country by globalization. It’s about harnessing what’s already there in terms of resources and talent,” says Abeiderrahmane. “I’m proud of the business but more importantly the herders are too.”

Tiviski pays 150 ouguiya (55 cents) a litre to the roaming herders, a significant boost to the income of the herders, whose nomadic lifestyle leaves them with few other economic opportunities.

Innovation didn’t stop with camel’s milk either:

Wastewater from the milk production process is pumped to two nearby plots and acts like fertilizer for plants in the Tiviski gardens that provide some rare greenery in this city constantly under siege from the advancing sands.

The world is ready for camel products, but in an ironic twist, despite demand, the UK doesn’t allow camel cheese to be imported. (Leave it to the “developed” world to make a mess of things.)

With the appearance of a rather square Camembert but the taste of a tangy goat’s cheese, it has had stores like Harrods of England licking their lips.

But EU regulations means it cannot be exported. “It’s quite ironic, really,” Abeiderrahmane chuckles. “Because, despite the rules, most of the cheese makes it to Europe now - it just happens through people’s suitcases.”

A good rundown on option ARM mortgages from Business Week. Hat tip to At These Levels:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”