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.

In addition to the changes in other areas of their site, Yahoo is in the process of upgrading their Finance section. Part of the upgrade will be new and improved charts, now in beta test.

Take the new charts for a test drive.

The folks doing commentary at Comstock Partners aren’t real certain of this whole ’soft landing’ idea in the housing market. As a matter of fact, they’re pretty certain of the ‘hard’ line, and believe that the stock market is in denial:

The market is suddenly assuming that since energy prices are declining and mortgage rates are drifting down, consumer spending will pick up and the housing industry decline will end. In our view this outcome is highly unlikely. Our negative outlook for consumer spending is based far more on the end of the housing boom than it is on high oil prices. In turn, it now evident that housing is already undergoing a hard landing that can’t be cured by a downturn in mortgage rates, and that the situation is likely to worsen…

With housing already in a hard landing, it will be extremely difficult to avoid a hard landing in the economy as well. In our view the stock market is in the same kind of denial it was in 2000 when the vast majority of strategists and economists already knew the dot-com bubble had burst, but mistakenly thought it would have little impact on the rest of the economy or on stocks.

Some of the numbers that they present are pretty amazing:

• 32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
• 43% of first-time home buyers in 2005 put no money down.
• 15.2% of 2005 home buyers owe at least 10% more than their home is worth.
• 10% of all home owners have no equity in their homes
• $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.
• 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.

Once again, thanks goes to The Big Picture.

After an initial rush, stocks chopped around for the rest of the day, and managed only modest gains, despite what all the CNBC ‘alerts’ would lead you to believe - that network is an embarrassment. The final results for the day:

Bonds gave up their early gains, and finished mixed:
6-month: 5.10%   2-yr: 4.86%   5-yr: 4.75%    10-yr: 4.79%    30-yr: 4.91%.

Market internals were positive, and volume was much stronger than it has been, but we know that there were special circumstances to help boost trading today. Advances/declines were 3 to 2 on the NYSE and 10 to 9 on the Nasdaq, with up/down volume 5 to 4 on both exchanges. New highs/lows were 186/30 on the NYSE and 125/39 on the Nasdaq.

Only a few groups were able to move much above the flat line, with the housing stocks (+1.6%), internets (+1.2%), gold and silver stocks (+1.1%) and software (1.0%) making their way above the pack. On the red side, paper stocks fell 1.8%.

Energy prices were slightly higher. Crude turned around after morning losses, and finished about a dime higher at $63.33/barrel. Gasoline was up a couple of cents to $1.57/gallon and natural gas snuck up to $4.98/mmBTU. The dollar index fell to 85.63. Gold and silver were flat at $578 and $10.72/ounce.

BMB Note: Well, we’re pretty much there - options expiration week helped push the two big indices (Dow and S&P) back onto the doorstep of the May highs. Now I guess we’ll see if the market really has something new and different going, or if the headwinds in the form of a slowing economy and troubled housing market are too tough to overcome. Of course, none of the other major indices are back near their May highs, but CNBC will help us try to sweep that inconvenient little factoid well under the rug.

When it comes to next week’s news, we’re looking at PPI and housing starts on Tuesday and the next big Fed meeting on Wednesday (I wouldn’t look for too much to come out of the Fed meeting - I don’t expect any change in rates, nor any real change in their statement. They won’t rock the boat - the sailing has been smooth for a while now.). One would think we’ll get a little movement in there somewhere, but it’s hard to say which direction. Clearly the bias is to the upside - after two months down, we’ve now gone two months right back up. But will the market be able to push through to new highs or will it be turned back?

Though this morning’s CPI report was touted as being right on target, and the market seems relatively pleased with the number thus far, there are some who point out that the numbers are anything but great:

“While the August inflation figures could have been worse, they are neither fish nor fowl,” said Ken Mayland, president of ClearView Economics. “They are not ‘good.’”

Both the CPI and core CPI were close to rounding up to 0.3%, noted Stephen Stanley, chief economist for RBS Greenwich Capital. “Today’s number is right in the middle,” so both inflation hawks and doves “can feel happy,” he said.

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The core CPI is now up 2.8% in the past year, the biggest gain since December 2001. The core CPI is up at a 3% annual rate so far this year, and rose at an annual rate of 2.9% in August alone.

The headline CPI is up 3.8% in the past year, down from a 4.1% gain in the 12 months ending in July. So far in 2006, the CPI is running at a 4.6% annual rate.

Maybe you’re ok with a 4.6% rate of inflation. I’m not. Considering I’m only getting a little over 5% on my cash, looks like those of us that ever bother to save any money are just running in place, doesn’t it?

And lets consider that rounding error - when you’re dealing with small numbers like 0.2-0.3%, and reporting them as rounded to a single decimal point, your margin of error is really quite large. If any number from say 0.151% to 0.249% could be reported as a “0.2% change”, that’s a margin of error of nearly 50%!!

Update: Beginning in Jan. 2007, the BLS will display CPI index values to three decimal places, and percentage changes will be computed based on the three decimal places, but “Percent changes will continue to be rounded to one decimal place.” So, the numbers behind the scenes might be slightly more ‘accurate’ (if you can call the CPI computation the least bit accurate in the first place), but the number reported by the media will still have the same large range of error. Obfuscation is the name of the game.

One thing we’ll be getting today is volume. With options expirations combining with the S&P quarterly rebalancing, volume is already near yesterday’s levels, and there’s more than two hours of trading left.

The morning rally, which had CNBC ‘alerting’ all over itself again, seems to have lost a bit of its luster, at least for the time being. While the three major indices are still showing green, the NYSE, Russell, mid-caps, transport and utilities have all come back to the flat line or below, and the Nasdaq A/D line is slightly in the red. Homebuilders, software (on a big move in ADBE earnings) and internets lead the winners, while hospitals and networkers are giving up a little ground. Bonds are higher, pushing yields back down.

Proving that oversold can become even more oversold, crude oil is down another 80+ cents this morning, gasoline near unchanged and natgas up a dime. The dollar is higher, gold and silver lower.

As BMB was watching the television hype around the new Microsoft Zune music player yesterday, he thought to himself “Aren’t they kinda late to the party?” After all, the iPod will be moving into at least its third Christmas season already, and everybody and their brother has already come out with their own “iPod killer”.

Barry Ritholtz comments on Microsoft’s “trend following” tendencies - only he uses slightly different language:

What I found most fascinating about “This Week in Microsoft” were the 3 separate products that leaked out over the past few days:

• The Zune iPod challenger (in classic “steal the other guys thunder” following Apple’s event)
• Soapbox: The Microsoft YouTube Clone
• Live: The Microsoft Google challenger

Let’s get a few things straight about Mister Softee. First, forget all the chatter coming from Redmond about innovation. They are now and have always been utterly shameless copycats. They do not innovate; They do not create cool products; They are boring code writing cubicle dwelling drones — and that’s what they should be.

The second thing you need to know about Microsoft: They print money like they were a branch of the U.S. Treasury Department.

That is the bottom line for investors, and the cash ain’t coming from all these other products attempting to recapture lighting in a bottle. Its Windows 1st, Office 2nd, and then a big 4 way tie for SQL, Hardware (mouses etc.) Server SW, and then everything else. All these other products — including Xbox, hotmail, MSN, etc. — are what happens when you have more money than God and still want to be one of the cool kids.

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Understand my complaint about Redmond: I don’t begrudge them these many attempts to stay relevant and hip, to keep pressing buttons until they find the next thing that works. Hey, after you become one of the most successful firms in the history of Capitalism, it becomes hard to repeat that performance every quarter.

I’m just tired of the bullshit about all their terrific innovations (Spare me the techno-babble about multithreading processors or dynamic ram usage).

Deron Wagner is watching the iShares Belgium ETF for a breakout. On the broader market, here are his thoughts:

Many industry sectors and leading stocks have been acting quite well over the past week, so it’s not likely the 200-day MA on QQQQ will trigger a sharp reversal to the downside. However, it does provide a good excuse for the bulls to take a break. We therefore expect to see a bit of sideways consolidation and perhaps a modest price retracement in the short-term. As long as the broad market correction is not too steep, it will provide a good chance to scoop up shares of strong ETFs and stocks that pullback or move into support of their primary uptrend lines. Overall, more sectors are now in uptrends than downtrends, especially the tech-related issues, but there are still a few pockets of weakness such as Utilities, Energy, and Gold/Silver.

While the market is pleased with a relatively tame CPI report, Ford (F) announces thousands of job cuts and DaimlerChrysler (DCX) lowers its 2006 outlook.