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.

One thing you can say about Doug Kass — once he makes a call, he sticks with it:

The ramifications of an extended housing downturn are broad — far broader than many realize. For example, the apartment REITS, a sector I am short, argue that there has been no new construction, so supply/demand favors an escalation in rents. But just wait until speculators, unable to sell their condominiums and homes, resort to renting the units.

Or consider the implications for building materials companies like Eagle Materials (EXP), which warned on Tuesday. What about the sale of pickup trucks, which are often used on the construction trade? What does an extended downturn portend for carpet, gypsum, lumber and appliance manufacturers? Or for subprime and some prime lenders? And what do you suppose happens to the plethora of real estate agents and mortgage brokers? (Do they become daytraders again?)

You get the point: The housing decline is just beginning to be felt. The fixed-income market recognizes this. But for now, equity market participants don’t. Common sense has taken a sabbatical.

Don’t believe the housing soft-landing advocates, and do recognize the broad economic impact that a protracted downturn will have on our economy.

The worst is yet to come.

Hat tip to The Big Picture.

Here is the transcript of FSO’s interview with Matt Simmons that was mentioned here at BMB over the weekend.

This probably isn’t good news for the Nasdaq / semis / disk drives. MRVL closed at 19.09, trading near 16.

	The small-cap stocks continue to lag the big Dow stocks, and quite badly. The Russell 2000, which has never come close to returning to its May highs, is now in danger of breaking its uptrend off the lows.
	The hospitals were starting to look like they were in a bit of trouble. The $RXH broke near-term support today.
	Many of the restaurants had joined the retail stocks in a ‘consumer’ rush-up off the July lows. Now, some of those restaurants are rolling over. Applebee’s, for example, has had a rough couple of days.

Charts courtesy of StockCharts.com

The Dow made another run at the all-time closing high, forcing CNBC to dust off the old ‘alert’ machine, but the rally was short-lived, and stocks pulled back into the red. The major indices, with the exception of the DJ Utilities, all finished in the red, with a 1.3% drop in the Nasdaq 100. Here are the summary numbers:

Bonds were slightly higher, bringing yields a little lower:
6-month: 4.99%   2-yr: 4.65%   5-yr: 4.55%    10-yr: 4.61%    30-yr: 4.75%.

Market internals were a little on the ugly side, especially on the Nasdaq. Volume, however, came in a bit lighter than Friday’s. Advances/declines were 10 to 9 on the NYSE but nearly 1 to 2 on the Nasdaq. Up/down volume was about 3 to 4 on the NYSE and 1 to 2 on the Nasdaq. New highs/lows were 124/23 on the NYSE and 92/65 on the Nasdaq.

Groups were mostly red, with biotechs (+2.0%), homebuilders (+1.3%) and airlines (+1.1%) leading a short list of winners. On the losing side, oil services (-2.6%), software (-1.4%), internets (-1.2%), natural resources (-1.2%), networking (-1.1%) and natural gas stocks (-1.0%) led the way.

Energy prices were mixed. Crude took another drop, to $61.03/barrel. Gasoline fell a few cents to $1.51/gallon, but natural gas was a couple of pennies higher at $5.64/mmBTU. The dollar took a morning dive and stayed down, dragging the dollar index back down to 85.60. Gold was down a few bucks ($596/ounce), but silver was up a nickel ($11.46/ounce).

BMB Note: Not a particularly interesting day, but the weakness in small caps continues, and the Nasdaq looked quite weak today as well. In techland, we’re starting to see a little slippage in the groups that led tech up, namely software, networking, etc. In addition to those areas, the hospitals took a turn for the worse today, breaking down below recent support, the first real breakdown in a while outside of the commodities.

The Russell has pulled back right to its downtrend line. If that breaks, and other trend lines start to break as well, then we could be in for some more meaningful correction. For now, it’s just something that bears watching.

In the numbers game, we get auto and truck sales tomorrow, which shouldn’t be huge market movers. But they’re already talking about the monthly jobs report due on Friday morning.

The 6-month T-Bill snuck back above 5% in today’s Treasury auction while the 3-month was just slightly lower. The 6-month investment yield was 5.014%, compared to last week’s 4.998%. The 3-month went for a yield of 4.890%, a slight drop from 4.895% last week.

BMB stumbled upon this information last week, but didn’t post anything about it at the time because I couldn’t find enough information. But now that Jeffrey Saut has brought it up…

While gasoline was probably set for a seasonal-decline following the summer driving season anyway, we learned something last week that clearly accentuated the decline.

As we understand it, back in late July Goldman Sachs decided it was going to reduce the weighting of gasoline in its widely followed commodity index (GSCI). Participants wanting to dissect the entrails of that decision may refer to The Financial Times story dated August 29, 2006 titled “Market Insight: Index shifts follows oil decline.” Suffice it to say, Goldman took the gasoline weighting in its commodity index from 7.3% to 2.5%, for pretty mysterious reasons, in a gasoline-centric economy (IMO). Goldman even went so far as to scale-in those reductions at intervals between August and November. Accordingly, the billions of institutional dollars that “mimic” (read: invest) the GSCI have had to periodically SELL those gasoline futures contracts to stay in-sync with the index’s new weightings. Unsurprisingly, unleaded gasoline prices peaked on August 3rd at $2.35/gallon, basis the NYMEX November future’s contract, and crashed into last week’s lows of $1.46/gallon for an eight-week price decline of 38%, causing one old Wall Street wag to cream, “SPURIOUS!”

Even the NY Times caught it:

Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index’s weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings…

Unleaded gasoline made up 8.72 percent of Goldman’s commodity index as of June 30, but it is just 2.3 percent now, representing a sell-off of more than $6 billion in futures contract weighting.

To be a little fair to Goldman, the index’s gasoline weighting didn’t drop completely to 2.3 percent. Some of the gasoline concentration was reallocated to the new RBOB contracts, which were given a 2.37% weight. However, the combined percentage of unleaded gas and RBOB of 4.68 is just over half the weight given to gasoline prior to the rebalancing of the index, and the total weight given to energy has been reduced from 76.26% to 70.67%.

Here are the ‘before’ and ‘after’ GSCI weightings:

BMB has said before that things don’t make a lot of sense right now. The markets don’t seem to be in synch with the “news”, for whatever reason.

Michael Shedlock (aka Mish) has a few things to say on that subject, and relates a few comments from a couple of the Minyanville folks in the process:

There was an interesting conversation on Minyanville on September 26th between Kevin Depew and Scott Reamer. Let’s tune in.

Kevin Depew:

“You guys always seem bearish,” someone wrote me last night. That’s simply not true.

Frankly, it is extraordinarily difficult to make money betting against stocks. And I don’t know of any Professors at Minyanville who are permanently bearish. If Minyanville seems bearish it’s just by comparison to the always-bullish-all-the-time news that permeates the mainstream media that it just seems that way.

So far this morning all I’ve read are bullish stories. Everything is bullish. Here are some of the bullish things I’ve read this morning:

• The decline in oil and gasoline prices is bullish because it helps the low-end consumer.
• The rise in oil and gasoline prices, if it happens, is bullish. It shows good economic growth.
• The price wars over generic drugs is bullish because it helps free up discretionary income for those retirees who tend to spend the most money on prescriptions.
• The declining housing market is bullish because it dampens inflation and makes housing more affordable.
• The “unexpected” recovery in the housing market, if it happens, is bullish because it furthers the “wealth effect.”
• Rising rates are bullish because that signals strong economic growth.
• Falling rates are bullish because that helps drive mortgage refinancing and cushions ARM resets.
• A falling dollar is bullish because it makes exports more attractive.
• A rising dollar is bullish because it makes imports less expensive.

Scott Reamer:

Data itself doesn’t matter. It’s the environment into which it is fed that matters. In this case, since we are seeing historic, record risk-seeking (bullishness/complacency) EVERYTHING is bullish or considered so. So ANYTHING people say or data that comes in - even the most bearish (like housing stuff or UPS, LEND, HRB etc) - is “bullish” because people are in that frame of mind. It’s at such an extreme and it is THAT condition that appears to be nearing an important - critical - inflection point.

Of course, both lower and higher oil prices cannot be bullish together. Understanding that particular riddle comes from understanding that it isn’t the DATA itself that matters - but the psychological environment into which it is fed that matters. And THAT is the environment which you should be trying to measure and analyze. Not the data.

Chris Johnson of Schaeffer’s, with his summary from today’s Monday Morning Outlook:

Wrapping it up, the market heads into October with a slight wind at its back, as investors who sidelined themselves before seasonally weak September (which turned out to be anything but weak) continue to move into long stock positions. But this trickle of money is balanced against the current overbought conditions to make for a market that is likely to consolidate before moving significantly higher. Earnings reports will start to flow next week to provide the next wave of fundamental catalysts for the market. As we’ve not heard much on earnings expectations from analysts and investors (translation: expectations are not running high), the potential damage from disappointing earnings reports seems to be lower than normal. As a result, investors are wise to continue viewing the market with a cautiously optimistic eye.

Kevin Haggerty does his “wondering” out loud again:

The market has significant longer-term timing risk based on previous bull-cycle highs and four-year cycle lows, so it remains a trader’s market with extreme risk for longer-term position holders. If this market gets to 12/22/06 without at least a 10% correction, it will be the longest the market has done that from a previous bull cycle high. All of this certainly makes one wonder what the Fed has done or is doing to keep this market on a high note through mid-term elections. It is getting a little too obvious watching the SPX rally after every significant potential crisis or fallout, which is the “bad news is good news” syndrome. No, it has nothing to do with the “market climbs a wall of worry” cliche. The immediate trading focus remains the energy sector for daytraders and right here some pullback is expected. After a couple of days for any new October money put to work, we should get a better handle on any other short-term sectors that deserve a focus and where traders can ring the register.

I don’t think it’s just the Fed. I think central banks the world over can be thanked for keeping the money spigots open. They saw what happened in May when the tough talk was threatening to reduce liquidity, and since then have moderated their talk, and their actions. Notice that Japan has not come through with the rate hikes that they were threatening. The US Fed is on pause, and it’s a virtual lock that they will not raise rates before the end of the year, and the prevailing wisdom is that the next move will be a rate CUT. All the tough talk has chickened out, and it looks like we could get mild re-inflation of some of the bubbles. The monetary policy makers are doing the one thing they do best - inflate, and try to hide the evidence.

They have succeeded in talking energy and commodity prices back down (for now), and the hot housing market has cooled somewhat. So they’ll just try to keep the house of cards propped up and hope some concrete just shows up someday.

A few numbers out after the open, but they haven’t seemed to make much of an impact: the ISM index was a little weak, construction spending overall showed a slight increase, and pending home sales increased in August, but are down 14.1% in the past year. Of course, the realtors are already calling a bottom in the housing market.

In the market, this all adds up to a lot of nothing at the moment. Major indices are mixed, A/D lines are slightly in the red, and the groups are split, with biotechs, gold stocks and utilities leading the winners, and oil services and hospitals losing ground.

The bond market has moved yields slightly lower. Energy prices are flat to lower, the dollar has taken a turn to the downside, gold and silver are slightly higher.

That’s one way to give your stock a boost - find someone to buy your company. Myogen (MYOG) up 46% on a buyout by Gilead, Harrah’s up 17% on speculation of yet another private equity buyout.