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.

Tobin Smith lets loose on Canada’s idea to change the energy trusts’ tax treatment.

Tobin assures us that this change is only a proposal at this point. And though he’s subtle about it, he doesn’t seem to think it’s a very good idea:

Last night in Ottawa, the “Dishonorable” Minister of Finance Jim Flaherty announced his proposal for a Tax Fairness Plan for Canadians. The plan seeks to restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations.

I call him “the dishonorable” because I stood in a room with him nine months ago when he told a group of us that “You can rest assured that the Tories will NOT go after the energy trust business like our predecessors.”

But now we have what may be the single-stupidest economic policy move I’ve ever witnessed.

“The measures I am bringing forward today are necessary to restore balance and fairness to Canada’s tax system, to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions,” said Minister Flaherty. “Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians.”

“In the best interests” — boy, if I had a nickel for every time I’ve heard that line from a politician.

Bear in mind, ladies and gents, this is ONLY a proposal. It’s not a new policy and the fat lady has not even begun to warm up on this becoming a law as Flaherty has proposed.

So what if this idea becomes law? Mr. Smith says, if you mess with your trusts, we’ll take ‘em:

Sure, take on the operating businesses that are only converting to the income trust structure because your bonehead laws forced them to, but leave the energy trust industry alone.

Or you won’t have a “Canadian Energy Income Trust” business.

I talked to a number of private equity guys today and I can assure you of one thing: We’d love your energy trust business in the United States. If this form of capitalism is too aggressive for you, we will buy it — for CASH.

We will buy it and move the domicile of the trusts to the U.S., kick out the Canadian investors who depend on their monthly income and continue what the pioneers of the industry started and YOU killed.

Imagine … $300 billion of private equity and $1 trillion or more of bank lending firepower is undoubtedly drooling over the idea of buying these energy trusts from you today.

If you go ahead with this plan, I will personally guarantee that I will organize the first buyout –it will be a piece of cake. And if the Canadian government meddles with these takeovers, it will cost your country BILLIONS in lost revenue and duties.

Take a deep breath, close your eyes and remember that over 85% of ALL your exports from your lovely country go to the United States.

Canada’s economy is half the size of California’s — we could buy the energy trust industry over lunch. Canada, you have the great fortune of having incredible energy and mineral resources — if we knew they were so valuable in the 18th century, we would’ve made you an offer you couldn’t have refused then.

But Minister Flaherty, you’re just looking out for the best interests of Canada, right? Grow up.

If you choose to kill the geese that lay the golden eggs, the most energy-deprived country in the world will roll up your industry, assume ownership, and pick up and grow the industry that you so irrationally seem to want to throw away.

	Here’s that 10-year yield again, ready to test those September lows. Soft landing? The bond market is NOT convinced.
	The Russell broke through the bottom of a nearly 3-week trading range today.
	Gold, as represented by the GLD ETF, has made a nice move above up out of its recent range, and the move above 60 is important technically, in a number of ways, one of them being the break of the downtrend off the May highs (see “Golden 60s” from a couple of weeks ago). The 20-day MA has turned up, and it looks like the 50-day is getting ready to turn higher as well. Gettin’ pretty interesting.

Charts courtesy of StockCharts.com

We got the first taste of some selling pressure that we’ve had in quite a while today, and even though it backed off just before the close, it left the major indices with a few bruises:

Bonds appear to have given up the ’soft landing’ idea once again, and are pushing yields down to test their recent lows:
6-month: 5.09%   2-yr: 4.64%   5-yr: 4.52%    10-yr: 4.56%    30-yr: 4.68%.

Market internals were pretty weak, and volume looks like it may have picked up just slightly over yesterday’s levels. Advances/declines were 11 to 21 on the NYSE and 5 to 14 on the Nasdaq, with up/down volume 2 to 7 on the NYSE and 1 to 4 on the Nasdaq. New highs/lows were 240/23 on the NYSE and 108/52 on the Nasdaq.

The group picture was very red, with only the utilities managing to stay above water. Leading the move down were the brokers (-2.3%), disk drives (-2.3%), HMOs (-2.2%), airlines (-2.1%), steel stocks (-2.0%), semiconductors (-1.9%), networking (-1.7%), internets (-1.3%), oil services (-1.3%), retail (-1.3%) and biotechs (-1.3%).

Energy prices were mixed, with crude and gasoline bouncing around but finishing flat ($58.71/barrel and $1.46/gallon), but natural gas moving higher to $7.71/mmBTU. The dollar index edged higher to 85.44. Gold and silver were big winners on the day, with gold gaining 12 bucks to $618/ounce and silver moving up to $12.39/ounce.

BMB Note: Well, we knew the market was extended and was ripe for a pullback, and we got some more of that today - a little more emphatic than it has been the last few days.

In the major indices, uptrends remain intact for the most part. The Nasdaq moved to the bottom of its 2-3 week range, but hasn’t broken that support yet. The story is a little different in the Russell 2000 ($RUT), which did break short term support at 756. We could get some downside testing there. Keep an eye on the small/mid caps, as the $SML and $MID broke support along with the Russell.

Looking at the various groups, drugs ($DRG) are in danger of breaking support, the hospitals ($RXH) are still a mess, and the HMOs ($HMO) have gotten hammered over the past few days. After today, the regional banks look like they are struggling ($KRX). The utilities have held up well yesterday and today, while other groups are consolidating or pulling back.

Gold and silver made strong moves today, but the associated stocks didn’t hold a lot of their gains. Still an area to keep an eye on, especially as the market dawdles a bit here. Maybe the commodity areas will be able to move a little independently of the rest of the market, although some of the metals got hit today and stopped me out of a position. So it goes.

The bond market has been pretty convinced of something other than the ’soft landing’ scenario over the past week. Are stocks starting to listen as well?

Geez, one of those days where there’s just lotsa red. Everything seems to be lower, except bonds of course. Stocks are down, oil prices are down. Gold and silver had started the day strong, but now the metals and the associated stocks are pulling back as well. About the only area holding up for now are the utilities.

Update - 12:55 CT: That didn’t last long. Stocks are still floundering a bit, but oil and gold have made nice comebacks.

A smaller-than-expected build in crude inventories this week, and healthy drawdowns in both gasoline and distilates:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) rose by 2.0 million barrels compared to the previous week. At 334.3 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories dropped by 2.8 million barrels last week, and are at the upper end of the average range. Distillate fuel inventories declined by 2.7 million barrels, but remain above the upper end of the average range for this time of year.

Refineries are operating at 88.9% capacity, and YOY demand remains strong:

Total products supplied over the last four-week period has averaged over 21.3 million barrels per day, or 5.5 percent more than averaged over the same period last year (when Hurricanes Katrina and Rita lowered demand levels). Over the last four weeks, motor gasoline demand has averaged nearly 9.4 million barrels per day, or 4.1 percent above the same period last year. Distillate fuel demand has averaged over 4.4 million barrels per day over the last four weeks, or 8.6 percent above the same period last year. Jet fuel demand is up 4.1 percent over the last four weeks compared to the same four-week period last year.

The market thought it would get off to a good start this morning, helped by an upbeat jobs forecast from ADP (but as we’ve seen before, ADP doesn’t always get it right). But the ISM report came in weaker than expected, and that reversed any gains that came about in the first hour of trading.

The major indices now find themselves fighting off some red numbers, and the bond market continues to hammer yields lower. In the groups, precious metals stocks lead the way for a second day, with utilities a distant second. Airlines and homebuilders lead the losers.

Energy prices are near flat after a somewhat bullish inventory report. The dollar is down slightly, with gold and silver each moving higher.

Over at Finance Trends Matter, David Shvartsman has some good info on the Canadian oil sands projects, and the tremendous amounts of resources - energy, water and money - that it takes to extract the oil from the ‘oil sands’, or ‘tar sands’.

David poses a good question: For all the money that is being spent, and will be spent over the next X number of years to extract this oil, could that money be better spent on developing alternative (non-petroleum) sources of energy?

One last point. In the most recent issue of Barron’s, Andrew Bary notes that output from the oil sands could rise, from the current figure of 1 million barrels a day, to 4 million barrels a day by 2020. He also points out that energy companies will spend an estimated $100 billion dollars to further develop the Alberta oil sands region over the next decade.

Here’s a question for knowledgeable readers. What could be done with that $100 billion dollars if applied to the development or improvement of existing renewable/sustainable energy technologies?

1 to 4 million barrels of oil a day is a pretty small blip compared to the 85 million or so barrels produced worldwide to keep up with demand today - and that 85 million will need to grow much more than the 4 milllion that the oil sands will provide by 2020 if demand continues to grow at the current pace.

Is it worth all the money and resources? Or do we start to move away from oil as an energy source as quickly as we can? If the peak oil theorists are right, that extra 4 million barrels is NOT going to make up for the decline in production in the rest of the world’s conventional oil fields.

One other note: if you’re looking to invest, or are already invested in some of Canada’s energy trusts, be aware that the Canadian government wants in on the action, and is planning to tax their distributions.

Deron Wagner has some good advice when it comes to placing stops. Keep in mind that he’s a relatively short-term trader, so adjust the idea for your own situation, but the idea is the same - make sure you give your stocks enough ‘wiggle room’ when choosing your stop points:

Throughout my early years of being a novice trader, one of the biggest problems I had was being stopped out of a stock, only to watch it reverse back in the right direction only pennies below my stop. Eventually, I figured out why this was happening. The problem was that I was placing my stops at the same level as all the other traders. My stop was too obvious! Because specialists and market makers knew where the majority of stops were residing, they were making sure that every test of trendline support resulted in a quick probe below those stops. Then, they could accumulate shares of the stock before continuing the primary trend. After years of frustration from losing money in this manner, I learned to give my stops enough “wiggle room” below the obvious trendline support where all the other traders had placed their stops. Years later, I now know my stops are in the right place when the position I am in reverses just before hitting my stop.

On the recent market action, Wagner sees a bit of ‘churning’ going on. I can’t disagree:

Given that the S&P, Nasdaq, and Dow were each within 0.1% of unchanged, yesterday’s higher volume pointed to a bit of “churning” beneath the surface. “Churning” occurs when overall volume increases substantially, but prices don’t. If this occurs near the lower channel of a downtrend, it is often bullish because it indicates institutions are scooping up shares while the bears are trying to drive stocks lower. Conversely, “churning” near the upper channel of an uptrend is usually a bearish sign of institutional selling into strength. This, of course, doesn’t necessarily mean that stocks will suddenly fall from here, but astute traders should proceed on the long side with caution in the short-term.