Bear Mountain Bull

• Time to close out the year. Some big numbers out of some of the groups on the year – which groups will be the big winners next year?
• Hard to believe that the market as a whole did as well as it did this year with the semiconductors down more than 2%.
• Housing stocks have bounced back considerably from their lows, and the housing index finishes the year down less than 10%. But the peak in housing stocks came back in the summer of ‘05.
• Natural gas and oil services have been leading the energy complex lower over the past few weeks.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

This week, John Mauldin hands off his pen to Barry Ritholtz, who does a bang-up job in wrapping up the economic events on the past five-or-so years in “Real Estate and the Post-Crash Economy”. If you don’t know, or don’t understand, what has happened in the post-dot-com era, and how we got to where we are today, then Barry’s piece should be required reading:

Few investors seem to have fully considered the impact the boom and subsequent bust will have – for the real estate market, to equities, and to the overall economy. Today’s commentary aims to correct that. We want to put Housing’s surge into the broader context of this business cycle, and examine what the slowdown will mean to various economically sensitive sectors. To do that, we will look at:

• How this expansionary cycle got started;
• Why this post-recession cycle has been so unusual;
• How this housing market has been “backwards”
• Where these factors are impacting consumption, the economy, and equities.

At the end of the year, Financials look the strongest, with Staples and Discretionaries still holding up well, but without a great deal of momentum.

Materials, Energy, Utilities, Industrials and Tech are all in various stages of pullback or sideways movement, with Tech looking the weakest as the XLK flirts with its 50-day moving average.

Health Care is still the laggard of the bunch.

Here are the numbers as we close out 2006 – pretty much an up, down and back up year:

Charts courtesy of StockCharts.com

A collapse of truly Houston-Oiler-like proportion:

Trailing Minnesota by four touchdowns at halftime, Texas Tech coach Mike Leach told his team it had a chance to make history.

The pep talk turned out to be a prediction.

The Red Raiders spotted Minnesota a 31-point, third-quarter lead, then rallied for a stunning 44-41 overtime victory in the Insight Bowl Friday night, the largest comeback in Division I-A bowl history.

That guy is a resourceful little one, isn’t he?

North Korean dictator Kim Jong Il is planning to use the London gold market to avoid financial sanctions imposed by the international community.

Kim’s cash-strapped Communist regime has relisted its central bank with the London Bullion Market Association this year, and is preparing to sell gold through London.

While gold traders have said they have not seen any sign of the North Koreans disposing of gold in London since the Chosun Central Bank regained its status as a “good delivery supplier” this year, some experts believe North Korea will sell its gold through London once it gets a regular supply from its mines.

	The stocks of the “new era”, like McDonalds.com and Goodyear.com, continue to cruise.
	Of the broad-based major indices, the Nasdaq-100 is still the biggest concern. Even Apple’s move today couldn’t hold up the NDX, which is struggling with overhead price resistance as well as moving averages.

Charts courtesy of StockCharts.com

For what it’s worth:

Bonds were lower again, yields moving higher yet again. And it was worse early – the 10-year yield hit a high of 4.720% before pulling back:
6-month: 5.08%   2-yr: 4.81%   5-yr: 4.69%    10-yr: 4.70%    30-yr: 4.81%.

Market internals were decidedly negative for the second day in a row. Volume was lackluster most of the day, but spiked into the end of the session for the highest levels of the week – we can probably attribute some of that to end-of-month, end-of-quarter and end-of-year positioning. Advances/declines were 2 to 3 on both exchanges, with up/down volume near 3 to 7 on each. New highs/lows were 163/18 on the NYSE and 118/37 on the Nasdaq.

Very few winners in the groups, with the REITs (+0.3%) doing the best. Airlines led the losers (-1.2%), along with metals and mining stocks (-1.2%), natural gas stocks (-1.1%), and steel stocks (-1.0%).

Energy prices were slightly higher. Crude bounced back from early losses to finish up by better than 50 cents at $61.05/barrel. Gasoline added a penny to $1.60/gallon, and natural gas gained a nickel to $6.30/mmBTU. The dollar index fell to 83.66. Precious metals continued to sneak higher, gold up to $636/ounce, and silver to $12.81/ounce.

BMB Note: Four days off. Let’s hope the action picks up a bit come Wednesday. Have a nice New Year’s weekend.

From Larry McMillan in The Option Strategist Weekly Updater this week (sign up):

The Santa Claus rally has begun with a strong bullish move. This year it encompasses the four trading days of this week and the first two trading days of next week. If the period is bullish — and it certainly looks like it’s going to be this year — it merely confirms the seasonality of that time period, However, if the period is bearish, it can have implications for next year.

In summary, the simplest approach is the best one for this market: as long as prices continue to climb, there is no reason to abandon the bullish bandwagon. Admittedly, the bandwagon has become very crowded (when was the last time you saw a bearish analyst on CNBC?), and that makes us nervous. So be sure to keep tightening your stops, because once the selling begins it will be furious as all the newbie bulls try to squeeze out the exit at the same time.

Apple is loved again this morning, and stock markets will be closed on Tuesday in honor of former president Ford. That turns this into a four-day weekend.

And since we are likely to see little action in the markets today, it’s a good thing that there are five football games to watch on television.

Martin Goldberg offers up his investment themes for 2007. His favorite idea??

It’s the time of year for those yearly inane predictions about the year ahead. Here is mine… As an investment, buy gold, precious metals, and precious metals stocks. While there are other potential successful investments for the year ahead, gold, precious metals, and precious metals stocks present the best combination of fundamental and technical qualities that appear to be sustainable over the long term. While some other ideas appear more suitable to shorter term trading opportunities, the trends in gold, precious metals, and precious metals stocks appear to be both secular and strong. Some charts are presented tonight that describe what I mean.

Some good charts on commodities, the dollar, interest rates, housing and the current market conditions. Check it out.

	Bond yields have risen as a result of a drop in bond prices over the past month. The charts of the bond ETFs like IEF and TLT show that the principal value of those bonds has been clipped pretty good. Is this just a correction – or a change in trend, which would send yields even higher?

Charts courtesy of StockCharts.com

Please move along, folks. There’s nothing to see here:

Bonds had another rough day, although they did come up off their worst levels. But yields were higher yet again, with the 10-year yield reaching its highest levels since the beginning of November:
6-month: 5.09%   2-yr: 4.80%   5-yr: 4.68%    10-yr: 4.69%    30-yr: 4.81%.

Market internals were mildly negative, again on light volume. Advances/declines were 9 to 10 on the NYSE and 8 to 11 on the Nasdaq, with up/down volume 8 to 11 on the NYSE and 2 to 3 on the Nasdaq. New highs/lows were 209/23 on the NYSE and 157/34 on the Nasdaq.

Gold and silver stocks (+1.4%) were the only ones that could muster a move of any significance. No groups lost more than 0.5%.

Energy prices were slightly higher. Crude gained for the first time in five days, moving up to $60.53/barrel. Gasoline held steady at $1.59/gallon, and natural gas finally got a break, gaining back a little ground to $6.25/mmBTU. The dollar index fell slightly, to 83.97. Gold moved up to $627/ounce, and silver was higher as well, at $12.75/ounce.

BMB Note: What am I supposed to say about a day like today, when only one group was able to move even one percent in either direction, and most moved less than a half-percent?

Gimme a break. Let’s get this holiday stuff over with.

Wondering why the Transports have been doing so poorly? No matter what anyone wants to admit on Tout TV, the economy is slowing down, and the truckers can see it. At The Big Picture today, Barry relays remarks – and a chart – from the American Trucking Association:

“On a seasonally adjusted basis, the tonnage index fell to 106.8 (2000=100) from 110.8 in October, which is the lowest level since late 2003. The index decreased 8.8 percent compared with a year earlier, marking the largest year-over-year decrease since December 2000. Year-to-date, the truck tonnage index was down 2.8 percent, compared with the same period in 2005. The not seasonally adjusted index decreased 9.5 percent from October to 106.5. . .

November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said ATA Chief Economist Bob Costello. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear. The most troubling number is the 8.8 percent contraction from November 2005, despite the fact that year-over-year comparisons are difficult due to the very robust volumes during the same month last year. One month certainly doesn’t make a trend, but if we continue to see year-over-year reductions of similar magnitudes in the next couple of months, it could indicate a greater economic slowdown than economists are projecting at this point.”

The weekly inventory data from the EIA showed a large drawdown in crude oil inventories, but builds in gasoline and distillates:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 8.1 million barrels compared to the previous week. However, at 321.0 million barrels, U.S. crude oil inventories remain above the upper end of the average range for this time of year. Total motor gasoline inventories rose by 3.0 million barrels last week, and are just above the lower end of the average range. Distillate fuel inventories increased by 0.5 million barrels, and are in the middle of the average range for this time of year.

Refineries were operating at 90.9% of capacity. On the demand side:

Total products supplied over the last four-week period has averaged over 21.0 million barrels per day, or 1.1 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged 9.4 million barrels per day, or 1.6 percent above the same period last year. Distillate fuel demand has averaged over 4.3 million barrels per day over the last four weeks, or 1.0 percent above the same period last year. Jet fuel demand is down 6.7 percent over the last four weeks compared to the same four-week period last year.

A bit of give-back this morning after yesterday’s gains, but nothing very significant at the moment. Major indices are just slightly in the red, and the advance/declines figures are red as well. Movement in the groups is pretty muted, with gold stocks leading the few winners and oil services leading the losers, though no groups are down big.

Treasuries are lower again, and yields are moving higher. Energy prices are slightly higher. The dollar is mixed, with gold and silver both higher.

Can you blame them? The outlook for the once-almighty dollar is pretty bleak at this point.

The wilting U.S. dollar is pushing the United Arab Emirates, a close U.S. ally, to convert 8 percent of its foreign exchange reserves into the healthier euros, the central bank governor said on Thursday.

The Emirates’ nearly $25 billion currency reserves are currently 98 percent dollars. That percentage will drop to 90 percent in six to nine months if the bank’s directors approve the switch as is expected, Central Bank governor Sultan Bin Nasser al-Suwaidi said.

“It’s a prudent move and it’s indicative of broader thinking,” said Simon Williams, HSBC’s chief Middle East economist. “It’s another factor that will exert downward pressure on the dollar.”

A bigger worry for the U.S. Federal Reserve Bank is that the six energy-rich Gulf Arab countries may consider converting dollar holdings in their far larger government investment funds, which Williams said keep more than $1 trillion under management. Gulf governments typically do not release the compositions of those funds.

“If they’re moving those assets out of the dollar on the same scale, that’s a much bigger deal,” Williams said.

Gary Kaltbaum says there are still plenty of good things going on in the market. But the Nasdaq ranks right up there on his list of concerns:

We then finish with the NASDAQ and NDX. We mention this because these areas have had a great reputation for leading the markets both up and down. Again, maybe this is just a pause but as of this second, the NASDAQ and more specifically, the NDX are laboring a bit here especially when comparing to the Dow and S&P. The last time this occurred was in the March/April period before the market went into an intermediate term correction.

Deron Wagner, on the current divergence in the major indices:

When the major indices are showing such divergent patterns, it indicates the presence of a tug-of-war between the bulls and bears that typically leads to indecisive and choppy overall conditions. While it’s certainly possible for the S&P and Dow to continue rallying with the Nasdaq lagging behind, rallies driven by such leadership are usually short-lived. Soon, we should see the resolution of either the Nasdaq catching up and moving to new highs, or the S&P and Dow correcting down to the vicinity of the Nasdaq. A healthy Nasdaq is necessary in order to confirm the strength in the S&P and Dow, so traders will be watching the coming week closely to see which scenario occurs first.

This was the ‘breaking news’ on CNBC’s On the Money program, regarding the options issues swirling at Apple:

Steve Jobs, chief executive of Apple Computer (NASDAQ:AAPL), was handed 7.5m stock options in 2001 without the required authorisation from the company’s board of directors, according to people familiar with the matter.

Records that purported to show a full board meeting had taken place to approve Mr Jobs’ remuneration, as required by Apple’s procedures, were later falsified. These are now among the pieces of evidence being weighed by the Securities and Exchange Commission as it decides whether to pursue a case against the company or any individuals over the affair, according to these people.

I wonder if we’ll see another opening gap-down for AAPL tomorrow. Or maybe no one cares.

Ben Stein jumps on the ‘global savings glut’ bandwagon (which is pure hogwash, IMO):

…the hedge funds can borrow money, invest it safely and make enough to repay the loan with interest and still have a profit. They can do this because the cost of money is so low these days.

Why is it so low? Because the Chinese people save about 40 percent of what they earn and use a lot of it to buy United States Treasury securities, keeping overall interest rates low. The Japanese do the same, and so do the immensely wealthy petro-states. So when the hedge fund managers cash their huge checks and sail their yachts and fly in private jets, they should thank people living carefully elsewhere. Savings in Guangdong, China, mean mansions in Greenwich, Conn.

John Succo jumps on Ben Stein, and gives us all a lesson on ‘liquidity creation’, the engine that is current driving asset prices higher the world over:

I disagree for the most part on your thoughts of where this cheap money is coming from: It is not coming from a high savings rate from Asian investors but from the creation of credit by all central banks.

The Federal Reserve creates credit through its open market operations like REPOS and coupon passes. If the Fed wants to inject liquidity (credit) into the system, they simply call up large broker dealers and buy some of their bonds with credit they create out of thin air (this expands their balance sheet). The dealer then passes this credit on to “the market” by making loans to mortgage companies or margin accounts or whatever. Because each layer of lender is only required to keep marginal capital on hand, a $1 billion REPO done by the Fed eventually creates as much as $100 billion in new credit to the consumer.

That credit creates the liquidity for additional consumption in the U.S., but these days we are buying our stuff from China (other countries too but we will just say China to make it easy). When a Chinese company receives dollars in trade, this normally would drive up U.S. interest rates: the company goes to the central bank of China to exchange Yuan for dollars; the central bank of China would normally sell those dollars into the currency market for Yuan thus driving up U.S. interest rates. But in our world of today these dollars are being sterilized: the central bank of China prints the Yuan to give to the company and takes the dollars and buys U.S. securities.

It is not the excess savings of Chinese investors that are buying U.S. securities. It is central banks creating credit themselves to buy those securities. The tick data that measure foreign inflows of money does not distinguish between private investors and central banks going through brokers to buy U.S. securities. We believe that as much as 90% of foreign money buying U.S. securities (not just Treasury bonds, but corporate bonds, mortgages, and yes, stocks) is not private investment, but central banks.

Mr. Succo also warns that this ’system’ is likely unsustainable:

In order for other central banks like China’s to print the Yuan necessary, they too must create credit. Public debt in Asian countries is expanding as a result and creating worries: this is why Thailand came out essentially raising margin requirements to reduce speculation that is occurring as a result. Notice how they were quickly slapped down by their trading partners who do not want to rock the boat at this time.

This situation is very unstable in the long run. The Federal Reserves’ balance sheet this year alone has expanded by $30 billion in this way and created $3.5 trillion of new credit in the U.S. Public debt around the world is growing exponentially and total debt in the U.S. now stands at nearly 3.6 times GDP (1929 was 2.8 times).

My hedge fund’s position is the opposite of the carry trade you mention. There is coming (timing is unclear where it may be tomorrow or may be years away) a massive correction in debt and derivatives whose magnitude is only growing with time.

	The Nasdaq-100 is still a no-show as the Dow reaches new highs. This remains a concern.
	Apple stock rebounded nicely today after an initial selloff on options concerns. But this chart is still in pretty bad shape.
	Chinese stocks have gone absolutely parabolic in the last few weeks. Be careful. I wouldn’t be chasing them here. Your call. Just don’t be the last one in.
	Interest rates have been sneaking higher over the past month, and are testing their downtrend line off the July highs.

Charts courtesy of StockCharts.com

Holiday cheer seems to still be in the air on Wall Street – it’s just too bad there aren’t more people there to share in it. Another good day for stocks, but it’s difficult to be convinced of real strength on these light volume moves:

In contrast to stocks, bonds took a beating, and yields move to their highest levels in more than a month:
6-month: 5.09%   2-yr: 4.77%   5-yr: 4.64%    10-yr: 4.66%    30-yr: 4.78%.

Market internals were solidly positive, but as expected during the holiday week, volume was light, though stronger than yesterday. Advances/declines were 15 to 4 on the NYSE and 7 to 3 on the Nasdaq, with up/down volume 17 to 3 on the NYSE and 3 to 1 on the Nasdaq. New highs/lows were 280/17 on the NYSE and 183/35 on the Nasdaq.

Precious metals stocks (+2.6%) along with metals and mining stocks (+2.1%). Also gaining ground were steel stocks (+2.0%), homebuilders (+1.9%), airlines (+1.4%), transportation (+1.3%), commodities (+1.3%), natural resources (+1.2%), oil stocks (+1.2%), oil services (+1.1%) and networkers (+1.1%).

Energy prices were mostly lower. Crude oil fell for the fourth straight day, to $60.34/barrel. Gasoline gained a couple of cents to $1.59/gallon, but natural gas has been hit at contract expiration, falling to $5.84/mmBTU. The dollar index fell slightly, to 83.97. Gold moved up to $627/ounce, and silver was higher as well, at $12.75/ounce.

BMB Note: Good day for stocks today. The Dow and NYSE composite both managed to reach new highs, but none of the other major indices were able to confirm those moves. The Nasdaq-100 continues to be the worst of the bunch, struggling to get back above its 50-day MA.

As for me, I prefer to wait these weeks out. The moves looked good today, but the lack of volume behind them makes me skeptical. Let’s see if the market can hold up into next week. And keep an eye on those bond yields – continued rising rates could put a bit of a damper on stocks as well as the supposedly rebounding housing market.

Hey, it’s a slow holiday week. Time to reminisce a bit on a few of my favorite commercials of all-time, the Bull and Bear series from Ameritrade. Remember the one in the diner??

	“I predict you’ll be on the menu.”
	“Nobody likes a talking steak, either.”

Great stuff. Or maybe I have a warped sense of humor.

Another positive holiday season open today, with the indices enjoying gains on strong advance/declines – of course, volume is soft. The movers thus far are the gold stocks and the homebuilders, with energy stocks lagging again. Bonds are giving back yesterday’s gains, and yields are higher.

Energy prices are slightly lower, and the weekly crude inventory report has been pushed to tomorrow by the holiday. The dollar is flat, gold and silver slightly higher.

In one of the big stories of the morning, Apple shares are down more than 4% on more concern over the backdating of options. That AAPL chart is starting to look pretty ugly.

I never thought I’d say this, but I think you’ve got a much better chance by watching Cramer on TV (“Watch TV – Get Rich”) than by getting your stock tips from spammers:

The look of spam isn’t the only thing that has changed. Much of the new spam no longer depends on people clicking a link or downloading a Trojan horse. Instead, the single purpose of most image spam today is to promote a specific company’s stock–it’s a “pump and dump” stock scheme.

Here’s how it works: People behind the scam typically buy a bunch of penny stock in a company. Next, they send out millions of spam messages touting that stock–typically via zombie computers (owned by home PC users). When enough people buy the stock–and believe it or not, some people actually do–the spammers sell their holdings and make a modest return.

How many people actually fall victim to these stock tips? A spammer can make a 5 to 6 percent return in just a few days from stock hyped via spam, according to a recent study conducted by researchers at Oxford University and Purdue University. The researchers also found that spam recipients who invest in those same stocks lose about 7 percent of their investment.