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.

A nice follow up to our post of earlier today. Over at TheDOCument.com, Deric is also wondering why anyone would listen to Toll Brothers’ CEO. But they are:

Another example of the perversity of risk emanating from the market came with an earnings report from Toll Brothers. The home builder reported a 10 % revenue decline and 42% earnings decline versus the same quarter last year. Toll stated contracts slipped 56%, and they experienced a higher-than-expected 585 cancellations. Their 2007 forecast came in well below consensus. Oh, and by the way, they feel that “certain markets” may be bottoming. The word “bottom” was all speculators needed to hear to drive TOL up 3% in the face of all the other bad news. Does no one remember the rosy forecasts emanating from this company a year ago while its CEO was shoveling his own shares back into the market? Why would anyone believe them when they say the market is bottoming? Hey, but why stop there? If Toll’s market is “bottoming” then all the other home builders must be turnaround stories, too. As a group, the homeys were up 2% in today’s session. Insane.

	At the intersection of energy and metal and mining lie the coal stocks. Peabody Energy recently broke out of a 6-7 week base, and looks pretty buyable on a pullback. Disclosure: BMB owns shares of BTU.
	The 20+ year bond ETF - TLT - has moved steadily higher since May as yields have fallen. But if Pimco’s Bill Gross is correct and yields fall to near 3 percent, TLT has further to run.

Charts courtesy of StockCharts.com

A rather uninspiring day. The major indices made modest gains, but volume was again somewhat tepid and group movement was muted:

Bonds were near unchanged for another day, yields moving just slightly higher on the long end:
6-month: 5.02%   2-yr: 4.52%   5-yr: 4.39%    10-yr: 4.44%    30-yr: 4.57%.

Market internals were mixed, positive on the NYSE but pretty flat on the Nasdaq, and volume came in just above yesterday’s low levels. Advances/declines were 3 to 2 on the NYSE but just above flat on the Nasdaq, while up/down volume was 3 to 2 on the NYSE but just below flat on the Nasdaq. New highs/lows were 543/12 on the NYSE and 214/36 on the Nasdaq.

The group picture leaned postive, but there were very few movers in either direction. The homebuilders (2.2%) led the winners, while gold and silver stocks (-1.1%) led the losers.

In the energy space, prices were slightly lower again. Crude oil recovered from early selling to finish with a loss of only a penny to $62.43/barrel, gasoline fell a couple of cents to $1.64/gallon and natural gas slid to $7.69/mmBTU. The dollar index held fairly steady at 82.51. Gold was flat at $646/ounce, but silver snuck up to $14.08/ounce.

BMB Note: Not much to talk about today. The S&P 500 oozed to another relative high along with the Russell/Mid-caps/Small-caps, but the Dow and Nasdaq are being stubborn about joining in. And the group movement was very uninteresting. Of course, there are still those freaks buying housing stocks. Whatever. I’m not. Although, you never know, maybe I’m the idiot. After all, CNBC.com has an interview with Bill Gross of Pimco, who says that bond yields are headed for the high 2’s or lower 3’s - maybe that will ignite the housing boom all over again. Who knows?

I’m just trying to figure out how in the world I’m going to make money in a near 3 percent interest rate environment. I’ve grown pretty comfortable with 5+% money-market returns. Maybe if bond yields really do fall that low, the bond ETFs will be the place to be. Or maybe the utilities.

From Tobin Smith yesterday, on hedge funds and the leverage they use:

Chicago-based Citadel Investment Group disclosed in their IPO filing that for the $13 billion in capital they manage, they spent $5.5 BILLION in interest, trading fees and other “investment costs” last year. Most of the costs were interest — 90%, in fact.

How do you run up nearly $5 billion in interest costs? By borrowing 12.5 times your equity capital, that’s how.

At any time in the trading week, Citadel has net debt (net of equity) of more than $100 billion. With gross assets of $166 billion, that’s 12.5 times leverage on their $13 billion.

Not every hedge fund runs such high leverage — some are even higher. Bond funds routinely run at 10 times leverage on their underlying bond positions, but when you add in derivatives contracts and rate swaps, their net effective leverage can be 20 times or more.

Anyway, sports fans, it’s nosebleed leverage like this that should help you understand how:

* Amaranth Partners could lose $6 billion in one week on bad natural gas bets.
* $60 billion in energy trusts could lose 25% value in one week on Canadian regulatory shifts.
* Nearly 20% of all hedge funds go out of business every year.

***

Here’s today’s lesson: When you see one of your stocks make a head-scratching move up or down, 9 out of 10 times it’s due to a highly leveraged hedge fund covering a poor short call or a hedge fund that is blowing out its long position without regard to price.

These types of moves are what you do when you have 10 to 12 times leverage — at 10 times leverage, a 1% down move is a 10% down move for the leveraged player. A 10% down move is a 100% loss, a 20% loss is 200% loss…you get the picture.

Now you understand what’s behind some of the amazing intraday moves you see in some of your stocks when you have no idea what’s behind them.

Not much movement out of the gate this morning. The major indices are showing only slight gains, but A/D lines remain in the green for now. Most groups are higher as well, but there aren’t many big movers: the homebuilders lead on the upside, while gold stocks, oil services and steel stocks are giving some back.

Bonds have drifted lower, pushing yields up. Energy prices are lower, as are gold and silver. The dollar is slightly lower as well.

So, homebuilder Toll Brothers (TOL) warns yet again on their profit outlook:

Luxury home builder Toll Brothers Inc. on Tuesday said next year’s annual profit will likely fall substantially from the recent boom years as the housing market continues to unwind…

But the homebuilders (XHB) are up more than 2% on the news. Why? Because of this:

“Fifteen months into the current slowdown, we may be seeing a floor in some markets where deposits and traffic, although erratic from week to week, seem to be dancing on the bottom, or slightly above,” said Chief Executive Robert Toll in a statement. The CEO was among the first earlier this year to warn the housing downturn could end up being more drawn-out than expected.

Believe him if you’d like. As for me, I never take into account the CEO’s “view” of the company’s future. If anyone has an ulterior motive for painting a rosy picture, it most certainly is the CEO.

When it comes to corporate executives: You don’t hear a word out of their mouths when they are buying stock before the upturn, when they can see that things are going to improve - or when they’re selling stock, knowing full well that things are headed into the dumper. So when you hear them talking, you might want to consider running the opposite way.

Despite the new highs in the S&P yesterday, Deron Wagner is a little cautious on the market in the short-term (of course, everything he does is short-term!), due to the lack of volume the last couple of sessions:

Right now, we really don’t like the overall price and volume action we see in the broad market. Specifically, the stock market has made substantial price moves in both directions over the past two days, but has done so on declining volume each time. It was positive that volume declined when stocks fell last Friday, but negative that they followed up with a strong session of gains on even lower turnover. When this type of action occurs, it is often an early warning sign that institutions are backing away from the market, leaving the retail investors to battle it out amongst themselves. Unfortunately, this usually leads to choppy and erratic trading action that is plagued by both false breakouts above resistance levels and breakdowns below support levels. Simply put, the buying power of institutions is required in order to sustain steady trends. Without it, short-term traders can easily churn their accounts. For that reason, we are shifting into SOH mode (”sitting on hands”) until the market decides with conviction the direction of its next major move. Capital preservation is key when the market is giving mixed signals at pivotal levels.