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 casualty of the weakened housing market - and poor subprime lending practices:

Ownit Mortgage Solutions, a California company that described itself as one of the top 15 lenders to homeowners with weak or no credit histories, has shut down, citing “the current unfavorable conditions of the mortgage industry.”

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Ownit ran out of cash needed to meet its obligations to repurchase loans from investment banks and others who bought them in the secondary market, people in the industry said. The banks, which convert the loan payments into mortgage-backed securities for sale to investors, can force the original lenders to repurchase loans if the mortgage borrowers default.

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Merrill (Lynch) is believed to own about 20% of Ownit. A Merrill Lynch spokeswoman declined to comment. CIVC Partners, a Chicago-based private equity firm, also has a stake in Ownit and was an investor in First Franklin before Dallas sold it to National City. CIVC’s Dan Helly, who oversees the Ownit investment, didn’t return a call for comment.

How many more of these to come? And how many bank and/or investment firms stand to lose if these mortgage-backed securities start to crumble under a mountain of defaults?

Hat tip to Mish’s Global Economic Trend Analysis.

	Software is one of the groups that is looking a little toppy here, and is helping to hold the Nasdaq back. The Goldman Sachs software index broke below its near-term support and its 50-day moving average today. The next support level lies just below 180.
	Oracle is a prime contributor to software’s recent poor performance.
	If the homebuilding business is on the way back, which is the impression you get from looking at the homebuilders’ stocks, then why is a mortgage lender hitting new 52-week lows?

Charts courtesy of StockCharts.com

Today was just a little more interesting that the past few days have been, but not in a good way. The major indices leaked a little bit, and closed at or near their lows of the day:

Another index worth noting today: the Nasdaq 100 got hit harder than the rest, falling 21.67 points, or 1.20%.

Bonds were flat, leaving yields pretty much where they were:
6-month: 5.04%   2-yr: 4.57%   5-yr: 4.44%    10-yr: 4.49%    30-yr: 4.61%.

Market internals were negative, and the Nasdaq registered a distribution day as volume ticked up. Advances/declines were 8 to 11 on the NYSE and 2 to 3 on the Nasdaq, with up/down volume 1 to 2 on the NYSE and 3 to 5 on the Nasdaq. New highs/lows were 322/11 on the NYSE and 149/32 on the Nasdaq.

More group movement than we’ve been seeing as well, and most of that was to the downside. Steel stocks (+1.8%) led the winners, while homebuilders (-2.2%), semiconductors (-1.7%), internet (-1.4%), retail (-1.4%) software (-1.2%) and computer tech (-1.0%) all lost ground.

Energy prices were mixed: crude oil recovered from early losses to finish with a gain of 30 cents to $62.49/barrel, gasoline held steady at $1.62/gallon, and natural gas fell 6 cents to $7.67/mmBTU. The dollar index was near unchanged at 82.75. The precious metals also bounced back from a morning drop, with gold finished near flat at $632/ounce and silver gaining to $13.87/ounce.

BMB Note: Hmm. The Dow tried to break through to new highs, but failed. The Nasdaq remains weak, relative to the other major indices, and the selling today was concentrated in tech. Is that something to be concerned about? Nothing to panic about yet, but certainly something to watch. The Nasdaq is holding back here, and many of the tech groups are stuck in sideways ranges or beginning to look slightly toppy.

The pullback in gold and the gold stocks is starting to look interesting - silver not as much. I think silver could relax a bit more before it looks real attractive. The energies have paused - maybe we’ll see a little pullback there as well. And the steel stocks just keep on cruising.

Oh, and lest we forget, tomorrow morning is the monthly non-farm payrolls report. Always the topic of far-too-much discussion.

The debate over the homebuilders rages on. After a few days of nice gains, following a slow run-up since July, a supposedly well-respected analyst (if there IS such a thing) doesn’t necessarily agree with the optimism toward the group:

Credit Suisse analyst Ivy Zelman said in her report that price-to-earnings ratios are at peak levels and that even normalized earnings after a messy 2007 cannot justify the valuations.

Calling the sector a “crowded trade,” Zelman said the group is “priced for perfection” based on investors’ assumption that orders, cancellations and inventory will all sequentially improve in the fourth quarter of this year and the first quarter next year.

“Several big name investors have added credence to this claim, squeezing shorts in the process,” she wrote. “In talking with investors, we have the perception that whether the market has found a floor isn’t a debate. It is being taken as a given.”

That news has the homebuilders reversing course a bit today, down about 2% as a group.

I was wondering why the symbol CSWC just started flying by on the ‘new highs’ list today. The intraday chart showed a nice start to the day, then a pullback, then an absolute blast-off early in the afternoon. CSWC is up about 20 bucks, or 15% on the day - I’d never heard of the stock, and I couldn’t find any news.

Until this:

Cramer’s secret stock was Capital Southwest (CSWC), a Dallas-based small-cap venture investor. He said the stock, up $9 Thursday at $141 and change, could go to $200.

I guess it’s not a “secret” anymore now, is it? I guess there are those who just sit in wait of his afternoon segment, and jump in and buy whatever comes out of his mouth. That’s one heck of a way to “invest”.

Update: The 50-day average volume for CSWC is around 19,000 shares. Today? 600,000+ and counting. Some of the things that man does should be considered criminal. They are criminal, in my mind.

Another pretty quiet day. The metals - steel, metals and mining - are getting the best of it, while the homebuilders are giving some back. Other than that, not many movers in the groups.

For the breakout players, a nice one in AKAM today…

BMWife here. I’m not much into remodeling unless you count tiling or recarpeting. Maybe a new bathroom faucet or some other widget that needs replacing due to use (or overuse or the fact that lime in the water can destroy any substance known to man).

Imagine my surprise as I was tootling through news articles to find that remodeling a bedroom can cost upwards of $70k. $70k???? I hope these remodels included ADDING significantly to the structure–like about 1000 square feet of a new room, maybe an elevator and it better include the furnishings. But I digress. The point of the article was to show how little a homeowner can expect to recoup–especially in a housing market where house prices are actually falling.

The market started out on a slightly positive note, and the Dow snuck above its recent highs, but that move didn’t hold for long. A/D lines have fallen back into the red, the S&P is flat and the Nasdaq is still dragging its feet behind the rest. Bonds are flat as well.

Steel stocks are the winners so far on the day, while homebuilders, oil services and gold stocks are lagging. Energy prices are lower, as are gold and silver. The dollar is flat.

Paul van Eeden hasn’t given up on the idea that we could see a rather unlikely combo — a falling dollar in conjunction with rising interest rates:

While reading through some of the data and news reports from the past week I again came back to a thesis I postulated some time ago: that we are going to see the dollar fall in conjunction with rising US interest rates. I know it makes no sense at first blush, but I also find it hard to see how things could play out any differently.

Take the US stock and bond markets for example: The S&P500 Index is up 11.9% since the beginning of the year. That sounds pretty good. But if you were an international pension fund in Europe you would have made a paltry 0.78% return on your investment because the dollar is down 11.12% against the euro this year. A London-based fund would have lost 0.97% on its US equity investments if it could match the performance of the S&P500.

During the year the US Dollar lost 11.12% against the Euro, 9.09% against the Swiss Franc and 12.87% against the Pound. How long will it be before international bond and equity funds decide to cut their losses?

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At the moment 43% of all US Treasuries held by the public are owned by non-US residents. Do you think those investors are happy with the decline in the US Dollar? The current yield on a 10-year Treasury is 4.4%, which means that most European bond investors that held US Treasuries lost money this year. When they do the rational thing and sell their US notes and bonds, US interest rates will start rising. But because this will coincide with selling dollars and buying other currencies such as Pounds, Francs or Euros, the Dollar will fall at the same time as interest rates are rising.

There is very little the Fed, or anyone else, can do about this. About the only thing the Fed can do is to monetize the Federal debt (buy US Treasuries in the open market). The problem with monetizing the debt is that the Fed has to create brand new money to pay for the bonds it buys and by doing so it will increase the US money supply, which will cause prices to rise and the dollar to fall even further (could this be why the Fed decided to stop publishing M3 data and why Ben Bernanke is so worried about inflation?).

I have a dozen articles on my desk about the housing market, the auto industry, jobs, interest rates, the retail sector and so on, and I considered writing about the sad state of the US economy again this week, but I think it is much more important to keep our focus on the bigger picture. I suspect very few people anticipate that the dollar will fall while US interest rates rise, and I cannot be sure that it will actually play out that way, but stranger things have happened.

Using “Silly String” to detect trip wires in Iraq. Neat.

Everyone has different ideas on how to go about trading and/or investing, and how to choose what stocks or other asset classes to invest in. That’s the wonder of the markets - there are nearly infinite possibilities, and a nearly infinite number of techniques or methods that can work for you.

“Finding Your Edge” is an open BMB discussion on investing and trading ideas and techniques.

How do you go about making your investment / trading decisions? Are your decisions based on technicals, fundamentals, or both? Do you distinguish your ‘investments’ from your ‘trades’? Do you use specific money management techniques? How do you limit your risk? How do you decide when to take profits? What tools do you use to help make these decisions?

Feel free to share your ideas in the comments section, and maybe you’ll pick up a few ideas from others that you’d like to try for yourself.