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 very good discussion between Mike Shedlock and Paul Kasriel of Northern Trust, on the possibility of a Japan-like deflation occurring in the US. Here Mike quotes from an email from Mr. Kasriel:

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Mike follows up with some good questions on the Fed and inflation. Go read the whole thing.

A good rundown on the Fed, the deficit and money creation from TheDOCument.com today:

Speaking of double-speak, former cabal leader Alan Greenspan helped the dollar lose ground when he said he expects the dollar to keep dropping until the nation gets its current account deficit under control. Sir Alan makes a good point which critics of the Fed should keep in mind: given our fiat currency system, the Fed’s discretion with regard to money creation is severely inhibited by the fiscal discipline… or lack thereof… of our government. In order for our government to spend more than it receives in taxes, it must sell bonds. Someone has to buy those bonds, and if no one wants them, the price falls and the rate the government must pay goes up.

Problems start to arise when vast sums of these bonds start maturing. If the government cannot repay the bonds out of tax receipts, it must refinance them, and it naturally wants to do so at low rates. Politicians then lean on the Fed to be a buyer and provide liquidity through money creation. In other words, they monetize the debt.

Based on similar comments about fiscal discipline made by Greenspan throughout his term, I believe he understood the problems of money creation. He was faced with the dilemma of either forcing discipline via higher rates… and possibly sacrificing his career… or keeping the game going. He chose the latter. The problem with Greenspan’s approach is that it encourages risk tolerance, thereby increasing the odds of disaster. Such is the environment inherited by Bernanke.

I’m not so sure our current chairman understands the malevolent effects that frivolous money creation has on the allocation of resources in an economic system. Bernanke’s studies and published papers give the impression that he believes liquidity is the cure for economic woe. The current hawkish tones regarding inflation are nothing more than posturing to defend the U.S. Dollar. When the full force of the housing downturn is felt, he will print like mad.

It’s all about keeping the game going - whether it’s Helicopter Ben or Uncle Al. And we will all pay a dear price for their ineptitude. Someday.

Something to inject a little humor into what is sure to be an excruciating presidential campaign.

I mean c’mon - Democrat or Republican, you have to admit that this guy is waaayyy out there. How he continues to get elected is beyond me.

It doesn’t appear as though investors are counting on huge Christmas returns from all of the retailers. These former high flyers all topped in either October or November, and have performed pretty poorly since then:

Charts courtesy of StockCharts.com

Hmm. I know I’m starting to sound like a broken record, but that’s because the market appears to be skipping. Another day of relatively light volume, minimal movement in the major indices and very little group action:

Bonds bounced back after their big drop on Friday, and sent lower once again:
6-month: 5.06%   2-yr: 4.66%   5-yr: 4.49%    10-yr: 4.51%    30-yr: 4.62%.

Market internals remain positive, but continue to be weaker on the Nasdaq. Volume didn’t improve much from last week’s sluggish levels. Advances/declines were 3 to 2 on the NYSE but just above flat on the Nasdaq, while up/down volume was 5 to 4 on the NYSE and about 3 to 2 on the Nasdaq. New highs/lows were 261/20 on the NYSE and 163/41 on the Nasdaq.

Group action remains unimpressive. The airlines (+1.9) got a boost as oil prices came down, and the steel stocks (-1.3%) pulled back after their strong move last week. But that’s it for groups making significant moves.

Energy continue to slip back. Crude oil gave back another 80 cents to $61.22/barrel, gasoline dropped a couple of cents to $1.60/gallon and natural gas fell 13 cents to $7.43/mmBTU. The dollar gave up morning gains and the dollar index fell slightly to 83.20. index moved to its highest level in a week at 83.28. Gold and silver each posted slight gains, to $630/ounce and $13.80/ounce respectively.

BMB Note: Geez, hard to get excited when hardly anything changes. Maybe everybody is standing by waiting on “Fed day” tomorrow - but I don’t expect much news out of that either. Something will happen, sooner or later, to get this market moving again, either up or down, but I don’t know what it will be at this point.

And it’s options expiration week too. Ordinarily, the market has been getting a little pop at expiration time. In fact, Bernie Schaeffer said this morning:

In fact, during the past 11 months, the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) have suffered a weekly loss during the week of expiration only three times and the average return during this time period is a gain of 0.64 percent.

Jan.: -2.1 percent
Feb.: +1.7 percent
March: +1.6 percent
April: +1.9 percent
May: -1.7 percent
June: -0.5 percent
July: +0.3 percent
Aug.: +2.9 percent
Sep.: +1.3 percent
Oct.: +0.1 percent
Nov.: +1.5 percent

I think one potential reason for the upside bias in expiration weeks is the unwinding of heavy out-of-the-money puts that accelerates during that week. As these out-of-the-money puts are bought back to capture what little time value is left, those who took the other half of the trade and sold the puts are able to buy back the SPY shares they sold as a hedge against the short put position. This unwinding action in turn helps to add buying pressure to the SPY during this week.

Maybe we’ll see it this time around, maybe we won’t.

No surprise that rates are slipping. This weeks T-Bill auction brought a 3-month investment rate of only 4.926%, the second consecutive week under 5 percent. The 6-month bill is hanging on just above that mark at 5.057%.

Time to start wondering where income is to be gained if rates continue to fall.

Early buying has waned, leaving the major indices with very slight gains on the morning. A/D lines are still positive and most groups are in the green, but there isn’t a lot of power behind the move. Gainers include the airlines, gold stocks, and homebuilders.

Bonds have regained a little footing, pushing yields lower. Energy prices are lower, with the biggest move down coming in natural gas. The dollar is a little higher, and gold and silver are slightly higher as well.

A new issue of the ChartWatchers newsletter from StockCharts.com is available. In this issue: Is the Dow looking toppy?, a look at NYSE stocks above their 200-day MA, a change in the SPY/QQQQ ratio, defusing the crash talk, the disconnect between energy stocks and oil prices, and the rebound in commodities.

Deron Wagner is watching pharma and oil services on the up side, and software on the down side. On the broader market:

Expect trading to be relatively subdued ahead of tomorrow’s FOMC meeting on interest rates. At 2:15 pm EST, the Feds will announce whether or not they will make any changes to the Federal Funds Rate. As always, most institutional traders are likely to remain on the sidelines until after the announcement. With regard to the broad market, we shifted out of “sitting on hands” mode to “dip a toe in the water” on the short side on December 7, but we do not yet have enough confirmation to aggressively start entering additional broad-based ETFs. Perhaps resolution of the market’s mixed signals will come after tomorrow’s Fed announcement, so be prepared for a sharp move in either direction.