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.

	One more down day and the Nasdaq 100 will have given back last week’s breakout.
	One contribution to the Nasdaq weakness could be that the market’s rekindled love affair with Cisco appears to have hit the skids, at least for the time being.
	The “new economy” airlines also got their wings clipped a bit today.

Charts courtesy of StockCharts.com

Another pretty unimpressive day for stocks, in either direction. The Nasdaq which led the way up last week, has lagged the other majors so far this week, and the Transports gave back about half of yesterday’s gains:

Bonds resumed their decline, and yields moved back up to new relative highs:
6-month: 5.15%   2-yr: 4.90%   5-yr: 4.77%    10-yr: 4.78%    30-yr: 4.87%.

A mixed day internally, with the NYSE looking quite a bit stronger than the Nasdaq. Voulme stayed right around the same levels we’ve been seeing, though ticking up just a bit from yesterday. Advances/declines were 10 to 9 on the NYSE but 8 to 11 on the Nasdaq, and up/down volume was 11 to 9 on the NYSE but a poor 1 to 3 on the Nasdaq. New highs/lows were 245/20 on the NYSE and 147/39 on the Nasdaq.

The group picture leanded slightly to the red. Oil services (+1.6%) led the way, followed by housing stocks (+1.1%) and oil stocks (+1.0%). The airlines (-3.6%) finally ran into a bit of trouble, and they were joined on the down side by networking stocks (-2.0%), computer tech (-1.3%), paper stocks (-1.2%), transportation (-1.1%) and computer hardware (-1.1%).

Energy prices were again mixed. Crude oil bounced up by more than a buck to $52.24/barrel and gasoline picked up a penny to $1.38/gallon, but natural gas slipped back to $6.23/mmBTU. The dollar index edged lower, to 84.95. That helped gold move up to $632/ounce and silver to $12.76/ounce.

BMB Note: Not much to speak of yet this week when it comes to follow-through to last week’s move, though things haven’t really broken down at all yet either. It will be interesting to watch how the Nasdaq and Nasdaq 100 behave over the next few days, as they would be in danger of giving back last week’s breakout. The Nasdaq sits at 2479, with the breakout back around 2470, and the Nasdaq 100 closed at 1827, with the breakout above its November high of 1824.

Without any clear direction, I’m content to simply manage my existing positions, and probably won’t be looking for anything new until things change a bit. The market’s been pretty much stuck in the mud the last couple of days, and that’s not a very attractive environment for trading. A lot of times, all you get is dirty.

Apple earnings after the bell tonight, the CPI report and housing starts in the morning. Something needs to get this market moving again.

Update: Apple’s numbers look like they blew away estimates, but have guided a little lower for next quarter. Question: How come companies are supposed to issue a warning if they’re going to miss estimates on the downside, but there doesn’t seem to be that same expectation that they should ‘warn’ on the upside? Apple’s profits weren’t anywhere near the estimates - shouldn’t they have been guiding higher throughout the quarter?

The talk is starting to become louder that an extended downturn in housing will not affect the economy as a whole, and the pain will be contained entirely within the housing market. Case in point comes from Calculated Risk:

“Dr. Edward Leamer, Director UCLA Anderson Forecast, writes in The Economists’ Voice: Is a Recession Ahead? The Models Say Yes, but the Mind Says No:”

My view, announced in December 2005, is that this time will be different. This time the problems in housing will stay in housing. So far, I am feeling very smug. But this keeps me up at night. In this column, first the models, and then the mind. The models say that a recession is coming soon. The mind says otherwise.

The mind: why i think the models are wrong

The models that rely on history suggest that the extreme problems in housing currently being corrected will almost surely infect the rest of the economy, but that history does not take into account two important facts:

• Manufacturing is not poised to contribute much to job loss.

• Real interest rates are very low and there is no evident credit crunch, now or on the horizon.

These facts make the problem in housing less severe than it would be otherwise, and help to confine the pathology to the directly affected real estate sectors: builders, real estate brokers and real estate bankers.
…
The models say “recession;” the mind says “no way.” I’m going with the mind. This time the problems in housing will stay in housing. If you are a builder or a broker, it will feel like a deep depression. The rest of us will hardly notice.

That all sounds well and good and makes for nice discussion. But my question is a little simpler and more fundamental than that: How can you go through a 4+ year economic expansion, that was fueled in a very large part by the expansion in the housing market — be it through added employment in lending and construction, consumer spending boosted by mortgage equity withdrawal, and the list goes on and on — yet then come out and tell me that if the housing market (and lending market with it) gets into trouble, that the difficulties will remain confined to the housing market, and not reach out into the economy as a whole? How can you tell me that “the problems in housing will stay in housing”, when I think it’s quite clear that the “good” in housing did NOT stay in housing?

That argument simply just does not compute with me.

Wait wait, lemme guess: it’s different this time. Ok. We’ve heard that before. Can you say “new economy stocks”? As one commenter to the above post at C.R. put it: “It appears his justification for saying so would be akin to saying in 2000 that the collapse of the IT bubble would only affect tech firms and those who’d invested in tech firms - everyone else wouldn’t notice anything.”

The homebuilders are getting a big boost today from Lennar’s earnings release, in which they reported an as-expected loss for the fourth quarter, but suggested that their 2007 profits could exceed those of 2006. Of course, that it just a hopeful guess, since there is no way they could know for sure what their profits will be like a year in advance, but that doesn’t stop today’s investors from jumping right in and buying the stock, along with that of any other company that has “Homes” in their name.

But as you might expect, some good things would have to happen for LEN for them to meet that rosy outlook, as Nicholas Yulico points out at TheStreet.com:

But Lennar’s target is based on a long string of conditions that must be met. It requires that strong employment continues, low interest rates stay low, the economy stays healthy and the market for new homes demonstrates traditional seasonal improvement.

The most striking part about the forecast is that it suggests that margins will improve in the second half of 2007.

Lennar has been aggressively cutting prices to clear homes and restore its balance sheet. Nowhere in the earnings release does the company say it has reversed this policy because the housing market is improving.

The homes already in backlog (to be booked as revenue in the first half of the year) also have low margins due to the price cuts.

“We think the guidance may be difficult to achieve, as the high level of homes for sale will likely continue to pressure home prices, absent a sharp improvement in demand,” Bank of America analyst Daniel Oppenheim wrote in a research note Wednesday morning.

Even if Lennar reduces construction costs and corporate overhead, the high inventory of homes for sale will continues to pressure home prices, absent a sharp improvement in demand, which will lead to lower margins, Oppenheim noted.

BMWife here again, with another technology update. Now this one is pretty cool, although at the moment, you have to be wealthy enough to throw 100k at it (at least)–or be in good enough with the state/local government to get them to subsidize the project as “research.” Still, it’s good to know it can be done.

The other problem, of course, is that this project was started from scratch. We need technology ideas that can be worked into existing homes because there are already a lot of homes out there.

A whole lotta nuthin’ goin’ on this morning, with the indices all huddled around the flat line, and advance/decline lines mixed as well. In the groups, some bounceback in the metals, energies and homebuilders, while the airlines are seeing some profit taking.

Bonds are pretty near flat, yields up just a few ticks. Energy prices are also flat. The dollar is lower, gold and silver higher.

In Gary K’s eyes, it’s pretty obvious there are some areas of the market that are “not working”:

Oils, gold, silver, and other commodities remain in their own private bear market. Most commodity prices have been plunging. Oil has done a bungee jump…with no ability to rally so far. Continue to stay far away from these areas as they have shown no accumulation whatsoever.

We stated that housing was going back into its bear phase. We stick with that stance as many names have now rolled over…and are breaking down. You already know our thoughts on the overall housing industry.

We finally have to make note that the “used to be” all-important SOX, continues to lag. We say this because for a decade, the SOX has led the NASDAQ and NDX both up and down. Not any more as the SOX continues to lag as the NASDAQ and NDX break out. There are many names in semi-land that continue to act horrid…TXN,AMD,LLTC,NSM…for starters.

We do not like the action in many of the lenders. This bears watching as ACF,WM,CFC,COF,LEND have either topped, broke down or have been blasted. Mortgage REITs have turned to dust for the most part.

But on the flip side:

What’s working?

JUST ABOUT EVERYTHING ELSE. It is a positive that the NASDAQ and NDX just broke out. As long as they stay above those pivots, all is well. It is a positive that the Transports have come back to life as Oil plunges. It is a positive that breakouts are back to working again. For several weeks, we saw many failed names. It is a positive that so many leaders pulled back to their respective 50 day averages, held and turned back up.

And as we have stated on several occasions, until major indices break support or moving averages, the market remains with the benefit of the doubt.

The big econ number of the morning is the Producer Price Index, which showed a larger-than-expected increase of 0.9%, but an increase of just 0.2% ex-food and energy. Of course, we all know no one really uses food and energy.

It’s a good thing we don’t really use food, since ‘food’ portion of the PPI showed some pretty large increases:

Wholesale food prices rose 1.7%, the largest gain in more than three years. Fresh fruit prices jumped 26.3%, the most in six years, while fresh vegetable prices rose 21.7%.

Good thing there’s no inflation, huh?