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.

From MarketWatch:

U.S. home builders are still pessimistic, but are growing much more confident in the housing market, according to a monthly survey released Thursday by the National Association of Home Builders.

The NAHB/Wells Fargo housing market index rose to 40 in February from 35 in January. It’s the highest since June 2006. The index had fallen to a 15-year low of 30 in September. A year ago, the index was at 56. The index has been below 50 for 10 months.

The way I see it, the builders can be as optimistic as they want - the real question is, will the lenders be willing, or able, to lend? I think the answer to that is a resounding NO - at least certainly not with the freedom that they have lent in the past few years.

	Hmm. Another market leader, rolling over and falling by the wayside.
	Ackk, never mind. Everything’s gonna be fine. Ben says so. Have another beer.

Charts courtesy of StockCharts.com

A rather unspectacular day for stocks as a whole, but in true never-going-down-again-market fashion, most groups still finished in the green and the major indices snuck higher, but the Transports and Utilities backed off slightly:

Bonds continued to move higher, seeing a few more signs of economic weakness, and that pushed yields lower:
6-month: 5.14%    2-yr: 4.83%    5-yr: 4.69%    10-yr: 4.71%   30-yr: 4.81%.

Market internals remained positive, but on lighter volume than yesterday. Advances/declines were 3 to 2 on the NYSE but flat on the Nasdaq, with up/down volume 6 to 5 on the NYSE and 2 to 1 on the Nasdaq. New highs/lows were 320/10 on the NYSE and 164/41 on the Nasdaq.

A few groups still posted decent gains, led by the steel stocks (+2.1%), HMOs (+1.9%), hospitals (+1.9%) and computer hardware (+1.2%). Oil services (-1.6%) led the weakness in the energy stocks.

Energy prices were mixed. Crude oil was flat at $57.99/barrel, gasoline dropped a couple of cents $1.60/gallon, but natural gas was higher to $7.29/mmBTU. The dollar index slipped a bit to 84.02, while gold and silver were pretty flat at $669/ounce and $13.92/ounce.

BMB Note: Not much to say. A bit of a day of rest after two decent up days, and we roll into options expiration tomorrow. Some of the economic news out today wasn’t that great, but these days, the market doesn’t care one bit.

News out tomorrow has the potential to move things around a bit - housing starts and PPI - so we’ll see. And don’t forget - the market will be closed on Monday for President’s Day.

Calculated Risk quotes from a WSJ article that discusses how the big banks are digging through the pile of mortgage paper that they bought up over the last couple of years, scrounging for loans that violate contracts so that they can get out from under them and force the originators to buy them back:

Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry.

As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.

.. Investment-banking firms and investment firms that bought mortgage-backed securities are hiring firms to scrutinize subprime portfolios for loans that violate contracts.

Clayton Holdings Inc. is working with a half-dozen investment-banking firms to identify loans that should be repurchased. Clayton has also been hired by two hedge funds to review mortgage bonds they own for potential repurchases.

“Nobody was doing this in earnest before late last year,” says Kevin Kanouff, president of Clayton Fixed Income Services, adding that he expects the volume of putbacks “to trail off in the third or fourth quarter. The carnage that you are seeing…is not over.”

And the lending Implode-O-Meter hits 22 with Silver State Mortgage.

PS. If you’ve got time, read through the comments on the various articles at Calculated Risk. There are a few folks that are inside the business that have quite a bit of insight to offer into what’s going on. Interesting stuff.

But of course, the stock market doesn’t care. Yet.

And then there’s this:

U.S. industrial production fell in January by the largest amount since Hurricane Katrina devastated the Gulf Coast in September 2005, the Federal Reserve reported Thursday.

***

The report was “dismal,” wrote Stephen Stanley, chief economist for RBS Greenwich Capital, although he judged that the January downturn was a “temporary weather-related bump in the road,” not a fundamental shift in the economy.

“The sector is in recession,” wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics, noting that output fell 1.7% annualized in the fourth quarter and is heading for a decline in this quarter as well.

Hmm. Weren’t we just talking about the “factory sector”?

Maybe things aren’t as rosy as we’re being led to believe. The Philly Fed Index comes in far worse than expectations.

Headline on MarketWatch says:

FED GAUGE OF PHILADELPHIA-REGION ECONOMY FAR WEAKER THAN FORECAST

CNBC reports a drop in the Philly employment index, the first in years, and an increase in prices paid. Link to story coming when available.

Update: Here is more info. It seems that we have two reports telling us quite different stories. What to believe?

In the Philly Fed report, the headline index dropped to 0.6 from 8.3. Economists had been looking for a drop to about 5.3.

The Philly Fed’s new orders index fell to negative 0.5, while the shipments index dropped by more than 22 points from January to 1.7. The unfilled orders index improved to negative 10.5, indicating that manufacturers are working off their backlogs. And the prices-paid and prices-received indexes both showed little change, while the employment indexes contracted.

In the Empire State report, the headline index rose to 24.4 from 9.1, confounding expectations of a drop to 8.7. New orders and shipments increased, with unfilled orders moving out of negative territory. The employment indexes improved.

The Empire State survey’s new orders index rose to 18.9 from 10.3, while shipments rose to 27.1 in February from 16.1. The inventory index improved to negative 7.5 from negative 19.2.

Judging from the move higher in the bond market - to lower yields - they’re believing the Philly news over the New York.

What’d I say yesterday? That we’d reach the top when everyone felt that things couldn’t be better?

We must be getting close.

Not much extension to the rally of that past two days as of yet. The majors are hanging right around the zero line, and A/D lines are at or just below flat. The groups are split, with HMOs, hospitals and steel stocks higher, and energy stocks lower.

Bonds are slightly higher, holding yields down again. Energy prices are lower, the dollar is flat, gold and silver slightly lower.

At The Big Picture this morning, Barry walks through defining reality - your view of reality depends on who you are, and which hat you happen to be wearing this morning. He discusses his own reality from four different viewpoints:

I come at the markets and investing from several distinct perspectives: As a Trader, as a Strategist/Economist, and as an Asset Manager.

As someone who started in this business as a Trader, I know that as a trader your reality is defined by what is on the screen in front of you. The trend is your friend and momentum is your lover. You cannot afford to ignore all the liquidity sloshing around you, or the very obvious underlying bid to the markets. Buying the dips is a money maker (until its not), and you cannot afford to miss that opportunity. I am all too aware that he who lives by momentum dies by momentum.

While the talking heads opined how much the markets liked Bernanke’s comments, the Trader in me just snickered. Like many of you, I saw the big buyer of SPX futures at 9:59am — he lit up the markets long before any human had the ability to read Bernanke’s comments and determine they were dovish on inflation. It was just a well timed program, and if you ever spent any time on a trading desk, you said to yourself, “Jump on board, the big boys are taking us higher!”

However, the Economist in me sees the widening disconnect between what the majority of the public believes, and the less sunny reality beneath. I know that the Q4 GDP 3.4% data was junk economics at its worst. GDP will get revised downwards to 2.5% or 2.25% or worse. We now have 3 consecutive Qs of decelerating economic growth. My inner Economist knows that the business cycle has not been repealed, and notes the vaunted post-Christmas Gift Card Sales Surge failed to materialize, with disappointingly flat January retail sales. The re-acceleration meme so prevalent last quarter was utter mythmaking spin. These are the facts.

***

My inner statistician looks at earnings at an historically high percentage of GDP, and knows that a reversion to the mean is inevitable. With this quarter’s likely drop below 10% Y-Y earnings on the S&P, we know that a mean reversion is rapidly approaching.

The Strategist in me notes the complacency, the near record levels of NYSE Margin, the somewhat frothy Bullish Sentiment and the slightly stock skewed asset allocation, the VIX at ~10. However, none of these factors are at levels that scream contrary indicator. At worst, they are a yellow warning light. Smart strategists have to have the patience to wait for the needle to “get pinned,” as exuberance can run further than most expect. Indeed, this most recent two day rally could even jump start the process to take us towards those excessive levels.

As an asset manager, I know how painful it is to miss the upside (we got Bearish in late January 2000, and watched markets scream higher for 10 painful more weeks). But I also know how much damage gets done in the down cycle, and watched people who failed to heed the warnings get utterly demolished, their assets shattered, their retirements ruined. Our aset allocation is now ~65% long, 20% short, 15% cash, with the stocks doing well, the shorts doing not too poorly, and the cash earning 5%. We have mostly big caps and agricultural chemicals and a smattering of other names, and very little tech. But this is uncomfortably long, and I am itching for the signals to move me towards a more defensive posture.

And still, we wait.

Good stuff Barry.

Deron Wagner is still eyeing some bullish setups - but judging from this summary paragraph, he may not plan on holding them long if he gets in:

Only three days ago, the major indices were starting to look pretty bearish. The Nasdaq was in the process of following through on a “head and shoulders” chart pattern, while the Dow had begun to break below support of its primary uptrend line. But, oh, how quickly things change in the market’s current state of indecision. Yesterday’s rally enabled both the Dow and S&P Midcap 400 indices to close at new record highs, while the S&P 500 finished at its highest level since September of 2000. The S&P, Dow, and Nasdaq each remain well extended above resistance of their long-term trend channels, while the S&P is trying to grind out its ninth consecutive month of gains. The long-term charts may be “overbought,” but it doesn’t matter. As we have learned the hard way, being short, even when quality setups present themselves, has not been an easy task. Conversely, buying at current levels requires a willingness to quickly take profits and/or cut losses because recent breakouts in the broad market have gone nowhere. Now more than any time over the past six months, we believe CASH IS KING!