Bear Mountain Bull

Roger Nusbaum says:

You probably know that Van Eck has finally listed its long awaited Russia ETF (RSX). You can click here for more info from Van Eck.

The fund is very heavy in energy at 40%. It is very heavy in several energy stocks you have heard of like Gazprom, Lukoil (client and personal holding), Rosneft and a few others.

No, Roger. Actually we didn’t know – that’s why we visit your site!

More on RSX at ETF Trends. And on the up-and-coming list:

Also on the way from Van Eck is Global Alternative Energy ETF (GEX) expected May 9th. The Ardour Global Index extra-liquid consists of 30 alternative energy stocks from across the globe.

On his radio show today, Gary Kaltbaum emphasizes that the recent move has been very Dow-centric, and that’s not necessarily a good thing. He lists a number of important stocks that are in bad shape, or are breaking down. Names like: FDX UPS BBY HD LOW TGT FD SPLS WAG KSS COH COST SKX CHIX MGM LVS WYNN ODP OMX.

If the market were in great shape, this wouldn’t be happening. Gary’s advice:

I believe a little defense ain’t gonna kill you here. I believe we’re going to do some corrective work, right here. To what extent I don’t know, how long I don’t know…

Listen for yourself.

Turkey’s major stock index took about a four- percent tumble and the Turkish currency took a dive yesterday on concerns over the future of their political system. David’s got a rundown at Finance Trends Matter.

Update: More on the Turkey story over at Random Roger’s.

Reported after the close:

Electronics and entertainment retailer Circuit City Stores Inc. said Monday it will report a loss in its first quarter because of “substantially” lower sales in April of large flat panel and projection television.

Circuit City said it now expects a loss from continuing operations before income taxes of $80 million to $90 million for the first quarter of 2008.

The company also withdrew its outlook for the first half of the year, citing “uncertainties in the current operating environment.”

Hmm. Ford said last week that their April auto sales were “terrible”, and now this from Circuit City. So just how well is that consumer spending holding up?

	The Nasdaq put in a nasty looking ‘engulfing candle’ today, and is threatening a break of its uptrend off the March lows.
	The Russell had been struggling to make a meaningful move above its February highs, and that effort was dealt a severe blow today. The $RUT has given back two weeks worth of gains, and the uptrend off the lows has been violated.
	Some rough days recently for the hospitals…
	…and the HMOs.

Charts courtesy of StockCharts.com

The Dow’s quest for 20 of 22 up days ran into a buzzsaw in the last hours of April trading, and we got some of that pullback we were looking for. The Dow was up early, but the Nasdaq was dragging all day, and going into the close, the sellers took hold and brought the Dow back below the surface.

The Russell 2000 got smacked hard, and raises a bit of a flag regarding the strength of the broader market. Also, the Transports continue to get bashed by higher gasoline prices:

Bonds rallied on the morning’s weak economic numbers, sending yields lower, with the 6-month dropping back below 5%:
6-month: 4.99%    2-yr: 4.59%    5-yr: 4.51%    10-yr: 4.62%   30-yr: 4.81%.

Market internals were pretty ugly, volume picked up sharply in the last couple of hours of trading to levels above Fridays, and the market indices went out at the lows of the day. Not a good combo. Advances/declines were about 3 to 7 on both exchanges, with up/down volume 2 to 7 on the NYSE and 1 to 5 on the Nasdaq. New highs/lows were 253/35 on the NYSE and 147/100 on the Nasdaq.

No groups finished higher, and the weakness was widespread. Homebuilders (-2.5%) led the way down, followed by the oil services (-2.3%), steel stocks (-2.1%), metals and mining (-1.9%), gold and silver stocks (-1.9%), retail (-1.8%), chemical (-1.7%), REITs (-1.7%), software (-1.6%), transportation (-1.6%), networking (-1.6%), biotech (-1.6%) and HMOs (-1.5%).

Energy prices were mixed, with crude oil dropping back to $65.65/barrel, but gasoline jumping nine cents to $2.44/gallon, and natural gas up a couple of cents to $7.85/mmBTU. The dollar index was up early but dove throughout the day, then bounced late to finish near Friday’s mark at 81.45. Gold held steady at $678/ounce but silver dropped a few cents to $13.36/ounce.

BMB Note: Well, that wasn’t good. A pretty nasty close to the month of April, but considering where things were, I guess I’m not very suprised.

We’re seeing the beginnings of pullbacks in some of the groups, and some signs of more than just a pullback in others. The REITs and homebuilders are showing weakness again, and the commodity groups/metals look like they could have further to go – the gold and silver stocks are getting hit particularly hard, though gold prices haven’t fallen much yet. Maybe we should be on the lookout for a corresponding drop in the prices of the metals themselves.

Gasoline prices are giving the transports fits. Retailers are starting to look a little shaky, and the HMOs and hospitals look to be dragging down the health care side of things.

In the major indices, the Nasdaq’s poor advance/declines over the past couple of weeks were giving us a hint of trouble ahead. The Naz stands right at its April uptrend line for now, but the Russell broke its uptrend today and has now pulled back below those February highs to its prior breakout point, giving back two weeks worth of gains. If the small and mid-caps don’t hold up, eventually the large caps would have to weaken as well.

I’d be a little careful about putting new money to work here – we don’t know for sure what we’re dealing with yet, and somehow the market needs to work off some of its recent excess. Maybe we’ll see a pullback and consolidation, maybe just a one-day dip, or maybe something worse.

I don’t think the market can stay so out-of-synch with the indications of a weakening economy for a lot longer, especially if those indications continue to flow in. Tomorrow we get the ISM index and auto/truck sales.

We’ll have to wait and see what’s ahead.

I have no idea why the stock market remains strong despite the economic warning signs that seem to be flashing a brighter yellow day after day. But it is what it is, until things change.

Here’s Ivan Martchev today:

I’ll be the first to tell you that the message of the stock market and the message of economic indicators are as different as night and day. The market is incredibly strong, while many reliable economic indicators are incredibly weak. Which is right?

The last time we saw an incredibly strong market with notably weakening economic indicators was in the spring and summer of 2000. When I say a strong market I refer to the large cap indexes. Save for the big crack in March, off the May bottom the Nasdaq rallied strongly all the way into Labor Day.

I’ll also be the first to say that this time, according to everything I’ve looked at, the stock market is much stronger than in 2000 due to the breadth of the advance. The bid under the market is relentless.

The bizarre part is that many of the indicators that called the recession that began in late 2000 are now weaker. The only thing I can think of here is to play the upside with secular bull market stories in emerging markets and natural resources, and have a devised defensive plan with down-market strategies for when/if a selloff begins.

Some relatively weak economic reports this morning haven’t swayed the ‘dip buyers’, as an early move lower in stocks was bought back up, and most of the indices are hovering around the UNCH mark for now. Advance/decline figures are just below flat on the NYSE, but a little worse than that on the Nasdaq.

Not a lot of big movers in the groups. Oil stocks and utilities are leading the few winners, but posting only slight gains, and HMOs lead the losers.

Bonds are higher, pushing yields down. Energy prices are mixed – crude lower, gasoline higher. The dollar has pulled back to near flat from early gains. Gold and silver are slightly lower.

• Personal income and spending up, but spending is slowing.
• Chicago PMI drops, worse than expected.
• Construction spending up only slightly in March, lighter than expected.

Paging Rosie O’Donnell – message for Rosie O’Donnell. Please pick up any white courtesy phone.

Yes indeed, fire can and does melt steel:

Witnesses reported flames rising up to 200 feet into the air. Heat exceeded 2,750 degrees and caused the steel beams holding up the interchange from eastbound I-80 to eastbound Interstate 580 above to buckle and bolts holding the structure together to melt, leading to the collapse, California Department of Transportation director Will Kempton said.

Bloomberg:

China ordered banks to set aside more money as reserves for the seventh time in 11 months to try to prevent an accelerating economy from overheating.

Lenders must put aside 11 percent of deposits starting May 15, up from 10.5 percent, the central bank said on its Web site.

They’re trying things – but I’m not sure anything is doing much to slow things down, especially in the Chinese stock market.

As ridiculous as things were getting…

In the rampant real estate speculation of the Las Vegas valley three years ago, people lined up outside Pulte Homes sales offices overnight as if they were waiting for the release of the latest video game console or hot new movie.

Having seen his house in an upscale part of suburban Henderson, Nev. jump $200,000 in value in 18 months, Sam Schwartz felt he couldn’t miss any part of the boom.

He spent the night in the parking lot with TV, snacks and drinks, along with about a hundred other people.
The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.

Schwartz intended to buy a new home and then quickly sell it within the year — for a huge profit. Most people waiting were flippers just like him, he said.

***

The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.

… I don’t think it’s a huge surprise that this is where we are today:

In Clark County, which encompasses Las Vegas, one of every 30 homes began the process toward foreclosure last year.

In real estate booms, stock markets bubbles, whatever it is: Don’t be the last one in.

	Sometimes the charts can provide just as many questions as answers. Is this a “broadening top”?
	Is this a breakout to a new bull move…
	…or just a retest of the broken trendline off the July lows?
	Bob Hoye says: “The rule is very simple: short rates go up during a boom, and they go down during the subsequent contraction. Don’t worry until short rates come down – because then that tells you the party is over. But so long as the party is on, short rates will rise.” Are short rates rising, or falling? “Party on”? Or “last call”?

Charts courtesy of StockCharts.com

Notes on the latest moves in the industry groups:

• When much of the market is moving up, it makes it easy to identify groups that are lagging.
• Some of the best performing groups might be looking a little stretched – be careful there.
• Only three groups in the red over 8 weeks, only two over 4 weeks – it wouldn’t surprise me to see some groups maybe pause here and moderate the advance a bit.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

Last weekend, we discussed the rarity of the Dow making gains on seven consecutive days – and it’s happened twice in the past month. After Friday’s close, the Dow showed gains in 19 on the past 21 trading sessions. A normal occurrence? I think not.

A friend passed along these comments from Rev. Shark at RealMoney.com:

It may have seemed like another mundane day of ordinary gains, but today marked a rather impressive feat for the Dow. According to sentimentrader.com, this is only the third time in the 110-year history of the index that it has closed in positive territory for 19 of the last 21 trading days. That is almost four straight weeks of gains, which is remarkable.

The last two times this sort of streak occurred was in the summers of 1927 and 1929. Of course, we had the worst crash in history in October 1929, which is probably just a coincidence, but it does make you think.

There are not enough data here to be statistically significant, but it is interesting to see how rare this run has been. There is no question it can continue, but when you start approaching this sort of extreme, you should think at least a little about defense.

Maybe we shouldn’t get too used to these kinds of streaks.

More good stuff from John Mauldin this week. He passes along a few thoughts from Jeremy Grantham, via TheStreet.com:

“While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent. One, unsurprisingly, is legendary value investor Jeremy Grantham – the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham … has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

“‘Everything is in bubble territory,’ he says. ‘Everything. The bursting of this bubble will be across all countries and all assets.’

“‘From Indian antiquities to modern Chinese art,’ he wrote in a letter to clients this week following a six-week world tour, ‘from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!’

“‘Everyone, everywhere is reinforcing one another,’ he wrote. ‘Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.’

“As Grantham points out, a bubble needs two things: excellent fundamentals and easy money. ‘The mechanism is surprisingly simple,’ he wrote. ‘Perfect conditions create very strong ‘animal spirits,’ reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism.’

“And it becomes self-sustaining. ‘The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you.’”

But recognition of the bubbles doesn’t necessarily correspond to the bursting of them:

So, does he counsel you to run for the hills? No. Their study of bubbles suggests there is a short but dramatic “exponential” phase before the bubble bursts. He writes:

“My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. … In which case, pessimists or conservatives will take considerably more pain.”

So what is fueling the stock market if it is not a rising economy? Let’s look at a few possible reasons.

First, we are seeing large amounts of stock being taken out of public hands and going into private hands. Lombard Street Research reports that net retirement of stock in nonfinancial US companies reached 5.2% of GDP in the last quarter of 2006, and about 6.5% of their market value. About 85% of that was financed by debt of some kind, either through buy-backs, takeovers, or private equity (the latter of which is highly leveraged).

Second, money supply does matter. We are seeing the broad money supply indicators (M-2 and M-3) rise not only in the US but all over the world. This is not a central bank pumping function but a market-driven phenomenon, as leverage is increasing the capital deployed in today’s markets. The central banks of the world have largely lost the ability to control the money supply, other than by the narrowest of measures, which are increasingly less meaningful. We are not seeing the rapid increase in money supply show up in inflation or loss of buying power but rather as inflation in asset prices of every kind, as Grantham notes.

Finally, rising prices create their own kind of self-fulfilling momentum. As more and more people throw caution to the wind and jump into the market, hoping to capture some of the profits they see their friends making so effortlessly, you finally get down to the last bear standing. Mr. Market will do whatever it takes to prove the most people wrong. And one of his favorite things to do is to create momentum markets which defy the logic of the underlying fundamentals. It then ends in tears.

Some interesting thoughts from Doug Noland this week – a long quote, but I didn’t think just a line or two would do it justice:

Today’s financial Euphoria is Unique. It involves asset price bullishness generally and globally. It is an especially emboldened Euphoria, nurtured from repeatedly overcoming various types of market and economic adversity. It is a Euphoria built upon the resounding confidence in the power of new technologies and the resiliency of contemporary economies. It is a Euphoria underpinned by extreme confidence in the competence and capabilities of the Federal Reserve and global central bankers. It is a Euphoria bolstered by the faith in contemporary finance and the capacity to effectively recognize, quantify and manage risk.

Today’s financial Mania is also Unique. You don’t see individual Americans flocking to speculate in the stock market. There’s no discernible manic crowd behavior akin to what we’ve read in financial history books. The stock market rises, yet there’s nothing too crazy (Internet-like) with respect to the nature of trading or outward excesses. And stock market gains aren’t all too outrageous, while increasingly outrageous home price inflation has largely settled down.

I’ll wrap up this rather uninspiring Bulletin this evening with a proposition for the pondering: What makes this period Unique and especially dangerous is that the current Mania is in sophisticated private Credit instruments, most having little or no transparency and issued outside the traditional purview of central bankers and financial regulators. Unprecedented gains in financial wealth come not predominantly from stock or asset prices shooting openly (and “vertically”) to the moon. Instead, the Mania Unique to this extraordinary phase of “Financial Arbitrage Capitalism” involves the enormous (and highly concentrated) accumulation of “small” spread profits on tens of Trillions of “dollars” of highly leveraged “structured” Credit instruments (expanding insidiously and “horizontally”). Pricing isn’t a critical issue and they don’t even have to trade, as gains are accumulated with the receipt of “payment in kind” spread profits through the issuance of only more debt instruments.

The heart and soul of this Credit Mania is Uniquely electronic and largely “over-the-counter”. It is operated chiefly by the powerful international “banks”/securities firms, largely to the betterment of themselves and a relatively select group of clients. It remains invisible to most. I’m not saying this is some conspiracy, and I certainly don’t want to imply that it is operated with malice intent. I’m just suggesting to think in terms of a Unique Mania that has evolved over years and under extraordinary circumstances to the point of becoming deeply entrenched. Today, it’s incredibly powerful but at the same time supported by increasingly fragile underpinnings. For one thing, the associated financial flows are becoming increasingly unwieldy and its “reserve” currency an accident in the making. We should expect its eventual unraveling to be similarly exceptional. In the meantime, this Mania is an imbalance exacerbating and “currency”-debasing behemoth. And that concludes my bout of “defiance” for this week.

Apparently a lot of people do. Here’s Jim Puplava on this week’s Financial Sense Newshour:

If you go back to 2001, this has been the largest buying spree by investors of gold bullion in any bull market that we’ve ever seen in the precious metals. It’s been consistent since 2001, and for the first time in history, individuals own more gold than central banks. You’re talking about 40 million ounces that they’re buying a year, and we’re not counting jewelry or anything else. And if you look at that happening, that’s telling you something. That’s telling me the smart money says, “You know what, we don’t trust fiat currencies, there is real inflation, and we want to own something that’s tangible.”

Not a lot of difference between most of these sectors – it’s obvious they’re up. About the only thing that sticks out is that some of them are getting a little extended away from their 50-day moving averages (the red line). It might pay to be a little more careful around those areas.

On the ‘down’ side – which isn’t really very down – the Financials and Consumer Discretionary stocks are still lagging the rest of the market. Both the XLF and XLY have yet to move above their February highs.

The numbers as the major indices move to new highs yet again:

Charts courtesy of StockCharts.com

Reuters:

U.S. auto industry sales have dropped far below expectations for April, a Ford Motor Co. executive said on Friday as rival General Motors Corp. rolled out an incentive program intended to boost crucial month-end sales.

“This month is terrible,” Ford chief sales analyst George Pipas said in an interview. “We are not even close to where we expected to be in April.” Pipas said the spillover from weaker housing to other areas of the economy and rising gas prices appear to be affecting consumers but added that many of these same factors were also present in March. “I have a hard time explaining why April is so weak,” he said.

More on Ford, GM, and drivers cutting back on auto insurance coverage at Mish’s site.

From MarketWatch:

The vacancy rate for owner-occupied homes rose to a record 2.8% in the first quarter from 2.7% in the fourth quarter, the Commerce Department reported Friday.

A year ago, the vacancy rate for homes typically occupied by their owner was 2.1%, a record at the time. The median asking price was $185,200.

The vacancy rate for rental homes rose to 10.1% from 9.8%, the highest in two years. The median asking rental price was $659 a month.

And if it’s housing, it’s at Calculated Risk as well, complete with charts.

	Market breadth has been questionable of late, even as the indices cruise higher. Here we see that on the Nasdaq, more stocks have fallen than have risen on 7 of the last 9 days – the number of advancers minus decliners is below zero.
	Same story on the NYSE – and this isn’t just stocks. It includes all of the closed-end funds and bond related ’stuff’ that trades there.
	Feeling the pain at the pump yet? Gasoline prices are back to the levels of last August – just prior to the Goldman Sachs Commodity Index-induced nosedive.
	The airlines are feeling the pain.

Charts courtesy of StockCharts.com

Another messy day in stocks (of course the Dow was up, silly, why do ask?). The morning GDP report didn’t help the early mood. The major indices held near flat much of the day, but the action behind the scenes was less than impressive, with A/D lines hanging in the red the entire session. Volume did pull back a bit, but so did the small/mid caps, Transports and Utilities:

Bonds were only slightly lower, yields up a few bps:
6-month: 5.02%    2-yr: 4.66%    5-yr: 4.58%    10-yr: 4.69%   30-yr: 4.88%.

As I mentioned, the internals were very much on the weak side, but volume lightened up from the past couple of days. Advances/declines were about 7 to 9 on the NYSE and 2 to 3 on the Nasdaq, with up/down volume 2 to 3 on the NYSE and 7 to 9 on the Nasdaq. New highs/lows were 209/24 on the NYSE and 160/69 on the Nasdaq.

The groups were weak as well. Only the oil services (1.4%) managed to gain more than a percent. On the losing side, the airlines (-4.1%), and the homebuilders (-2.4%) gave back a lot of yesterday’s gains. Also losing ground were the disk drives (-1.6%), semiconductors (-1.6%), hospitals (-1.4%), transportation stocks (-1.4%), and paper stocks (-1.4%).

Energy prices were higher, helped by the news of terror arrests in Saudi Arabia. Crude oil was up more than a dollar to $66.40/barrel. Gasoline continues its relentless climb up off the January lows, today reaching $2.35/gallon, and natural gas was higher as well at $7.83/mmBTU. The dollar index fell hard on the GDP report, but bounced back to repair some of that loss and finished at 81.48. Gold moved up to $679/ounce and silver recovered some of yesterday’s losses, moving up to $13.43/ounce.

BMB Note: The very poor GDP number threw markets for an early loop, but the indices held up, but I’m not so sure that we can count on that behavior continuing.

Looking at the next couple of weeks, I think the best way to approach this market is with a bit of of caution and/or skepticism. Why? Because I think we could be setting the stage for a little pullback or consolidation here.

Here a few of my thoughts — any or all of which may completely off base, but I’ll throw them out here anyway since you’ve been kind enough to visit the site:

• The market is overbought, extended, stretched – however you want to put it. You know the Dow has been up 19 of the past 21 days (2 down days in the last month of trading!). Look at your favorite momentum indicator on the major indices, and chances are good it’s in overbought territory in the near-term.
• End of the month. The end of April is here, and funds have had the best month they’ve had in a few years. That has likely kept them from taking as many profits as they might have at these levels, but now the month is ending. Not to mention that we’re moving into May – how many investors are planning to “sell in May and go away” after recovering from February’s dive?
• End of earnings season. The number of earnings reports coming out will be falling off quickly, and face it, the reactions to those earnings – whether deserved or not – has been adding a great deal of fuel to the fire for the past few weeks.
• Market breadth has been weakening. In the past couple of weeks, there have been a few big-name stocks holding up the Dow each day, and a few big-cap names helping to hold up the Nasdaq and Nasdaq-100. But underneath the surface, more stocks have been losing than gaining – Nasdaq advance/declines have been negative on 7 of the past 9 days.

Obviously, these elements don’t guarantee that things will move lower. Just be aware that these issues are out there, and be choosy about entry and exit points. I’m not saying the world is ending – just that conditions, as I see them, are ripe for a little market weakness ahead.

Just keep your eyes open, and be careful. That’s all.

Since the big number of the morning was the first report of 1st quarter GDP, how ’bout a quick wrap-up on just what the GDP is, courtesy of The Big Picture:

GDP is the sum total of the economic activity in the nation. It is comprised of Personal consumption, plus Gross domestic investment, plus Government consumption and investment, plus Net exports.

Putting that into a simple formula would look like this:

GDP = consumption + investment + Government spending* + (Exports − Imports)

There are 3 GDP releases: Advance, Preliminary, and Final. We get one at the end of each month. Because some of the data takes a while to assemble, the first two releases are often revised. Recall the initial 2006 Q4 release was 3.5%, which turned out to be off by almost 30% (final was 2.5%). The range of revisions is typically between 50 and 100 basis points. There’s no grand conspiracy here, it merely takes a while to assemble various data, like capital spending, imports, exports, etc.

Once we have a GDP number, we can look at it two ways: Nominal and Real. Nominal GDP is the dollar value of output (see formula above), regardless of inflation. Real GDP takes into account how much of the increase in dollar output is attributable to price increases, versus output increases.

The poor GDP report started things off pretty weak, and even though the major indices are all hugging the UNCH mark, underneath the surface things are quite a bit weaker, with A/D lines well in the red. Most groups are lower as well.

Bonds are flat. The dollar was doing fine until the GDP numbers came out – that sent the dollar index from the 81.80s to the 81.30s. Energy prices are flat, gold and silver slightly higher.