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 the Running of the Bulls blog:

Meteor to Hit Earth Next Week, Market Rises

From the Wall Street Journal, a division of News Corp.
Watch for the Journal’s Page 3 Money Honey$ coming soon

NASA scientists issued a press release today stating that a meteor 1,000 miles in diameter is expected to hit Earth next week.

NASA expects cataclysmic destruction, with much of earth’s population at risk, rivaling the catastrophe that wiped out the dinosaurs millions of years ago. (5000 years ago for those who live in Kansas.)

On the news, investors bid the Dow up 140 points, with industrial and material stocks leading the way.

“Since much of the planet is about to be destroyed, I imagine we’re going to need a lot of spending on infrastructure” said Biff Huffington III, 25, of Rolling In It, LLP, a hedge fund based in Greenwich CT.

“This will force the Fed to cut rates this year” stated Scooter Jones III, 23, head trader of Gouge & Purge, a hedge fund based in Greenwich CT.

“With private equity buying, companies buying back their stock, and credit markets and global liquidity, the market is going higher,” said Joseph P. Anderson III, 18.5, head of Imgoingtoblowyourbrainsout LLP, a hedge fund based in Greenwich CT.

The space agency expects the meteor to land in the vicinity of Toronto, Canada.

None of the portfolio managers had ever heard of Toronto. “That isn’t near the oil sands so why would I know?” said Huffington.

BMB has been of the opinion that when it comes to housing and the economy, you can’t have it both ways. You simply can’t have an economy that rides the strength in the housing market for 4 or 5 years, and then expect that same economy to be blissfully unaffected when that housing market starts to come apart - and that the damage will be ‘contained’ to only the housing sector. That logic makes no sense whatsoever.

Mathew Emmert agrees, and sets out to debunk some of the popular housing myths:

A crumbling housing market and an overextended consumer could result in an ugly ending for this economic party.

I’m typically not that bearish an investor, but these days there appears to be plenty to worry about, and though the financial markets continue to soar I believe the signs point to tougher times ahead for investors. A weaker housing market will likely be the lynchpin.

The explanations as to why everything is going to turn out rosy just don’t hold water with me. I find the market’s tendency to credit a sector for its positive contributions while downplaying its negative potential a bit unbalanced. This psychological phenomenon — commonly referred to as complete and utter denial — has resulted in the current lack of appreciation for the truly negative impact of this housing downturn.

Since the market bubble burst in early 2000, everyone has credited housing with not only minimizing the negative impact of the losses, but subsequently generating a tremendous recovery in both equity prices and individual wealth — and rightly so. Yet now, when all signs point to a rapid end to the glory days of real estate, we appear dead set on believing that the housing sector alone is not powerful enough to throw a wrench into the economic machine. Again, that’s a rather unbalanced view.

***

I suppose the bottom line is that no economic factor this large exists in a vacuum. Big or small, the connection is there, and you can bet your assets that the repercussions of a weaker housing market will be felt in myriad other ways. Be ready.

You may or may not agree with Jeffrey Cooper - it doesn’t matter. But his writing is fun to read, and hey - he uses coffee references!!! With me being a home-roaster and home-barista, he’s found my weakness:

As with all booms, most participants believe this time is different. Indeed, this time IS different.

First, a fact. A hundred monkeys with a hundred computers over a stretch of a hundred years could never come up with a wave like this. The last time this happened was never.

There was the DJIA in the 1920’s driven by the leading edge stocks in the new era industries of auto and aviation. This paralleled the technology bubble in the new paradigm stocks in the NAZ in the 1990’s.

There was Japan in the end of the 1980’s. Of course, there was Holland and the tulip-mania, which peaked 360 years before 2000.

Recently, there was the real estate bubble. But, there has never been a worldwide synchronous wave like this, where nearly every asset class everywhere is a bubble. Globubble.

Intense, exhilarating, whipped-up with a fistful of debauched dollars and yearning-to-be-invested yen, and done so well it tastes real. A cosmic cappuccino, frothed-up and topped with a big head of equity foam. Bless the market’s pointed little head. It’s La La Land – get with it. Line up for your ten-dollar espressos.

It’s words and money – lots of stories connected to lots of money with a lotta low people in high places on opium – or OPM in the vernacular, other people’s money.

It’s thousands and thousands of words (but just because this is the age of information let’s not confuse information with enlightenment) and cheap money wheezing and bursting into the marketplace in a bipolar kung-fu kaleidoscope of derivatives, yen carry, ETF’s and private equity. It’s a codependent latte of liquidity, oozing speculation spearheaded in China where the Shanghai index has tripled in the last twelve months.

China, where incidentally I understand 1.5 million retail brokerage accounts were opened in the last week alone. I promise I won’t ask you to do this again, but read that last line once more.

Yes. Go ahead. Read that last line one more time.

	Sometimes just messing around with the chart tools can be fun. Maybe I should stop picking on China’s stock market, huh? Here’s the Dow with the Shanghai Composite (solid line) plotted behind it.
	Stretched. The MACD (Moving Average Convergence/Divergence) indicator plots the difference between the 12-day and 26-day exponential moving averages. Looking at the Dow, the MACD is clearly the highest it’s been at any time in the last three years. Has anyone ever heard the term ‘mean reversion’?

Charts courtesy of StockCharts.com

Ever Green.

The market made believe that the Fed’s statement mattered today, politely waiting until the announcement was out of the way before ramping up. But with the way the market has been lately, I think the Fed could have said they were raising rates a full percentage point and the market would have found good news in that somewhere.

The Transports didn’t get to play along today, since they got their day in the sun yesterday:

Bonds took a dive on the Fed-speak, and yields got bumped back up on the long end - but fell on the short end:
6-month: 4.98%    2-yr: 4.73%    5-yr: 4.58%    10-yr: 4.66%   30-yr: 4.83%.

Market internals were positive, and volume ticked up above the levels of the past few days. Advances/declines were 12 to 7 on the NYSE but not even 5 to 4 on the Nasdaq. Up/down volume was 2 to 1 on the NYSE and 4 to 3 on the Nasdaq. New highs/lows were 275/17 on the NYSE and 171/54 on the Nasdaq.

The group picture was mostly green, with the merger-mania driven metals and mining stocks (+1.9%) leading the way, followed by the semiconductors (+1.7%), retailers (+1.3%), paper stocks (+1.3%), steel stocks (+1.3%), REITs (+1.1%) and homebuilders (+1.0%).

Energy prices were mixed following the morning inventory report, which showed a good build in crude but only a slight build in gasoline inventories. Crude oil fell to $61.63/barrel, but gasoline moved up to $2.23/gallon and natural gas rose to $7.73/mmBTU. The dollar index bounced back after a morning dip on the Fed release, finishing right around the 82 mark. Gold slid back to $680/ounce and silver dropped to $13.33/ounce.

BMB Note: Stretched becomes more stretched. The market doesn’t know the meaning of ‘down’ anymore.

I didn’t see any particularly good news in the Fed’s announcement, but there wasn’t anything bad either. So why not go up, right?

As I was watching the market go up, and having listened to all the merger babble and ‘noise’ surrounding this rally, I thought back to the last real ‘noisy’ period that I remember, that being 1999-2000. Not that I’m trying to make any connections between now and then, but at least back then, you could almost see that there was an underlying “reason” for what was happening and all the excitement: the PC boom was still in full swing, the internet had just begun to see widespread use, cell phones were becoming commonplace, and technology companies and others were not only making things work, but trying to feel out just how this ‘new age’ was going to work for them, and what the impact was going to be on how the world worked.

In trying to understand the ‘noise’ surrounding today’s huge moves up, not just in global stock markets, but in all assets, I just don’t see that same sort of driving force. It is liquidity, and liquidity alone, that is responsible. No fundamental new technology, no landscape changing innovation. Just money. Easy money, and lots of it. That’s it.

And that’s what bothers me. There’s nothing under there.

No big surprise - the Fed holds their funds target rate at 5.25%. I don’t think there were many surprises in the statement either.

The market hasn’t quite figured out how to react, starting lower, then higher, then lower again. We’ll see where things end up by the close.

In other rate news, the Bank of England is considering a rate hike as their inflation rate rises to 3.1%. Like central banks the world over, the BOE “insists inflation will fall — but it’s been wrong so far.”

As long as there is excess liquidity, there will be inflation. There’s no avoiding it.

As the Fed stokes the fires of inflation…

This isn’t exactly news (and it’s more than a bit simplistic) but the presses at the Federal Reserve are running full bore right now. Every hint of weakness in the economy or financial markets is being monetized away, partially because we need to pay for Iraq. This drives up the price of everything, including stocks. Remember, a nation’s stock market almost always rises when its central bank inflates; the performance of the U.S. market in the 1970’s was the exception and not the rule. Zimbabwe has the world’s highest rate of inflation. Wondering how its stock market is doing? Take a look.

…Todd Harrison wonders, as Tim did yesterday, how will we know when we’re at the top? We won’t. Just like we said, one day - poof!

• I remember 1999 like it was yesterday, which is interesting because I forget alotta things nano-seconds after I see them. But why do I bring this up? Because the rumortrage and innuendo bids influencing stocks–not to mention manic stock jockeys doing the same–is reminiscent of that juncture in the market.
• What I’m not smart enough to know is which inning we’re in. Is this JDSU 200, 400, 600, 800, 1000 or 1200? That’s why I’m being patient and disciplined and opportunistic while everyone else is racing to keep up with the Dow Joneses. That’s short-term frustrating but long-term intelligence, at least from where I sit.
• I mentioned JDSU earlier as one of the many examples of euphoria that kept going and going and going. I clearly remember the sentiment during each leg of that lift as all-too-familiar pundits banged the drum to get on board. With each push higher, their credibility seemingly gained credence. And then, one day, we woke up and poof—it was all over.

Thanks to At These Levels for the CR pointer.

Only a bit of maneuvering ahead of the Fed, as the major indices hug the zero line, with the Nasdaq drooping a bit on negative A/D again. The lagging REITs lead the way followed by the merger-driven metals, while oil services, networkers and oil stocks are at the end of the line so far.

Bonds haven’t moved much. Energy prices are mixed, the dollar is a little lower, but gold and silver are both lower as well.

Fed announcements have a way of moving the markets, both good and bad. Here’s Deron Wagner this morning:

Turnover surged higher across the board. Total volume in the NYSE was 14% higher than the previous day’s level, while the Nasdaq volume increased by 15%. Technically, it was not a “distribution day” because the major indices were little changed, but bearish churning was definitely present. Volume was much higher in the morning while stocks were selling off, then dwindled as stocks recovered throughout the afternoon. It was our impression that institutions were dumping shares ahead of today’s FOMC meeting, while retail investors took advantage of what they saw as a “buying opportunity.” Certainly, it will be interesting to see the market’s reaction to the Fed commentary after today’s announcement on interest rates.

***

We suggest laying low today and keeping tight stops on any long positions you have going into the 2:15 pm EDT announcement on interest rates. As usual, there will likely be a lot of post-Fed volatility, regardless of whether or not the Federal Reserve Board announces any shocks to the system. Beware of knee-jerk reactions, as if often takes a day or two until the market shows its true hand.

From the comments on a post at Calculated Risk:

An economist friend of mine asked a homebuilder “what inning are we in in regards to the downturn in housing?” The homebuilders response: “we haven’t even gotten to the ballpark yet.”

The disbelieving voices are growing larger and louder when it comes to last week’s non-farm payroll figures:

In other words, if you “Worked without pay,” the BLS Household survey considers you gainfully employed. Beyond absurd . . .

The entire game of government numbers, and the rest of us actually listening to them and believing them, is truly “beyond absurd”.