Bear Mountain Bull

From this article, it sounds like ‘insider trading’ is getting to be more and more of an ‘inside’ job these days. Pretty disgusting, actually:

As regulators follow the money from suspicious trades, they’re discovering a number of trails are leading straight to Wall Street investment banks.

“One of the things that is particularly disturbing to me is the number of Wall Street professionals that are engaged in insider trading,” says Linda Thomsen, director of the SEC’s enforcement division. “It is frankly outrageous.”

Since April 2006, the SEC has filed insider trading- related lawsuits against more than a dozen investment bankers, analysts and executives whose jobs require them to safeguard clients’ secrets. That’s a higher number of cases than during the entire decade of the 1990s.

Ok, I’ll go along with “frankly outrageous”.

From the Features of the Week at Finance Trends Matter.

John Mauldin covers a couple of different BMB topics in one shot this week.

As David pointed out in his comments on our post from yesterday, Mauldin gives us his take on the BSC/CDO/subprime/ratings fiasco. In addition, the first part of the column covers the oil and gasoline mess in Iran, which we saw in the news a few days ago.

Why do we look at charts? Because, as they say, a picture is worth a thousand words.

Sometimes we get a little too focused in on the daily movements of the market. Let’s take a couple of steps back, and look at the sector movement over the past six months. Looking at the charts from the perspective of where they are now versus where they started the year, and the relationship of the moving averages, we have a pretty clear case of the “haves”…

…and the “have nots”.

The numbers as the market sits on the fence – half on one side, half on the other:

Charts courtesy of StockCharts.com

In today’s Five Things, Kevin Depew talks about ‘the game’ being played by the ratings agencies as they drag their feet on downgrading many of the securities backed by home mortgages:

2. How the Game Is Played

An important Bloomberg article this morning spills the beans on how the game is really played on Wall Street.

• Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are masking growing losses in the market for subprime mortgage bonds by not cutting the credit ratings on about $200 billion of securities backed by home loans, Bloomberg is reporting.
• This is precisely the mark-to-model and conflict of interest issue Minyanville Professor John Succo first raised more than a month ago.
• Bloomberg has found that almost 65% of the bonds in the indexes that track subprime mortgage debt don’t meet the ratings criteria in place when they were sold.
• So why aren’t the ratings agencies downgrading the credit ratings?
• Downgrades by S&P, Moody’s and Fitch would force hundreds of investors to sell holdings, Bloomberg says.
• Meanwhile, executives at S&P, Moody’s and Fitch say they are waiting until foreclosure sales show that the collateral backing the bonds has declined enough to create losses before lowering ratings on some of the $6.65 trillion in outstanding mortgage-backed debt.
• That certainly sounds reasonable… until one realizes that both S&P and Moody’s maintained investment-grade ratings on Enron debt until days before the company filed for bankruptcy.

“Downgrades would force hundreds of investors to sell holdings.” Why? Because many buyers of these securities, say pension funds and the like, have rules as to the ratings of securities they are allowed to invest in. They are not allowed to buy anything below a certain rating level, and if their holdings are downgraded below that point, they must liquidate. In that case, as those securities were sold, the true ‘market price’ would then become apparent, forcing all other holders to face their losses.

Keep your eyes and ears open as the weeks and months go forward. Read things like the Bloomberg article over the weekend or over the holiday to get up to speed. At least, if this thing starts to blow up, like it has the potential to, you’ll know what happened and why. And hopefully you’ll be ahead of the pack in taking steps to protect yourself.

Update: More on the same subject – and the same article – from At These Levels.

	With only around half the Nasdaq stocks above their 50-day moving averages, the Composite index still sits just a few points off its recent highs.
	But the S&P has closed below its 50-day for 6 days in a row.
	The financials still look like a big problem area to me. The banks have been in rough shape for a while…
	…and now the brokers have cracked a bit, twice bouncing off the underside of the 50-day in the past week.

Charts courtesy of StockCharts.com

Who knows what goes into days like today when the end-of-month, end-of-quarter and end-of-first-half are all on the line, but suffice it to say that there had to be a bit of ‘window dressing’ going on this week. Although today, it seemed like there were times when the windows were being dressed, and then there were times when the windows were being undressed.

The Dow ran up 100 points in the morning, and was then down more than 100 points with less than an hour to go in the trading day, only to finish with a loss of 13 points. Volatility, welcome back.

Though there was a lot of bouncing around today, the indices ended up running around in a circle, and little progress was made in either direction:

Bonds rallied again, and pushed yields down to their lowest levels in three weeks:
6-month: 4.93%    2-yr: 4.87%    5-yr: 4.93%    10-yr: 5.03%   30-yr: 5.13%.

Market internals leaned to the negative side, and volume spiked in the last hour to move above yesterday’s levels. Advances/declines were 10 to 9 on the NYSE and 4 to 5 on the Nasdaq, with up/down volume 4 to 5 on the NYSE and 2 to 3 on the Nasdaq. Most of the new highs came early in the day – new highs/lows were 129/58 on the NYSE and 156/84 on the Nasdaq.

The group picture was split, and again there were few big movers. Paper stocks (+2.0%) and oil stocks (+1.0%) led the winners, while the homebuilders (-1.7%) and the brokers (-1.3%) led the losers.

Energy prices were higher across the board. Crude oil finished above the 70 mark at $70.45/barrel, gasoline picked up a couple more cents to $2.29/gallon, and natural gas finally got a break, gaining to $6.80/mmBTU. The dollar got smacked around a bit, pushing the dollar index down to 81.93. The PM’s had a decent morning, but fell later in the day – gold held at $648/ounce and silver slipped $12.30/ounce.

BMB Note: Not quite sure what to make of today’s action – another up, then down, then back to even day. Considering the fact that we seem to be in a trading range, that didn’t help to move us out of it.

Some stocks and some groups remain relatively strong, and other groups (and stocks) are quite weak. We’ve got a pretty split tape, with some weak underpinnings to the market. If you put a gun to my head, I’d have to say that I think the market is going lower, finally falling prey to the weeks of distribution we’ve been seeing. But until the indices break support levels, you can’t get too aggressive betting on that direction. However, there isn’t a lot of strength to buy into either. You decide how you want to play it.

Next week is an abbreviated holiday week, without a great deal of data to move the market, although the non-farm payroll numbers will come out on Friday. We’ll see if the market can still hold up now that the quarter is over.

CNBC has the “iPhone Countdown” on the screen.

This is way over the top.

	In spite of this week’s little bounce, and despite the moves higher in some popular momentum names, the underpinnings of the market remain rather weak, suffering from a good deal of distribution over the past weeks. The percentage of S&P stocks above the 50-day moving average was at 80 percent when June began, but will end the month somewhere near or below the 50 percent mark.
	The Nasdaq index has been slightly stronger than the S&P, but that ’strength’ is dependent on far fewer stocks as well. The Naz will also end the month with just around half its stocks above their 50-day MAs.

Charts courtesy of StockCharts.com

Traders are making sure this quarter and first half of the year goes out on a positive note. The indices are sporting modest gains and A/D lines are in the green. Leading the move are chemicals, oil stocks, oil services, paper, commodities, disk drives and natural gas.

Bonds are up slightly, yields edging down. Energy prices are higher, with crude oil sticking back up above $70/barrel. The dollar is lower, gold and silver higher.

Larry McMillan says that the ‘trading range’ is pretty clear at the moment (follow the link to see the article with charts). I don’t know about you, but I’m not crazy about the idea of trying to trade the day-to-day chop associated with a range-bound market:

The S&P 500 Index ($SPX) has clearly carved out a trading range on its chart. There was heavy resistance in the 1535-1540 area a couple of weeks ago. When that couldn’t be penetrated, the market fell rather sharply, eventually bouncing off the 1485-1490 area a couple of times making that a support area. Until proven otherwise, traders can utilize this information — buying near support and selling near resistance. Eventually, the market will break out one way or the other, but until it does, there is plenty of room within this trading range to take advantage of it.

The equity-only put-call ratios remain on sell signals (see Figures 2 & 3). These intermediate-term indicators are the most bearish in our set of indicators. For this reason, we are thinking the eventual breakout will be on the downside, unless these put-call ratios improve. For now, they are rising from low (extremely overbought) levels, which means they are on strong sell signals.

Market breadth (advances minus declines) has been rather negative as well. When the market fell last week, breadth was extremely poor for several days. This produced an oversold condition in breadth oscillators.

Volatility indices ($VIX and $VXO) have been extremely volatile as well. They broke out to the upside when the market fell, thereby establishing an uptrend. That was bearish, in our opinion. However, $VIX got a bit ahead of itself, reaching nearly 19 on Tuesday, before collapsing below 16 on Wednesday. That is enough of a reversal to qualify as a spike peak buy signal in $VIX. Those typically are quite reliable buy signals as well.

So, the indicators are at odds with each other to a certain extent. The $SPX chart is neutral within the trading range. The equity-only put-call ratios are bearish. Volatility has given a spike peak buy signal, and the breadth oscillators are somewhat positive — having moved from deeply oversold to a more neutral status. This is the kind of mixed picture that one can expect to find when the market is trading within a range. So, this is not unusual to see.

It’s tough to make good decisions when basing them on bad data.

BMB talks of the inaccuracy and/or obfuscation of the government numbers often. As luck would have it, the ‘bad numbers’ syndrome afflicts not just our government, but other groups reporting data as well — especially if they have something to hide. These days, that could be the realtors.

From The Big Picture:

From a South Florida paper, we learn that local realtors are refusing to submit ALL THE DATA to their regional Board of Realtors, because doing so would dilute the nicer parts of town with lower-priced and worse-performing neighbors:

“The Naples Area Board of Realtors has long wanted to report that city’s results undiluted by lower-priced and worse-performing neighbors.

In fact, for the past few months, the board has refused to submit its sales and price numbers to the Florida Association of Realtors for its comprehensive monthly reports.

Marla Martin, an FAR spokeswoman, said the Naples board — representing the wealthiest median home sales prices in Florida — had raised issues with the state association relating to the presentation of the board’s sales and price data.”

As we’ve said before, times are definitely getting more interesting. The Bear Stearns mess that became public last week was just the beginning. I have a feeling we’ll be hearing a lot more stories like this in the weeks and months ahead:

Caliber Global Investment Ltd., a London-listed fund that controlled almost $1 billion of mortgage assets, said on Thursday that it’s shutting down after turmoil in the subprime market cut demand for its shares.

Caliber, run by Cambridge Place Investment Management, plans to sell all of its assets over the next 12 months and return as much money as possible to shareholders, the fund said in a statement. The plan needs to be approved by investors at an extraordinary meeting in August, Caliber added.

Caliber is the latest casualty of rising delinquencies in the subprime mortgage market, which caters to poorer borrowers with blemished credit records. Bear Stearns Cos. is trying to salvage two of its hedge funds that focus on the space, while another run by UBS AG shut down earlier this year.

Subprime mortgage problems have also disrupted some initial public offerings. Everquest Financial, which had ties with Bear’s troubled hedge funds, pulled its IPO registration earlier this week.

Carlyle Group, one of the largest private-equity firms in the world, cut an IPO of a mortgage bond fund by 25% and dropped the price, Bloomberg News reported on Thursday.

The tip comes from The Big Picture, where Barry has a bit more to say on the subject.

	“Leading stock” watch: RIMM had been pulling back from its highs for a while now. That should change tomorrow, as the stock is up about 20 bucks in the after-market.
	Despite the media’s pronouncement of the iPhone as the Second Coming, Apple stock has been unable to gain any ground for over a month.
	The silly shoes company’s toes got stepped on yesterday, and they didn’t get much of a bounce today.
	China Watch: The Shanghai composite has been thrashing around after losing its upward momentum, and took another big hit last night. Anything can happen, but this chart wouldn’t give me warm fuzzy feelings if I were invested there. That’s the third break of the 50-day in the last few weeks, after not having touched that marker since last September.

Charts courtesy of StockCharts.com

Unimpressive.

Those who were setting up for a big post-Fed rally were presented with a big fat Fed Fizzle instead. The market edged up in seeming anticipation all morning, then tried to rally a couple of times after the announcement, but things fell flat, leaving the indices looking pretty flat on the day, and volume was embarrassingly light:

Bonds were a little weak in the morning, then lost even more ground after the Fedspeak, and yields moved higher:
6-month: 4.93%    2-yr: 4.95%    5-yr: 5.01%    10-yr: 5.11%   30-yr: 5.20%.

Despite the flat finish in the indices, market internals were slightly positive, though volume was lighter than we’ve seen all week. Advances/declines were 3 to 2 on the NYSE and 10 to 9 on the Nasdaq, with up/down volume 5 to 4 on both exchanges. New highs/lows were 105/45 on the NYSE and 160/58 on the Nasdaq.

The groups were split, with only a few big movers. On the plus side, the airlines (?? +2.0%) led the way, followed by metals and mining stocks (+1.2%), steels (+1.2%) and paper (+1.2%). Leading the red line were the homebuilders (-1.8%) and oil services (-1.5%).

Energy prices were mixed, as crude oil moved back above the $69 mark to $69.57/barrel, and gasoline gained a couple of cents to $2.27/gallon, but natural gas slid to $6.66/mmBTU after the morning inventory report. The dollar index dipped early, but rallied back as rates rose, finishing back near where it started at 82.33. The PM’s are gaining back some lost ground, with gold back up to $649/ounce and silver to $12.45/ounce.

BMB Note: That was certainly a dud. I think what impressed me even more (or less) than the poor price action for a Fed day was the seeming lack of interest – pretty quiet on the volume front.

So, we’re still in that quarter-end window dressing period, and they weren’t even able to conjure up any sort of a Fed rally (of course, they didn’t dump everything either). Not sure if that’s telling or not, but it is interesting. I’m not real excited about looking to enter too many more positions until I’m more convinced of some direction, one way or the other. The down side was teased pretty strongly over the past week, and that has left a lot of groups in bad shape, as we’ve discussed here already. For the up side to shape up, we’re going to need a lot more days like yesterday to strengthen the charts to the point where things look more solid.

For now, I’ll stick with my winners, but I’ll be watching them pretty closely. This market is still acting pretty tired here, and with the exception of the momo stocks, there aren’t a lot of real good things happening. I’m willing to wait it out a bit yet.

RIMM reported good earnings after the bell, along with a 3:1 stock split, and that has the stock trading up about 20 bucks in the after market – that’s after RIMM had been sliding for about a week-and-a-half. Question: If RIMM is doing that well, how many more ‘customers’ will there be left to jump onto the iPhone?

Just a note – a lot of people get all excited about a split, but did you ever do the math? It’s a wash, folks. You end up right back where you started. I don’t get that.

So CNBC finds a way to pump the iPhone even when they pretend to not be pumping the iPhone – the last hour was designated an “iPhone Free Hour”. And they made sure to mention it both when the hour started and when it ended.

I always wonder just how much Apple stock they own…

Update: From Minyanville’s Jeff Macke, in today’s Buzz Bits:

I’ve alerted CNBC that I’m going to become a full-time Ninja, dedicating my life to the stealthy killing arts, if forced to talk about Apple’s (AAPL) over-hyped, retro-network i-Phone one more time. Not to over-tease tonight’s Fast Money or anything but let’s just say I’m in the market for some XL black pajamas.

No change in rates – no surprise there. Although they’re still talking tough on inflation:

The FOMC acknowledged improvement in both inflation and growth prospects. The committee said inflation had improved modestly, but said that “a sustained moderation in inflation pressures has yet to be convincingly demonstrated.”

No, they’re not going to actually do anything about inflation. But they sure are going to keep watching it and talking about – as it continues to go higher and higher…

But those hoping for a rate cut can’t be very hopeful at this point either.

Not too sure how meaningful the morning action is, considering it’s Fed Fun Day today. The indices are mixed, but hanging right around the flat line, with A/D lines in the green. The group action leans green, with gold stocks, airlines (even though oil is back above $70), and metals leading the way. The homebuilders are giving back some of yesterday’s bounce after KBH reported earnings this morning.

Yields are up at the 5-year end but flat out at the 30-year end of the curve. Energy prices are mixed, with crude and gasoline higher, but natural gas lower after the natgas inventory report came out about a half-hour ago. The dollar is lower, gold and silver higher.

The ‘final’ number on Q1 GDP, subject to later revisions that we won’t hear much about, was revised upward to a still-poor 0.7%, and the rumblings of inflation are getting harder to squash:

U.S. economic growth in the first quarter was a little bit stronger than previously believed, but so was inflation, the Commerce Department reported Thursday.

The U.S. economy grew at a 0.7% real annual pace in the first three months of the year, the slowest pace in four years, compared with the 0.6% estimate reported last month. Final sales increased 1.7% annualized, a tenth better than last month’s estimate.

Core consumer prices rose at a 2.4% annual pace in the quarter, revised up from a 2.2% pace previously reported. Core prices — which exclude food and energy — are up 2.3% in the past year, revised up from 2.2% earlier. The upward revision was due to higher prices for physician services.

Yeah, right. “Physician services”. The only prices that are going up. Sure.

That’s your money that the House members just voted to stuff into their own wallets.

Are you happy with what you’re getting in return?

So this is how the ‘biggest IPO in years’ is taking the world by storm. Hmm. With an IPO price of $31, it looks like just about everybody is takin’ on water at this point. And what does this tell us about the current state of the market? It can’t possibly be as bad as Vonage, can it?

Update: A few comments on Blackstone from Fintag:

Fintag says
I did predict last week that Blackstone should not IPO. The stars told me that this Monday was a day of market corrections and although it was not major I really believe that the seeds of doubt have been sown in the market that Pirates do not deserve to be treated like any other conglomerate.

I would never invest in a company that rapes and destroys companies with no regard or accountability to national interests and whose main reason for existing is to rip, strip and pay themselves fat dividends off the back of cheap debt.

C’mon Fintag, tell us how you really feel!

Chart courtesy of StockCharts.com

	The S&P teased a break of support and bounced higher, but remains tucked under the 50-day. Range bound for now.
	The Russell got a huge bounce off that support area. It, too, looks somewhat range bound.
	The brokers had a good day, as everyone is hoping – and some believing – that the whole Bear Stearns hedge fund mess is over now, and will just ‘go away’. I think not. It’ll be back – or it’ll pop up somewhere else.
	The banks were up today too, as was just about everything. But that doesn’t do much to ‘fix’ the bigger picture here.
	The steels got a big reversal off their lows of the morning, but remain pretty bent out of shape.
	The sharp rise in bond yields had everybody pretty freaked out a couple of weeks ago. Yields have pulled back quite a bit from those highs – but they’re still a half-point higher than they were in May. Where to from here?

Charts courtesy of StockCharts.com

Seen on CNBC:

Goldman CEO: Private equity hasn’t peaked.

Seems to me if someone has to come out and tell you it hasn’t peaked, that means it’s peaked.

You know, same thing with all of the people trying to tell you that housing has ‘bottomed’.

Ouch. DRIV closed at 50.67, now trading at 43.77.

Here’s why.

Somehow, I just knew ‘they’ wouldn’t let this market fall too far going into the end of the quarter. Sellers took the day off and let the bulls have the market back, at least for today:

Bonds rallied early, then fell back, but still finished with gains on the day, and yields fell a little further:
6-month: 4.93%    2-yr: 4.90%    5-yr: 4.97%    10-yr: 5.09%   30-yr: 5.20%.

Market internals reversed their negative course to finish much more positive today, and volume was maybe just a few ticks above yesterday’s levels. Advances/declines were 3 to 1 on the NYSE and 11 to 5 on the Nasdaq, with up/down volume 4 to 1 on the NYSE and better than 5 to 1 on the Nasdaq. New highs/lows were 53/141 on the NYSE and 110/99 on the Nasdaq.

The groups were pretty much all green, with some of the real laggards getting a turn at the front of the pack today – like the homebuilders (+2.6%) and the biotechs (+2.1%). Along with them were the semiconductors (+2.2%), REITs (+2.1%), oil services (+1.9%), gold and silver stocks (+1.7%), disk drives (+1.7%), utilities (+1.5%), brokers (+1.5%), computer hardware (+1.4%) and networking (+1.3%).

Energy prices moved mostly higher after the weekly inventory report. Crude oil bounced back up by more than a dollar to $68.97/barrel. Gasoline was flat at $2.25/gallon, but natural gas finally had an ‘up’ day, gaining a few cents to $6.93/mmBTU. The dollar index was flat again at 82.31. Gold was steady at $643/ounce while silver got back a few cents to $12.27/ounce.

BMB Note: Well, things look a little better today – at least any big drops have been staved off, at least for a day. The market teetered only a bit this morning before buyers came in, and things held in the green most of the day.

But that doesn’t change the picture much. The indices just bounced off of support levels one more time, but there just isn’t enough strength in the groups to get too excited. Many of the ‘hot’ stocks remain hot, but the moves are a little more muted. The semiconductors got another big push today – I still have no idea what’s at work there.

In energy land, stocks there got a bit of a reprieve today as well, as oil inventories were a bit weaker than expected, and crude prices bounced back.

I remain very cautious. Today’s move up just helped to reinforce the recent trading ranges on the major indices, and it’s hard to make big commitments in either direction when you’re ’stuck in the middle’.

Tomorrow morning we get the final reading on Q1 GDP – that was that horrendous 0.6% number remember? Then in the afternoon is the Fed announcement, and today’s move makes you wonder if some aren’t trying to get a front-row seat for some big post-Fed rally they believe could happen tomorrow, since the last two meetings have produced solid rallies after the fact. Then again, I’m sure there were plenty of eager shorts that were covering their positions today – the last week or so has been the best the shorts have seen in some time.

And next week is a holiday week. I hate holiday weeks in the market.

I hope the closing bell is loud enough to wake me up. This one has been pretty dull. Oh sure, stocks are up a bit, but it’s pretty lifeless.