Bear Mountain Bull

Over at Calculated Risk, Tanta says she is “underwhelmed” by what she’s seen of the Bush plan:

What this looks like to me:

1. Immediate FHA assistance for people who are already 90 days down. Does this mean “up to 90 days down,” “at least 90 days down,” or what? Waiting to offer refi assistance until borrowers are in the foreclosure process isn’t likely to make them want to go find the friendly neighborhood loan officer to do an FHA refinance. And by then, they’ve got a big chunk of past-due payments (not to mention possibly a prepayment penalty) to roll into the new loan. However,

2. We can’t offer more proactive assistance to those who look like they’re ready to default but haven’t gotten there yet, because apparently after all this time we still need some more task forces. I’m guessing that we’re still working on how the “more favorable rates” become available when the FHA insurance premium has to be raised and investors aren’t exactly crushing each other in the rush to buy these loans.

3. But if you’ve already lost your home to foreclosure or short sale, you might get a tax break. This will “keep people in their homes” by making it less expensive for them to give up their homes. Or something.

My view? FHA will be an important part of the process of trying to save as many subprime borrowers who want to keep their homes as we can save. Surprise. FHA is the traditional home of “disaster relief.” But this is a bigger disaster than FHA can absorb.

The rest of Bush’s plan seems to involve arm-twisting with lenders and Fannie Mae and Freddie Mac. That’s already going on all over the place as we write here, and has been for some time. But our fearless leader has used the Friday before a long holiday weekend to make a big “market moving” announcement about it. There’s news for you.

	Big-caps continue to outperform the little guys, although the S&P was thwarted in its attempt to move above last Friday’s highs.
	In small-cap land, the Russell couldn’t make it back to last week’s highs, and that 50-day is now crossing below the 200-day.

Charts courtesy of StockCharts.com

From Peter Schiff:

This week, Larry Kudlow and others strongly chastised Bernanke for his failure to read the writing on the wall and urged the Fed Chairman to quickly slash the Fed Funds rate. Methinks the pundits doth protest too much. For years, Kudlow, who practically coined the term “Goldilocks economy,” has dismissed with scorn suggestions that the American economy was anything less than ragingly healthy. If our economy is really so strong, why does he call so loudly for the artificial stimulus of a significant rate cut?

In truth, the writing has always been clearly on the wall all along. A credit bubble has been steadily inflating for at least the last six years, which in its final frenzy produced some of the most absurd mortgage funding products the world has ever seen. To anyone not dependent on the hysteria, a no-doc, no money down, negative amortization, interest only, adjustable rate jumbo mortgage was a just as clear a sign of pending catastrophe as $200 for a share of Pets.com, or 5,000 Dutch guilders for a single tulip bulb.

The one thing all bubbles have in common is that they eventually pop, and ours just did. Unlike the popping of the last bubble in 2000-2001, this one will fall directly to our economy’s bottom line. And this time the Fed can not step up to the plate with unlimited liquidity injections.

I’m not going to bother with too much explanation of today’s action, as our government’s continued interference in the markets was pretty much front and center. If you don’t know what went on, just browse over the posts for the day and you’ll figure it out.

The most interesting part of the day was perhaps the last 15 minutes, when the indices pushed up near their highs of the day, and then fell hard into the close.

Here are the number as it was ensured that August finished in the green:

Bonds were lower, yields higher across the board:
6-month: 4.22%    2-yr: 4.13%    5-yr: 4.24%    10-yr: 4.53%   30-yr: 4.83%.

Internals were positive, and the last minute sprint down to the wire pushed volume a little higher on the NYSE. Advances/declines were 7 to 1 on the NYSE and 7 to 3 on the Nasdaq, with up/down volume 19 to 1 on the NYSE and 6 to 1 on the Nasdaq. New highs/lows were 40/50 on the NYSE and 76/51 on the Nasdaq.

Hmm. Up/down volume 95 to 5 on the NYSE - and the Dow is only up 119? That’s a little bizarre.

All green in the groups, led by steel stocks (+3.1%), gold and silver stocks (+2.6%), retail (+2.4%), homebuilders (+2.3%), brokers (+2.3%), metals and mining (+2.2%) and oil services (+2.1%).

Energy prices were mixed. Crude oil rose above the $74 mark to $74.04/barrel, but gasoline dropped a few cents to $2.05/gallon and natural gas slipped to $5.46/mmBTU. The dollar bounced lower, but then recovered and left the dollar index down just a bit at 80.81. Gold and silver were both higher - gold to $673/ounce and silver to $12.02/ounce.

BMB Note: I’m not going to put too much effort into trying to analyze the government news-fed, end-of-fiscal-year-for-the-financials movement of stocks today. I will say that I remain very defensive and very skeptical of this market. You can decide for yourself what’s best for you.

Maybe Gary Kaltbaum said it best earlier today: “making bets in the nonsense we have been seeing is not conducive to fiscal health.”

Have a great holiday weekend. I will be spending much of the weekend parked in front of the television, enjoying the return of football season. It really is a shame that the best spectator sport has the shortest season, but maybe that makes us fans appreciate it all the more.

The Big Picture has a few comments regarding the timing of President Bush’s announcement today:

…I find this whole thing terribly interesting. A very minor policy change at the margins, but one with timing that is utterly exquisite. The President’s speech:

• Immediately diverts attention from Fed Chair Ben Bernanke’s speech;
• Comes right before a 3 day weekend;
• Is on the last day of the month;
• Is on the last day of the fiscal year of many financial firms.

It just strikes me as . . . peculiar. Remember, White House chief of staff Andrew Card famously stated: “From a marketing point of view, you don’t introduce new products in August.” That’s as true about wars as it is about major economic rescue plans.

—

If you were introducing a major economic policy initiative that was going to address a major issue — wouldn’t you wait until Tuesday? Its only 4 days away. This is a huge vacation week, many people aren’t around, and all they will hear is that the President did something.

I normally stick to mathematical analysis, preferring numbers to instinct, data to politics. But todays “news” struck me as an exquisitely timed, very clever PR stunt. Not to be cycnical, but this appears to be much more politics than policy, and a lifeline to the big investment banks on the last day of the month and (some of their) fiscal years. I suspect Hank Paulson had a major hand in the timing (I think Hank Paulson has a major hand in a LOT of things these days - BMB).

But a fix for what ails the system? Not even remotely close. That’s a function of time and quite a bit of creative destruction. As we noted on Monday, “Capitalism without financial failure is not capitalism at all…”

C’mon, Mike. Tell us how you really feel:

Bernanke Proves he is a Complete Fool

There really should have been no doubt about this before, but there was and by someone whose opinion I highly respect as well. Just two days ago this person asked “Mish, what’s your gripe with Bernanke?”

Bernanke Gripe List

• I think interest rate targeting to the CPI is complete foolishness.
• I think ignoring asset bubbles and dealing with them later is complete foolishness.
• I think he set very bad precedent about what the Fed is willing to hold as collateral.
• I think he is an extremely poor study of the causes and cures of the great depression.
• I think a policy of positive inflation is a policy of blatant theft that benefits those with first access to the money (banks and the wealthy) to the detriment of everyone else.

Other than that what’s not to like?

Wait, there’s more…

No Mr. Bernanke, It’s most assuredly NOT “worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance.”

—

With that proposed “solution” Bernanke proves he is a complete fool. Once again we see he is totally incapable of distinguishing the problem from the solution. That is why he is wrong about the great depression and that is why he is wrong again now.

The cause of the great depression was an enormous expansion of money supply and credit leading up to the economic collapse. Bernanke insists the solution was more monetary stimulus by the Fed. He is completely misguided.

He is now repeating the same mistake. The Housing bubble was created by too loose monetary policy by the Fed in conjunction with Congressional meddling.

Problem or Solution?

• Fannie Mae and Freddie Mac are the problem not the solution.
• Innovative lending products are the problem not the solution.
• 300+ Congressional bills to make housing affordable is the problem not the solution.
• Repeatedly bailing out the markets is the problem not the solution.
• Creative thinking sponsored by the Fed and embraced by both Greenspan and Bernanke is the problem not the solution.
• Greenspan embracing ARMs and derivatives is the problem not the solution.
• Being “Ready and Willing to Act” is the problem not the solution.
• The HUD is the problem not the solution.

—

The Fed and this Congress and that general attitude are the problem not the solution. Every passing day, more and more government intervention is piled on top of government intervention on top of government intervention all in an effort to correct what went wrong with the last government intervention. No one ever bothers to figure out that it was the original government intervention that created the original problem.

The “Original Sin” in this case goes way back, all the way to 1913 when Congress created the Fed. With that in mind, it should be perfectly clear what the problem and the solution is.

The fact that there is so much talk about what the Fed and government will and won’t be doing is proof enough to me that there is some real concern out there. And that same fact, that they’re doing all of this talking with the market just a few percent off the highs, should scare the heck out of you - not reassure you.

Protect your capital.

From Gary Kaltbaum this morning:

I must…I must ask the question…a very important question. WHAT HAS HAPPENED TO OUR FREE MARKETS? Where have they gone? I do not believe I am the only one asking this question. Let’s see.

Our Treasury Secretary, no less than 10 times in the past few months, has opened his yapper to tell us housing was stabilizing and or bottoming. Why hasn’t anyone asked him to appear on the hill to answer where his information was coming from? This has been an obvious attempt to interfere in the markets. Why do they have to interfere with the markets?

Our Fedhead…no all the Fedheads have been out no less than several hundred times over the past year to tell us everything WAS A-OK. Don’t worry about this, that or the other thing. Why can’t they keep their mouths shut? Why do they have to interfere with the markets?

Why did Bernanke lower the discount rate the day of options expiration instead of a day that did not mean as much? Why is he interfering with the markets? And in a laugher, Bernanke was quoted just this morning as saying” It is not the Fed’s responsibility to protect lenders and investors from consequences of their decisions”! Who is he trying to kid? Dropping $250 billion on a problem is exactly that. Let me rephrase that…that’s one quarter TRILLION.

Why did George Bush decide to make an announcement that he was bailing out…ooops, excuse me, helping out subprime borrowers the morning of a light volume, pre-holiday trading day? In fact, why is George Bush trying to bail out anyone? Why is George Bush trying to interfere with the markets? This is not his job.

Whatever happened to RISK IS RISK? You take stupid risks, you pay the piper. Whatever happened to that? Why is someone who bought a house at the top of the market bailed out? Why does someone with no money who took a mortgage they couldn’t afford bailed out? These are not innocent people. These were greedy people who became greedy at the most inopportune time. These people thought they could buy a home with no money down…and with no net worth…and sell that home 3 weeks later and make a ton of money…yet they get bailed out? Why are the hedge fund managers who went 15-1 margin bailed out? Why are lenders who lent money to people without asking for income statements…without asking for net worth statements…without asking for anything…bailed out? Why are private equity idiots who are sitting with over $300 billion in unfunded buyouts bailed out?

I know free markets. Free markets are a friend of mine. These are no free markets. Our markets are now being constantly interfered with in order to save the so-called “masters of the universe” and I have to tell you, it is downright depressing. If markets want to go to the moon, I am all for it. If markets wanted to go into a bear market, I am all for that. I just want free markets.

Investors who bought the top of the market in the year 2000 lost a lot of money. Were they bailed out for their stupidity? Nope! If they felt they were wronged, they sued…some won their cases…some lost. That’s the system. I did not see anyone lifting a hand to Aunt Mary and Uncle Bob who lost money because they bought a ton of Lucent at the highs.

Do not bail out the morons who bought at the top of the cycle. If they feel they were wronged, let them sue the lender in court. I am not a cold-hearted person. I just believe what we are seeing is laughable and needs to end. I am urging all free market proponents to speak up about this nonsense.

The market is all over the map this morning but since it is end of quarter for the BROKERS…I do not expect a reversal…but making bets in the nonsense we have been seeing is not conducive to fiscal health. I will have a market wrap-up on Tuesday. And if you want to know why all the spastic action, look no further to all the open mouths. Fed minutes send markets lower Tuesday…a Fed letter sends markets up Wednesday. Everyone needs to shut up. Have a great holiday weekend!

The market rides the ‘bailout bump’ into the long weekend. The indices are all sporting gains, and A/D lines are holding in the green as well. All the groups are green too, with gold and silver stocks, steels, oil services, homebuilders and brokers leading the way.

Bonds are lower, pushing yields a little higher. Oil prices have snuck above $74/barrel, but gasoline and natgas are flat. The dollar fell early, but recovered, and the dollar index is just slightly higher. Gold and silver are higher. In the long run, if money keeps falling from the sky, I expect gold to be a LOT higher. But it hasn’t happened yet.

Mr. Practical this morning, in response to a reader email regarding discount window borrowing:

The inevitable is beginning. The government, with its proven abilities to “manage” markets, is coming up with solutions. Those solutions are placebos at best and poison at worst.

Your implication is correct. Heavy borrowing at the discount window simply illustrates there are no other sources of liquidity to service current liabilities. Of course this does nothing to expand the credit base (it is trying to shrink, not expand), which is necessary to re-inflate growth. The forces of deflation are growing.

So the U.S. government is beginning to pull out all the stops. We now see Republicans bending over to bail out lenders (this has nothing to do with the borrowers) by reforming laws and using taxpayer money and foreign borrowing to bail them out. If I was a U.S. taxpayer who has been prudent with my money I would be furious. If I were a foreign lender I would pull my money out of the U.S. as fast as possible (lower dollar).

This is the beginning of the end. The markets will incorrectly rally on this last step by a Republican president to appease the banking industry. The more government control, the more inherent debt in society and the less future growth.

As markets rise this morning I would use the strength not to increase risk, but reduce it even more.

I can’t disagree. And as “a U.S. taxpayer who has been prudent with my money”, I am furious. But I’ve been pretty angry for quite a while already…

Interesting though. It’s getting to the point where you can almost smell the desperation in the air.

Futures are up this morning as the markets look forward to speeches from Bernanke and Bush.

I hear helicopters…

The Bush administration is due to announce later on Friday a plan that could help stem a wave of mortgage defaults, according to published reports.

Under the plan, the Federal Housing Administration mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages, according to reports in The Wall Street Journal and the Washington Post, citing unnamed administration officials.

People who have missed mortgage payments are now ineligible for FHA insurance.

The president’s plan would allow them to be eligible for FHA insurance if the amount they are required to pay each month increases, as has happened on many adjustable loans with so-called “teaser” introductory rates, the newspaper reported.

—

The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, both newspapers reported.

There’s been an awful lot of talk in the past couple of days about some piece of news that came out claiming that insider buying was at some new high amount, and how bullish this was for the market.

For example, there’s this ‘graf from Clif Droke:

Bolstering this bullish stock market outlook based on the insider sales data is a recent report by a respected financial newspaper. According to the Financial Times, total insider buying in the U.S. stock market reached $252 million in August, the highest level since 2003. This compares to a seasonal average of $186 million. At the same time, insider sales have dropped sharply from a four-year monthly average of $4 billion to $2.9 billion.

Lemme see. Insider buying of $252 mil, versus insider selling of $2.9 billion. Yes, ‘billion’, with a ‘B’. By my calculations, that’s still 11.5 times more selling than buying. Gonna have to do better than that to convince me that the insiders are “all in”.

	The techs tried to get away this morning, but had a little trouble escaping the gravitational pull of that 50-day moving average.
	But the techs are about the only ‘bright’ spot at the moment. The Transports are still stuck in reverse…
	…and the financials aren’t exactly turning things around yet either.

Charts courtesy of StockCharts.com

Indecision.

The market started lower out of the gate but found its footing rather quickly, and the techs tried to run away with things in the morning. But an afternoon selloff dragged the techs back down to earth, and sent the Dow down 100 points before things mellowed out and wandered around into the close.

Volume was mixed again - lighter on the NYSE but ticking up a bit on the Nasdaq as the techies play with their toys - but still more stocks down than up today.

The Transports and Utilities lagged the broader indices:

Bonds were higher across the board, and yields moved lower. Those 3-month T-Bills rallied strongly again this morning, but pulled back in the afternoon. Still not sure what’s going on there…
6-month: 4.23%    2-yr: 4.09%    5-yr: 4.23%    10-yr: 4.51%   30-yr: 4.84%.

Internals were a little worse than the final scores might indicate, except that we see money piling into those tech stocks that are trying to hold up. Advances/declines were 2 to 3 on the NYSE and 8 to 11 on the Nasdaq, with up/down volume 3 to 7 on the NYSE but a positive 2 to 1 on the Nasdaq. New highs/lows were 24/60 on the NYSE and 60/66 on the Nasdaq.

Mixed action in the groups, and none of those early leading tech groups were able to hold gains above a percent. The REITs (+0.8%) led the green list. Banks continue to struggle, and they led the losers with a loss of 1.1%.

Energy prices were mixed. Crude oil fell to $73.36/barrel and gasoline slipped to $2.08/gallon, but natural gas moved up to $5.58/mmBTU. The dollar bounced around and finished the day with the dollar index up a bit to 80.86. Gold dropped a couple of bucks to $665/ounce, and silver lost a few cents to $11.72/ounce.

BMB Note: It looked like the techs tried to make a run for it this morning, but they were reeled back in as the rest of the market was forced to lay back.

Hard to read much into today’s action, and tomorrow will likely be a light volume affair as we roll into the holiday weekend. The talking heads are babbling about Bernanke’s big barking to be done tomorrow out in the mountains, but I doubt that he’ll say much to tip the Fed’s hand. That won’t stop the pundits from dissecting every word, however…

Might as well sit back, rest and take it easy on the long weekend. When it comes to the market, it doesn’t look like there’s much to do. Maybe things have firmed up a little bit over the short term, but I still have my doubts in the longer term. The indices still don’t look that great, and a lot of sectors are in pretty bad shape - and those financials, which started this all, continue to slide.

The early move down off the morning futures has relaxed somewhat, leaving the Dow and S&P still in the red, but tech strength continues as the Nasdaq and Nas-100 move into the green - but Nasdaq advance/declines are still negative, indicating that the ’strength’ remains concentrated in small areas.

Techs lead the green list, while banks, utilities and brokers continue to give up ground. That just doesn’t seem like good news to me when the financials can’t get going at all.

Bonds are higher, and the rush into T-Bills continues - the 3-month discount rate stands at 3.53%.

Energy prices are flat. The dollar gained a little ground overnight, gold and silver are slightly lower.

Gary Kaltbaum weighs in on market conditions and Fed forecasts:

Before I get into the market action, here is my take on the economy and the Fed.

I believe many areas of the economy are already in recession and unlike many economists who are predicting 2.5% GDP growth this quarter and next, I believe the economy will be close to flatline if not worse. I say this because of my unofficial Kaltbaum indicator. In the past couple of weeks, I visited and have spoken with a couple of dozen sales reps at a few big retailers…business is bad. I spoke to a dozen contractors…business is as bad as 1990. I spoke with several executives at housing companies…UGH! I spoke with a dozen auto dealers…guess what…you are going to see a lot of zero percent deals soon. The list goes on and on. I am seeing housing prices come down markedly across the nation. I am seeing credit card delinquencies…the consumer’s last bastion…skyrocket. I am seeing foreclosures skyrocket. I believe we are now going to see all this affect employment. Expect job creation to stall.

You know I am not a cassandra…but the business cycle is the business cycle. Economies do have down time…and for sure, we have been way overdue. The end of the world is not at hand. Just expect slower growth. Whether or not a recesssion comes, beats the heck out of me. There is a vast wasteland of people who have called for recessions and depressions that never came to pass.

The FED…There should be no doubt that the FED will cut Fed Funds at their Spetember 18th meeting…but I expect not a quarter point…but a half point. But that is not the real story. I EXPECT THE FED TO CUT RATES AND THEN CUT RATES AND THEN CUT RATES DOWN TO 4%. After all, the 10 year is yielding 4.5. It is quite normal for Fed Funds to be a half point below Fed Funds. The wild card in all of this will be the dollar. The dollar index is sitting on a ledge right here…on major league long-term support. I am not sure it would be a good thing if the dollar breaks below it. The Fed, in my humble opinion may be walking a tightrope.

As far as the market, the NASDAQ experienced a suspect follow through day on Wednesday. Volume was heavier than the day before but only a smidge higher…and overall, volume was light. The last follow through…which occurred a few Monday’s ago, failed miserably in 3 days leading to a mini-meltdown. Remember, every bull move has been preceded by a follow through day…but not every follow through day has led to a new bull move. I cast a suspicious eye at this one because 7 out of 10 stocks are in poor technical shape but will honor it by looking for sound high volume breakouts of leading growth stocks. Currently, it is slim pickings…so the market has some proving to do. Already, it feels like we are back to the trading before the market was squashed…where OILS and COMMODITY names lead…a select few growth names get a ton of money flows…FINANCIALS continue to puke…HOUSING continues its give-up phase…and most stocks do not participate. Just remember, the A/D topped weeks before the market did and in the NASDAQ case, amazingly, it was just at an ALL-TIME LOW…indicative of the continued concentration of money in big-cap NASDAQ stocks.

I also want to make note of the following statistic…an eye-opener!

Since the beginning of the 2006, here are the cumulative S&P 500 returns by days of the week:

Monday 1.40%

Tuesday -0.36%

Wednesday 18.72%

Thursday 4.36%

Friday -0.61%

I expect the market to continue to throw ridiculous curveballs. Just look at Tuesday and Wednesday…so take your time. The possible good news is that the FED is MOST DEFINITELY on the side of the markets right now and will not let up. I am headed out for some whitewater rafting for the Labor Day holiday. Enjoy your holiday as well.

Helping the market’s advance today:

Adding to the bullish sentiment were statements by Fed Chairman Ben Bernanke made in a letter to Senator Charles Schumer. The letter stated the Fed was monitoring the markets closely and ready to act if needed. In addition, Chairman Bernanke also said that there was no need to lift caps for the government sponsored entities’ (GSE) portfolios of Fannie Mae (FNM) and Freddie Mac (FRE) to accommodate new borrowers.

Don’t worry, be happy.

How’s that stretched consumer doing? Poorly enough to knock Williams-Sonoma’s profit down 27%. But that’s good news to the low-balling idiot analysts. From today’s Five Things:

5.  What Aren’t We Buying With Our Credit Cards?

Williams-Sonoma (WSM) reported reduced profit that exceeded analyst estimates this morning, largely due to Pottery Barn “revitalization efforts.”  The stock is up, so what do these “revitalization efforts” and this talk of “reduced” profits mean? 

• Williams-Sonoma this morning said profit fell 27%, but the good news is this actually beat analyst expectations, and so the stock is higher.
• “They were terrific numbers, much better than expected,” Joe Feldman, a Telsey Advisory Group analyst, gushed to Bloomberg.
• “Pottery Barn had a strong performance due to the initiatives they have in place to really drive the business,” he added.
• And what initiatives are those?
• The Pottery Barn “revitalization initiatives” that helped drive the “improving trend,” according to CEO Howard Lester. 
• Pottery Barn’s a 190-store chain accounts for half of Williams-Sonoma revenues. 
• After showing declining sales for four consecutive quarters the chain showed a 1.8% gain in sales. 
• How did they do it? 
• They reduced or eliminated shipping charges for some Pottery Barn items.
• They reduced advertising expenditures for Pottery Barn.
• They increased markdowns of Pottery Barn items, some by as much as 75%. 
• Meanwhile, merchandise inventories are projected to be running in a range of $750-775 million for the third quarter, compared to $661 million in the third quarter last year, nearly 15% higher.
• Did they open a bunch of new stores?  No, in fact, some stores are being closed for remodeling.
• Are they anticipating 15% revenue growth?  No, actually they are projecting about half that. 
• Rising inventories amid weaker sales growth, price cuts, rising credit card balances, rising credit card defaults? 
• We’re not buying it… literally.

And the retailers led the way up today…

	Despite today’s big recovery rally, the S&P remains nestled well below its now-downward-sloping 50-day moving average, and was able to just stick its nose back above the 200-day.
	Lost in all the ruckus surrounding stocks today was the big rally - again - in short-term Treasuries, sending 13-week yields plummeting. Who’s running for cover, and from what?

Charts courtesy of StockCharts.com

Out of the blue.

Welcome back to the world of spastic volatility, where investors will sell everything they’ve got into the closing bell one day, and buy ‘em right back the next day. As long as I live, I’ll never understand it.

The market started off positive, and just continued to work its way higher throughout the day, squeezing shorts all along the way. By the time it was over, the major indices had made back just about everything they’d lost in yesterday’s storm. But while Nasdaq volume snuck just above yesterday’s levels, volume on the NYSE pulled back, failing again - as it did on Friday - to register an ‘accumulation’ day on a big price rise.

Bonds were lower across the board, and yields moved up - except in that 3-month, where there was a rush to get into short-term Treasuries again and the yield tanked. Do they know something??
6-month: 4.37%    2-yr: 4.17%    5-yr: 4.31%    10-yr: 4.57%   30-yr: 4.88%.

Internals were almost as good as they were bad yesterday - except for that little lighter volume problem. Advances/declines were 5 to 1 on the NYSE and 3 to 1 on the Nasdaq, with up/down volume at 19 to 1 on the NYSE and 9 to 1 on the Nasdaq. Still not much in the way of new high, though - new highs/lows were 22/82 on the NYSE and 44/82 on the Nasdaq.

No red today. Leading the groups were the retailers (+3.9%), oil services (+3.8%), homebuilders (+3.6%, some of which were hitting new 52-week lows early in the day…), computer hardware (+3.5%), gold and silver stocks (+3.4%), steel stocks (+3.2%), oil stocks (+3.2%), metals (+3.1%), commodities (+2.8%), transportation (+2.8%) and semiconductors (+2.8%).

Energy prices were mixed again. Crude oil bumped up to $73.51/barrel and gasoline up to $2.10/gallon, but natural gas slipped to $5.41/mmBTU. The dollar index fell to 80.71. Gold edged up to $667/ounce, and silver gained better than a dime to $11.84/ounce.

BMB Note: Today would look great if it hadn’t come on the heels of yesterday’s bloodbath. But a one-day move doesn’t break the downtrend that we’re in, and does little to repair the charts that have sustained tremendous damage over the last 6 weeks. So just relax and take your time. The market has quite a bit of work to do to prove that it’s worthy of your money.

Days like today, in the context of what I would characterize as a ‘bearish’ environment, remind me of the descriptions of ‘bear market rallies’ that we’ve presented here in the past. Here are a couple of them.

The first comes from Rob Hanna last summer:

Bear market environments do not act as mirror images of bull market environments. Turning a graph of a bull market upside down is typically not a good representation of how a bear market will act. This is because they rule by different emotions. Bull markets rule by greed. Bear markets rule with fear.

Fear is more powerful and causes sharper reactions. It is also pervasive. It is not only what causes the market to trend lower, but it is also the emotion that rules the rallies. Rallies in bear market environments are especially fierce. People who are short become afraid of losing all their profits and are forced to cover as the market begins to bounce. Additionally bottom pickers rush in for fear of missing the bottom. Many times these rallies are sharp enough to temporarily take out resistance levels in stocks and indices. This tends to fool many investors and technicians. To profit in an environment that is susceptible to such sharp, short-covering rallies, traders need to be willing to shorten their time frames and take profits more readily.

The second is from Gary Kaltbaum, also from last summer, and seems to fit rather nicely into today’s context:

“Bear market rallies are sharp. They are large, they look good, they are noisy, they get people talkin’ about ‘em. They suck you in, they make you feel good for a day or two, and then they kill you soon thereafter.

If what we are in - the overall market, not today - if we are in a real bear market, and we just didn’t have a one-month mini meltdown, today would be a classic bear market rally day.”

Maybe this wasn’t a bear market rally. Maybe this was the real thing. But coming on lighter volume than yesterday, it doesn’t feel all that “real” to me. We’ll see down the road, won’t we? And if I figure out how to trade 280 points down one day and 250 up the next, I’ll let you know.

Oh yeah. The market had better be careful about acting too healthy, or it’ll never get that Fed rate cut…

Some discussion the past day or two seems to support the belief of BMB readers that the consumer is “desperately seeking credit”.

Today at The Big Picture, Barry quotes the Financial Times:

“US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders’ willingness and ability to repay their debt - fell for the first time in more than four years.”

And the Chicago Tribune:

“Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That’s the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch — the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

“You’re not going to be able to get that mortgage loan. You’ll be stuck with the higher interest credit card debt,” warns Carl Steidtmann, chief economist with Deloitte Research. “We will have to live within our means. I know it’s a troubling phenomenon. But we’re not going to be able to spend at levels well above our income levels.”

Yesterday, an emailer to Minyanville, a former “treasurer of a top credit card company”, joined in:

Finally, no one is talking about it yet, but I think the market will soon begin to realize that the credit card lenders have in essence become the consumer lenders of last resort. As consumers have been shut out of the mortgage and home equity world, the last available credit is plastic. One statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth - a key sign that the consumer is stretched. In normal times, you would expect aggregate credit card balance growth to run about in line with GDP and retail sales growth. This year it is running almost 2.5 times that. Clearly consumers are using their cards for far more than purchases. And my guess is that for many Americans their credit cards have become the latest, but potentially last, source of financing available.

Consumer debt, outside of the mortgage realm, has not been a huge topic of discussion when it comes to the ‘credit crunch’. But as the economy slows - assuming it does - the massive amounts of consumer debt on the books will become a much larger issue, especially if the unemployment rolls begin to grow.

A bit of a bounce coming out of yesterday’s drubbing, and so far, much of the bounce is holding. Indices are up slightly, and A/D lines remain well in the green. The most positive group action is coming from the disk drives, computer hardware, steel, gold and silver, and oil services. The financials, however, continue to drag.

Bonds are slightly higher at most points on the curve, but we’re seeing another big boost at the short end which is pushing the 3-month yield back down below 4%.

Energy prices are slightly higher, following the weekly inventory report which showed large drawdowns in both crude and gasoline, but a build in distillates. The dollar weakened some overnight, and gold and silver are a little higher.

Gary Kaltbaum, on his radio show today:

When I look at the charts of the market — and let me be blunt, ladies and gentlemen, you can take it or leave it. There are plenty of people out there that say what I do is B.S. - my clients know it’s not. Very simply, what I am seeing, the action and the picture of this market is very bearish. It is very bearish.

Whether or not we only revisit the lows, I don’t know. Whether or not we pass those lows, I don’t know. Whether or not this is a bear market, I don’t know. What I do know is there is going to be some more not-so-good action in the market. The market is speaking loud and clear, and if you look at the pictures that I’m looking at, to me, it’s the worst of all worlds.

“Cash Is Best Defense In Slumps”:

What does one do when the stock market turns sour? Go defensive? We often hear: Get into tobacco and those household staples. That’s what the big guys do.

Do you really buy that line? You shouldn’t.

The stock market began its correction July 26. Since the broad market has such a strong impact on individual stocks, it just makes sense to avoid corrections and bears.

How best to do that? By moving to cash. Not by buying defensive stocks…

—

Even these so-called “safe” stocks are not immune.

Where does this myth come from? In fact, while we have the choice of being in the stock market or not, some of the biggest guns don’t.

Many mutual funds, with billions under management, simply must be in stocks. They have discretion over which stocks to buy, but they can’t shift to bonds or cash in a big way.

These huge players gauge their performance against the indexes. If the S&P 500 falls 10% and they lose only 6.5%, they’ve had a good year.

Your gauge is much simpler: Did you make money?

The charts speak for themselves. A number of groups have the mid-August lows in their sights. Enter at your own risk.

Charts courtesy of StockCharts.com

Well, now. That wasn’t nearly as boring as yesterday. Yesterday was pretty much a snoozer - today looked more like a nightmare. For the bulls, that is.

The market started off weak, held a bit while it waited for the Fed minutes (which was old news, anyway), then resumed its slide pretty much into the close. Except for the Utilities, which took their big hit yesterday, the indices all got clocked for losses of two percent or more, with the Russell and the Transports getting the worst of it:

Bonds were higher across the board, and yields fell, especially on the short end of the curve:
6-month: 4.24%    2-yr: 4.08%    5-yr: 4.22%    10-yr: 4.52%   30-yr: 4.86%.

Internals were, in a word, horrible. Volume wasn’t nearly as heavy as we’d been seeing during the big decline, but it did increase over the weak levels we’ve been getting the last few days. Advances/declines were 1 to 7 on the NYSE and 1 to 4 on the Nasdaq, with up/down volume an incredible 1 to 19 on the NYSE and 1 to 10 on the Nasdaq. New highs/lows were 20/39 on the NYSE and 15/58 on the Nasdaq.

Looking for green in the groups? You’re joking, right? The numbers were big and red. Worst off were the housing stocks (-4.6%), steel stocks (-4.1%), banks (-3.7%), metals and mining (-3.7%), brokers (-3.5%), REITs (-2.9%), transportation (-2.9%), defense stocks (-2.9%), paper stocks (-2.8%) and oil stocks (-2.8%).

Energy prices were mixed, with crude oil down slightly to $71.73/barrel and gasoline down a few cents to $2.02/gallon, but natural gas moved up to $5.59/mmBTU. The dollar fell early but bounced back to push the dollar index up a bit to 80.85. Gold dropped a few bucks to $663/ounce, and silver held near $11.73/ounce.

BMB Note: Regular readers know that I haven’t been crazy about this market, and that the light volume bounce up off the lows hadn’t done much to draw me back in. Yesterday morning, I wrote this in an email, regarding the bounce: “At this point, I view it as a sharp retracement of the initial first thrust down into a longer down cycle.” Obviously, the action of the last two days has only served to reinforce that view.

There is very little reason to be long this market. The downtrend off the highs remains intact. Many, many of the charts are in horrible shape. Even the ‘leading stocks’ gave back significant chunks of ground today. The Chinese stocks that had been launched yesterday fell out of orbit today and could burn up on re-entry. The market remains on the defensive, and looks to do some downside testing here, at the very least. Whether it tests all the way back to the August 16th lows remains to be seen. But there is little strength to be found - what strength there is isn’t worth the risk.

Lots of cash riding in CDs paying better than 5% is feeling pretty good right now. And even that may get a little more difficult as short rates come down, but I was still able to grab a 9-month issue at 5.30% just this morning. When it comes to stocks, my preference would be to either stand aside or look for opportunities on the short side. It’s up to you to decide how you want to play it.