Bear Mountain Bull

The FHA puts a stop to seller-financed down payments via ‘charities’. More clamps being put on all the various scam home financing schemes that have been springing up:

The Federal Housing Administration will prohibit borrowers from using seller-financed down payment assistance programs that have helped hundreds of thousands of people buy homes but have come under the scrutiny of federal authorities.

Such programs allow home sellers to give money to charities, which in turn assist buyers with their down payments. The sellers pay the charities a service fee, but often recoup the money by charging a higher price for the homes, usually 2 or 3 percent more, or an amount equal to the down payment, according to a 2005 study by the Government Accountability Office.

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Almost 200 charities nationwide — one of the largest is AmeriDream in Gaithersburg — have participated in such arrangements. But the Internal Revenue Service and other government entities have raised concerns, particularly after the GAO study found that borrowers receiving assistance from the charities were more than twice as likely to default or become delinquent than other FHA borrowers were.

More mainstream media coverage of the bogus inflation numbers. Dan Gross at Newsweek says that there’s no inflation – as long as you ignore all the things that have gone up in price:

The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting) while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).

Thanks to The Big Picture.

Notes on the latest moves in the industry groups:

• Over the longer term, the strongest charts still belong to groups like defense, chemicals, internets, oil services, computer tech.
• Other groups continue to show good relative strength on a more recent basis: biotechs, commodities, steel, software, HMOs, gold and silver, oils, metals.
• The groups that remain very avoidable: banks, paper, housing, airlines.
• And there are still some very important groups that provide reason for concern, as they continue to underperform, like the retailers, semiconductors, transportation and brokers.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

Mike Shedlock congratulates the world’s central bankers on all they’ve ‘accomplished’ in recent years:

Current Conditions Summary

• Public spending is out of control in the US and UK.
• Banana Republic charges are being leveled at the US and UK.
• Runs on the bank occurred in the US and UK.
• The Fed is accepting mortgages as collateral in the US for the first time.
• Foreclosures are at all time high in the US.
• The US dollar is at all time lows.
• Japan is still struggling with deflation.
• Two failed banks in Germany were bailed out by the ECB.
• There are US Congressional threats of tariffs against China.
• There is a proposal to freeze short term commercial paper for up to 7 years in Canada.
• Housing bubbles in the US, Spain, and Australia are deflating.
• Housing bubble in Canada is still inflating.
• China refuses to float the RMB and sterilize US dollars flooding in. That in turn is fueling Chinese inflation.
• Price controls that can’t possibly work were implemented in China in response to Chinese aforementioned Chinese inflation.
• Commodity prices are soaring.
• Oil is at record high prices.
• A Massive carry trade in Japan is fueling a plethora of asset bubbles around the globe.
• $500 Trillion in derivatives are floating around dwarfing the size of the global economy.
• The global credit bubble dwarfs by orders of magnitude the credit bubble preceding the great depression.

Other than the above, the global economy seems pretty normal and rather well balanced. It’s a tribute to just how well central bankers have done their jobs.

Energies and Techs have worked their way back above their July highs, with the Industrials and Materials just behind:

The Staples, Health Care and Utilities have made a bit of a run, but the Utes got smacked a bit on Friday.

The Discretionary and Financial stocks are still trailing the rest of the pack:

The numbers as the market tries to decide what to do from here:

Charts courtesy of StockCharts.com

Has the Fed’s rate cut accomplished what it was supposed to?

The Financial Times has the answer and it’s both “YES” and “NO”:

Markets have had more than a week to digest the dramatic cut in the Fed Funds rate to 4.75 per cent. Has it worked?

It has stimulated equities. There are notes of caution – the main indices are not back to their highs, and defensive stocks have outperformed for the last week – but the cut has made stock investors a lot of money.

Intriguingly, it has also made money for commodity investors. The S&P GSCI non-energy commodity index is up a cool 16 per cent since the Fed cut the discount rate in August.

But the Fed was not acting for these people. It wanted to relieve the crisis of confidence in money markets, where doubts about the quality of collateral had sent soaring the rates at which banks could raise funds.

Here, there are two ways to look at it. The dollar Libor rate, at which banks lend to each other, fell by the full 50 basis points. Having touched 5.725 per cent, it is now 5.23 per cent.

In asset-backed commercial paper 90-day paper rates reached 6.25 per cent and have come back down to 5.37 per cent.

So the rate cut reduced the cost of finance, bringing it back down to the levels before the crisis. This is important.

But there is a second way to look at it. Normally Libor and commercial paper are closely tied to Fed Funds. Both tend to be only slightly higher than Fed Funds, reflecting only slightly higher risks. When those spreads suddenly widened, it signalled a crisis of confidence.

Those spreads are as wide as they were before the rate cut. In July, commercial paper traded at only 4bp above Fed Funds. That spread is now 62bp. Three-month Libor usually trades at 10 or 11bp above Fed Funds: that spread is now 45bp.

So the rate cut euphoria has not flushed the underlying lack of confidence out of the system. The money market shows banks are still fearful of ugly surprises in the next few months. Maybe that should temper the roaring equity and commodity markets.

At These Levels informs us that today’s closing price of gold sets a historical precedent:

Gold bullion made fresh 27-year highs today yet again. It has never closed above $700/oz. in history on a monthly basis, so this looks to be very meaningful.

	The dollar had bounced a bit into mid-August, when the Fed started ‘doing their thing’. The dollar quickly turned tail, and today the dollar index plunged to new all-time lows.
	It wasn’t just a coincidence that gold started to run back in mid-August…
	…as did most other commodities.
	Stocks also reacted positively to the Fed’s moves, and haven’t seen the drop in the dollar as a negative development. Yet.

Charts courtesy of StockCharts.com

Yet another day without much movement in the indices, although this one took on a more negative tone than the last couple of days, as advance/decline lines remained in the red throughout the day, and most groups gave up ground.

In the indices, the Utilities got hit the hardest, breaking near-term support and falling to their lowest level since Fed day back on the 18th. The Russell 2000 slipped back as well:

Treasuries bounced all over the place today as the dollar got smashed. Yields were a little higher on the short end, but flat on the long end:
6-month: 4.06%    2-yr: 3.96%    5-yr: 4.23%    10-yr: 4.57%   30-yr: 4.83%.

Internals slipped over to the negative side, and a late volume surge pushed up above yesterday’s levels. Advances/declines were 7 to 9 on the NYSE and 2 to 3 on the Nasdaq, with up/down volume 2 to 3 on the NYSE and 4 to 5 on the Nasdaq. New highs/lows were 168/82 on the NYSE and 136/84 on the Nasdaq.

In the groups, the only real winners were the networkers (+2.3%) on the 3Com buyout news. Gold stocks (+0.9%) started strong but pulled back late. On the losing side were utilities (-1.5%), oil services (-1.3%), steel stocks (-1.1%), metals (-1.1%), homebuilders (-1.0%) and regional banks (-1.0%).

Energy prices were lower. Crude oil pushed back above the $83 level, but fell back late in the day to finish at $81.66/barrel. Gasoline dropped two cents to $2.07/gallon, and natural gas slipped to $6.87/mmBTU. The dollar was the big story of the day – though few were willing to talk about it – as the greenback was smashed, driving the dollar index down to all-time lows, finishing around 77.75. The precious metals liked that idea, with gold rising to $743/ounce and silver to $13.72/ounce.

BMB Note: A rather wishy-washy end to the quarter. Things were hanging just in negative territory most of the day, but some selling in the last hour knocked things down a bit – but some of that drop was made up in to the close. The utilities suffered a pretty healthy setback today, so that will be something to keep an eye on.

The big move was in the dollar, as it got taken to the cleaners. The Fed and the government seem content to destroy the value of your currency, as long as it’s done quietly – so you don’t start screaming about it. As long as they can keep the resulting inflation ‘hidden’ from you as much as possible, you won’t complain. You’ll notice that prices for everything continue to rise, but you’ll be told month after month that inflation is under control, so you won’t give it another thought. You’ll just pay the higher prices, wonder why your paycheck doesn’t stretch as far as it used to, start looking forward to your next raise, and go about your business.

The stock market doesn’t seem to care about the dollar destruction yet either. And the pundits will always find a way to spin things to make it ‘positive’ for stocks, since everything is always positive for stocks in their eyes.

Stocks were pretty quiet much of the week, so it makes you wonder if they aren’t resting up for another lurch in one direction or the other. And they probably are – but we don’t know which way.

…is being flushed down the toilet:

You can send your hate mail thank you cards to the Federal Reserve, ATTN: Ben and Al.

The dollar index breaks below the 78 level.

You can check out the dollar index in real-time here.

How long can the stock market continue to hold up? Jeffrey Cooper appears to be wondering that as well:

In October of 1987 the market crashed. Real estate was strong, the economy was firm, but the dollar was an issue. In 1929 when the market crashed the dollar was strong and the economy was firm. What’s wrong with the current picture:

• The Fed is creating all the money that’s fit to print.
• Real estate is suffering worst decline in a generation.
• The dollar is making forty-year lows.
• The economy is soggy and may be on the verge of tanking.

Economists expect the worst Christmas since 2001 as consumers react to the negative wealth effect from the decline in the value of their homes.

But, hey, let’s buy stock. Let’s buy stocks because there may be someone behind us that will pay even more. Does anyone stop to think what is behind the demand side for stocks? The large franchise multi-nationals may be earning more on the dollar translation, but what is the actual value of those dollars when translated? Seems like some serious circular logic from outside the loop to me.

Well, I’ll keep looking for opportunities as long as it does hold up, but I’ll have my finger on the trigger, ready to bail when the time comes. And I’ll continue to focus on those areas, like commodities, that stand to benefit the most from the current financial environment.

Like today’s nice move – again – in the precious metals, as the dollar index tags another all-time low.

A bit of weakness today – that’s a switch, isn’t it? The indices are all showing slight losses on negative A/D lines, led down by the Russell at this point. In the groups, we find only networkers (helped by a 3Com buyout) and gold stocks up.

Bonds are lower at the short end, higher on the long end – yields are the reverse of that, of course. Energy prices are mixed – crude up, gas and natgas flat.

The dollar is the big story, though of course, no one likes to talk about it, as the dollar index sinks to new lows. That has both gold and silver making nice moves to the upside once again.

Along with the gold stocks and oils, I’m keeping an eye on pullback setups in a couple of the coal stocks, namely BTU and FCL.

Not recommendations, just observations. No position in either stock at this time.

The Dow is only 100 points off its high, but even the ‘perfect’ house isn’t without a problem child or two. Some of the big names in the Dow 30 are still refusing to participate in the “Happy Days”:

Charts courtesy of StockCharts.com

The market literally just oozed upward today. I feel like I’m watching the lava still flowing, still oozing, after last week’s Fed eruption. And like the lava, it just keeps on going, little by little. It doesn’t move fast, but it can’t be stopped either.

The Utilities were the only losers of the day, but for a change, the Dow was at the end of the winners’ train today:

Treasuries were higher, yields moving lower:
6-month: 4.05%    2-yr: 3.94%    5-yr: 4.21%    10-yr: 4.57%   30-yr: 4.83%.

Internals were positive, though volume backed off a bit. Advances/declines were 12 to 7 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume 13 to 7 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 187/84 on the NYSE and 138/86 on the Nasdaq.

Mainly winners in the groups, led by metals and mining (+2.0%), networkers (+1.9%), steel (+1.6%), oil services (+1.6%), homebuilders (+1.5%), gold and silver (+1.4%), and natural gas stocks (+1.2%).

Energy prices were significantly higher. Crude oil gained well over two dollars to $82.92/barrel. Gasoline added six cents to $2.09/gallon, and natural gas gained fifty cents to $6.92/mmBTU. But don’t you worry none – since increasing energy costs don’t count for inflation. The dollar index rebounded somewhat after a big morning dip, and finished around 78.40. Gold added six bucks to $734/ounce and silver gained a dime to $13.49/ounce.

BMB Note: Most stocks were up today, and a few groups did relatively well, but all in all, I thought the action was pretty dull. I hate these times when the market just keeps leaking up – or down. Just move and get on with it.

Again, not a lot has changed. Volume was a little limp, unless you were watching those Chinese stocks. I don’t know what’s going on there, but it has to mark an ‘end game’ of some sort. Wild stuff. It’s always interesting to see just how far the gum pieces fly when the bubble finally bursts.

As for the indices, the Nasdaq and Nas-100 have continued to move higher since “Fed day”, the Dow has just edged above those highs, but the S&P and Russell have not. The Transports are still stuck.

Tomorrow finally marks the end of the quarter. Maybe there have been EOQ games going on, maybe not. The market still seems rather detached from reality and fundamentals, at least in some areas. Ok, I’d be willing to bet the homebuilders don’t feel that way.

There are a few numbers out tomorrow – income and spending, Chicago PMI, consumer sentiment, etc. But I just don’t think the numbers matter anymore – at least not right now they don’t. Good or bad – I just don’t think the market is paying the least bit of attention to the numbers.

Not of mine, but a few from Todd Harrison as he ponders the current financial landmines landscape:

• One of the more interesting junctures in financial history continues to continue as we edge through the minxy meander. While the market movements are somewhat muted, the motion under the surface is pretty amazing.
• €3.9 billion of emergency funds tapped overseas?
• $38 billion in repos by the Fed?
• Slow and steady seepage in the world’s reserve currency?
• It’s nuts, really, particularly since it’s so darn stealth. Meanwhile, the markets (read: asset classes) continue to grind higher into quarter-end as fund managers look to put lipstick on their pigs.
• We’ve talked about many of these dynamics of late–the dollar as the lens, foreigners holding the trump card, the importance of Europe (thanks Minyan Peter)—but that doesn’t make the day-to-day any easier.
• In fact, while I’ve traded through 17 years of market environments, I’m not sure I’ve ever seen such a massive confluence of cumulative crosscurrents.

Barry has a few thoughts on the Bear-Buffett rumor floated yesterday:

There are many rumors I give a smidgen of credit for being very loosely based on fact. Where there’s smoke, there’s fire, etc.

This is not one of them.

First off, Bear Stearns (BSC) has become a giant rumor factory itself. First, a Chinese bank was taking a big stake. Then, a major money center bank was an acquirer. And now, Warren Buffett.

That’s right, the world’s best known value investor wants to own a company that could very likely have zero book value. A buyer of businesses with reliable earnings streams now wants to get into trading? Buffett is the guy who had an unpleasant time running the ego factory at Salomon Brothers, and now we are told is looking at Bear? The man who is the chief spokesperson for the “Derivatives are financial WMDs” — he’s a tire kicker for the poster boy for MBS derivatives driven hedge fund disasters?

PUH-leeze.

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it does not take more than a nano second of contemplation to recognize this as little more than an end of quarter goosing from the usual suspects.

Indeed, it seems that every time a given sector or stock is in trouble, someone floats a rumor that Buffett is a buyer. I had the same reaction to this absurdity that I did back in February when we heard Warren was buying a major stake in a large public home builder (Surprise! turned out to be nonsense). A commenter yesterday pointed out this November 2006 story regarding the Bill & Melinda Gates Foundation, a charitable trust that for some reason was taking a stake in 7 homebuilders. (Also, if you forward this email to 10 people, Bill Gates will give you $1000!)

It looks like someone is simply wildly throwing shit against the side of the barn, hoping something will stick. That may work for cooking pasta, but its not a way to base your trading and investing.

The timing of these rumors — option expiry, end of quarter mark up, or pre-earnings — always seems to be suspect.

Then there’s the companies themselves: Funny, these rumors always seem to fly around troubled firms or industries that just happen to have very large short interests.

Gee, do you think anyone is trying to squeeze the shorts?

Stocks are pulling back a bit, after a rather feeble early attempt to push things higher. Indices are hovering just above flat, with A/D lines still in the green from the open. Most groups remain in the green as well, led by homebuilders (go figure), networking, metals, and energy.

Yields are lower across the board, taking a healthy dip at the 3-month mark.

Energy prices are mixed, crude up more than a buck. The dollar got smacked this morning, with the dollar index touching 78.16 according to INO – that would be right around the all-time low. Gold and silver are both higher.

This on CNBC: “Fed adds $38B in liquidity to system, highest since August 10.” Yup, things are just fine. The helicopters are still running ’round the clock.

Lousy. Are we surprised? Of course not.

Update: The charts are up:

Welcome to your new world.

Stock markets around the world are zooming, and US index futures indicate another positive open here. The Nasdaq-100 has been higher 6 of the last 7 days, 8 of the last 10.

But the dollar is sinking, and mortgage rates are on the rise, despite the Fed’s rate cuts.

And the stock markets celebrate each piece of bad economic news, figuring more rate cuts are on the way.

From Tim Knight:

I think the psychology in today’s market is best captured by this……….a day or two ago, when the UAW voted to go on strike against GM, the stock for GM went up. Commentators said that a strike was actually good for the company, and the stock. This morning, when the union and the company came to a meeting of the minds, the strike was called off, and the stock went up. Because the absence of a strike is good for GM too.

There’s just no such thing as bad news anymore, folks. Like the kids say these days: it’s all good.

When someone asks you what it means when they say a stock has gone “parabolic”, just show them this chart.

Chart courtesy of StockCharts.com

A fairly positive day for stocks. The futures carried right past the durable goods report, and stocks stayed in positive territory for the entire day. Things sagged in the middle of the day, with the Dow pulling back to about +40, but a late day “jam session” – no doubt helped by talk of a deal for Bear Stearns – ran things back up to +135. The market started to dip a bit in the closing minutes, but that’s not allowed, so another ‘jam’ on the last minute of trading pushed the Dow back up near a triple-digit gain.

I told you things would be propped hold up this week, into the end of the quarter.

Treasuries finished with very little movement:
6-month: 4.05%    2-yr: 3.99%    5-yr: 4.27%    10-yr: 4.63%   30-yr: 4.90%.

Internals turned positive again, with volume a little lighter on the NYSE but slightly better on the Nasdaq. Advances/declines were 21 to 11 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume 2 to 1 on the NYSE but a positive 7 to 4 on the Nasdaq. New highs/lows were 154/92 on the NYSE and 151/93 on the Nasdaq.

The group picture was split, but with more winners than losers. The brokers (+2.1%) led the way on that late day BSC speculation, followed by chemicals (+1.7%), paper (+1.3%), airlines (+1.3%) and steel stocks (+1.1%). Gold and silver stocks (-1.7%) continued their pullback, followed down by another new low for the homebuilders (-1.6%).

Energy prices were mostly higher. Crude oil rebounded from an early dip to gain nearly 80 cents to $80.30/barrel. Gasoline dropped a penny to $2.03/gallon, but natural gas moved up to $6.42/mmBTU. The dollar index gained back a little lost ground to 78.54. Gold fell a few bucks to $728/ounce and silver lost a few cents to $13.39/ounce.

BMB Note: A fairly positive day for stocks, though aside from the Nasdaq, the indices are struggling to move much above their post-Fed highs. We’ll see how things play out.

Today doesn’t change the picture a great deal. The good are still doing well, the bad are still doing pretty poorly, relatively speaking. Of course, the homebuilders are the ones that are stinkin’ it up the worst, hitting new lows daily.

Some of the commodity leaders, oil services and precious metals stocks are in pullback mode, so I’m on the lookout for opportunities there. I’m also seeing some nice pullback setups in the utility area.

The big-caps are holding up, small caps only so-so. The usual momentum suspects are moving back and forth – some charging to new highs today while others took a bit of a breather. The split market remains pretty split, so be careful where you go wandering.

Tomorrow we get the final reading on Q2 GDP and the new home sales numbers. But do the economic numbers really matter anymore? Of course, good news is good news, but bad news just means more Fed cuts, right?

I still think the market is acting just a bit too confident at this stage, and the bulls have gotten pretty cocky already, considering they had to have the Fed pull their butt out of the fire — TWICE — to be at this point. But it’s been this way for months and months now. People seem to believe that bad things are never going to happen – or if they do happen, the market still won’t go down.

At The Big Picture, Barry notes that some of the mainstream media is picking up on the absolute joke that is the CPI measurement. In his own comments on the subject, he has this to say:

We’ve already discussed the increases in energy, and other commodities. And we have painfully detailed the specifics of Agflation. Let’s expand on some of those examples from the Bloomberg column:

• Since 2001, health premiums have risen 78%; Wages have gained 19% over the same period. CPI inflation measure? 17%.
• Housing is the single-largest expense for most Americans — as much as a third of total cash outlays. The Labor Department’s Bureau of Labor Statistics only tracks “owner’s equivalent rent” (OER). Housing costs/Owners’ Equivalent Rent is 23.158% of CPI.
• During the housing boom, OFHEO had housing prices increasing 13% per year; Non-government foundations had real estate taxes increasing about 6%; Over the same period, BLS measured ‘housing cost increases’ at 4% — about half of its actual price increases.
• Median real-estate taxes on owner-occupied housing went from $1,614 in 2005 to $1,742 in 2006, an increase of 7.93%. (That’s more than double CPI inflation rate).Oh, and ‘Owners’ Equivalent Rent’ doesn’t account for real estate taxes.

A real CPI would’ve eradicated most it not all of GDP during that period. And the more realistic GDP figure would be more in line with the lack of growth in real income and ‘real’ jobs.

Those of you who are fellow tri-state residents (NY, NJ, CT) will be as thrilled as I was that BLS shows transportation costs are declining; especially since the MTA (NY) said it will be increasing NYC subway fares .25 (12.5%) to to $2.25 per ride. Commuter railroad fares on both the Long Island Rail Road and Metro-North rail lines are rising 8% to close its budget gap.

This is now far, far beyond spin – its simply outright lying to present a version of reality that radically differs from the “Real” one (pun intended).

So why haven’t we gotten a more realistic version of inflation — one that has a high correlation with the construct known as reality? Well, it would wreak havoc with GDP, and potentially, the stock market. An accurate cost of living increase — in theory, what CPI is supposed to measure — would’ve eradicated a whole lot of GDP gains over the past 5 years.

That “Real Real’ GDP figure — adjusted for CPI inflation, which was adjusted for ACTUAL inflation — would be far more in in line with the lack of growth in real income and ‘real’ jobs . . .

As reflected in the plummeting dollar, many of the gains of the past few years were purely inflation driven, nominal asset price increases — not real (after inflation) gains.

Kevin Haggerty had a little to say on the inflation subject this morning as well:

I said in the last commentary that the Fed has essentially lost the game of chicken, and this will be known as “the inflationary recession,” as the $US Dollar declines, and gold, energy, commodities and interest rates rise, not to mention food, healthcare, insurance, education and whatever else we use everyday that I forgot to mention. However, you wouldn’t know it by the bogus CPI numbers put out by the government, which is more than willing to carry on the Great CPI Hoax initiated by the Clinton Administration, when they changed the CPI measurements to fit their needs. For example, the current official CPI measurement to 9/30/07 (year to year change, not seasonally adjusted) is about 2.0%, but the pre-Clinton CPI hoax is 5.5%. (shadowstats.com) The Clinton gang just said if the numbers don’t make us look good, then “change them,” which they did, and why the hell would the next administration change them back? No way. The same people who got screwed on their cost of living raises, social security payments, etc (based on the CPI), due to the Clinton 3-card Monte game with the CPI, don’t even know it, and will put “him” back in office again. Go figure. However, the change was obviously a benefit to the government debt and social security payments, so “who cares what happens to the people?”