Bear Mountain Bull

Remind me never, ever, to put any faith in government numbers of ANY type whatsoever.

As Rex Nutting writes on today’s GDP report, “Inflation was low because oil prices surged”

As odd as it sounds, the government reported that inflation was at a four-decade low in the third quarter, primarily because import oil prices rose so much.

If you don’t understand that, welcome to the confusing world of national income accounting, where up sometimes is down, and where sometimes one plus one can equal zero.

The simple explanation:

Because of the way the government counts and reports the numbers, real-life inflation was understated and growth was overstated.

The economy didn’t really grow 3.9%, and inflation really wasn’t 0.8%. The numbers aren’t as good as they look.

—

Most of the time, the government’s formula doesn’t produce any weird numbers, because the mathematical quirks all cancel each other out. But in the just concluded third quarter, it did produce quirky numbers that don’t accurately reflect reality, even though they are correct from an accounting point of view.

Imported crude oil prices rose from an average of about $69 a barrel in the second quarter to $75 in the third, but wholesale gasoline prices fell by about 10 cents to $2.07 a gallon. Imported prices for energy rose, but domestic prices didn’t.

In the government’s accounting, prices of imported goods rose at a 10.3% annual pace in the quarter, but that increase was subtracted when figuring the economy-wide price index. Import prices subtracted 1.3 percentage points from inflation in the third quarter. With domestic prices rising slower than they had previously, it was enough to push inflation to four-decade low of 0.8%.

The accounting is right. But it’s not reality.

Thanks to Barry at The Big Picture.

I maintain that someday, somehow, somewhere, this massive inflationary ‘experiment’ the entire globe is engaged in will eventually hit some sort of wall and blow up – big time – in our collective faces. How that happens and when that happens – and what the end results will be – I have no idea.

But it will happen, and Todd Harrison knows it too:

Man, OK, a few thoughts in no particular order….

The good news, I suppose, is that some axioms (such as the first move post-FOMC is typically the false move) remain in play. The pressure was short-lived before the dollar headed south and (pick an asset class) smiled in kind. Equities, crude (+4.5%), metals (gold, silver), soybeans, corn, orange juice. One and all, all for one.

We’ve watched the world unfold in real-time over the last five plus years in Minyanville. It was–and continues to be–the most interesting stretch in the history of the financial markets. I hold myself to task for seeing many of these agendas but perhaps not profiting as I could or should have. I own that, but not much else for more than a trade.

I must confess something. As I was contemplating what to write just now, I leaned back in my chair and felt a profound sense of sadness. Yes, sadness. Emotion is the enemy when trading but the feeling had nothing to do with a P&L. It was more like… how can I say this… we’ve reached a point of no return. We may have been there long ago but, well, it sorta sunk in.

I stand to gain a lot from hyper-inflation. But this isn’t really about me. It never has been. It’s about “us”, those who are charging ahead, pun intended, with a false sense of securities. I’ve seen manias last much longer than I could conceive and respect that this, too, could last. But I also believe that for every reaction, there is an equal and opposite reaction.

And that’s what’s scary. Even on Halloween.

	Though the Nasdaq moved out to new highs…
	…the S&P is still fighting to regain the ground it lost the week before last.
	When I saw CVS roll by on the new-high list today, I had to scratch my head…
	…because I already knew what Walgreen’s chart looked like. How’s that for divergence?

Charts courtesy of StockCharts.com

The Great Pumpkin Inflation lives on.

This was just all too predictable. Since when do markets follow the script to the ‘T’? The Fed lowers rates, stocks rally, bonds fall, yields spike, the dollar sags, oil and gold hit new highs. There were no surprises here at all. That’s just weird.

Yields were little changed on the short end of the curve, but moved higher on the long end:
6-month: 4.07%    2-yr: 3.93%    5-yr: 4.15%    10-yr: 4.46%   30-yr: 4.73%.

Internals returned the to positive side of the boat, and volume increased, as it’s prone to do on Fed day. Advances/declines were 7 to 3 on the NYSE and just shy of 2 to 1 on the Nasdaq, with up/down volume 7 to 2 on the NYSE and 3 to 1 on the Nasdaq. New highs/lows were 243/92 on the NYSE and 160/138 on the Nasdaq.

Most of the groups were higher, with only the homebuilders (-3.4%) losing a big chunk of ground. Leading the winners were the gold and silver stocks (+4.1%), commodities (+2.7%), natural gas stocks (+2.7%), oil services (+2.6%), software (+2.6%), transportation (+2.3%), steel (+2.2%), chemicals (+2.1%), metals and mining (+2.1%) and oil stocks (+2.0%).

Energy prices moved higher – a lot higher. Crude oil jumped more than 4 dollars to $94.53/barrel, gasoline added 8 cents to $2.34/gallon, and natural gas rose another 30-odd cents to $8.33/mmBTU. The dollar index plunged to new record lows yet again, finishing at 76.58. Gold futures tagged the $800 mark mid-afternoon, and the spot price stands at $795/ounce, while silver moved back up to $14.44/ounce.

BMB Note:  Did you ever notice how ‘the speculators’ always get blamed for record oil prices, but they never get blamed for new highs in stocks? Why is that?

Well, we got pretty much we expected today, all the way around – which is a bit surprising to me, and disturbing at the same time. Markets shouldn’t act this reliably, or be this predictable. Is there something more surprising waiting around the corner?

So, the market got its rate cut, and contrary to what many told us going in, it seems quite happy with the quarter-point cut for now. But how long will the celebration last? They’ll probably be begging for another emergency cut if the Dow should slip a couple hundred points from here. And how long will stocks continue to laugh in the face of $94 oil, $800 gold and a sinking stinking dollar?

Hey, look at it as a new experience. 70’s style inflation, which produces 1999-style stock prices. What a party.

For today, it’s all good. Especially for those of us invested in energy and precious metals. We can smile for a while.

A 25-bps cut in both the Fed Funds rate and the discount rate. We’ll see how the various markets react.

There was one dissenting vote, which favored no cut.

Here is the text of the Fed statement. You can decide for yourself what it means – the blabber is that they’re indicating that future rate cuts are uncertain at this point. At any rate, the stock market isn’t all that thrilled at the moment.

…that 15 minutes before the Fed is scheduled to announce their decision on the Fed Funds rate that crude oil is trading at an all-time high above $94/barrel?

The indices are edging up. We see the NYSE Comp, the Utilities and the Transports – despite a run-up to $94 in oil – all up about one percent.

I think the bulls are trying to sneak in ahead of the Fed move – anticipating a positive reaction perhaps?

Remember how those commodity prices dipped yesterday? Oil, gold, silver? They’re all right back up there today. Crude tagged 94 following the morning inventory report before pulling back. Gold and silver also ran right up to Monday’s highs, and are now also pulling back a bit…

Fed in two hours. I can pretty much guarantee that things will look different – in some way – by the close today.

A positive open in the wake of the morning GDP report, and in advance of the much-anticipated Fed announcement this afternoon. The indices are slightly higher, A/D lines are in the green, and most groups are higher, led by a rebound in the commodities: gold and silver stocks, steel, metals, natural gas and oil stocks.

Not a lot of movement in the Treasuries – yields slightly lower on the short end, up a bit on the long end. Energy prices are higher, with crude back up more than 2 bucks following the weekly inventory data, which showed another decline in crude stockpiles where a slight build was expected. The dollar is moving pretty much sideways, with gold and silver up slightly after yesterday’s drop.

Hmmm. The gov’t tells us, in its first guess, that the economy grew at a 3.9% annual pace in the third quarter, and ADP says that payrolls increased by more than 100,000.

So why is Wall Street clamoring for another rate cut today?

Not all of those market leaders were running to new highs today. It looks like the Dry Ships started taking on some serious water in the middle of the day. Another leading stock, WYNN, dropped 5 bucks during the day and is down another 8 in the after-market.

Chart courtesy of StockCharts.com

	Today’s pullback in the commodities puts the oil services index back on shaky ground.
	Will the real market please stand up – or fall down? Names like Apple are keeping the Nasdaq and Nasdaq-100 indices propped up near their highs…
	…while more than half of the Nasdaq stocks are below their 200-day moving averages.
	Take for example, some of the truckers, which are spewing oil all over the road.
	Then we have things like Coke and Colgate acting like dot-coms…
	…with just over half of the NYSE stocks above their 200-day MAs. Weird stuff.

Charts courtesy of StockCharts.com

Buyers seemed hesitant to jump in ahead of tomorrow’s Fed meeting, except for those jumping in on the train bearing the usual suspects, as those stocks headed to new highs yet again. But the indices finished mostly lower, and many more stocks moved lower than higher:

Treasuries barely moved for a second day, leaving yields pretty much as they were:
6-month: 4.04%    2-yr: 3.80%    5-yr: 4.05%    10-yr: 4.38%   30-yr: 4.67%.

Internals moved back to the negative side of the page, with volume just above yesterday’s levels. Advances/declines were 2 to 3 on the NYSE and 3 to 5 on the Nasdaq, with up/down volume 1 to 2 on the NYSE and 3 to 4 on the Nasdaq. New highs/lows were 118/95 on the NYSE and 140/137 on the Nasdaq.

Sometimes the laggards lead, and sometimes the leaders sag – which was definitely the case today with the commodities. Leading the list of losing groups today were the steel stocks (-5.2%), oil services (-4.3%), metals and mining (-3.1%), oil stocks (-2.9%), commodities (-2.6%), gold and silver stocks (-2.6%), transportation (-1.9%), paper stocks (-1.9%) and telecoms (-1.8%). The airlines (+2.7%) got a bump as oil prices fell, and the homebuilders (+1.3%) moved higher as well.

Energy prices moved big, but in opposite directions. A big pullback in crude oil, to the tune of more than 3 dollars, back to $90.38/barrel. Gasoline fell 6 cents to $2.26/gallon, but natural gas rose some 75 cents to $8.02/mmBTU. The dollar index sagged to another new closing low at 76.73. Gold and silver gave up yesterday’s gains, with gold coming back to $783/ounce, and silver sliding to $14.16/ounce.

BMB Note:  Again, not a lot has changed. The Nasdaq continues to hold up – why? Because the stocks that are doing well, like the AAPLs and the GOOGs, have a great deal of influence in the indices. So the indices hold up, even though a majority of Nasdaq stocks are in poor shape technically (see the charts a little later today).

Yesterday, we said that “commodity oriented stocks continue to perform well”. But that situation changed to some degree today as most of the commodity areas pulled back, with some, like the steels and oil services, getting smacked pretty good. Still too early to tell whether this means some sort of end to the commodity run, but it looks there will be at least some pulling back/correcting to do in these areas.

The market seemed to be pretty cautious ahead of the Fed announcement tomorrow, with volume just slightly above yesterday’s light turnout. We do get a few numbers out in the morning – Q3 advance GDP, Chicago PMI and construction spending – but none of those numbers are likely to have near the influence of the Fed fables, out at 2:15 Eastern. The fur should start flying almost immediately…

The story almost never seems to change. The indices are moving only a little – the Dow down 23 and the S&P down 3, while the Nasdaq is up 7 and the Naz-100 is up 10. But the Nasdaq advance-minus-decline percentage is at minus-15!!

Money continues to flow into the few stocks that are moving higher. This can’t continue forever. Today it seems like it’s only THREE stocks – AAPL, BIDU and GOOG.

I think the market is on the edge of the ‘pre-Fed paralysis’ zone. Indices are hanging just below the flat line, as are the A/D lines. The groups are split this morning, with the commodity areas leading the losers: steel, oil services, metals, gold and silver, paper, etc. Airlines are getting a bump as oil prices pull back.

In the bond market, we find Treasuries with little change. Energy prices are mixed – only natural gas is higher. The dollar is fairly flat, gold and silver are pulling back slightly.

The morning after we put out the charts talking about how well the commodity groups are doing, what’s leading the way down today? One guess – and it has a lot to do with metals and energy…

Though I only post links to them occasionally, I read Jeffrey Cooper’s columns on Minyanville just about daily.

Not no more. This notice is at the bottom of his column today:

Beginning Tuesday, November 6th, Jeff Cooper’s daily column will be moving exclusively to his subscription service, Jeff Cooper’s Daily Market Report. With his service, you will also receive daily swing and day trading setups as well as follow-ups from Jeff.

Sorry gang, I don’t pay for stuff like that. I don’t quite understand why they would move the column to the pay service, especially since it’s more market talk and opinion than anything, and doesn’t even come close to offering specific trading advice or setups. And it sounds like he’s going to still be writing the column nearly every day anyway…

Oh well, it was nice knowin’ ya, Jeff. See ya.

You bet it is. As was mentioned in the BMB comments section earlier, today’s oil supplies are insufficient to meet demand:

The problem is that supply and demand issues are not something we must prepare for in 2010. They are here today, and likely to increase in the years ahead. Global crude oil production hit an all time high in May 2005 of 74.3 million barrels per day. By July 2007, crude production was down to 73.3 million barrels per day, a drop of a million barrels. Total liquid energy production, including crude, topped out at 86.1 million barrels per day in July 2006. Today it is 85.1 million. Beyond speculation and geopolitical problems, world demand is now 88 million barrels per day. The gap is helping to drive prices higher, and future projections indicate the gap will grow substantially.

—

Matt Simmons, investment banker and author of “Twilight in the Desert” states the problem succinctly.

“There is a bona fide need for oil demand to grow from 88 million barrels a day next year to 100, then 105, then 110, and 120 by, say 2030. The problem is that use and supply will always have to equal out. And the supply of oil, the growth, has petered out. Crude oil supply peaked in the spring of 2005. We’re bridging the gap by natural gas liquids and refinery processing gains and inventory liquidation. And that basically can’t last. So we’ve got a global energy train that’s headed right towards a granite mountain, and there’s no tunnel through the mountain.”

Numbers are easy to project, but finding the oil is hard. To go from today’s 88 million bpd to 100 million would require discovering the equivalent of two North Sea oil fields (at peak production). North Sea was discovered in 1968 and took 10 years to bring to production. Incidentally, the North Sea oil fields peaked in 1999, and production has been declining steadily since.

An open letter to Ben Bernanke from Charles Zentay:

Dear Dr. Bernanke:

I wanted to write to thank you for helping the price of Gold and to encourage you to keep up the good work. I know you will. I’ve never been a fan of Gold throughout my investing career, but the Fed’s policies over the last 10 years have changed my mind.

I also wanted you to be one of the first to know that I am advising my readers to start putting a significant amount of their money in Gold. I recommend long-dated Gold futures, Gold ETFs (like GLD), and Gold producers (such as NEM, TRA, and CGHRF.PK). I especially like the smaller miners as they have more upside potential.

In spite of the run up, Gold continues to be a great investment. Burgeoning inflation is likely to push the price higher, as markets move from discounting Gold relative to stocks and bonds to putting a premium on it.

If I’m misguided, please let me know. But I trust you’ll be there to pump lots of liquidity into the banking system.

Allow me add my own note of thanks to Big Ben and Uncle Al as well. The gains in gold and other precious metals over the past few years have been greatly appreciated in the BMB household.

Update:   As long as we’re on the subject of gold, how ’bout a few words from Frank Barbera:

Were it not for a meager $1 decline the week of October 5th, Gold would now be up 10 weeks in a row going back to the lows of August 16th at $652.10. Since then, the Midas Metal has glittered its way north to the tune of $132.90 the ounce or 20.38%. In light of this stellar performance, it’s a good thing, isn’t it Mr. Poole, or was it Mr. Mishkin, that Gold has no inflationary forecasting value cause otherwise it might be sending some type of strongly worded message. –Nah!! that couldn’t possibly be it, —lets talk to Mr. Summers who seems to believe that a 20 to 30% decline in the Dollar is, well, —perfectly OK.

Excuse me, while I place another order to my bullion dealer, as I am trembling in fear of the US Strong Dollar policy.

Seriously, the incredible level of Dollar “benign neglect” goes beyond the inconceivable, — a total abrogation of any fiduciary responsibility on behalf of our cherished political and monetary leaders. So please forgive the mini rant, its just sometimes I can’t help myself as I visualize the price of toilet paper and toothpaste spiraling higher and out of control.

Commodity stocks are on a roll – metals, both precious and non-precious, as well as energy stocks:

Why? Well, the value of the dollar no longer seems to be a concern of the Fed or the government:

And that has helped send commodity prices through the roof:

Charts courtesy of StockCharts.com

In general, it seemed like a positive day for stocks as the major indices hovered in the green most of the day. But there were a few caution flags, with advance/decline lines unimpressive, staying in the red most of the day on the Nasdaq, the Russell was flat, the Transports lost a little more ground, and volume pulled back considerably:

Treasuries barely budged, with yields up just slightly on the short end and down on the long end:
6-month: 4.05%    2-yr: 3.78%    5-yr: 4.04%    10-yr: 4.38%   30-yr: 4.66%.

Internals were so-so, but leaned to the positive side, as volume pulled back to the lightest levels we’ve seen in a while. Advances/declines were 6 to 5 on the NYSE flat on the Nasdaq, with up/down volume 7 to 4 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 287/84 on the NYSE and 197/126 on the Nasdaq.

More green than red in the groups, but only a few big winners: networking (+2.1%), gold and silver stocks (+1.7%), semiconductors (+1.5%), commodities (+1.5%) and internets (+1.0%). Homebuilders (-1.7%) and HMOs (-1.4%) led the losers.

Energy prices continue to cruise higher. Crude oil rose almost two bucks for another day, rising to a new high of $93.53/barrel. Gasoline rose to $2.32/gallon and natural gas was higher as well, to $7.27/mmBTU. The dollar index hit yet another new low and finished at 76.82. The spot price of gold came down from its high around $794 to finish at $790/ounce, and silver had another big day, jumping to $14.44/ounce.

BMB Note:  Not much has changed. A lot of the usual suspects kept flying by on the new high list today, although with the hint of market strength coming out of Friday, some of the worst areas have stopped dropping and have even bounced at this point.

Commodity oriented stocks continue to perform well – metals and mining, gold and silver, and many energies are strong, and utilities have made a big run in the last week or so. Some of the beaten down retailers took the opportunity to bounce today: DDS, RSH, URBN, CC, TLB, COH, AEO. But, there’s always gotta be a stick in the mud, as ODP got hammered.

We’ve got some seasonality in the market’s favor this week – traditionally a strong week for stocks – and of course, there is anticipation of a Fed move on Wednesday as well. Bottom line – stick with the strong areas and avoid the weak ones until things change.

Is it just me, or does it feel like the ‘pressure’ is really starting to build inside the financial balloon? Stocks are split, with less and less stocks trying to carry the market’s load, yet the indices edge higher. The pressure mounts on the Fed to cut rates, but the dollar keeps sliding, and commodity prices are headed to the moon. The pressure can’t keep building this way forever – it sure seems like something’s got to give, somehow, somewhere. The question is when. And when it happens, does the air come out in a long, slow leak – or do we hear a big ‘bang’ as the whole thing blows up all at once?

Why does the media keep writing these stories? Can’t they tell from looking at the stock market that none of these problems matter?

In August 2006, Reeves and her husband bought a $214,000 home with almost no money down, leaving them with a monthly payment of $1,636 — higher than they planned on, especially with her husband’s furniture sales job largely commission-based and business not good due to the U.S. housing slowdown.

An attempt this spring at refinancing with another lender fell through, leaving them behind on payments and struggling.

But as part of her efforts to avoid defaulting on the mortgage, Reeves said she has “maxed out” all her credit cards, spending to the limit on basic needs. “Now all I’m doing is making the minimum monthly payments.”

According to nonprofit groups providing debt counseling to home owners, more Americans like Reeves risk being swept up by the next wave of home owners to default on their mortgages.

The reason? A second debt mountain on top of the first.

All of this mess is ‘contained’, I tell you. It’s not going to cause any trouble at all. Hank says so.

A hint of green persists in the morning activity, but the Russell has pulled back to flat, the Transports are under water and A/D lines are relaxing, with the Nasdaq A/D line now flat. The groups are now spreading out, and we’re seeing a bit more red than we were earlier: homebuilders and airlines are leading the losers. Commodities, networkers and steel stocks lead the green list.

Treasuries are a little lower on the short end, yields up, but things flatten out further out on the curve. Energy prices are slightly higher, the dollar is bouncing back after a morning dip, gold and silver now just slightly higher.

…on the rail-thin market.

A discussion on the current narrow market and how it relates to the top back in the dot-com daze on Gary Kaltbaum’s radio show last Friday between Gary and Scott Bleier of HybridInvestors and Fox News Bulls and Bears. Scott says:

“Do you remember back in the year 2000 and in 1999 when the ‘markets’ were going straight up, the majority of stocks were going down and it was just a few very large-cap stocks that were winning the day? And the more narrow it became, the closer we got to the end?”

Here’s the link to the audio file – the discussion starts about 2 minutes in.

Sorry I’m a few days late with this one, but Business Talk Radio didn’t get their archives link straightened out until today.

Gary Kaltbaum is pleased to see that the SEC is finally at least talking about the insider trading that’s become so prevalent on Wall Street:

Someone is finally listening to my radio show.

A senior U.S. Securities and Exchange Commission official said on Thursday insider trading appeared to be “rampant” among Wall Street professionals and the agency has formed a working group to focus on it.”I believe we’re going to see more insider trading cases,” Linda Chatman Thomsen, the SEC’s enforcement director, told reporters on the sidelines of a securities fraud conference. “I am disappointed in the number of cases we are seeing by people who make an abundant livelihood in the market that they are sort of abusing by insider trading,” Thomsen said, referring to cases already brought against professionals this year. Insider trading “appears to be rampant” among Wall Street securities professionals, she added.

I guess someone finally looked at the action in Hilton the day before a buyout announcement…or that the FINANCIALS ramped the day before the FED cut…or the buyout rumors that occur every day…it’s about time.

So…Countrypuke Financial rallies up because the CEO says things will be better in 08. Let me get this straight :the “tanned one” sells $120 million of stock in the last year…never says anything negative until things are REAL BAD…is still selling as of 2 weeks ago…announces more than a $billion loss…and now is trying to tell everyone what things are going to look like next year. I can think of a great joke here but this is no joke…just nonsense.

I will be surprised if Stanley Oneal is still running Merrill by the time you read this.

In the past week, the market bounced off its recent lows. More importantly, the market closed near the highs every day. Just about every day the market was being cheesed…and every day, the ugly was bought up. This, in spite of a few ugly earning’s reports as well as more blow-ups in financial land. It is normally a positive when markets close on a high note.

More importantly, I do not think anything has changed. All that happened is that again, the good get gooder…and instead of the bad getting badder, the bad bounced. FINANCIALS of all kinds had been melting down. They had not just become oversold but had mini-crashes. Take a gander at the charts of INSURANCE companies like ABK, MBI, PMI or FINANCIALS like DSL, FNM, FRE. I do not think FINANCIALS bounced solely because of what the “tanned one” said. I think they bounced because bungee jumps eventually bounce.

I continue to want you to overweight just a select few areas…because it is these areas that continue to lead.

I start with COMMODITY-types which include OILS, GOLD/SILVER, STEEL, ALUMINUM, COPPER and you can now add COAL to the list. On top of that, continue to overweight SHIPPERS, FERTILIZER, SOLARS, MEGACAP TECHNOLOGY…but not the SEMICONDUCTORS which are still in meltdown mode. You can also add UTILITIES to the groups that are coming out of the bear. CHINA, HONG KONG, and BRAZIL remain the strongest countries. Continue to overweight big cap over small cap…and continue to stay away from almost anything FINANCIAL as this bounce will end on, SEMICONDUCTORS, LENDERS, S&Ls, REITS, BANKS, most RETAIL. Notice I am not even talking major indices today. I could tell you how strong the NASDAQ and NDX are…but I can also show you the NASDAQ A/D line at ALL TIME LOWS. This is not “throw the dart” time. This is sector specific time…and until that changes, I would not deviate as you are losing a ton of cake if you are in all the bearish areas.

I see that Gary has the same thoughts about Countrypukewide and “the Orange one” as I did last Friday. I was wondering why everyone was all excited about their ‘forecast’ – since I don’t remember them ever telling us how lousy this last quarter was going to be. Why should we believe them now?

I sure can’t say I understand it, but I see world indices up, US index futures up, and all the usual suspects trading higher in the pre-market. This headline from MarketWatch kinda says it all:

Crude oil touched a high of $93.20 overnight.