Bear Mountain Bull

Stocks leaked into the end of the year, as the indices never really recovered from a morning dip.

The Nasdaq-100, which has been the strongest of the indices, and the Transports slid the furthest:

Yields moved a little lower again:
6-month: 3.39%    2-yr: 3.05%    5-yr: 3.44%    10-yr: 4.03%   30-yr: 4.45%.

Internals were negative, and volume picked up a bit from Friday’s levels. Advances/declines were about 4 to 5 on both exchanges, with up/down volume just below flat on the NYSE but a poor 3 to 8 on the Nasdaq. New lows swamped new highs again: highs/lows were 14/209 on the NYSE and 32/202 on the Nasdaq.

The groups were mostly red, but the homebuilders (+2.8%) managed to move higher. Leading the losers were the gold and silver stocks (-1.7%), oil services (-1.6%), internets (-1.3%), computer tech (-1.3%) and drug stocks (-1.2%).

Energy prices were mixed. Crude oil was near flat at $95.98/barrel, gasoline picked up a penny to $2.48/gallon, and natural gas moved up to $7.49/mmBTU. The dollar was a bit higher, moving the dollar index up to 76.63. Gold slid a few bucks to $833/ounce, but silver added a penny to $14.77/ounce.

BMB Note:   Another rather weak performance from the market today - not the way you’d like to see it close out the year.

We’ll get more economic data out later in the week, with the big jobs number out Friday morning, and hopefully volume will start to return. Right now the market is looking a little shaky - it’s probably a matter of whether the traders coming back from their holiday will be looking to get in or looking to get out.

Calculated Risk has the fully illustrated story:

The first graph shows the Not Seasonally Adjusted (NSA) sales per month for the last 3 years. Note that on an NSA basis, November sales were slightly below October. The impact of the credit crunch is obvious as sales in September, October and November declined sharply from earlier in the year.

A little slippage into the end of the year. The indices are all showing losses at the moment, with the Russell down more than a percent. The gold and silver stocks are leading the decline, followed by computer hardware, steel, disk drives, oil services and networkers.

Treasuries are higher on the long end, bringing yields down. Energy prices are flat to lower, the dollar is higher, gold and silver are lower.

Notes on the latest moves in the industry groups:

• As we close out the year, we see that the commodity and energies, along with utilities and HMOs looking fairly good at the moment.
• Despite the supposed buzz surrounding ‘tech’, some of the charts tell a different - or maybe indifferent - story.
• Significant weakness continues in many areas, like financials, retail, airlines and housing.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

The song remains the same.

The Utilities and Staples still look good, while Energy was the only sector to gain ground on the week, as the XLE holds that move above the recent highs.

Health Care, Tech, Industrials and Materials remain in slightly varying states of sideways.

And you already know the story on the Discretionaries and Financials:

Here are the numbers as we move to close out 2007:

Charts courtesy of StockCharts.com

	The banks are showing no signs of a turnaround yet, as they work their way back to new low territory.
	Silver, following in gold’s footsteps this week, is threatening a breakout of its own (long SLV).

Another selection of well-known names, from different areas of the market, from today’s new lows list:

Charts courtesy of StockCharts.com

Ho ho hum.

Stocks muddled their way through the Friday after Christmas, with the indices getting an early pop, but that was
given back quickly. A little dive around lunchtime was recovered by early afternoon, and things drifted quietly into the closing bell.

The Utilities got the best of a sloppy day:

Yields moved lower on the long end of the curve:
6-month: 3.42%    2-yr: 3.10%    5-yr: 3.50%    10-yr: 4.08%   30-yr: 4.50%.

Internals leaned negative, with volume just above yesterday’s levels. Advances/declines were just above flat on the NYSE but about 4 to 5 on the Nasdaq, with up/down volume 10 to 11 on the NYSE and 2 to 3 on the Nasdaq. After a few day with new highs getting the upper hand, we’re seeing new lows pick up again: highs/lows were 27/196 on the NYSE and 27/137 on the Nasdaq.

The groups were split, with only a few movers: gold and silver stocks (+3.1%), commodities (+1.2%) and steel stocks (+1.0%) led the green team, while homebuilders (-2.4%), airlines (-2.0%) and REITs (-1.4%) led the losers.

Energy prices were mixed. Crude oil pulled back from morning highs to finish down slightly at $96.00/barrel, and gasoline fell a few cents to $2.46/gallon, but natural gas was higher, to $7.35/mmBTU. The dollar slipped further, pushing the dollar index down to 76.21. Gold closed out a strong week at the highs, at $839/ounce, and silver is riding high as well, back up to $14.76/ounce.

BMB Note:   A pretty muddled day for stocks in general.

On the good side, the precious metals stocks had been sagging, but they picked their heads up this week on the strength in the metals. Energy stocks also had a good week, but they stalled a bit today as oil pulled back from its highs.

On the bad side, we’re not seeing much strength - at all - from those weak areas of the market. Homebuilders and housing related stocks have been slipping back again, along with the banks, REITs and retail. Not much to be encouraged about there.

Looking at the indices, they’ve been kinda stuck-on-sideways, failing to take any advantage at all out of the gains from last Friday and Monday. A pretty poor performance for a typically strong holiday week, if you ask me.

From Calculated Risk’s follow-up post on today’s new home sales report:

This graph shows New Home Sales vs. Recession for the last 35 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001. This is what we call Cliff Diving! And this shows why so many economists are concerned about a possible consumer led recession - possibly starting right now.

The indices got an early bump, but the new home sales numbers helped take some of the air of the sails, and the gains are pretty meager at the moment, but A/D lines remain in the green. Gold and silver stocks lead the winners, along with transportation and commodities, while homebuilders, airlines and housing stocks lead the losers.

Treasuries are higher, yields lower. Energy prices are higher. The dollar is lower, gold and silver are higher.

More lousy numbers, but we really shouldn’t expect anything else. Calculated Risk has the updated charts, and a comment:

This is another VERY weak report for New Home sales. All revisions continue to be down. This is the fourth report after the start of the credit turmoil, and, as expected, the sales numbers are very poor.

I expect these numbers to be revised down too.

Speaking of homes - not just new, but all homes for sale - you might take a look at the chart that Barry has up over at The Big Picture, showing the inventory value - in dollars - of homes on the market over the last 20+ years. The big spike up in the last 6-7 years looks pretty bubble-like.

Looks like the guy the other day was right about the ‘yard sale economy’:

Banks including Citigroup (C) and HSBC Holdings (HBC) are considering sales of everything from branches to entire units, The Wall Street Journal reported Friday, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp (STU) and the bank’s Japanese consumer finance business, the report said. New Citigroup CEO Vikram Pandit is considering laying off as many as 20,000 employees and shedding business lines, the report continued, citing people familiar with the matter. HSBC may sell its auto-finance business, the report added.

Ok, maybe he wasn’t talking specifically about the big banks selling off assets. But if you’re interested, you might check eBay or your local Craigslist just in case…

It’s pretty obvious that Kevin Depew was having an awful lot of fun with today’s Five Things.

There’s too much good stuff to excerpt here, so you’ll have to go check it out for yourself - things like “Ben Bernanke’s NCAA March Madness Bracket” (stagflation wins!) and “Warren Buffett’s Tips for Individual Investors” for starters.

Well ok, maybe just one sample. Here, how ’bout this:

4.  Title Revision!  Title Revision!

In 2005, National Association of Realtors Chief Economist David Lereah released the book,
“Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit From Them.”

Interestingly, the title for the 2006 edition of the book was changed to:
“Why the Real Estate Boom Will Not Bust - and How You Can Profit From It.”

Below are Minyanville’s suggestions for subsequent title revisions in later editions of Lereah’s book through 2015:

2007:  “Why the Real Estate Boom Will Not Bust and How Foreclosures are Technically Part of the Continuing Real Estate Boom, In a Way.”
2008:  “Why the Real Estate Boom in Distressed Properties Will Not Bust (except in certain local markets) and How You Can Use Leverage to Profit From It.”
2009:  “Why the Phrase “Real Estate Boom” is Often Misunderstood to Mean Higher Prices and How You Can Pray for Them.”
2010:  “Why the Real Estate Boom Will Soon Bounce Back and How to Eventually Profit From It.”
2011:  “Why Did I Have to Write “The Real Estate Boom Will Not Bust Through the End of the Decade” and How Did I Not Realize How Long A Decade Really Is?”
2012:  “Oh, Dear God, Please, Please Let the Real Estate Boom Bounce Back… and How You Can Profit From It.”
2013:  “Please, Please, Just Let the Real Estate Boom Come Back This One Time for This One House and How You Can Break Even From It.”
2014:   “Why I Am Willing to Accept a Small Loss of 35% On the Real Estate Boom and No Longer Care About How to Profit From It.”
2015:  “Why Can I Maybe Borrow a Couple Dollars Off You Until the Real Estate Bust is Over?”

	A mixed message from the S&P chart. A clear pattern of lower highs since October, but the August and November closing lows have held, and we’ve even seen a ‘higher low’ in the past few weeks.
	No mixed messages from the airlines - one of the first groups to sink to new relative lows.
	Gasoline futures hit the $2.50/gallon mark today. That has to be pretty much in line with the all-time highs.
	Sigma Designs was one of the hot market leaders, but is making a serious bid to be removed from that list.

Charts courtesy of StockCharts.com

Hmm. So much for that nice, quiet, holiday week trading.

Nasty day in the market today, as things started off poorly and just got worse. All of the indices took their lumps, with the Russell getting smacked around but good:

Investors scurried for the shelter of bonds, sending yields lower:
6-month: 3.41%    2-yr: 3.21%    5-yr: 3.61%    10-yr: 4.19%   30-yr: 4.60%.

Internals flipped back over to the negative side, with volume increasing over yesterday’s low levels. Advances/declines were about 1 to 3 on both exchanges, with up/down volume 1 to 8 on the NYSE and 1 to 4 on the Nasdaq. New lows outdid new highs again: highs/lows were 49/154 on the NYSE and 52/137 on the Nasdaq.

The groups were all red, with the airlines (-3.3%) leading the slide, followed by the REITs (-3.1%), banks (-2.4%), disk drives (-2.2%), steel stocks (-2.2%), insurance (-2.2%), brokers (-2.1%), housing stocks (-2.1%), and metals (-2.0%).

Energy prices were higher. Crude oil moved back above $97 before pulling back to $96.62/barrel. Gasoline ran to near record highs at $2.50/gallon, and natural gas gained a few cents to $7.10/mmBTU. The dollar had another bad day, with the dollar index falling to 76.65. Gold pulled back from highs above $830 to around $824/ounce and silver slipped nine cents to $14.58/ounce.

BMB Note:   Well, that was quite interesting. I didn’t expect to see such a nasty selloff during a holiday week, but there it was. Of course, it’s impossible to say what today really means, although the selling obviously got some folks’ attention. The volume picked up quite a bit from yesterday, and things slid pretty quickly during that last hour after an early afternoon bounce.

We’ll see what happens from here. Tomorrow’s the end of the Christmas week, but then we’ve got New Year’s Day Tuesday. I’m pretty sure Monday is a full trading day though, but I wouldn’t expect volume to start picking up until sometime after Tuesday.

I doubt that today’s action will change my near-term view, which has been one of disinterest and confusion. Last night, as I was scanning the charts for trading opportunities (trades, mind you, not investments), I realized 1) that I wasn’t seeing many, if any at all, attractive setups, on either the long OR the short side, and 2) I wasn’t even sure, from the market standpoint, which trades I should be looking for - longs or shorts! At that point, I figured I might be best off sitting on my hands just a while longer waiting for the picture to clear up a bit. Hopefully it will soon…

A few days ago, the topic of deflation came up in the comments section of our post on the “Yard Sale Economy”. As it turns out, the column by Peter Schiff that I referenced there prompted some rebuttal by Mike Shedlock, and a further response from Mr. Schiff.

Mike Shedlock tries to wrap up the whole inflation/deflation discussion today, and has some investment advice for both the hyperinflationary and deflationary scenarios:

Investment Themes For Hyperinflation

• In hyperinflation the last place one wants to be is in cash.
• Commodities in general are a standout.
• Gold is a standout.
• Precious metals are a standout.
• Property is a winner.
• Equities are a winner.
• Treasuries are distinct losers if not outright shorts.
• Foreign currencies
• Energy

The single best asset for a hyperinflation scenario is actually property. With housing or commercial real estate one can borrow with next to nothing down. No other asset class offers as much leverage. With no skin in the game one might amass $1 million dollars worth of property that might sell for an unbelievable amount in a few short years if not sooner.

Is there a catch? Why yes there is. One needs to be able to make mortgage payments on the loan. That means the timing of the hyperinflation better be spot on. It also means that property values better keep on rising from the moment the leverage is taken or income must rise enough to afford the mortgage if it does not.

—

Investment Themes For Deflation

• In deflation, debt is the enemy.
• Risk is to be avoided.
• Cash is raised.
• Treasuries are sought out as a safe haven
• CD ladders offer a good investment structure.
• Gold, acting as money does well.
• Select equity shorts or Puts are a standout.
• Renting as opposed to owning a house should be considered.
• Currency plays.

One can see the effect of excessive risk with the housing implosion regardless of what one thinks is going to happen down the line. Rising unemployment and/or falling income with no way to pay the bills is the chief concern. Before even thinking of investing in a deflationary environment, one should pay off all credit card debt, live below one’s means, and have a cash cushion equal to one year’s salary to pay the bills.

After decades of inflation the overall deflation theme may be hard to take, but it is what it is. The single best performing asset in this environment might be equity puts. However, just like those overleveraged in housing found out, timing must be precise. Anyone shorting or buying puts on strong stocks has gotten killed. Even index puts and index shorts have fared miserably for all but nimble traders. On the other hand, those in housing related shorts have done well. Those in gold have also done well.

Inquiring minds will note that gold is in the hyperinflation category and the deflationary category as well. That is because of gold’s unique property with a dual role as a money and a commodity. Gold is money. The case was made in Misconceptions about Gold. Money is hoarded in deflation so gold should act well in deflation.

Do not make the mistake of thinking that gold always does well. It does not. It fell from over $800 to $250 in a decade’s long crash. There was positive inflation all the way. Thus gold is not an inflation hedge no matter what anyone says, except perhaps in the very longest of timeframes. The key here is that gold does well at extremes. Those extremes are severe inflation and deflation.

There is plenty there to read amongst all that stuff, and I have no idea who’s right and who’s wrong about whether we’re headed for significant inflation, deflation, or neither. But hey, it’s a slow holiday week, so we may as well see if we can’t absorb a little information that might help us recognize things as they unfold in the probably-not-so-distant future…

Not a lot of excitement this morning. In the financial news, Durable goods orders were unimpressive, and Goldman is picking on Citi.

The markets are responding with a great deal of apathy, with the indices and A/D lines both hanging in the red. Almost all of the groups are red as well, with airlines, REITs, disk drives and paper stocks leading the decline.

Treasuries are higher, yields lower. Energy prices are mixed, with crude and gasoline slightly higher. The dollar sunk again this morning. Gold is slightly higher, silver a bit lower.

We’ve been viewing the pattern in gold as a bullish consolidation. With the breakout looking to be to the upside, so far we’ve been right (long GLD).

Some - but not all - of the energy stocks have had pretty healthy runs over the last month or so:

Charts courtesy of StockCharts.com

Even during the light volume holiday week we get a split tape, with the indices unable to make much headway and stocks split pretty much down the middle:

Yields moved mostly higher:
6-month: 3.56%    2-yr: 3.31%    5-yr: 3.72%    10-yr: 4.29%   30-yr: 4.68%.

Internals leaned positive, with volume very much on the light side. Advances/declines were flat on the NYSE and 5 to 4 on the Nasdaq, with up/down volume flat on the NYSE and 13 to 6 on the Nasdaq. New highs/lows were just better than flat, at 76/68 on the NYSE and 100/102 on the Nasdaq.

The groups were split, with metals and mining (+2.4%), gold and silver stocks (+2.3%), steels (+2.0%) and oil services (+1.5%) at the top of the green side of the page, and airlines (-2.1%), REITs (-1.7%) and retail (-1.2%) leading the losers.

Energy prices were higher. Crude oil gained more than two bucks to $95.97/barrel, gasoline ran up to $2.45/gallon, and natural gas rose a few cents to $7.06/mmBTU. The dollar index fell to 77.19. The precious metals enjoyed gains, with gold up to $826/ounce and silver to $14.67/ounce.

BMB Note:   Light volume again today, and a mixed bag. Many of the new highs are familiar names, with some of the energy stocks and coals also picking up the pace.

Gold looks like it’s moving out of that triangle consolidation we’d been watching, and barring a fakeout, has broken out to the upside. That comes on the heels of fresh all-time highs in platinum.

The thin trading makes it hard to commit to one direction or the other - for now, the strong areas remain relatively strong, and the weak areas remain fairly weak. Same ‘ol, same ‘ol, I guess.

From ETFtrends.com:

PowerShares will launch two new exchange traded funds (ETFs) following the Dorsey Wright point and figure charting and relative strength. Carl Delfeld for ETFXRAY reports that DWA tracks multiple technical market indicators through a state-of-the-art Point & Figure methodology that identifies technical  leaders within a marketplace. The ETFs should begin trading on December 28.

PowerShares DWA Developed Markets Technical Leaders Portfolio (PIZ) follows the Dorsey Wright Developed Markets Technical Leaders Index and is made up of 100 companies domiciled in developed countries. PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) is based on the Dorsey Wright Emerging Markets Technical Leaders Index made up of 100 companies domiciled in emerging markets countries.

Stocks have taken a slight dip out of the gate this morning. The indices are showing a bit of red, with A/D lines hanging in negative territory as well for now. Leading the decline are the airlines, retail and REITs (weren’t those the best groups on Monday??), with gold and silver stocks leading the winners.

Treasuries are flattish. Energy prices are mixed, with crude and gasoline higher. The dollar is slipping, gold and silver are higher.

A couple of the bigger stories this morning: Buffett’s big stake in Marmon, and more lousy housing data as the Case-Schiller price index continues to plummet.

Merry Christmas and a happy holiday season to all from the BMB gang.

Hope everyone has a safe and wonderful holiday!

From MarketWatch:

Target Corp. warned on Monday that December sales at stores open at least one year were running well below its previous forecast and may actually decline, jeopardizing earnings growth at the No. 2 U.S. retailer.

The warning, among the earliest assessments of holiday retail traffic, fuels fears that the U.S. consumer is starting to feel the pinch of a slower economy, higher prices and a much tighter credit market.

After the market closed in a holiday-shortened session, Target said that based on sales in the first three weeks of December and projected sales over the next two weeks, sales for the five weeks ending Jan. 5 would likely lie in a range of plus 1% to minus 1%.

In early November, the company forecast same-store sales for the month of December would slump into the low single digit range, and on a calendar-adjusted basis same-store sales would rise 3% to 5%.

“Our updated expectation indicates December sales will likely fall well short of the meaningful improvement (Chief Executive Officer Robert) Ulrich described at the end of November,” the company said in a recorded message.

Pointer from The Big Picture.

From today’s Buzz Bits:

A Pressing Question For 2008 - Mark Bloudek - 7:54 AM

One piece of news that I didn’t see much coverage on this week was from the CEO of Bank of America (BAC) in the following article about prime mortgage customers.

This is the big elephant in the room because if the citizens of the US decide to walk away from their house due to being underwater on the mortgage (there are lots of people are in this position in California), then I don’t see how very many banks (or the banking system) will survive in their current form.

I keep reading that foreclosures/defaults are rising (rate of change) at record rates. I then think to myself how many of the quantitative models that banks/financial firms use to model the rate of default must be going crazy right now. In this environment, I firmly believe that quantitative models are useless in the current environment because of the exact effect that the BofA CEO states in the above article. What is interesting about all this is that I used to ask people (over the past couple of years during the bubble) what they would do if home prices fell significantly (approximately 20-30%) and over half of them told me they would just walk away since they put nothing down.

So as I see it, one of the major themes of 2008 is the banking system dealing with this factor. Hank Paulson has started to try and address this with his “let’s freeze the rates” proposal, but will it be enough to convince people to stay and not walk is the question. 

And not one quantitative model can answer this question. Therefore, anyone that tells me the banks or financials have bottomed is just guessing as no one can reasonably predict the default rate going forward for mortgages. And of course some quant will tell me this the 1 in 50 trln event. Of course, Minyans know better than to believe such a statement.

The Yahoo finance page, on the ‘big news’ of the morning:

The top news item was that Merrill Lynch will receive up to $6.2 billion from equity sales to the Singapore government wealth fund Temasek Holdings and to Davis Selected Advisors. Merrill jumped to $58.37 a share, up $2.83 shortly after the open. That helped boost the entire financial sector.

Then, it was reported that the sale involved common stock at $48 a share. Merrill quickly slid and ended the day down $1.64 at $53.90 a share. Nevertheless, financials remained higher on the day.

Never mind the fact that this was also the ‘big news’ on Friday morning.