Bear Mountain Bull

The dollar ‘bulls’ somehow keep ignoring such fundamental truths as this one:

The non-partisan Congressional Budget Office is projecting that the fiscal year 2008 federal budget deficit will increase to $396 billion from $162 billion in fiscal year 2007. So, federal borrowing in this fiscal year is projected to be 2.4 times as much as last year. And on top of this increased federal borrowing, we now have the Federal Reserve providing $601 billion less support to the Treasury securities market at an annual rate. Is it any wonder why the yields on Treasury securities are rising now?

We just keep diggin’ that hole. Deeper and deeper…

This kind of stuff would make the PPT look like child’s play. And you wonder why people might become disenchanted with the markets:

For those of you that laughed when I have remarked about the markets moving to socialization where government bureaucrats control pricing of risk and the allocation of capital, please read this news story. It’s being floated and vented in Europe first to garner support from a more socialistic society.

Do not underestimate the dark power of this legislation and do not listen to the innocuous presentation by government officials. It’s certainly a ways from this proposal to controlling markets, but the ability is there and when there is ability, when has the government failed to use it? The slippery slope is steep indeed. The proposal essentially would grant vast authority to the Federal Reserve and the government to virtually control markets. It will give them the ability to gather private market information and unilaterally decide if positions taken with that private money for private investment is somehow negative for the financial system. It could then force the unwinding of those positions. Initially the powers will be used to supposedly prevent over leverage in the system (that the Fed created itself). But it doesn’t exclude the situation where a hedge fund that is long puts can be forced to unwind those puts at the government’s discretion.

More comments from Mish at his site, along with the text of the story from FT.com (in case the above link requires registration).

I’ve been hearing a lot of talk about the recent ‘dollar rally’ and ’strength’ in the dollar. All I can say is that those folks must have better eyes than me, ‘cuz I just don’t see it. Ok, the dollar index has stopped going down for a little over a month. That’s about it at this point.

Chart courtesy of StockCharts.com

A tale of two sessions: there was the pre-Fed session, and there was the post-Fed session.

Stocks ran up in the morning prior to the Fed announcement, and then proceeded to run even higher for a few minutes after the announcement, but then sold off over the last 90 minutes, giving back all of the gains for the day.

The indices all finished in the red, with the exception of the NYSE Compositie:

Treasuries moved higher, pulling yields down:
6-month: 1.63%    2-yr: 2.28%    5-yr: 3.03%    10-yr: 3.74%    30-yr: 4.47%.

Internals were mixed but leaned negative, with volume moving to the highest level in four days. Advances/declines were 10 to 9 on the NYSE but flat on the Nasdaq, with up/down volume 4 to 5 on the NYSE and 2 to 3 on the Nasdaq. New highs/lows were mixed at 40/19 on the NYSE but 31/79 on the Nasdaq.

The groups were widely split. Only a few groups were able to record solid gains: gold and silver stocks (+3.1%), airlines (+2.1%) and oil services (+1.4%). Leading the losers were the homebuilders (-3.8%), paper stocks (-3.8%), retail (-2.3%), disk drives (-1.9%), REITs (-1.6%), semiconductors (-1.5%), computer hardware (-1.2%), software (-1.2%) and insurance (-1.0%).

Commodity prices were all over the place, with crude oil closing the early session at $113.46/barrel, but rallying back up more than a dollar since that time. Gasoline dropped a couple of cents to $2.92/gallon, but natural gas is hanging tough at $10.84/mmBTU. The dollar index took a dive when the Fed left things rather open-ended, back to 72.60. That helped to bring the precious metals back up off their morning lows, with gold ending the day at $877/ounce and silver at $16.81/ounce.

BMB Note:   Buy the rumor, sell the news? I’m not sure what the market didn’t like in the Fed’s announcement - after all, they got pretty much what they were expecting. Maybe there was something in the statement they didn’t like - I haven’t yet taken a closer look at it. And when it comes right down to it, I guess I don’t really care what they say - what matters is what the market does with it.

So far, the market isn’t crazy about it. We’ll see how that translates into market action over the next day or two. Stocks have still been struggling to make a meaningful move higher, and that pattern continued today.

I’m a little slow getting my head back into things, so I don’t have a lot to say at this point just yet. The market leaders - those ags, chemicals, fertilizers, oils, etc. - had gotten whacked pretty well the last few days, so those areas are done, at least for now. Now the Fed news is out of the way, along with most of the earnings, and we’re moving past the end of the month into the ’sell in May and go away’ period. Is that what traders will do?

That would be the sound of the debt-gorged American consumer finally hitting the wall:

At Craigslist, which has become a kind of online flea market for the world, the number of for-sale listings has soared 70 percent since last July. In March, the number of listings more than doubled to almost 15 million from the year-ago period.

Craigslist CEO Jeff Buckmaster acknowledged the increasing popularity of selling all sort of items on the Web, but said the rate of growth is “moving above the usual trend line.” He said he was amazed at the desperate tone in some ads.

A lot of people have known this for a very long time, yet nothing has been done about it - as a matter of fact, Congress and this administration made matters even worse by adding the prescription drug benefit.

I’m not convinced that the next administration will find the courage and/or support to make any changes either:

Medicare is lurching toward disaster and it is too late for the Bush Administration and Congress to do anything about it, U.S. Health and Human Services Secretary Michael Leavitt said on Tuesday.

He said the next administration will have to act to stop rising costs and get control of the $400 billion federal health insurance plan for the elderly, which now covers 44 million people.

“Higher and higher costs are being borne by fewer and fewer people. Sooner or later, this formula implodes,” Leavitt said in a speech to the right-leaning Heritage Foundation and American Enterprise Institute think-tanks.

“There is serious danger here,” he added. “Medicare is drifting towards disaster.”

David Walker was trying to wake people up when he was at the GAO, having now moved on to The Peterson Foundation.

Hmm. Obviously, I haven’t been paying too much attention to what’s been going on the past few days, but a glance at a few headlines tells me that not much has changed.

For instance, banks are still desperately trying to make ends meet as Citigroup plans to sell even more stock. Mish has even more on some of the games the banks are playing to make it look like their heads are still above water.

It’s time again for BMB to take a long weekend and a bit of a break from the markets, so there won’t be much in the way of new posts for a few days, but I will be checking the site (and email) now and then.

The comments section will remain open - if something interesting happens or you find a good article or column, please feel free to post it in the comments so that others can see it as well (and me too!). BMB readers often have just as much good stuff - or more - to say than I do, so please feel free to share even though we’re on a bit of a ‘posting timeout’.

We certainly do appreciate all of you taking the time to visit BMB and share your thoughts and views. Look for regular posting to resume sometime next week, probably Tuesday or Wednesday.

Lance Lewis today:

Goldilocks believers want to think that “government” or the Fed can make inflation go away by talking tough about it or by the Fed “pausing.” Only slowing money and credit growth will bring down inflation, but I feel the cost of doing that will be the implosion of the financial system. Stagflation is still here. It hasn’t gone away overnight because crude oil is $116 as opposed to the $119 it was yesterday.

As was the case back in August when the Fed decided to ramp up the printing presses in response to the credit crunch, you can’t have it both ways. To keep the system functioning and the asset-price dependent U.S. economy from imploding, money and credit growth must continue to expand, but the cost is going to be more inflation. Inflation isn’t going abate just because the Fed pauses.

The dollar isn’t going to magically recover either, unless the rest of the world wants to bear more of the inflationary burden via printing of their own currency to prop up America’s, which will then increase their inflation rates.

	As a trader or an investor, it’s up to you to pick your perspective and trade accordingly. The short-term picture looks fairly positive…
	…but the longer-term forecast is still pretty cloudy.
	The banks helped lead the market up today…well, ok, not all of the banks.
	Are interest rates making an important turn higher here, despite all of the easing from the Fed?

Charts courtesy of StockCharts.com

The worst will be first. Especially from time to time in the stock market.

The dregs - airlines and financials - came up off the bottom of the barrel to help push stocks higher today, but the rally lost some of its luster late in the day as the Dow gave up about half of its gains in the last 45 minutes.

Most of the indices finished in the green, but the NYSE Comp’s gains were slim, and the Utilities lost ground:

Treasuries fell rather hard, and yields were bumped higher. That pushed the 5-year yield to its highest level since early January:
6-month: 1.68%    2-yr: 2.39%    5-yr: 3.10%    10-yr: 3.83%    30-yr: 4.55%.

Internals were positive, and volume accelerated in the last hour to finish higher than the past couple of days. Advances/declines were 12 to 7 on the NYSE and 9 to 5 on the Nasdaq, with up/down volume 13 to 7 on the NYSE and 7 to 3 on the Nasdaq. But despite moves up, again, in the indices, we saw more new lows than new highs: highs/lows were 39/40 on the NYSE and 20/90 on the Nasdaq.

The groups were widely split, with more winner than losers, and some big numbers on both sides. As we mentioned, the laggards turned leaders today: airlines (+6.1%), brokers (+5.0%), banks (+4.4%), homebuilders (+2.8%), REITs (+2.2%), disk drives (+2.1%), insurance (+2.0%), retail (+1.6%), defense (+1.5%) and semiconductors (+1.5%). Commodity groups were slammed, and they led the losers’ list: gold and silver stocks (-3.8%), metals and mining (-3.3%), commodities (-2.6%), natural gas (-2.4%), steel (-2.3%), HMOs (-2.2%), oil stocks (-2.1%), oil services (-1.8%) and chemicals (-1.7%).

Energy prices finally pulled back - but just a little bit. Crude fell a couple of bucks to $116.06/barrel, and gasoline dropped three cents to $3.02/gallon, but natural gas was still higher by two cents at $10.80/mmBTU. The dollar index bounced higher, up to 72.57. That helped push precious metals down again, with spot gold falling to $886/ounce and silver to $16.71/ounce.

BMB Note:   Hmm. What to take away from a day like today? Was it good that the indices did well, and that the worst groups came to the front of the line for a day? Or was it bad because the leading groups are now coming under pressure? Was it good that the major indices started to poke above Friday’s highs? Or was it bad because they couldn’t hold there - and sold off into the close?

Good questions.

This market remains one with a lot of question marks, and not a lot of good solid answers. But I think you know where I stand, and I thought Kevin Depew put it pretty well this morning:

We believe it means we are simply in a counter-trend rally driven by a reversion of excessive negative sentiment. Put more simply, people are relieved the entire economic system did not collapse on the back of the (ongoing) debt bubble. However, once this condition of relative relief is, well, relieved, we face a darker reality in the second half of the year.

That’s my story for now, and I’m stickin’ to it. It’s up to you to decide how best to play it, according to your tastes.

BMB will be taking a few days off for a little R&R starting tomorrow, so posting will be extremely light if at all, but I encourage readers to drop by anyway and leave their observations and any interesting info they find in the comments section for others to see and chew on if they’d like. Hopefully things won’t get too quiet around here.

The bookends from today’s Five Things:

1. If the Economy Is So Bad, Why Are Stocks Going Up?

It’s a classic investment conundrum: The economy looks terrible, so why are stocks going up? The reality, difficult as it may be to grasp, is that the economy and the stock market are two different things. That’s why it is important to consider long-term economic issues within the context of short-term movements in supply and demand.

There continues to be underlying demand for stocks as illustrated by the long-term bullish percent indicators we follow being positive and in reasonable field position.

Below is where we stand with the point and figure bullish percent indicators for equities, based on Investors Intelligence data.

• NYSE Bullish Percent: Xs (Positive) 42.8% 
• Nasdaq Composite Bullish Percent: Xs (Positive) 29.2%
• Russell 2000 Bullish Percent: Xs (Positive) 42.7%

This simply tells us demand is in control of the stock market. That’s great for the short-term. But if you listen closely to what companies are saying, there’s little reason to be encouraged longer-term by what’s happening in the broader economy. So what does this discrepancy mean?

We believe it means we are simply in a counter-trend rally driven by a reversion of excessive negative sentiment. Put more simply, people are relieved the entire economic system did not collapse on the back of the (ongoing) debt bubble. However, once this condition of relative relief is, well, relieved, we face a darker reality in the second half of the year.

5. NASCAR Fans Taking a Pit Stop

An interesting article in USA Today takes a look at how slowing consumer spending and high gas prices are impacting NASCAR.  TV ratings are up 2% so far this year, but attendance at the tracks has declined or remained flat.

As a result, some tracks are attempting to offset increased costs for fans by lowering ticket prices. Lowe’s (LOW) Motor Speedway in North Carolina is promoting its $39 tickets for the 165,000-seat Coca-Cola 600 on May 25 as part of affordable packages, the newspaper reported.

NASCAR attendance is an interesting indicator. According to the article, 53% of NASCAR fans earn less than $50,000 annually and 31% less than $30,000.

Re: number 1 — As Jim Puplava would put it, we’re probably in the ‘creamy filling’ of the Oreo. Or as another writer put it the other day, we are likely in the eye of the hurricane - having made it through the front end of the storm, but about to get whacked again as the back end comes ashore.

So far, stocks have spent the morning wandering around, trying to figure out what to do. The indices are straddling the zero line, with A/D lines just in the red. Groups are split, as money moves back into some of the weaker areas once again - financials and airlines - while the leaders from the commodity groups continue their sharp pullback.

Treasuries have moved lower, pushing yields up. Energy prices are mixed, with crude pulling back about a buck or so. The dollar index has gotten another bounce up, and that has pushed gold and silver lower again.

The March numbers are out: “New-home sales are down 36.6% compared with a year ago.” Ouch.

We’ll post the link to the updated charts when available.

Update:   Not very impressive numbers. Calculated Risk has all the new charts posted in two posts, here and here.

Seen on MarketWatch:

“Cabot says stocks have bottomed”
“‘Worst is over’ for stocks, Legg Mason’s Miller says”

Question: Did you see headlines that said, “Cabot says stocks have topped”, or “‘Best is over’ for stocks” back at the top in October?

Answer: No. So why should you believe what they’re telling you now?

The Shanghai Composite was up more than 9% overnight, as the government reversed its move on trading taxes that was put in place as the market was soaring.

Considering the $SSEC was down around 50% off its highs, I’d say it was probably due for a bounce, wouldn’t you?

Can you imagine what CNBC would be like if the Dow were up 9% in one day? They wouldn’t even be able to speak.

	The semiconductors have been bouncing all over the place as they try to make their way out of the market basement. Today was another bounce up.
	More recent basement dwellers, the homebuilders, have also been trying to make the climb back out, but they seem to be losing a bit of steam here lately.

Some of the ‘hot’ stocks might just be getting started on that pullback we’ve been expecting:

Charts courtesy of StockCharts.com

A pretty lackluster performance for the market as a whole. The indices came back down off their mid-morning highs to dip into the red, then wandered back up and over into the close.

The techs led the way as the Nasdaq indices posted decent gains, but the NYSE Comp was near flat and the Transports were slightly red:

Treasuries showed little movement, so yields were steady:
6-month: 1.62%    2-yr: 2.20%    5-yr: 2.97%    10-yr: 3.73%    30-yr: 4.49%.

Internals were mixed. Volume remains light, but slightly above yesterday’s levels. Advances/declines were flat on the NYSE and 10 to 9 on the Nasdaq, with up/down volume 4 to 5 on the NYSE but 8 to 3 on the Nasdaq. Despite most of the indices finishing in the green, new lows easily exceeded new highs, with highs/lows 35/61 on the NYSE and 14/117 on the Nasdaq.

The groups were mixed. Some health care and tech led the green team: HMOs (+4.8%), semiconductors (+4.1%), hospitals (+2.7%), defense (+2.1%), software (+1.5%), health care products (+1.5%), REITs (+1.5%), disk drives (+1.5%), telecom (+1.4%) and networking (+1.3%). Some of the commodity areas slid to the red column: gold and silver stocks (-3.5%), homebuilders (-2.5%), airlines (-2.3%), metals and mining (-2.0%), chemicals (-1.8%) and commodities (-1.4%).

Energy prices have to be a concern for many folks at this point, be they investors or not. The new front-month crude contract is trading down just slightly from where the action was yesterday, closing today’s session at $118.30/barrel. But gasoline prices continue to climb, now at $3.05/gallon, and natural gas moved back up to $10.78/mmBTU. The dollar bounced back up a bit, moving the dollar index to 71.83. The precious metals got stomped on in the morning again, but came up off those lows, leaving spot gold at $906/ounce and silver at $17.11/ounce.

BMB Note:   A pretty wishy-washy day. I’m not sure what triggered the little run-up this morning, but it didn’t last long. But once the indices had fallen back down to flat, they got a little buying going again and finished the day in the green.

Tech seemed to be pretty popular today, and the semis got another pop from BRCM’s numbers. But the Nasdaq ’strength’ remains rather thin: today the Nasdaq was up 1.2% and the Naz-100 was up 1.3. Nearly 3 to 1 up/down volume was piling into advances/declines which were only a bit better than flat, and there were still only 14 new highs and 117 new lows. Just goes to show that you can’t pick just anything off the tree with your eyes closed and expect it to go up.

Some of those leaders are losing momentum - the coals, fertilizers and some of the oils backed off today. Those stocks are likely going to rest for a while. Maybe they’ll hold up here and be buyable for the next run, if there is one.

I’m still having a hard time getting real excited about anything on either side of the market at this point. Volume remains very light compared to average levels, so it’s apparent that I’m not the only one who feels that way. And even the earnings news is having a hard time getting people enthused. Maybe this is just the ‘pause that refreshes’. I don’t know. But I do know that resistance, in many forms - price congestion, moving averages and downward trendlines - still looms overhead.

Update:   Just an example of how playing the after-market on these earnings reports can be rather risky. AAPL closed at 163. Just after their earnings came out, the stock ran up to above 170 - it is now trading below 159.

At Finance Trends Matter, David thinks he’s found a bit of a pattern in the recent uproar over rising food prices:

In last week’s post on rising food prices, we tried to briefly outline some of the factors behind higher commodity prices and growing food shortages.

While I mentioned things like water shortages, loss of arable land, dwindling global stockpiles of grain, and monetary inflation, I seem to have overlooked a major force affecting prices of agricultural commodities: government intervention.

Now, while I’m no seasoned observer of the farming and agriculture industries, I have learned enough in recent years to know better. If you’ve ever heard or read about crop subsidies, food import and export tariffs/restrictions, and ethanol mandates, you know that farming is rife with government intervention worldwide.

So, when I read a clutch of articles on this topic (under the World News heading of “Global Food Crisis”) in yesterday’s (4/21) print edition of the Financial Times, it was no real surprise to see the theme of government intervention present in each and every article.

Go check it out.

Stocks got off to a shaky start this morning, but a ramp up in the last 30-40 mins. has improved the picture. The indices are all showing green, with A/D lines and most groups now positive. Leading the move are mostly groups down at low levels: semis, HMOs, defense, brokers, hospitals, REITs, networking and internet. Gold and silver are leading the red side of the page, as the commodities pull back.

Treasuries are mixed, yields up just a bit at the long end. Energy prices are fairly flat following the release of the weekly inventory figures. The dollar is higher, gold and silver are lower.

Deron Wagner this morning:

Frankly, it seems too obvious for the intermediate-term rally to end here, cleanly and precisely at resistance of the February highs in the S&P and Nasdaq. We believe a more likely scenario is for the major indices to make another leg up and test resistance of their six-month downtrend lines that we thoroughly analyzed in yesterday’s commentary. A few days of closing prices above the actual downtrend lines would not even be surprising, just to suck in the bulls one last time. Obviously, we cannot rule out the possibility that last Friday’s rally was indeed the absolute high of the intermediate-term rally, but we have not yet seen enough evidence to confidently begin selling short at the present time. While the market tries to figure out its next move over the next several days, cash may be the best position.

From Mike Shedlock:

New Lending Rules

• No declining markets
• 70% owner occupied
• 10% minimum down payment
• Adequacy of association budgets
• Requirements on commercial space

Looks like it’s “No Deal” on condos.

Email From Mortgage Broker

Tonight I received the following from “SEB” who writes:

Our residential department, had a buyer for a condo, seeking 80% financing, full doc, no paper taken back, cash down, our lender will not finance the project because Freddie or FNMA would not purchase the loan unless the condo project was 90% sold and the developer could not have taken back paper, net result, no sale, a lot of residential lenders we are dealing with will not make the loan if the market area where the property is located has declining values. A real credit crunch!

It is going to be extremely difficult if not impossible to get financing to buy a condo. Indeed it becomes a veritable “Catch 22″ in regards to sales where any building is less than 70% owner occupied. Perhaps some foreclosure sales or short sales go through where the bank is willing to hold the paper. However, who in their right mind would want to buy into such a building knowing they could not sell down the road?

And what about all those condo towers still going up? I sense a lot of bank owned condo towers as soon as construction is complete. Banks that financed condo towers are going to own them because the developers will be unable to get 70% owner occupied units even without the declining market restrictions.

It should not be long now before we start seeing some regional banks fail over this.

	Some of the major indices, which were able to sneak out of their ranges last week, are thinking about tucking right back in.
	The Russell, which never did escape its range, has already given back a big chunk of last week’s run-up.
	The dollar just keeps edging lower…though everybody insists that it’s time for the greenback to rally. They’ve been waiting for that rally for months now.
	Record oil prices have been extremely rough on the airline stocks.

Charts courtesy of StockCharts.com

A bit of a rough day for stocks, as things started out weak and just never improved - although the indices did come off their lowest levels, which were hit as crude oil spiked up near $120.

The Russell got the worst of it along with the Transports, but the Nasdaq was also down about 2 percent at its worst levels:

Even as stocks retreated, Treasuries weren’t able to mount much of a rally, and yields held up:
6-month: 1.64%    2-yr: 2.18%    5-yr: 2.93%    10-yr: 3.69%    30-yr: 4.44%.

Internals were negative. Volume ticked up from yesterday, registering a clear distribution day. Advances/declines were about 5 to 14 on both exchanges, with up/down volume 3 to 8 on the NYSE and 3 to 11 on the Nasdaq. New lows picked up slightly, with new highs/lows still on the positive side at 84/59 on the NYSE, but a negative 22/130 on the Nasdaq.

The groups were nearly all red. The airlines (-12.4%) were obliterated. They were followed down by the paper stocks (-5.0%), HMOs (-4.7%), semiconductors (-3.3%), computer hardware (-2.8%), disk drives (-2.7%), networking (-2.5%), transportation (-2.3%), retail (-2.2%) and housing stocks (-2.2%).

Higher energy prices are finally starting to take their toll. Crude oil teased the $120 mark before settling at $119.37 as the front month contract (May??) expired. Gasoline moved to $3.01/gallon - at least natural gas dribbled back to $10.59/mmBTU. Small consolation. The dollar index registered a new closing low of 71.33 as the dollar sunk to new lows against the Euro. Gold was flat at $915/ounce, silver was higher by a dime at $17.51/ounce.

BMB Note:   Not a good day for stocks. Thinks started out weak, and just never got any better, although the major indices did come up off their lows by closing time.

A few groups are now either setting or testing new low territory - the airlines are getting trashed, and the paper stocks and HMOs are dragging right along the recent bottom. The strong groups, few that there are, had mixed results today. Energy prices keep on cruising, helping some of the energy stocks, but certainly not all. And you’d think that those energy prices would have to set up for at least some sort of correction sooner or later. Nothing goes straight up. Oh, except those fertilizer stocks, right?

I just don’t see a lot to get too excited about at the moment. This was another distribution day, just two days after the big Friday move and the second in eight sessions, with last week’s two big up days sandwiched in-between. But although volume was heavier than yesterday, it was by no means huge. It just seems like we’re in a bit of no-mans’ land here. The strong areas are still too strong to buy here, and there just isn’t a lot else to look at right now. So we need to see if something else wants to step up when the leaders are finally forced to take a rest, and whether the market has enough gas left in its tank to take things much higher from this point.

Not a lot on the economic calendar this week, so we’re left with whatever earnings are coming out, and next week is Fed week. I have a feeling we might just chop around here for a while until we get that out of the way. By then, earnings will be pretty much done, and the market will have to make some decisions on its own.

Oh, and can we please stop hearing about the Pennsylvania primary now?

Not a very strong report. As you can see, it’s pretty typical to see the not-seasonally-adjusted numbers pick up in the spring, but the YOY numbers aren’t getting any better (click chart to see more at Calculated Risk):

Update:  CR has more on existing home inventories.