Bear Mountain Bull

It’s time again for a little BMB R&R, especially with the market behaving as bizarrely as it’s been. Maybe if we stop watching it start to behave a little better…

Posting will be very light and variable over the course of this week, but we’ll put up an open thread each market day for our readers to comment on the day’s market activity or to post any interesting links they might run across.

Check the space below for whatever the latest might be during this ‘off’ time, and please visit the various sites in the ‘Links’ and ‘Regular Stops’ for up-to-date market news and analysis.

BMB will be back in full swing by next weekend.

The latest issue of the ChartWatchers newsletter from StockCharts.com is available for browsing. Topics this time around include the REITs, recent strength in metals and oil services, historical levels of the S&P P/E ratio and resistance for the Dow.

Seventeen years ago, in front of Congress:

Prescient is too mild a word to describe Pizzo’s testimony. I recommend reading it in its entirety, so as to savor the full flavor of his brimstone and fire. But here is a choice excerpt, featuring Pizzo’s prediction as to the likely baleful consequences of allowing commercial banks to play with securities.

As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other’s customers from regulators.

Banks that need to get money to a troubled securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another’s securities subsidiaries and their customers as the market plummets.

In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.

That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.

Nice work, Stephen. Too bad they didn’t listen to you.

Emphasis added. Hat tip to Calculated Risk.

Jim Jubak doesn’t sound like he’s a big fan of the Treasury’s proposed changes to our financial regulatory system:

It’s a scam, a fraud, a charade, a lie.

But what else did you expect from a package of “reforms” fronted by a Treasury secretary who was formerly the CEO of investment bank Goldman Sachs (GS), a package written by Treasury Department officials with input from Wall Street’s biggest players? It’s no coincidence that many of the plan’s ideas echo those peddled by Wall Street lobbyists for years in the halls of Congress.

The plan throws the public and the politicians a few bones, but in reality the reforms have almost nothing to do with fixing the problems in the financial markets that have produced the current crisis. Instead, they’re an astutely timed effort to use the current crisis to give Wall Street what it has wanted for years: less regulation.

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It would be an overstatement to say Wall Street wrote the Paulson plan, but it sure had a lot of input. For example, the President’s Working Group on Financial Markets, which is the ultimate source of the Treasury proposal, set up two advisory committees in September to give advice about industry best practices.

One committee was supposed to represent investors. It’s the other, designed to represent the asset side, that gives the best example of who got a chair at the table while these proposals were being drafted. The committee was headed by Eric Mindich, a former Goldman Sachs partner who started Eton Park Capital in 2004. Others on this committee include D.E. Shaw, an international investment company with $35 billion in capital under management as of January, and Aetos Capital, founded in 1999 by James Allwin, the former head of Morgan Stanley’s (MS) investment-management business.

You can undoubtedly think of a few things that are conspicuous in their absence from the Paulson plan.

For example, I haven’t been able to find any program for fixing the conflict-of-interest problems inherent in the current debt-rating system. Analysts at Standard & Poor’s or Moody’s (MCO) sit down across a table to work out a rating with the Wall Street folks who are both issuing the debt and paying the bill for the rating. That certainly has contributed to the debacle of AAA-rated mortgage-backed securities going into default at junk-bond rates.

And I don’t see even the glimmer of a discussion about the advisability of giving the Federal Reserve more regulatory power when the U.S. central bank has proved so reluctant to use its existing powers in either the 2000 stock-market bubble or the 2006 real-estate bubble. The Fed was asleep at the switch during two different crises under two different Fed chairmen, so you’d think it would occur to someone that there’s a problem with the Fed’s culture or structure or something that makes the central bank a really bad choice for regulator.

But these aren’t the issues on Wall Street’s mind. They know this crisis will pass — aided by a lot of taxpayer money, in all likelihood — and that the real threat to Wall Street is the rising competition with overseas financial markets. Especially London.

This is the stuff of Wall Street’s nightmares: Just a day after Paulson unveiled his plan, Japan’s largest brokerage, Nomura Holdings (NMR), announced it was picking London over New York as the headquarters for its international operations. Nomura CEO Kenichi Watanabe rubbed salt in the wound by saying that London would be the financial factory for originating products that the investment bank would then export to the rest of the world. Nomura’s London head count has climbed to 1,400 from 1,250 at the beginning of 2008. In New York, the numbers have declined to about 900 from 1,322 since the start of 2007.

Good stuff. Go read the whole thing.

Thanks for the tip from Chart Swing Trader.

Doug Noland describes our fragile economy and the current government efforts to ‘fix’ it:

Regrettably, efforts by the Federal Reserve and Washington politicians to sustain the U.S. Bubble Economy are doomed to failure. It’s not that they are necessarily the wrong policies. More to the point, the basic premise that our economy is sound and growth sustainable is seriously flawed. We’ve experienced a protracted and historic Credit inflation and it will not be possible to keep asset prices, incomes, corporate cash flows, and spending levitated at current levels. The type and scope of Credit growth required today has become infeasible. Sustaining housing inflation and consumption has turned unachievable.

I’m all for long-overdue legislative reform. Who isn’t? But I’ll say I heard nothing this week that came close to addressing the key issues. We have longstanding societal biases that place too much emphasis on housing and the stock market, while we operate with ingrained policymaking biases advocating unregulated finance underpinned by aggressive activist central banking and government market intervention. In a 20-year period of momentous financial innovation, our combination of “biases” proved an overly potent mix. And it is worth noting that Wall Street security/dealer balance sheets expanded three-fold in the eight years after the repeal of the (Depression-era) Glass-Steagall Act.

The focus at the Fed and in Washington is to sustain housing, the stock market, and inflated asset prices generally - to maintain the consumption and services-based Bubble Economy. Bernanke believes that if financial company failures can be averted - and with the recapitalization of the U.S. financial sector as necessary - sufficient “money” creation will preclude deflationary forces from gaining a foothold. He assures us the Fed will not allow double digit price declines, despite the reality that such price moves have engulfed real estate markets. And while the federal government “printing presses” will be working overtime going forward, it is also apparent that a key facet of Washington’s strategy is to “subcontract” the task of “printing” to Fannie, Freddie, the FHLB, the banking system, and “money funds” - sectors that can today issue “money”-like debt instruments with the explicit or implied stamp of federal government (taxpayer) backing.

Basically, the strategy is to substitute government-backed debt for the now discredited Wall Street-backed finance. I’m the first one to admit that this desperate undertaking stopped financial implosion in its tracks. However, the problem with this whole approach - because of our “societal,” financial, and policymaking biases - is that our Credit system will just be throwing greater amounts of (government-supported) debt on top of fragile Credit Structures underpinned largely by home mortgages. Wall Street-backed finance buckled specifically because this (”Ponzi Finance”) debt structure was untenable the day increasing amounts of speculative Credit were no longer forthcoming. The underlying inventory of houses doesn’t have the capacity to generate debt service - only the mortgagees taking on greater amounts of debt.

The underlying Economic Structure is now THE serious issue. The last thing our system needs right now is trillions more mortgage debt, although it would work somewhat to sustain consumption and our “services-based” Bubble Economy. The inherent problem with a finance, housing, consumption, and “services”-dictated Economic Structure is that it inherently generates excessive debt backed by little of real tangible value or economic wealth-creating capacity. It may appear an “economic miracle,” but for only as long as increasing amounts of Credit are forthcoming. At the end of the day, one is left with an extremely fragile Structure both financially and economically.

Notes on the latest moves in the industry groups:

• Some of those commodity areas are leading the pack for now…
• …while a few other commodity areas, like oil, oil services and gold and silver aren’t quite as strong.
• The real estate stocks are holding, and trying to turn higher.
• Some of the beaten-up health care stocks have gotten a bounce, particularly the biotechs and hospitals.
• Despite a good week for the brokers, the financials remain pretty unimpressive.
• Some of the tech groups have put in minor lows, but nothing to get too excited about just yet.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.