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.

Becoming a good trader doesn’t happen overnight. Just as with any other skill or discipline, it requires time and practice to become proficient at it:

One of the biggest problems I see new traders struggle with is the mindset that somehow trading can be approached differently from other ventures or activities. This is something which either comes from too much focus on the prospects of profits and easy wealth building (greed, in short) or from just not considering that it is an activity which requires skill to do well.

In Enhancing Trader Performance, Brett Steenbarger talks about trading as a performance activity. He relates it closely to athletics, but you could very easily extend the metaphor to any other activity which takes time and effort to progress in skill. The point is that you cannot expect to just jump right in and be an expert. You must progress through stages of understanding, competence, and experience.

Trading is easy. I mean pointing and clicking to buy and sell is about at simple as it gets.

Playing guitar is easy too. Just pluck or strum. No one thinks they are going to pick up a guitar and become the next Jimi Hendrix, though. They know it takes hours and hours of practice to develop even a basic ability to play, nevermind getting to the point of having people pay to listen to you.

Why do people think that things are different in trading?

Good trading requires learning and practice - just like anything else you want to get good at. There are no quick solutions. Don’t expect them, and don’t let anyone lead you to believe that there are.

And after hitting a couple of buckets of balls, you’re still no Tiger Woods.

Some of Mike Shedlock’s comments on the ‘next moves’ from the Fed that we mentioned this morning:

Read the entire WSJ article. It’s a good one. That the Fed officials are having these kinds of discussions at all shows just how terrified of the perception setting in that we are following Japan, which of course we are.

The Fed is effectively in a position of not to being able to print money to buy Treasuries from banks, because of restrictions mentioned in the WSJ article and also because the banks are insolvent. Simply put, banks do not have the cash to accumulate Treasuries on their books to sell to the Fed this time around. And more writedowns on commercial real estate, auto loans, credit card debt, Alt-A mortgages, and pay option arms are coming. This will require still more capital raising efforts.

—

The Fed now has to buy risky paper from the banks or lend the banks the Fed’s own riskless assets at 1-2% yields to maturity on short paper against risky assets. There is no capital gain cushion built into the banks selling to the Fed for cash as in a normal reflationary cycle.

The Fed has already sponsored 3 new lending facilities, yet is having still more discussions on what to do next.

—

The Fed is now considering borrowing from the Treasury (US taxpayers). Were the Fed to have to do this to remain whole, i.e., have the Treasury underwrite the Fed’s balance sheet, the US central bank would be de facto insolvent, having insufficient assets to carry out its mandate.

The perceived invincibility of the Fed’s ability to reflate is now clearly in question. The Fed’s own discussions prove it.

The Trannies were the story of the day. We said just yesterday that “despite $100+ oil and collapsing airlines, the DJ Transports has held up much better than the broader-based indices.” That certainly wasn’t true today. Of course, we also said: “The Transports might struggle a bit tomorrow” after the UPS warning came out. That was an understatment.

A couple of other groups that had been showing strength of late got clipped today as well:

The groups that led this bear market down, namely retail and financials, still aren’t able to gather much steam. As for the airlines, well, they’re just an absolute mess:

And while the Fed and others ‘promise’ economic recovery later in the year, the market seems to be of the opinion that gambling and high-dollar auctions might be waiting a while longer than that to make a comeback:

Charts courtesy of StockCharts.com

Well, today was a little more interesting than the past few days have been. Unfortunately for the bulls, it was ‘interesting’ to the down side.

Stocks started weak and got weaker, hitting their lows in the last hour before getting a pop in the final 40 minutes or so. But the action was quite a bit worse than the major indices would indicate, and volume picked up, giving us one of those ‘distribution days’ that we were watching out for.

The Transports got a ‘double whammy’ from UPS and record oil prices, falling the equivalent of 440 Dow points. The Russell took it the hardest of the broader indices, dropping the equivalent of 238 Dow points:

As you might expect, Treasuries rallied with stocks weak, and yields fell back:
6-month: 1.50%    2-yr: 1.77%    5-yr: 2.60%    10-yr: 3.48%    30-yr: 4.32%.

Internals were pretty ugly, and again were weaker than the index numbers might lead you to believe. Volume increased from yesterday, particularly on the Nasdaq. Advances/declines were about 3 to 7 on the NYSE and 5 to 14 on the Nasdaq, with up/down volume 2 to 7 on the NYSE and 1 to 3 on the Nasdaq. I don’t think we’ve seen more new highs than new lows on the Nasdaq throughout this entire move up, though the NYSE has been much better on that measure. Today’s new highs/lows were 46/27 on the NYSE but 20/77 on the Nasdaq.

The group scene turned a pretty deep shade of red, and only a few commodity areas were able to hold up. Leading the trail lower were the airlines (-5.2%), homebuilders (-4.3%), paper stocks (-3.8%), transportation (-3.4%), brokers (-3.1%), biotechs (-2.8%), steel stocks (-2.6%), retail (-2.3%), REITs (-2.3%), HMOs (-2.1%), networking (=1.9%), banks (-1.8%), metals (-1.8%) and telecom (-1.8%). Gold and silver stocks (+2.0%) and semiconductors (+1.5%) led a short green list.

Energy prices jumped following the weekly inventory, with both crude and gasoline hitting new record highs before falling back. Crude finished the day at $110.87/barrel, but had been above $112. Gasoline was up a penny to $2.77/gallon after hitting a high of $2.82. Natural gas got back above the $10 mark, to $10.06/mmBTU. The dollar index took a dive, falling to 71.85. The precious metals enjoyed strong gains, with gold rising to $934/ounce and silver to $18.16/ounce.

BMB Note:   That wall of resistance that the market has been trying to climb over for the last week or so just got a little higher.

A pretty rough day for stocks. The Transports, which had been helping lead the market higher, got smacked but good. The retailers also got hit pretty hard, and some of the recent ‘hot’ groups, like the homebuilders and biotechs were also taken down. And the financials continue to look shaky at best, as they wait for the Fed to come along and give them another boost.

The indices took out their recent lows, so they’ve now given back some chunks of that big move on Tuesday - in the case of the Transports, nearly all of it. We’ll be watching those levels rather closely to see if that big breakout fails completely or not.

The precious metals got a nice pop today, though there’s probably still more work to do there before I’m convinced that gold and silver have built a decent base to launch another move from. But we’ll be watching.

As you know, we’ve been pretty cautious on this market, and today just serves to make us more so. We said that we’d have to wait and see where this ‘rally’ took us. Up to this point, it hasn’t taken us very far — and a few more days like today would likely bring it to an end. So there’s still no need to try and be a hero.

There a little more to the possible Citigroup sale of loans back to the PE groups than meets the eye.

Mish quotes Mr. Practical this morning:

As investors bid up the Citigroup (C) stock price early on the news that the bank sold $12 billion of bad loans at not too much of a discount, perhaps they should look closer at the deal.

In order to get that price, C had to agree to indemnify the buyers of the first 20% of losses.

Citi obviously did the deal at this artificial price so that it would not have to mark down too significantly the rest of its portfolio. Not to let facts get in the way, but the price it sold the loans at, if you include the indemnification, is very poor.

Risk is high and growing.

Mish goes on, quoting Bloomberg on Goldman:

Bloomberg is reporting Goldman Sachs Level 3 Assets Jump, Exceeding Rivals.

Goldman Sachs Group Inc., the most profitable securities firm, reported an increase in harder-to-value assets during the first quarter, exceeding those at Morgan Stanley and Lehman Brothers Holdings Inc.

Goldman’s share of Level 3 assets surged 39 percent to $96.4 billion at the end of February from $69.2 billion in November, according to a filing with the U.S. Securities and Exchange Commission today. The ratio of Level 3 to total assets rose to 8.1 percent from 6.2 percent.

—

“Just because an asset is defined as Level 3 doesn’t mean we’re uncomfortable with the value of the asset,” said Lucas van Praag, a spokesman for Goldman Sachs.

That’s an interesting way of putting it. Why not just say whether or not you are comfortable to make things clear? And while you are at it, why don’t you explain why have a price on commercial real estate loans last quarter but not this quarter?

—

Things are less than meets the eye at Citigroup and Goldman. Things are also less than meets the eye at WaMu (WM) as well…

In fact, one can dig into the financials of nearly any financial company now and find things that are less than meets the eye. What this all boils down to is this: Stockholders have been cheering optical illusions.

No, really, I’m serious. This time IS different.

Here’s Mr. Practical to explain:

In answer to the implication that Wall-Street and Washington are set on a second half recovery when, to these researchers and yours truly all the evidence points to something much larger and insidious, I offer a few thoughts on the great dumbing down of the market where volatility (on the upside) is being confused with information. I was once a great believer in the market discounting information correctly. I no longer am.

1) Never before have central banks and other non-economically-driven entities created so much “money” for themselves and bought risky assets with it. From Middle East oil money to China’s Communist Party, these neophytes to economic cycles and value are simply recycling fiat money back from foreign currency reserves. There is a quasi-political driver that creates a strong propensity to put those fiat reserves back into dollars to retain export market share.

2) Never before have those institutions been set on a path of reflation and embarked on policy so strained as to be nearly illegal to assure markets that anything will be bailed out and that any risk aversion will be punished. Paul Volcker just stated in a speech, “The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices.”

He went further to call the current credit turmoil the “mother of all crises” and said the financial system has “failed the test” of the marketplace. This goes hand in hand with a media that is incompetent in communicating the true nature of the situation.

3) Never before has the populace in general been so in debt. This numbs them to really bad news where they wish so hard that things are going to be OK they must ignore the facts.

4) Mutual funds, large institutions that hold vast quantities of stocks, don’t get paid to hold cash and are now conditioned to put any money right into stocks. They no longer think about protecting capital and therefore don’t care to try to understand implications. They will not sell until forced from redemptions, which may be coming right around the corner as people need funds to pay back debt. That is what all that money in money markets is for while there’s no real savings: the money in money markets can be circled around to being generated by debt.

5) There’s obfuscation from government reporting of statistics.

6) There’s a lack of experience by all market participants as to what a credit crunch really is, for there hasn’t been a real one since the 1970s or a really big one since 1930s.

More tentative action to start the day, with the indices just in the red, but A/D lines looking slightly worse than that. Leading the groups down are the homebuilders, biotechs, metals, steels, brokers and retail.

Treasuries are higher, yields lower. Energy prices are slightly higher. The dollar index is down a bit, gold and silver are a little higher.

Update:   On those energy prices, they spiked on the release of the weekly inventory report, which showed a much larger-than-expected decline in crude inventories.

A few tidbits:

• The private-equity folks will buy anything - or are they just completing the circle?
• Another airline skids to a halt.
• Richard Russell says the bull market never ended, and we’re off to hit new highs. If that’s true, it would only be on the back of huge inflation, in my opinion. And aren’t some of these guys changing their tune here?

…or the next ‘inventions’, are already in the works:

The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.

British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.

The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.

The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally.