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.

An interesting looking setup in the DBC commodity ETF. Just thought I’d point it out.

Chart courtesy of StockCharts.com

	Unlike the rest of the major indices, the Russell has been unable to move above its February rebound highs. But most of the major indices are forming the same ‘wedge’ shape up off the March lows.
	Steel stocks remain some of the strongest in the market.

Still lots of talk about a dollar ‘rally’. While the greenback has done better lately against the Yen and the Euro, the Australian dollar and Mexican Peso are clearly still holding their own.

Charts courtesy of StockCharts.com

Not a real impressive day for the market as a whole, as things just never got going. Energy prices jumped back up, and the commodity stocks moved back to the front of the train while everything else pretty much lagged back.

The indices didn’t suffer terribly, with only the Utilities taking a sizable hit:

Treasuries slipped, and yields moved up:
6-month: 1.69%    2-yr: 2.46%    5-yr: 3.18%    10-yr: 3.86%    30-yr: 4.58%.

Internals were a little worse than the indices might let on, especially on the Nasdaq, but volume was lightest in 4 days. Advances/declines were about 8 to 11 on both exchanges, and up/down volume was 2 to 3 on the NYSE and 3 to 7 on the Nasdaq. New highs/lows were mixed again at 38/15 on the NYSE but 45/74 on the Nasdaq.

The groups were split, with the commodity stocks holding up the green side of the page: steel (+4.0%), metals and mining (+3.6%), gold and silver (+3.2%), and natural gas (+1.9%). On the losing team were the airlines (-2.6%), retail (-2.4%), utilities (-1.4%), brokers (-1.3%), internets (-1.1%) and banks (-1.1%).

Higher energy prices certainly put a damper on things. Crude oil ran back up to new highs, closing just under $120 at $119.97/barrel, and is trading above $120 in electronic trading now. Gasoline rose another 8 cents to $3.05/gallon, and natural gas jumped 40 cents to $11.17/mmBTU. The dollar index slipped back to 73.18. Gold and silver bounced a bit up off their recent lows, gold to $873/ounce and silver to $16.67/ounce.

BMB Note:   Not a great day for stocks, but it didn’t appear that there was any real severe damage done, and volume was again light. You can’t really count this market out until we start to see heavier distribution - but I’m not seeing that much to get excited about on the up side either.

Today’s higher energy prices hit those groups that had gotten a bit of air last week when oil prices were lower, namely things like the airlines and retail. On the flip side, many of the commodity names that had been on a run before last week are bouncing back, particularly in the steels and the energy space.

Right at the moment, things are at a bit of a standstill. We’re still seeing the indices ‘wedging’ up here, instead of really breaking out and moving up, but we’re not seeing heavy selling either. I’d like to see one or the other before getting too interested in either side.

…get into this mess?

Bennet Sedacca lays it all out for those who haven’t been paying attention at all.

This week is part I. If you’ve got some time, I’d recommend reading the whole thing:

I’m frequently asked the following question: “How on Earth did we get into this mess?”

This question can be answered in both simple terms or with complicated industry clichés and jargon. The simple answer is that massive amounts of debt and liquidity have been created. The more complicated answer involves the Wall Street greed machine turning the debt into securities that are so esoteric that in my opinion it’s threatening the entire fabric of our financial system. These securities are so pervasive that it has kept those at my firm. Atlantic Advisors, away from credit risk for the past couple of years now.

The second-most frequent question would be “Is this mess over and what comes next?” My standard answer is that “They have probably sung the National Anthem but we haven’t gotten to the seventh inning stretch.”

I will highlight in this part how I think we got here, what comes next. In next week’s part, I’ll discuss what the next part of this crisis might look like.

How Did We Get Here?

Unfortunately, the short question doesn’t have a short answer. Money and debt creation can be directly linked to rising asset prices. So it’s important to know not only the current money supply, but the acceleration of money creation. Once money has been created, debt is created via the “multiplier effect,” and then funneled into asset prices.

—

Summary: What Lies Ahead

There have been many comparisons to the Japanese real estate bubble of the late 1980’s and its ultimate collapse. I featured the chart at the end of the piece in 2005 when I thought that home prices would fall and that the loans and derivatives of those loans (Level 2 and 3 assets among other esoteric investments) would have trouble, possibly for longer than anyone believes. I feel even more strongly that the ultimate fallout will be worse than I initially imagined. The last real estate debacle/credit mess took place in 1989-1990 and it took nearly 15 years for people to be emboldened enough to speculate in real estate again. Note that the Japanese experience took about 15 years to unwind as well. If cycles hold true as they usually do, real estate will have its next peak at least 12 to 15 years from now. I know this sounds draconian, but the level of debt this time around is so extraordinary (it is different this time, but in a negative way) that the unwind will be extraordinary as well.

If the monetary and fiscal spigots are turned off or retarded in 2009 as I suspect they will be, that will be where things get really dicey, a topic I intend to touch on next week in Part Two.

For the balance of the year, usually a good one in the fourth year of a term, I expect more Fed intervention. The intervention may come in the way of new financing tools like its Term Auction Facilities (TAF) for who I feel are its buddies on Wall Street rather than lowering the Federal Funds Rate much more from the current 2%. Some will applaud the Fed’s actions as being forward-thinking and with great imagination but frankly, its actions, whether covert or in the public forum (the ‘timing’ of some of the ‘surprise tactics’ is highly suspicious to me and others), they nauseate me.

When we take risk and are wrong, we pay the price. I don’t get to simply ship off my bad trades and pay myself a bonus. Many individuals in our profession are tiring of the special club, what I call the Moral Hazard Club, that has been created for a select few. I suspect as we head towards 2009, there could be backlash against the broker/dealer community and the Federal Reserve.

As for the rest of 2008, I expect a correction in equities, perhaps imminently, followed by a choppy, volatile balance of the year dominated by headlines and election year worries. One thing is for sure, though. The capital raise at financial institutions will continue unabated until enough securities have been force-fed to domestic and international investors alike. This should keep pressure on all markets.

Jeff Saut this week:

While I still believe the averages can extend higher into our cluster of timing-point “highs” between May 7th – May 14th, I also believe it’s pretty late in the up-move and therefore I’m not recommending any new trading positions. Rather, I continue to recommend scale-up selling of trading positions into strength on the belief that come late May it’ll become apparent that our economic problems are not behind us. That revelation should bring about a decline that will first be measured by “if” the U.S. economy spills into a recession (I still doubt it); and secondly, if that potential recession will be shallow/short or long/deep.

—

“But Jeff,” one caller questioned me last week, “the economic news has suddenly turned for the better! So why now, after being bullish at the January/March ‘lows,’ are you now turning cautious?” 

My  answer was “While the headline numbers are indeed turning bullish, if you drill down into those numbers all is not as it seems.” Case in point, the 1Q’08 GDP report, which at first blush showed a much stronger than expected positive 0.6% growth rate. However, if you exclude the increase in inventories of unsold goods, the “final sales” number was negative by 0.2%. In other words, the inventories of unsold goods added an artificial 0.8% to 1Q’08 growth. Moreover, residential investment collapsed to the tune of 26.7% annualized. Yet the GDP figures misstate this because they do not separate residential investment into true final sales of new homes, as well as into unsold inventories of new homes. Similar nuances massaged last week’s ISM Manufacturing report; and, then there were Friday’s employment numbers.

At first glance, the employment numbers looked impressive, with Nonfarm Payrolls falling by a much less than expected 20,000 (-80,000 estimated), while the Unemployment Rate edged down to 5.0% versus the median forecast of 5.2%. However, as stated in George Orwell’s book 1984 – “numbers mean what we say they mean” – the U.S. government’s recondite birth/death model, which adds jobs it thinks are being created but can’t actually count (read: fallacious jobs), added 45,000 construction jobs and 8,000 financial jobs. Ladies and gentlemen, given the state of real estate and financial industries, such additions are clearly a stretch!

Accordingly, I think such numbers will begin to be questioned in the months ahead and I continue to invest and trade accordingly.

A bit of a shaky start to the week for stocks, as indices have been leaking lower during the morning, led by declines in airlines, retail, utilities, financials and telecom. A/D lines are also in the red.

Treasuries are fairly flat. Energy prices are higher, with crude teasing the 120 mark again and gasoline back above 3 bucks. The dollar is flattish, gold and silver are higher.

Looks like BoA may be positioning themselves for a “do-over” on the Countrywide deal:

Bank of America Corp (BAC) is likely to renegotiate its deal to buy Countrywide Financial Corp (CFC) down to the $0 to $2 level or completely walk away from it, said Friedman, Billings, Ramsey, which downgraded Countrywide to “underperform” from “market perform.”

Countrywide’s loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America’s earnings due to the elevated credit expenses at Countrywide, analyst Paul Miller wrote in a note to clients.

He cut his target on Countrywide’s stock to $2 from $7.

Bank of America, which said in January it would buy Countrywide for $4 billion, said in a filing last week there was no assurance that any of the mortgage lender’s outstanding debt would be redeemed, assumed or guaranteed.

“Bank of America announced that it might not guarantee Countrywide’s debt, which is most likely the first step in renegotiating the entire deal,” Miller said.

Hat tip to Calculated Risk.