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.

John Hussman relives the rocky ride through the last bear market in this week’s column:

…the rally into 1/30/01 was quickly erased by a plunge in the S&P 500 Index of -19.7% into 4/4/01, followed by a powerful bear market rally of 19.0% through 5/21/01. The S&P 500 then proceeded to surrender that gain, and the events of 9/11 worsened an already weak market, driving the market down -26.4% from May’s rally high. The S&P 500 then surged 21.4% into 1/4/02, dropped -7.9% into 2/7/02, advanced 8.3% into 3/19/02, collapsed -31.8% into 7/23/02, advanced 20.7% into 8/22/02 and finally plunged -19.3% to its bear market low on 10/9/02, for a cumulative loss in the S&P 500 Index of -49.1%.

Investors really have no sense of market dynamics if they believe that a recession-linked bear market comprises a single decline of less than 20% followed by a “V” shaped rebound into a new bull market. While I don’t expect the market’s losses to be nearly as severe as they were in the 2000-2002 bear market, the simple fact is that if the recent market low was indeed a final bear market trough, it occurred at the highest valuation level of any prior bear market trough in history.

I don’t want to convey the impression that the market cannot advance further as a result of speculative pressures, but at present, the S&P 500 remains priced to deliver probable total returns of about 2-4% annually over the coming decade (a decade ago, using the same methodology, the projected return was in the range of 0-2%, which is about what we’ve observed). I do not hope for a steep market decline, but it is effectively the only way for stocks to be priced to deliver meaningful long-term returns.

After the RBA held rates steady again overnight, it looks like the Aussie dollar could be setting up for another move higher (disclosure: long FXA).

Chart courtesy of StockCharts.com

My poor brain is just incapable of resolving this seeming contradiction:

Charts courtesy of StockCharts.com

After stumbling out of the gate this morning, stocks ignored the bad news from FNM and $122 oil, and turned around and made one of those all-day climbs to finish in the green.

In a move that continues to defy logic, the Transports led the way:

Treasuries were mixed, with yields lower in the middle and higher on both ends:
6-month: 1.75%    2-yr: 2.37%    5-yr: 3.15%    10-yr: 3.91%    30-yr: 4.65%.

Internals turned around, and volume picked up a bit over yesterday’s low levels. Advances/declines were about 3 to 2 on both exchanges, with up/down volume 7 to 3 on the NYSE and 3 to 1 on the Nasdaq. But the Nasdaq continues to put in more new lows than new highs. Highs/lows were mixed again at 90/26 on the NYSE but 44/77 on the Nasdaq.

Commodities were the only groups in the green early, but that changed as the day wore on, though those areas still topped the winners’ list: natural gas (+3.3%), oil services (+2.4%), oil stocks (+2.3%), disk drives (+2.1%), paper stocks (+1.8%), steel (+1.7%), metals and mining (+1.7%), gold and silver (+1.6%), semiconductors (+1.6%) and homebuilders (+1.4%). The airlines (-2.7%) led a short list of losers.

Energy prices were mostly higher - and we’re starting to talk “a lot higher”. Crude oil pushed $123 before finishing at $121.84/barrel, up almost 2 bucks again. Gasoline jumped another nickel to $3.10/gallon, but natural gas backed off a few cents to $11.10/mmBTU. The dollar index fell to 73.00. Gold and silver gave up some of their early gains, gold edging up to $877/ounce and silver to $16.88/ounce.

BMB Note:   Not a lot has changed. The commodities still lead, and the indices are still holding up.

I don’t have a lot to say myself, but I thought these comments from FT columnist Tony Jackson (pointed to by David in his comments section at Finance Trends Matter) summed up my feelings pretty well:

…it is at least possible that developed world equities have largely discounted the worst, and will simply move sideways for a few more years. But it would help if they were obviously undervalued, instead of arguably the reverse.

I leave the last word to Andrew Smithers: “Of course I can’t tell what’s going to happen – but the chances of the market going down a lot versus up a lot seem unusually clear”.

Nonetheless, I’ll be happy to hang onto my commodity positions as long as they want to keep on going.

This Fannie Mae thing gets more ridiculous all the time. As BMB said this morning: “And what did the government just get done doing? A: They let Fannie take on even bigger loans and more risk. Brilliant. Let’s face the truth here - the government is making Fannie and Freddie their sacrificial lambs in an attempt to save the housing market.”

More on that subject in today’s Five Things:

Fannie Mae (FNM) this morning reported a wider loss than many analysts estimated, cut its dividend to 25 cents a share and said it will raise $6 billion in capital before it eventually burns to the ground while the Office of Federal Housing Enterprise Oversight plays a fiddle. We’re paraphrasing… but only slightly.

Even as Fannie Mae reported a wider-than-expected (for Fannie Mae executives at least, the rest of us seemed to know better) $2.19 billion first quarter loss, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator that oversees the government-sponsored mortgage giant actually lowered… yes, lowered… the amount of capital Fannie must hold.

The OFHEO said it will lower requirements for surplus capital to 15% from 20% once the $6 billion in capital is raised, and may reduce it even further to just 10% by September. The move by OFHEO to relax capital surplus requirements for Fannie Mae essentially enables the mortgage-finance company to buy more mortgages and take on even more risk.

“The lowering of the prudential cushion was appropriate in line with the company’s progress and with the need to maintain safe and sound operations,” OFHEO Director James Lockhart said in a statement, presumably to guard against not being able to maintain a straight face. For if there is one thing we know with absolute certainty, it is this: Fannie Mae is the antithesis of any operation that one could consider “safe and sound.”

Yikes. And after starting down 2 bucks this morning, FNM stock is now up 2 bucks on the day. I just shake my head.

It certainly could happen, especially if demand doesn’t drop and some extra supply doesn’t magically arise from somewhere - after all, supply is unable to even meet today’s demand, and all of the world’s major oil fields are already in decline:

Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a “super spike” in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 today on speculation demand will rise during the peak U.S. summer driving season.

“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,” the Goldman analysts wrote in the report dated May 5.

Barry’s comments at TBP:

Before you blow the guy off as an energy extremist, his $105 target 3 years ago was widely derided (”another Henry Blodget wannabe”).

It turns out he was way too conservative — The price shot $16 higher than his “ridiculous” target, and a year earlier than forecast.

I am not saying we are going to see $200 oil, but do not be too quick to blow off Murti.

Heck. The way oil prices have acted in the past few days (above 122 today), we could hit 200 next week. But apparently the market likes the idea, as it’s moved back into the green for the day…

Another rather unimpressive morning, as the indices droop a bit and A/D lines remain in the red, though off their worst levels. Again, it’s just the commodity areas that are having any success: natural gas, gold and silver, oil services, metals and mining, oil stocks and steel. Leading the slumping groups are the airlines, housing stocks, brokers and banks.

Treasuries are mixed, with yields up on the short end but lower on the long end. Energy prices are higher still, with crude trading above 121.50 and gasoline at 3.10. The dollar index is back below 73, gold and silver are higher.

Gary Kaltbaum this morning:

Raise your hands if you believe the FINANCIAL industry had net hiring of 3,000 last month? Who are they trying to kid?

Upon, the Microsoft (MSFT) and Yahoo (YHOO) first announcement, I told anyone who would listen to sell their YHOO off the bump from $19 to $30. That was a gift! I did not believe anyone would pay up… and actually was surprised MSFT was willing to go a little higher. I just saw more risk than reward. YHOO now trading under $24 today. Frankly, I believe if nothing else happens, if the market comes in again, you’ll see YHOO stock under $20 again. YHOO and MSFT have much too much culture clash.

Every day, I am inundated with reports about sentiment… most of these reports do not have a clue on how to rate sentiment. They treat it as a primary indicator when it is secondary… at best. Please pay 99% of your attention to price and volume. Overall, my biggest issue about sentiment right now is that it feels a little too widely accepted that the bull market is back and that the worst is over. Time will tell.

More importantly, short term, it is normal for the markets to pull in after they rally up into their longer-term moving averages… just like the DJIA did on Friday… but that should not sway you from the doubly important part of this market… and that is there are bull and bear markets sitting side by side… and it is more important to do sector by sector analysis than the overall market right now.

Last time, I told you the COMMODITIES were toppy and due to pull back. On cue, they were smoked. But in bull markets, extended stocks pull back to moving averages or support before bouncing higher again and that is exactly what happened on Thursday as OILS, COAL, STEEL, FERTS and other commodities pulled in hard and reversed off these important support areas. So… commodities remain in play and remain the strongest areas of the market. I won’t even discuss OIL prices. Just do the opposite of what I say!

We are getting leadership from the BIG-CAP NASDAQ 100 names that I talked about so much last year. Names like Apple (AAPL), Google (GOOG), and Research in Motion (RIMM) now have the bid again. Just remember, like last year, it remained a select few as the A/D of the NASDAQ continues to hang near ALL-TIME LOWS… which is amazing in itself. It tells you any NASDAQ rally is the opposite of broad-based.

I have also made note that the worst bear market areas held the lows, came off the lows and have been building a little head of steam. This includes the all-important RETAIL, FINANCIALS and SEMIS. If the markets are going to continue to attempt higher prices it will be because these areas continue to join the commodities to the upside. This may be tough in the near-term as these areas are right into the start of massive overhead resistance. Time will tell.

The best news is that there has been overall technical improvement as more and more names have turned the corner. Just take your time as this game has not been easy. Bulls should hope markets come in here to wipe the smiles off the bulls’ faces. There has just been too much acceptance.

From MarketWatch:

Mortgage-finance giant Fannie Mae reported a much greater-than-expected first-quarter loss of $2.2 billion, as credit-related expenses took a bite out of its bottom line, and said it’s planning to raise $6 billion in new capital.

And what did the government just get done doing? A: They let Fannie take on even bigger loans and more risk. Brilliant. Let’s face the truth here - the government is making Fannie and Freddie their sacrificial lambs in an attempt to save the housing market.

In my mind, this is the most logical way to view things at the present time - The Big Picture quotes Bill King:

…there is no way the US economy, which has never been more dependent on debt to generate GDP, can flourish without an enormous amount of debt creation. If debt is now being curtailed or rationed, there can be only one direction for the US economy.

It only makes sense.

Hmm.

A couple of headlines from MarketWatch this morning seem to go pretty well with the discussion we had here a week or two ago about David’s post at Finance Trends Matter on intervention in the food markets.

Take a look at these:

• “India may ban futures trading”
• “Thailand calls for a rice cartel”