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.

It used to be that the ‘vigilantes’ in the bond market would try to keep central banks’ inflationary efforts in check by driving bond prices down and yields up. No longer - the bond vigilantes are long gone in these days of forever-low interest rates.

But a group has stepped in to take their place - the ‘crude oil vigilantes’:

The “Group of Seven” central bankers, who control the money spigots in 2/3’s of the world’s economy, huddled with their colleagues from China and Russia behind closed doors in Basel, Switzerland this week, haunted by the “Crude Oil Vigilantes,” who threaten to unravel G-7 schemes to rescue troubled global banks. Earlier today, the price of West Texas Sweet traded as high as $124/barrel, doubling from a year ago, and guiding Chicago Corn futures to all-time highs.

European Central Bank chief, Jean Trichet, chaired a meeting of central bankers from the “Group of 10” industrialized nations on May 5th and acknowledged that, “Inflation risks are significant under the influence of oil and energy price increases, commodity price increases more generally, and food and agricultural products. This is perceived in all economies without exception. This is no time for complacency for central banks in any respect,” he warned.

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US President George Bush, whose approval rating has sunk to an all-time low of 28% in recent polls, said on April 29th there was no “magic wand” to bring down record-high fuel prices, with angry Americans facing $3.65 a gallon for gasoline and soaring grocery bills. “I firmly believe that, you know, if there was a magic wand to wave, I’d be waving it, of course. I’ve repeatedly submitted proposals to help address these problems, yet time after time Congress chose to block them,” he argued.

Yet it’s increasingly obvious to most casual observers that the biggest culprit behind the historic rally in crude oil is the Bush administration itself, which has put enormous political pressure on the Federal Reserve to slash the federal funds rate by 325-basis points to 2%, and crushed the value of the US dollar in the process. That’s unleashed the “crude oil vigilantes,” who have jacked-up “black gold” by $55 per barrel since the Fed’s rate cutting spree began last August.

The Bernanke Fed, working under the command of US “Plunge Protection Team” (PPT) chief Henry Paulson, has doubled the growth rate of the US M3 money supply to 17.5% rate, its fastest in history, and slashed the fed funds rate far below the inflation rate to “negative” interest rates. “The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in crude oil futures. This has driven prices higher,” said OPEC Chief Adbullah al-Badri on May 8th.

I’m sure you’ll be totally surprised by this one. Another financial company reports another huge loss, and announces plans to raise more capital (yawn…):

American International Group Inc. announced plans to raise $12.5 billion in capital as it posted its second straight big quarterly loss. The insurance giant took $9.11 billion in charges on its credit-default swaps and recorded $6.09 billion of investment losses.

From Mish’s blog:

The entire concept of a ’stimulus plan’ is complete nonsense. The government cannot, and does not, create additional resources. It can only take money from ‘A’ and shift it to ‘B’ , either via confiscation (taxes), borrowing, or printing.

In the first two instances, money goes from one pocket into another, in the latter case, the entire money stock loses value to the extent that additional money is printed. Not one of these cases results in an economic gain. On the contrary, this artificial redistribution hampers the flow of scarce resources to where they are needed most, and thus delays economic recovery.

There are obviously still some strong areas in the market…

…while a few other areas need to be watched - are they just pulling back, or starting to roll over?

Charts courtesy of StockCharts.com

Hmm. That was kind of a weird one.

Stocks bounced around quite a bit today, with the major indices moving between green and red a few times before ending up in the green. But the majors don’t really tell the story of what’s happening under the surface, as the commodities continue to assert themselves, but a few other groups may be starting to lose it a a bit. More on that later.

The indices all finished slightly in the green, thanks to yet another last-hour push:

Treasuries were higher again, yields a bit lower:
6-month: 1.72%    2-yr: 2.22%    5-yr: 2.98%    10-yr: 3.78%    30-yr: 4.55%.

Internals managed to finish on the positive side, but volume retreated a bit. Advances/declines were 11 to 8 on the NYSE and 10 to 9 on the Nasdaq, with up/down volume less than 5 to 4 on the NYSE and about 3 to 2 on the Nasdaq. The ever-present Nasdaq highs/lows problem was a bit worse: new highs/lows were 55/45 on the NYSE but 27/103 on the Nasdaq.

More winners in the groups, but the winners were the commodities once again, and the losers were led by some important groups. Leading the green team were the gold and silver stocks (+4.2%), steels (+3.5%), oil services (+3.3%), metals and mining (+2.4%), chemicals (+1.7%), hospitals (+1.6% - how’d they get in there?), natural gas (+1.6%), paper (+1.5%), defense (+1.4%) and computer hardware (+1.3%). There weren’t a lot of losers, but they were some fairly important groups that are now starting to show consistent weakness: homebuilders (-4.5%), retail (-1.9%), banks (-1.5%) and brokers (-1.4%).

Energy prices were - what else? - higher. Crude oil drooped early but finished up at $123.69/barrel, and is currently trading above $124. Gasoline rose another couple of cents to $3.14/gallon, but natural gas did back off a nickel to $11.27/mmBTU. The dollar index was flat at 73.47, but gold and silver enjoyed some gains as they try to come off their lows. Spot gold stands at $883/ounce and silver at $16.85/ounce.

BMB Note:   Another strong day for commodity stocks. The metals keep on rolling, oil prices are still cruising, and now even gold and silver are threatening to get back into the act.

Is that good news? Well, you wouldn’t think so, would you? Of course, if you would have told me six months ago that oil would be above $120 a barrel but the Dow would still be only 10% from the highs, I would have told you you were nuts.

To me, some of the more telling action today came in those groups that led the bear market down off this highs, those being retail, housing and the financials. The homies look like they’re starting to crack a bit, the retailers didn’t react real favorably to today’s retail reports, and the financials dragged all day - and they have been for a few days now. If those groups decide to roll back over again, this market’s going to probably face some trouble.

It might be time to start keeping an eye on the precious metals again. Gold stocks - as measured by the $XAU - have moved up about 10% in the past four days, and the metals themselves look like they might be trying to dig in their heels a bit here. We’ll be watching that situation.

So, as far as stocks are concerned, there are still plenty of questions. How long can the commodities/oils/steels/metals keep rolling? Will oil prices keep climbing? Even if they don’t, can they hold at these level? What about these financials, and the retailers, and the homebuilders? Are they starting to get into trouble again, or is this weakness just a temporary fakeout?

The next week or so might provide a few answers. Hopefully the picture will become a bit clearer - but make sure you’re keeping your eyes open. The ground feels like it might just start trembling a bit again here soon…

India has indeed acted further to suspend futures trading, continuing on a topic we’ve talked about before (here and here). Kevin Depew has a few comments on the ‘idea’ in today’s Five Things:

4. One Goal: Prevent Price Discovery

Today we see where India’s government suspended futures trade in basic foods such as lentils, soy and potatoes for four months, hoping to “stop price rises driven by speculators.”

Stopping price rises driven by speculators? That’s one way to put it. Another way to put it is they are preventing price discovery. Why? Simple, because they don’t like the prices that are being discovered.

The irony is that this prevention of price discovery is precisely what the Federal Reserve is doing by swapping out Treasuries for all manner of lesser-quality assets. They are basically preventing price discovery. Why? Because, like India’s government, the Federal Reserve, banks, home sellers, mortgage lenders, derivatives dealers, almost everyone, doesn’t like the prices that are being discovered.

The short rebuttal to this is that the Fed isn’t preventing price discovery, it’s simply providing liquidity because there is no price discovery currently taking place because there are otherwise no bidders. But you know what, as anyone who has ever tried to sell a ticket to a baseball game discovers after the first pitch has been thrown, a lack of bids is price discovery.

It’s retail confession day, and of course, Jeff Macke has the story. Here’s his intro:

Last month’s retail results were so dismal, so generally uninspiring in every way, that I chose to write instead to write about the Masters golf tournament. I told readers I liked Wal-Mart (WMT), Costco (COST) and Home Depot (HD) (up 5%, 9% and 3.2% since, respectively, for those scoring at home) and moved on to a weepy story about Jack Nicklaus. I stand behind that decision.

Now, somewhat ironically given that we’re entering the slowest part of the retail year - the slog between Easter and Back to School - the retail picture is slightly more interesting. In the last month we’ve had the distribution of billions of dollars of government checks. Literally every taxpayer in America below a certain income level has been given money. The retailers, being retailers, are capitalizing on the government’s moves by offering bonus gift-cards for shoppers redeeming their entire check right at the stores.

In terms of nuanced ways to go about encouraging consumption in the American consumer, “sending money directly” is to stimulus what “punching someone in the Adam’s Apple” is to a witty insult. What it lacks in subtlety it makes up for in brutal effectiveness. Americans will, in fact, spend money that arrives in their mailboxes with little to no explanation. I don’t offer this opinion as a snooty slight on the state of economic planning but rather an utterly obvious observation of the human condition.

The checks started arriving at the very end of the sales just reported and retailers ended their quarters April 30th. This timing confluence means the stimulus will still be abstractly “in the future” in regards to the numbers we see today and the quarters which will get reported over the next few weeks. As a result, we’re somewhat back to where we were a month ago, only without a good golf tournament to discuss instead.

Stocks are floundering a bit today, as both the indices and the A/D lines straddle the flat line, but there is definitely some divergence in the groups: gold and silver stocks, steel, oil services, metals, hospitals and computer hardware are higher, while the financials and retailers are lower.

Treasuries are higher, yields lower. The dollar index is a bit lower, gold and silver are higher.

Both the ECB and the BOE held interest rates steady today. I’ll let you decide whether that’s the right move or the wrong one.

Deron Wagner says that in the near-term, the market mood may be shifting, but:

It’s too early to confidently call the top of the intermediate-term countertrend bounce off the March lows, as we’ve yet to see how the major indices will act when they test support of their 20 and 50-day moving averages below.  Still, it’s safe to say the near-term bias now favors the bears.  Yesterday afternoon, we bought the UltraShort Dow 30 ProShares (DXD), which moves in the opposite direction of the Dow.  It’s already showing a decent unrealized gain, and we expect it to move higher in the near-term.  Depending on market action, we may add another bearish position in the coming days, but we’re using discipline and patience to make sure we don’t get ahead of ourselves without having an abundance of price confirmation.

We believe stocks will eventually retest their March lows and put in a more significant bottom before moving much higher, but it could take a while before that happens.  The seven-week old rally provided astute traders with profitable opportunities on the buy side of the market, but the current levels of key price resistance also afforded traders the chance to enter new short positions at low-risk prices.  The simple fact remains that the charts have shown us nothing more than a substantial countertrend bounce within the context of a primary bear market.  Trading what you see, not what you think is a great way to ensure you’re always on the correct side of the market.  Above all, when in doubt, stay out!