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.

…read through the comments on Barry’s site after one of his appearances on Kudlow’s show?

They’re hilarious.

I find it rather interesting that the VIX is now at its lowest points since the October highs — when the S&P was 160 points higher, the Dow more than 1000 points higher, and the Nasdaq 350 points higher.

Chart courtesy of StockCharts.com

Kevin Depew joins in today’s inflation discussion in today’s Five Things:

1. Consumer Inflation Reaching Hysteria Levels

The Consumer Price Index rose a less-than-expected 0.2% after a 0.3% gain in March, the Labor Department reported this morning. But I just bought a loaf of bread for $2.59, a gallon of milk for $4.58 and spent $80 filling up my car with gas. Clearly, all government inflation data must be a conspiratorial lie perpetuated by bureaucrats and politicians intent on keeping us in the dark about our own checkbook balances, right?

Well, far it be it from me to defend bureaucrats and politicians - certainly anyone with a stake in conjuring up votes from Americans has a vested interest in underreporting inflation - but the Consumer Price Index, flawed as it may be, is just a data a red herring, a smokescreen, a distraction. Simply put, increases and decreases in the Consumer Price Index are the least of our “inflation” problems. 

2. What Is Inflation?

The real issue is that the vast majority of us don’t understand what inflation really is. Now, we do understand what it means when the same trips to the gas pump in the car require more dollars to fund, or when the same amount of groceries require more dollars to carry out of the store, but these are merely symptoms of inflation.

Today we are in the midst of an episode of hysteria over the symptoms of inflation in two areas; food and gasoline. Some decry the lunacy of the Consumer Price Index, a government measure they say purposefully and willfully understates inflation. Some focus on inflation expectations, as if the mere expectation of continued inflationary symptoms was itself inflationary (this is akin to expecting hair growth to fuel hair growth).

What is inflation? It is actually very simple. It is an increase in the quantity of money and bank notes in circulation.

Where is the confusion? Ludwig Von Mises described it this way: 

“[P]eople today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.”

3. So, What Do We Do Next?

So, the question before us is not, Are food and energy exhibiting symptoms of inflation? The question is what happens as a consequence of those symptoms. And here is where we see a massive disconnect emerging.

Today’s “inflation” is illusory. It is the tail end of the Federal Reserve’s mirage of economic production; credit creation. The mechanism of transfer between the Federal Reserve and the consumer are banks. (It should be noted that the rise of consumer lending units, and the dependence on them (at least until late last year) by companies in the original business of selling tangible products, companies ranging from General Electric to General Motors and at one point even Target, are illustrative of the efficacy of the credit creation and transfer mechanism between the Federal Reserve and the people). And so the potential for this credit creation to fuel more inflationary symptoms is dependent entirely on the willingness both of banks to lend and consumers to borrow.

That is why this debt crisis is ultimately so deflationary. It chokes off credit at the nozzle while the hose (banks’ balance sheets) itself is leaking.

Are you paying more for gas? Yes. Are you paying more for food? Certainly. The question is what are you going to do about it. Our bet is you are not going to borrow and spend more. The consequence of credit creation and a crisis of unproductive debt is deflation. This is not an event; it is a process. Step one is the process of banks unwinding debt. Meanwhile, today’s symptomatic inflation in some high profile categories paves the way for tomorrow’s unwinding of debt by consumers. If the unwinding of debt and tightening of credit for corporations is merely a whisper of deflation while symptoms of inflation persist, the unwinding of debt by consumers will be a roar.

	Short term, the S&P trend is still up, but the battle over the 1420 barrier rages on. Longer term, the S&P is fighting with the 20-month moving average.
	Though some of the market has been enjoying good times up off the March lows, not all stocks have been taking part in the festivities.

Charts courtesy of StockCharts.com

Hmm. Another one of those days where the story isn’t in the final numbers, but really in the path taken to get there.

Things rocketed up out of the gate, and kept running until the afternoon - albeit on light volume again - and then things started to come undone in the last hour or two. Before looking at the final numbers, consider this: at the highs of the day, the Dow was up 161, the S&P was up 17, the Nasdaq was up 33, and the Nasdaq-100 was up 28:

Treasuries were lower, yields up, some edging to new multi-month highs:
6-month: 1.89%    2-yr: 2.51%    5-yr: 3.19%    10-yr: 3.91%    30-yr: 4.60%.

Despite the afternoon turnaround, internals finished most positive, with volume at or slightly above yesterday’s levels. Advances/declines were 3 to 2 on the NYSE but flat on the Nasdaq, with up/down volume 12 to 7 on the NYSE and 5 to 4 on the Nasdaq. New highs/low remain ever-divergent, at 122/19 on the NYSE but 60/74 on the Nasdaq.

The groups were somewhat split, with the commodities taking a back seat again. Leading the green team were the homebuilders (+2.7%), airlines (+2.6%), disk drives (+2.1%), computer hardware (+1.6%), retail (+1.6%), paper (+1.5%), telecom (+1.4%), semiconductors (+1.2%) and chemicals (+1.2%). The losers were led by oil services (-2.2%), gold and silver stocks (-1.8%), steel stocks (-1.5%), metals and mining (-1.5%) and natural gas stocks (-1.2%).

Energy prices gave the market just a tiny break, as crude pulled back to $124.22/barrel and gasoline slipped a few cents to $3.17/gallon - but natural gas was higher, at $11.59/mmBTU. The dollar index was just slightly higher, at 73.35. Precious metals were a little lower, with gold losing a couple of bucks to $864/ounce and silver slipping to $16.52/ounce.

BMB Note:   That was a rather interesting day - so has the market hit the wall? I think it’s probably a little too early to tell whether it’s hit a major wall or just a minor speed bump.

One of the things I found interesting during the big runup in the morning was the lack of participation from some of the usual suspects - like AAPL, BIDU, GOOG, RIMM, etc. They all hit their highs pretty early, didn’t move any higher, and were some of the first to start falling. I have no idea whether it’s meaningful or not.

Another thing about today’s morning rally is that volume dried up pretty quickly again, and was running pretty light up near the highs of the day, only to accelerate when the selling started.

Maybe today is just another bump in the road on the way to higher prices. After all, we haven’t seen the start of serious, consistent distribution up to this point. But for now, the Nasdaq and Nasdaq-100 did fail their mini-breakouts on the day, and the S&P has yet to get over that 1420 hump.

…of the Fed’s pawn shop, courtesy of Calculated Risk:

All news remains good news in this expiration week, and stocks continue to move higher. The Nasdaq indices and the Russell have edged out to new multi-month highs, but the Dow and S&P are still just below last week’s highs. A/D lines are solidly in the green this morning. Leading the groups are airlines, semiconductors, homebuilders, telecoms, computer hardware, retail and disk drives. The oil services are down slightly, in a very short red list.

Treasuries are flat to slightly higher, yields just a bit lower. Energy prices are flat to lower. The dollar index is just slightly higher, gold and silver are near flat.

I know the market is oblivious to bad news these days, but some of the foreclosure numbers out this morning are rather amazing. From Calculated Risk:

From Bloomberg: U.S. Foreclosures Rise 65 Percent as Vacated Homes Add to Glut

U.S. foreclosure filings climbed 65 percent and bank seizures more than doubled in April from a year earlier as rates on adjustable mortgages increased and vacated homes added to a glut of unsold homes, RealtyTrac Inc. said.
…
Bank repossessions jumped 145 percent in April from a year earlier to 54,574, according to Irvine, California-based RealtyTrac. The company has database of more than 1.5 million properties and monitors foreclosure filings including defaults notices, auction sale notices and bank seizures.

Banks will seize about 60,000 properties a month through December, when about 1 million U.S. homes, or a quarter of all homes for sale, may be bank-owned …

The current pace of 1,000 foreclosures per day in California makes 60,000 per month nationally very likely.

Some new ‘currency income’ ETFs from Wisdom Tree begin trading today (the Yen ETF begins trading Friday):

WisdomTree Dreyfus Chinese Yuan Fund (CYB)
WisdomTree Dreyfus Indian Rupee Fund (ICN)
WisdomTree Dreyfus Brazilian Real Fund (BZF)
WisdomTree Dreyfus Japanese Yen Fund (JYF)
WisdomTree Dreyfus Euro Fund (EU)

From Wisdom Tree:

The ETFs will seek to earn current income reflective of money market rates available to foreign investors in the specified country or region. The funds will also seek to provide exposure to changes in the value of a designated non-U.S. currency relative to the U.S. dollar. These funds are classified as Actively Managed ETFs by the SEC. While still maintaining the full transparency of ETFs, the ability for active portfolio management should allow for greater investment flexibility. Although each fund invests in very shortterm, investment grade instruments, the funds are not “money market” funds and it is not the objective of the funds to maintain a constant share price.

More on the ‘miracle’ CPI numbers from The Big Picture:

The usually Bullish Michael T. Darda of MKM Partners was rather skeptical of the data:

From the CPI report, “In April, the index for petroleum-based energy fell 1.6%, offsetting a 2.5% increase in the index for energy services. The transportation index declined 0.7% in April, reflecting a 2.0% decrease in the index for gasoline.” And to top it off, the index of commodity prices rose just 0.1%.

Huh? Gasoline prices rose by about 10% in April. Virtually every index of commodity prices is near all-time highs (and up about 30% since the beginning of the year). I’m not sure what the BLS is smoking here, but it must be pretty strong stuff.

I have to agree.

In what is probably the sickest joke that our government plays on its people on a monthly basis, the April CPI report was released this morning, reporting an increase of only 0.1% in “core” inflation. Never mind the largest increase in food inflation in 18 years.

And here’s a good one:

Today’s report showed energy expenses were unchanged after a 1.9 percent increase in March as gasoline prices dropped 2 percent. Fuel oil costs jumped 4.4 percent and natural gas prices climbed 4.8 percent.

The decrease in gasoline prices reflects government efforts to adjust the numbers for seasonal variations, Dana Saporta, an economist at Dresdner Kleinwort in New York, said before the report. The increase in prices at the pump was smaller than usual during April, causing the adjustment process to show a drop.