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.

The Transports finally cracked. The $TRAN broke through near-term support and the 50-day today, and the Nasdaq transportation index looks a little worse:

Part of the reason for the trouble in the Trannies? They finally went after the railroads today:

Some recent arrivals to the ugly party: semis, networkers, retail, REITs:

The financials are getting downright spooky. As you know, the banks have been getting crushed day after day. And in the brokers, Lehman isn’t the only stock hinting that __it’s about to hit the fan again, maybe soon:

Who knew that being ‘defensive’ could be so dangerous?

Charts courtesy of StockCharts.com

We told you that things were still pretty wobbly underneath the surface. The tremors worked their way up to where they were felt just about everywhere today.

The major indices all came under pressure today, and those ‘miracle’ Transports, that had held up defiantly as oil prices continued to rise, got ripped to shreds:

Treasuries rallied back up in the middle of the curve, but interestingly enough, didn’t move much out at the ends:
6-month: 2.12%    2-yr: 2.80%    5-yr: 3.47%    10-yr: 4.07%    30-yr: 4.70%.

Internals were pretty ugly again, and volume edged up above yesterday’s levels. Advances/declines were 1 to 4 on the NYSE and 1 to 3 on the Nasdaq, with up/down volume 3 to 17 on the NYSE and 1 to 8 on the Nasdaq. New lows increased again, with new highs/lows at 28/204 on the NYSE and 13/197 on the Nasdaq.

Pretty much a bloodbath in the groups today. Hardest hit were the homebuilders (-6.3%), airlines (-6.1%), transportation (-4.1%), banks (-3.6%), brokers (-3.6%), semiconductors (-3.4%), HMOs (-2.9%), networkers (-2.8%), hospitals (-2.6%), internets (-2.6%) and retail (-2.5%) - and there was plenty more red after that. Despite the carnage elsewhere, oil stocks (+1.1%) managed to hang in the green.

Energy prices awoke from their two-day slumber, and added to the market angst. Crude oil rebounded by over five bucks, up to $136.38/barrel, gasoline grabbed back 14 cents to $3.47/gallon, and natural gas moved up to $12.65/mmBTU. The dollar index slipped back to 73.26. The PMs recovered some lost ground, with gold up to $881/ounce and silver to $16.86/ounce.

BMB Note:   The destruction continues. Pretty ugly stuff - hope you’ve managed to stay out of the storm’s path.

Financials and housing may have gotten a bounce yesterday, but that’s all they got as both of those areas got ripped again today. And some other groups are starting to come apart as well, adding to the pressure on the indices: transportation, semiconductors, retail, REITs all breaking down, and I’m probably missing a few.

Aside from miscellaneous resources/oils, coals and fertilizers, there isn’t a lot of good going on right now. My few short positions are profitable, but things have been sold fairly heavily over the last few days, so I’m not seeing a lot of good new short entries. A bit of a bounce could change that, and I’m sure we’ll get something of a bounce sooner or later. After all, next week is options expiration, isn’t it?

But overall, the market is in pretty rough shape, and getting worse rather quickly. This is not a market to be toyed with at this point. If you’re not inclined to play the short side, just stay away, or find yourself a good corner to hide in (a room in the interior of the home, away from doors and windows). Preserve your capital for better days.

Lance Lewis thinks that maybe Ben and Hank have been watching a little too much late-night poker on television. When it comes to interest rates and the dollar, he says they’re bluffing. BMB agrees.

These statements by Paulson regarding intervention amount to a giant bluff, and like the Fed’s comments about inflation, they are merely designed to buy more time by trying to prevent the dollar’s decline from becoming disorderly. Talk will only go so far, however.

The same can be said for “Gentle Ben” Bernanke’s “tough guy” comments last night on inflation as well. After all, this guy has been talking tough against inflation every meeting since he began easing in September. Now the market is finally forcing him to raise the volume of the rhetoric somewhat by pushing oil to levels that six months ago would have been beyond the wildest dreams of most.

There’s no doubt that the Fed will eventually be raising interest rates at some point, but it won’t be until the banking system is in better shape. And even then, the creep higher in interest rates that the Fed is likely to undertake will remain well below the rising rate of inflation for some time (i.e.- real rates will still be negative even as the Fed is raising rates). Even the Fed’s Fisher, the supposed “hawk,” said today that any future rise in interest rates would be “very deliberate” and “gradual.”

This Fed bluff against inflation is no different than Paulson’s intervention bluff on the dollar. yes, the Fed will eventually be raising rates, but by the time it does, it will be so far behind the curve that it won’t matter much.

As I’ve noted before, it was after the dollar index bottomed in 1978 that inflation really accelerated during that particular stagflationary period. It was also after that low in the dollar index and after Volcker began raising interest rates that gold went up four-fold too. The Fed’s first rate hike is not the signal of the end of inflation. Instead, it’s typically the signal that inflation is about accelerate. Monetary policy works with a lag after all.

The Fed has been quite successful at running the printing press and cushioning the housing bust and the resulting credit crunch, but the price of that “printing” is going to be more inflation. There are no free lunches.

Have you noticed that the Fed fools never speak of actual “inflation”, but rather of “inflation expectations”? In other words, they’re not trying to manage actual ‘inflation’ - because inflation is their middle name. It’s what they do best, it’s their bread-and-butter. If they can’t inflate, they have no tools. They just want to be able to do it quietly, without everyone else really noticing.

And all this talk of the Fed raising rates has been pure lunacy. If the economy continues to go into the tank and the Dow drops another 500 points, those same people are going to be screaming for the Fed to “do something”. And the Fed will. They’ll lower rates. I have a feeling we could see 1.5 or even 1.25 on the Fed Funds target rate before this is all over…

From Bill Cara yesterday morning:

Yesterday, the Federal Reserve Bank of New York President Tim Geithner delivered a slick presentation of Fed concerns for the US financial system and recommended solutions. To be blunt, I thought his performance was disgraceful.

To begin, there is no American financial system; it is now a global one and the only solution will be a global one, not one regulated by the US Federal Reserve System.

Next in importance was that Geithner admitted the system was in trouble but not once did he hint at the real causes, which happen to be that embedded conflicts of interest and self-regulatory organizations mix like oil and water, which is to say the system is unworkable; it results in a system of insider deceit followed by cover-up. The public is sick of it.

Geithner also discussed the Bear Stearns tragedy, which he says almost destroyed the system if it were not for the actions of his bank. But not once did he admit that Bear Stearns II is happening before our eyes in the form of Lehman Brothers.

Bear and Lehman have gone down the same road. Inordinate fees packaging up fraudulent loans to hide the stench and then peddling the SIV’s to buyers who didn’t understand there was no real market. Then when suspecting people decided to pull their bids for that crap, the Fed discovered there was “no liquidity in the system”.

Why should there be liquidity for garbage. If a million dollar house is discovered to be termite ridden and sitting atop a chemical cesspool, it follows that there will be no bids for that property. Does that mean liquidity dried up?

To deny their problems, just like the bravado from Bear Stearns a couple days before declaring that bank was “bankrupt”, Lehman did the same, but this time few people listened. You see the banks have lost the ability to generate goodwill, which is to say to trade at several times book value. So when Lehman spokespeople claimed the bank was sound and not in need of new capital, traders scoffed. And a couple days later, when Lehman admitted the losses this quarter—their first ever—amounted to almost $3 billion and that they desperately need at least $6 billion in new capital, traders only smiled. I repeat; does that mean liquidity dried up?

I think it will be tough for the banks to come out of this stockmarket cycle without serious consideration to an entire new set of securities rules and regulations based on a new US Securities Act that recognizes the need to remove conflict of interest. “Trust us” is an expression like the horse-and-buggy, replaced by a new system, which in this case is “trust no one”.

The new banker will have to return to capital markets with the need to earn client respect one account at a time. I say that now because for the foreseeable future there will be very tough times in equity and debt markets. Regardless of how well the economy is performing or its outlook, prices of most securities will ratchet down to a point of book value. Portfolios that have been beaten down will be left in tatters.

As I say, for good reason, the buy side will no longer place much value on goodwill. The truth is there hasn’t been much coming our way for many years now.

“Trust no one” is the new rule. Tim Geithner, you don’t get it and maybe you never will.

For more on how much - or how little - those financial companies truly deserve our ‘trust’, you might give a listen to the opening segment of Gary Kaltbaum’s radio show from Monday afternoon - here is a link to the mp3 file.

A pretty rough start for stocks this morning, as the indices are following up on the weakness we’ve been seeing. Most of the major indices are down 1-plus percent at this time, with the Transports getting whacked for almost 4 percent. Leading the groups in the decline are the airlines, transportation, HMOs, housing, semiconductors, banks, steel, retail, REITs, internets and brokers.

Treasuries are running higher as stocks fall, pulling yields down. Energy prices are higher, and edged up a bit more following the release of the weekly inventory report. The dollar index is slipping back off its run of the past couple of days, and gold and silver are higher.

No matter which side you’ve been on, this hasn’t been an easy market to play.

Todd Harrison this morning:

I talk with a lot of sharp money managers and while they have variant views on where we’re going and how we’ll get there, there is uniform agreement regarding the toughness of this tape. Trading these squalls is akin to sucking air through a straw while swimming through a perfect storm. It’s not impossible to prosper but it certainly pays to keep an eye on the life raft.

The deleveraging process, while prolonged and painful, will ultimately lead to a sustainable rebirthing of the business cycle. The real recovery — as opposed to the artificial credit expansion we saw on the back of the tech bubble — will be ripe with opportunities for those with fresh capital.

I’m not smart enough to know whether the debt bubble unwinds as cancer or a car crash but I’m seasoned enough to respect that it’s an unavoidable reality. Until it does — one way or another — the underlying risk to the system will persist in kind.

That doesn’t mean we won’t see rallies and runs, it simply suggests that risk management trumps reward-chasing and our three core tenets of capital preservation, debt reduction and financial intelligence should remain in place.