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.

From today’s Five Things:

1. Regional Bank Woes Awaken Main Street

While Wall Street is busy congratulating itself with heart thumping back slaps over how Goldman Sachs’ (GS) earnings yesterday demonstrates how far the Debt Crisis is behind us, the guy who lives down the street from you in upper management of a regional bank is flipping over sofa cushions looking to scrounge up enough capital to make it to the end the year.  

Fifth Third Bank (FITB) today said it would try to raise $2 billion in capital through a combination of preferred and common stock offering and the sale of “non core” businesses. To a junkie, “non core” is just about anything in the flophouse not nailed down to the floor. In the case of Fifth Third, the bank spent, literally, the last decade swallowing up smaller banks all over Ohio, Indiana and Kentucky in the hopes of attracting a suitor. The debt crisis makes that plan unlikely at best.

Most astonishing, the bank said it saw a 40% to 45% increase in non-performing assets in the second quarter versus the first quarter. Yes, while Wall Street slaps backs and fires up victory cigars for surviving the fall, Main Street is about to get a gritty dose of reality and throw the fat right back into the fire.

See, Bear Stearns, Lehman Brothers (LEH), Goldman Sachs, those are Wall Street banks with Wall Street problems. There’s probably not more than a dozen people in all of Ohio who could be paid to muster up the strength to pretend to care about a big time Wall Street bank on the ropes. But Fifth Third? That’s different. That’s where people deposit their paychecks. That’s where people keep their certificates of deposit. That’s Main Street.

With consumer confidence and sentiment near their lowest in 20 years, dividend cuts and troubles for regional banks matter. This is Act II of the Debt Crisis. And it’s only beginning.

After breaking the near-term support of last week’s lows, there’s nothing left standing between the Dow and the January/March lows.

The bank stocks sunk to new lows, the REITs followed through to the downside, and a few other groups may be resuming their downward slide:

On the good side, the metals, oils and chemicals are holding up:

Some stocks are holding up a bit too well. Judging by the parabolic nature of some of these coal/resource stocks, some sort of corrective action can’t be too far away. Risk levels are off the charts with these stocks - and there are others out there. Don’t be the last one in.

Charts courtesy of StockCharts.com

Another shaky day for most stocks. A morning dip, a late morning save, and an afternoon slump that sent the Dow to its lows of the day, below 12000 and down 167 on the day. But another late-day save (what else) popped the Dow up a good 100 points before getting slapped back down a bit into the close.

Much of the market - including the major indices - continues to look like it’s in trouble, but the few bullish areas - metals, energy, coals, etc. - remain completely oblivious to the turmoil.

Treasuries turned back into a refuge for the ’scared’ money as they rallied, pushing yields down:
6-month: 2.22%    2-yr: 2.86%    5-yr: 3.56%    10-yr: 4.14%    30-yr: 4.71%.

Internals were pretty negative once again, and volume increased to its highest level of the week thus far. Advances/declines were 5 to 14 on both exchanges, with up/down volume 1 to 3 on the NYSE and 1 to 4 on the Nasdaq. New lows picked up, with highs/lows at 60/178 on the NYSE and an ugly 37/213 on the Nasdaq.

The groups were pretty red, with just a smattering of green. Leading the losers were the airlines (-3.4%), banks (-2.9%), semiconductors (-2.3%), networkers (-2.0%), retail (-1.9%), telecoms (-1.8%), transportation (-1.5%), REITs (-1.4%), computer tech (-1.3%) and disk drives (-1.3%). The few green groups were led by metals and mining (+2.6%) and steel stocks (+1.2%).

Energy prices refuse to back down. Crude ran back up more than two bucks to $136.68/barrel, gasoline moved back up a nickel to $3.47/gallon, and natural gas topped 13 bucks to $13.21/mmBTU. The dollar index gave up a morning bump to slip back to 73.41. Gold and silver posted gains, with spot gold now at $894/ounce and spot silver up to $17.33/ounce.

BMB Note:   Wild day. The metals/coals and misc. energies continue to run, but the rest of the market is having a pretty rough time of it.

The Dow broke near-term support - the lows of last week - and closed below those levels, though it was able to pop back above the 12000 mark. It remains the weakest of the major indices, and has been trending strongly lower since May 19th, now dangling just a few hundred points up off the Jan/March lows. The S&P hasn’t been much better, while the Nasdaq and Russell have held up better than the other two - though the Naz dipped back below the 50-day today.

My approach to the market hasn’t changed. The precious metals have worked their way back to the top of their trading ranges, and silver has edged back above the 50-day - I’d really like to see them break free of those ranges, where they’ve been subjected to numerous pumps-and-dumps. In stocks, though I’ve added a bit to my short positions over the last couple of days, I’ll probably be a little careful about adding too much more at this point. The market is always ripe for a short-covering bounce during these selling binges, and you never know when the Fed will pull a rabbit out of their butt hat to make the market jump, especially with expiration Friday only a couple of days away. And I put absolutely nothing past these guys…

And then when things get bad enough–say gasoline at 27 bucks a gallon, you just have to start making your own.

We’ve wondered before who was providing capital to all of these financial institutions that are so desperate to raise it, and what would happen if suddenly those ’sources’ of capital were to dry up?

Bennet Sedacca offers some possible answers:

I’ve been writing about financial institutions starved for more capital. So far they have gone to Sovereign Wealth Funds, which are now severely underwater and may have stepped away from the table permanently.

Note in Lehman’s (LEH) recent capital raise, folks like Putnam stepped up to ‘defend its position’. I’m fairly certain it’ll rue the day it made that purchase. Then, we had the Bond King at PIMCO say he would buy anything under the ‘Fed Umbrella’, whatever that is. After all, the Fed’s balance sheet is just as impaired as anyone’s. Using its alphabet soup of repo and term facilities, the Fed has jettisoned over $300 billion of Treasuries in exchange for esoteric garbage from banks and brokers. So, as the ‘lender of last resort’, the Fed is close to tapped out.

We’ve seen most financial institutions offer preferred stock and hybrids (those that are fixed rate that then convert to floating rate). The offerings started at 7% and then went to 8%, and many preferred shares and hybrids are now trading in the 9-10% range. So, imagine you’re one of these over-leveraged, under-capitalized institutions and you need money. Badly. Without the capital to replace the write-downs you’ve taken in sub-prime and are likely to take in Alt-A and construction loans, you’re in an impaired position. Issuing securities at 10% is not only non-economic; it re-prices everything else in the marketplace lower.

And now you become desperate. Just ask Fifth Third Bancorp (FITB), a bank I’ve talked about often. Fifth Third, along with National City (NCC) and KeyCorp (KEY) have the same, decimated business models. They’re based in the Rust belt, where manufacturing jobs are losing ground by the day. To come to market with a preferred offering, if I had to take a guess, it would need to be 10+%. FITB announced that it’s slashing the dividend and will attempt to sell $2 billion in convertible preferred shares with a yield in the 8.5% along with some nasty dilution for current equity owners. This is a disastrous turn of events, but one that was inevitable. Welcome to desperation station.

Who are the usual buyers of all the preferred deals we’ve been seeing over the past year? Mom and Pop retail—they won’t buy anymore, as Wall Street has jammed them full of securities that are severely underwater. Insurance companies–hmmm, let’s see–they won’t buy as they’re so deep in Level 3 Assets that they’re issuing themselves! What about the PIMCO’s of the world? It’s most likely full up as well. So the capital raising window, in the sense we’re used to is in the process of closing. 

This means that corporations will now do whatever they must in order to stay solvent. They’ll slash jobs and dividends and attempt to raise capital by issuing common equity. The problem is that they’re too late; they should have done this already. Instead they were stubborn and ‘hoped’ they would be OK and the economy would recover. But as they say ‘hope is a poor roadmap to success’.

Ladies and gentleman, welcome to Stage 2 of the Credit Crisis. This, in my opinion (a nod to the market Gods) will likely be more swift and unpleasant than Stage 1. And again, if I’m wrong, all I will have lost is opportunity, not capital.

Not too much positive action this morning as the indices drift lower on poor advance/decline figures. Leading the drop are the banks, airlines, telecoms, semiconductors, retailers and homebuilders.

Treasuries are higher, pulling yields lower. Energy prices are fairly flat after release of the weekly inventory numbers, and as Pres. Bush pushes for offshore drilling. The dollar index is just slightly higher, but gold and silver are a bit higher as well.

Put on your hard hats - the sky will be falling soon, according to RBS:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us - be prepared,” said Bob Janjuah, the bank’s credit strategist.

A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

We’ll seen if they’re right - cuz you can bet we’ll be watching.

Hat tip to Bill Cara.

A couple of earnings reports out - FedEx posts a loss and lowers guidance, Morgan Stanley beats estimates, on lower profit and revenues. Also in the financial arena, Fifth Third is raising capital - aren’t they all?

Index futures are pointing lower.