Bear Mountain Bull

In his market summary tonight, Frank Barbera looks at the danger of the “open trench” that is presented by the banking stocks, and probably the rest of the market:

Things continue to take a dim turn for the worse, and it is a story that is getting more and more difficult to chronicle with each passing week. To the casual observer, the stock market is not doing well, the economy is not doing well, but perhaps there is still some ray of hope. Perhaps there won’t be a recession, perhaps things will be getting better sometime soon. We sincerely wish we could be that hopeful, that detached from what is truly taking place. As an observer of the stock market, it is crucial to understand the environment within which one is attempting to operate. In order to do this, a strong dose of stone cold reality is needed. One cannot conveniently ignore facts, brush past unseemly data, and only look at the rosy side of the fence. To do so is suicide – an invitation to let Wall Street and the markets separate you from your hard earned money, not to mention what this could do to your client’s accounts and their hard earned capital.

As if the poor price action isn’t enough to keep you out of the market…

Bennet Sedacca offers up “25 Reasons to Remain Cautious”. Here are a few for starters:

1.  Stocks are firmly in a downtrend.
The S&P 500 is down roughly 20% from the market peak on October 11, 2007.

2.  Corporate spreads are rapidly widening.
Investment grade bonds yielded as little as 0.30% more than U.S. Treasuries did back in 2003 - but are now as much as 2.30% above U.S. Treasury rates.

3.  Everyone I know is saying “All is well, buy America.”
The crowd is usually wrong at extremes.

4.  European equities are taking out the lows of the year.
European large cap stocks are now down more than 28% after peaking on June 20, 2007.

5.  The capital-raising window is closed.
Firms are losing their ability to raise new capital to sustain their operations. There have been several new corporate deals in the past couple of weeks that have failed to raise the desired amount of money.

	The steel stocks have been some of the strongest in the market of late. Today, the DJ US Steel index recovered after a probe below the 50-day MA - but the index hasn’t made any progress in nearly two months now.
	The chemicals look like they’ve topped…
	…and that mystifying run in the Transports looks like it’s over too.

Charts courtesy of StockCharts.com

Just a messy, topsy-turvy, all-over-the-map kinda day.

Stocks got hit out of the gate, just as the futures indicated. Then the indices rallied back into the green, only to sink to new lows around lunchtime, but then rally back up to around the flat mark again by the end of the day. Again though, the advance/decline lines never did confirm the green in the indices, staying well in the red for the entire day.

Today it was the Naz-100’s turn to lead the crowd, while the Transports lagged pretty badly:

Treasuries were fairly quiet again:
6-month: 2.08%    2-yr: 2.62%    5-yr: 3.33%    10-yr: 3.98%    30-yr: 4.54%.

Internals were mixed with a negative bias, with volume increasing above yesterday’s levels. Advances/declines were 2 to 3 on both exchanges, with up/down volume just below flat on the NYSE but just above the flat line on the Nasdaq. The new highs/lows numbers still look pretty pathetic, with more than 1,000 new lows racked up today: 23/537 on the NYSE and 17/489 on the Nasdaq.

The groups were split, with a few winners, like the homebuilders (+2.0%), banks (+1.9%), gold and silver stocks (+1.2%) and natural gas stocks (+1.0%), and a few losers: steel stocks (-3.2%), airlines (-3.0%), paper (-2.5%), metals and mining (-2.0%), transportation (-1.2%) and telecom (-1.1%).

Energy prices finished higher, but off their highest levels of the day. Crude gained almost a buck to $140.97/barrel, gasoline added a couple of cents to $3.51/gallon, and natural gas gained 13 cents to $13.51/mmBTU. The dollar index slipped back to 72.37. The precious metals had solid gains again, with spot gold up to $939/ounce and silver moving back above the $18 mark to $18.09/ounce.

BMB Note:   A wild day, but it doesn’t change much in my book. Yes, the indices managed to come back up off their lows, but internals remained pretty weak. That said, I’m sure the pundits will be hailing today’s action as ‘the bottom’ (watch/listen for it - I’m sure you’ll hear that more than once), and the market may use today’s reversal(s) as an excuse to move higher for a day or two or three - but today certainly didn’t have any signs of ‘capitulation’, so I think that any bounce from here will be nothing more than that - a bounce. The downtrend off the May highs remains firmly in place for now.

It’s hard for me to be convinced of any newfound market ’strength’ when the indices haven’t even taken out yesterday’s highs…

Keep an eye on gold and silver. They’re trying to edge above those recent ranges, and for those looking to enter, may be buyable on pullbacks. Your call.

The market was applauding the ISM index number out this morning - or so it seemed in that first hour. And the headline number was indeed better than expected.

But was the news good? Not really, says Michael Donnelly at CEO Economic Update (via The Big Picture). And you never knew there was so much info in this number…neither did I:

The Chicago survey of Purchasing Managers (PMI) jumped from 49.6 to 50.2, meaning the manufacturing sector went from recession territory to positive. And keep in mind the survey was expected to fall to 49. That sure sounds like good news, and many in the media (USA Today) (NY Times) will tell you it’s good news.

But unfortunately it isn’t.

The guts of the index tell a very different story. Orders were down from a month ago and are still in negative territory. This is now the 7th month in a row that orders have contracted.

True, ISM said production was up this month, and that should be encouraging, but it all went into inventory. In other words, companies are building at a healthy clip, but nobody wants it. Manufacturing inventory spiked up and was so immense we had the first month since April of 2006 where most manufacturing companies said inventory was climbing. In the intervening two years the majority of firms said inventory had been declining.

But that isn’t the end of the inventory story. Purchasing managers said that their customers inventory went through the roof, not surprising as deliverers were up. Their customers said their own inventory hadn’t piled up like this since January of 2001.

What comes next? Manufacturing will have to shut down to work off accumulated inventory, and get to a production level more consistent with sales. We are already seeing plans like this in the auto sector.

But the news gets worse when we look at the price component. Manufacturing firms are faced with prices they haven’t seen since the 1970s. Prices in the survey were at 68 in the diffusion index last year, and now sit at 91.5.

Remember it’s a diffusion index so a reading of 100 would mean that every single survey response said they faced higher prices, this only happened once in June of 1950. At 91.5 prices are the highest since July 1979, and it’s important to differentiate between “good” prices that occur from excessive demand. And “bad” prices which are shocks to the system outside our control.

The action has been mostly negative, but has been getting bounced around by the various numbers coming out from the car makers, with some worse than expected, and GM better than expected - though still far from “good”.

Quite a bit of bouncing around already this morning, as stocks opened lower, but the indices have managed to work their way back up off the lows and escape serious damage thus far. Advance/decline lines are still well into the red zone, however, and the Transports are getting hit much harder than the broad-based indices at this point.

The groups are split, but the big winner are limited to the gold and silver stocks and banks right now, with steels, metals, airlines, chemicals, transports, telecom, semis and networking leading the losers.

Treasuries are mixed - yields are up on the short end, but a bit lower further out. Energy prices are higher. The dollar index is slightly lower, gold and silver are higher.

More ridiculous finger pointing.

From The Big Picture this morning:

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half:  Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm’s one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants’ faults. 

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

You know, it’s never really broken my heart that Blackstone stock is down more than 40% from its IPO price.

None that I can tell…

European indices are down more than 2%, and US index futures are pointing quite a bit lower as well (Dow futures down 112) - and the pundits seem to be a bit lost as to the ‘reason’. There certainly isn’t any singular news item, and CNBC has fallen back on the ol’ standby: “oil prices and credit worries”. Yeah, right. Whatever.