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.

Frank Barbera on the GSEs, Fannie and Freddie:

In the case of Fannie Mae, even without the FAS 140 negative impact, the company currently sports about $40 billion in overall capital. Within the loan portfolio, FNM currently has around $80 billion in sub-prime loans, and another $200 billion in tier Alt-A. Assuming a 40% loss rate on the sub-prime loans and 30% loss rate on Alt-A (which we believe could actually be considerably higher), that’s $32 Billion (sub-prime) + $60 Billion (Alt-A) for a total of $92 billion in poor quality mortgage losses. In our view, those types of losses equate to nearly twice the companies’ total capital suggesting that FNM is insolvent and heading for a further collapse. Shareholders may end up losing everything with the demise of the GSE’s, likely to carry devastating implications for the U.S. housing market which could accelerate lower in crash like behavior. Of course, FNM and FRE will probably both end up being nationalized by the US government along with the remains of the airline industry and other casualties of the current down cycle. Of course, there are those who point to the idea that the GSE’s have some degree of mortgage portfolio insurance, with Fannie and Freddie having SWAP agreements with bond insurers like PMI, MGIC, Genworth and others.

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Unfortunately, a glance at the collapse in bond insurers of all types suggests that when the time comes for Fannie and Freddie to look for insurance re-payment, the odds are high that none of the insurance entitites will be able to pay off, creating a daisy chain of counter-party risk and collapsing corporations. For those with any doubt, the worst of this crisis is still in front of us, and as I said a number of weeks back, ‘the only light at the end of the tunnel’ is a large freight train rolling down the tracks.

Well, it looks like they finally got a bounce to stick, at least into the closing bell.

And BMB missed most of it, because he was out having a nice lunch and running some errands. Since that’s the case, I don’t have much to say about how or why it happened (though certainly a drop in oil prices helped a bit), so let’s just look at the numbers:

Even though stocks were rallying, Treasuries rallied too, and pushed yields a little lower on the long end:
6-month: 2.03%    2-yr: 2.48%    5-yr: 3.19%    10-yr: 3.88%    30-yr: 4.45%.

The internals turned positive, and volume picked up over yesterday’s levels. Advances/declines were 21 to 10 on the NYSE and about 7 to 3 on the Nasdaq, with up/down volume near 3 to 1 on both exchanges. New highs/lows were still far from healthy, at 4/383 on the NYSE and 17/292 on the Nasdaq.

The groups were all green with the exception of the commodity areas, and in regular bear-market-rally fashion, the losers turned big winners for a day. Airlines (+11.2%) led the move up, followed by banks (+7.6%), homebuilders (+7.0%), REITs (+6.8%), brokers (+5.4%), transports (+5.2%) and insurance (+4.3%). The former market leaders, the commodities, got smacked around again: steel (-3.7%), metals (-2.0%), gold and silver (-1.7%), oil services (-1.5%), natural gas (-1.2%) and oil stocks (-1.0%).

Energy prices fell hard for the second straight day. Crude oil dropped another five bucks to $136.04/barrel, gasoline lost 12 cents to $3.36/gallon (go fill up!), and natural gas got driven down to $12.36/mmBTU. The dollar index was nudged higher, to 73.01, but the precious metals held their ground, with gold losing only three bucks to $921/ounce and silver gaining a few pennies to $17.80/ounce.

BMB Note:   We’ve told you we could see a sharp rally sooner or later, and that’s what got going today as the shorts in the most beaten-down areas run for cover. We’ll see if it amounts to anything more than that.

One day (actually, more like two hours) doesn’t change my stance. Things were very oversold, and today’s action doesn’t even bring the indices back to their severely declining 10-day averages. We could get more bouncing over the next few days, especially with this being the set-up week for options expiration next week, but unless something changes drastically, I don’t expect this bounce to last - and I would expect yesterday’s lows to be taken out before this leg of the decline is over. If things really do firm up and begin to change the market’s character, then we’ll re-evaluate at that time.

The indices aren’t showing much movement, and the A/D lines are straddling the flat line, but some of the groups are moving in opposite directions. Today we have the airlines, drugs, HMOs, health care products, biotechs, insurance, and defense stocks leading the green team, while those commodity areas that started breaking down last week are following through to the downside, led by the steels, metals and mining, natural gas, oil services and gold and silver stocks.

Treasuries are slightly higher, yields a bit lower. Energy prices continue to pull back, with oil back down to the $136 area. The dollar index has edged a bit higher, gold and silver are a little lower.

As oil becomes harder to find and produce, and becomes more and more expensive, people are going to have to turn to new technology not only for ground transportation, but for in the air as well.

Wonder what the ‘airplanes’ of the future might look like? Maybe they’ll be turtles:.

Thanks to a commenter at Bill Cara’s site for the pointer.

Boone Pickens was on CNBC this morning, and is launching his “Pickens Plan” to help reduce our dependence on oil.

The ‘plan’ even has its own website.

Here we go, further off in the wrong direction:

Federal Reserve Chairman Ben Bernanke said Tuesday that the Fed should have additional powers to prevent and limit financial market turmoil.

Congress should consider giving the Fed power to set standards for capital liquidity holdings and risk management for investment banks, Bernanke said.

In the past, the Securities and Exchange Commission has been the primary regulator of broker dealers.

In addition, Congress might give the Fed broad power to promote financial market stability, Bernanke said.

If Congress makes this choice, “I do not think the Fed could fully meet these objectives without the authority to directly examine banks and other financial institutions that are subject to prudential regulation,” Bernanke said.

The biggest problem is, who’s going to control the Fed? At present, they seem to do whatever they please…

Ok, maybe some of this is yesterday’s news…

Fannie and Freddie are getting smacked around again, IndyMac sounds like they’re struggling to hang on, Asian stocks had a fairly rough night, European stocks are following that lead, and Office Depot isn’t helping matters much this morning.