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 Mike Shedlock:

The credit bubble has popped. Fannie Mae (FNM), Freddie Mac (FRE), Washington Mutual (WM), Wachovia (WB), and Lehman (LEH) are all at serious risk. Many smaller payers are at huge risk as well.

Meanwhile, the Fed continues to orchestrate “takeunders” like the shotgun marriages between JPMorgan (JPM) and Bear Stearns (BSC), and Bank of America (BAC) and Countrywide (CFC). The Fed’s idea seems to be for the strong to take over the weak. The reality is the strong become weak through these efforts.

Paulson’s statement “Institutions Must Be Allowed To Fail” is in reality an implicit admission the Fed is powerless to stop a credit implosion whether the Fed wants to do something about it or not. We have finally reached the point at which the mess is too big to bail. All that remains at this point is the final numbers on how much taxpayers have to cough up when Congress foolishly tries to make water run uphill.

From Yahoo:

In a sign of some improvement in the credit crisis, Wall Street firms for the first time didn’t borrow from the Federal Reserve’s emergency lending program and commercial banks also scaled back.

Investment firms didn’t draw such loans for the week ending July 9. They borrowed just $1.7 billion in the previous week ending July 2, down from $6.1 billion in the week before that. Such borrowing rose as high as $38.1 billion in early April.

Hmm. While this might be ‘good’ news for the banks, it could be bad news for the Fed. Does this mean that the Fed now holds ALL of the garbage paper??

Just askin’…

Should the gov’t bail out financial institutions? Surprise!

At Mish’s blog, he quotes Hank as saying that neither homeowners nor institutions should necessarily expect help:

Homeowners should not anticipate a government bail-out, said Paulson.

“These borrowers can and should be living up to their mortgage commitment—government intervention here would be inappropriate.”

Paulson extended the same advice to large financial institutions. Banks should not expect to be bailed-out by government, despite intervention by the Federal Reserve in the near-collapse of Bear Stearns in March.

For market discipline to be effective, market participants must not expect that lending from the Fed, or any other government support, is readily available,” Paulson said. “For market discipline to effectively constrain risk, financial institutions must be allowed to fail.”

The way I see it, the government may not be able to bail out homeowners, banks, or other financials - because they’ll be too busy saving Fannie and Freddie. Mish also quotes Fortune:

“If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”

“The major issue is that these are very leveraged financial institutions, leveraged much more than any other bank, and they have lots of mortgage assets. As real estate values decline every day, the value of [the mortgages that it bundles, guarantees, and sells] are called into question,” says Dalton Investments co-founder Steve Persky, who has been focused on distressed mortgage assets.

The possibility of government aid looms because it’s hard to see how the private market can help the companies. Their stock market values have dropped so low that it would be difficult for them to raise money. For example, Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company’s market capitalization - the number of outstanding shares times the share price stands at $8.7 billion.

“An investment banker would be hard pressed to raise an amount of money nearly equal to the value of the entire company,” Egan says.

It’s debatable where the legal obligations lie, but as a practical matter, the government can’t let these institutions fail because they are being counted up on to help fix the mortgage mess. If Fannie and Freddie were unable to buy and back loans, banks would stop originating them and the pool of homebuyers would shrink, causing home prices to fall even further.

The doomsday scenario could cost taxpayers more than $1 trillion, says the S&P report. The report went so far as to say that a government bailout of Fannie or Freddie could force the agency to lower its rating on the creditworthiness of the United States.

So which is it? Will the gov’t save ‘em or sink ‘em? I don’t think there’s much doubt about Fannie and Freddie. But that might leave a lot of others left to try and do the jellyfish float all by themselves.

Update:   Mish asks the question, “What does Hank really mean?”, in tonight’s column at FSO:

Today Paulson Says Financial Institutions Must Be Allowed To Fail.
I would like clarification from Paulson as to what “fail” means. What it should mean is Fannie and Freddie go bankrupt, the government gets out of the GSE sponsorship business, and home prices fall to their natural level.

What I suspect Paulson means is We’re All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable. In this scenario, the share price of Fannie and Freddie will drop to zero, yet taxpayers will foot the bill to keep Fannie and Freddie in business.

From Mr. Practical. No comments needed - it speaks for itself:

Minyans shouldn’t be surprised by the comments of former Federal Reserve president William Poole: “Congress ought to recognize that these firms [Fannie Mae (FNM) and Freddie Mac (FRE)] are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer.”

Some time ago, we challenged the GSEs (government sponsored enterprises) business model, saying they were making extremely thin margins on very heavy leverage: It was highly probable that squeezing those margins would invalidate the business model and cause insolvency very quickly.

To most people, that seemed like an entirely hypothetical scenario when these stocks were thriving and the companies were carefully hiding their Achilles’ heels.

Now, it’s reality, but it still isn’t clear whether the lessons of leverage will finally be learned. Government officials certainly refuse to grasp them, since leverage is their only power. But the market understands leverage all too well, and it’s exacting the cure.

The GSEs are the system’s poster boys for leverage. Let’s not forget how we got here: The Fed drove real interest rates negative (and they’re still there), thus making “fake” capital available for widespread borrowing and spending.

Now the debt can’t be borne; the Fed’s devalued the dollar to death and thus destroyed any wealth the middle class had.

It’s breathtakingly cowardly - but then, I expect nothing less from bureaucrats.

We the people, unfortunately, still haven’t learned that lesson. We’ve rolled over and given away liberties to our government in order to “be safe”; now, we’re about to give still more power to the bureaucrats who took our wealth away.

Chart Swing Trader has pretty much the same feelings on the subject:

I guess much of the early choppiness was due to the testimony of the idiots…I mean experts from the Fed and Treasury before Congress, saying how they would solve all problems. I really do love how the Fed is asking for more regulatory power considering they were the ones that caused a giant part of this whole mess. It makes no sense to me whatsoever, but little the government does these day makes sense to me. The Yahoo Finance headline read “Fed Chief: Gov’t Needs More Power When Firms Fail.” Yeah, that sounds like a great idea. Why does government always need more power, and why don’t more Americans question that idea? How about we try a novel idea - let these firms fail once in a while. Once they know they won’t be backed entirely by the government, perhaps they will manage themselves a little better and stop taking on way too much risk that they know doesn’t really matter because the government will bail them out. OK, that’s enough for my rant for the day.

Ditto.

Today’s same-store-sales numbers were not greeted kindly by holders of retail stocks.

Here are a few of the names that were hardest hit on the day:

But there are plenty of other ugly retail charts to go around:

Charts courtesy of StockCharts.com

Another day with plenty of ups and downs. It just so happened that the closing bell rang during one of the ‘ups’.

The final numbers don’t tell much of a story, if indeed there IS a story to go with all of the thrashing around in the market today. Here’s where the indices ended, but they were all over the map:

Treasuries were quiet, with little movement in yields:
6-month: 1.95%    2-yr: 2.40%    5-yr: 3.08%    10-yr: 3.80%    30-yr: 4.41%.

Like stock prices, the internals were all over the place today as well, finishing mixed. Volume came in just a bit higher than yesterday. Advances/declines were just below flat on the NYSE and 15 to 13 on the Nasdaq, with up/down volume 6 to 7 on the NYSE but 13 to 7 on the Nasdaq. The huge spread between new highs and new lows continues, with highs/lows at 12/434 on the NYSE and 11/290 on the Nasdaq.

The groups had a few more winners than losers, and the commodity groups bounced back to the top of the heap for a day. The winners were led by metals and mining (+3.7%), natural gas stocks (+3.3%), gold and silver stocks (+2.8%), oil services (+2.7%), commodities (+2.7), steel (+2.4%) REITs (+2.2%) and chemicals (+2.0%). Leading the losers were the retailers (-3.2%), HMOs (-3.0%), homebuilders (-2.0%), paper stocks (-1.7%) and airlines (-1.5%).

Energy prices were fairly quiet much of the day, until something got them going right before the close. Whatever it was drove crude higher by more than five bucks, up to $141.65/barrel. Gasoline jumped 13 cents to $3.51/gallon, and natural gas rose 30 cents to $12.30/mmBTU. The dollar index fell back from an overnight bump, dropping slightly to 72.52. The precious metals had a fairly strong day, threatening yet again to break out of their multi-month consolidation. Spot gold gained 18 bucks to $946/ounce and silver moved higher by 17 cents to $18.29/ounce.

BMB Note:   I guess it’s kind of fitting that the Wimbledon tournament just ended - the stock market seems to have picked up on the tennis theme: back and forth, back and forth. It’s pretty hard to get a handle on what to do when things are moving up and down as much as they have been.

The indices bounced around again today, and the various groups diverged, but without much progress being made. Things stand pretty much where they were yesterday. The indices dipped just below their lows of the week a couple of times, but didn’t stay there, so the action remains somewhat range-bound - but from the looks of things, still rather treacherous.

I doubt that the roller-coaster ride is over. Buckle up, and please keep your hands inside the car.

Something just happened, some news of some sort, because oil took a spike upward of about five bucks and the market took a dive - and CNBC is talking about GE and light bulbs…

If we figure out what’s going on, we’ll let you know…

Update:   Both CNBC and Fox Business are trying to explain it with news of more Iran missile tests and politicians’ comments on Fannie and Freddie - there’s got to be more to it than that.

Here’s today’s 10-minute chart of USO. I don’t know how you get a move like that in oil without anyone knowing what’s going on.

Once a month, we get the flood of same-store-sales reports from the retailers. Luckily, it’s someone else’s job to wrap it all up. That someone would be Jeff Macke:

Wal-Mart (WMT) turned in better than expected Same-Store Sales this morning. Costco (COST) did the same.

If this sounds familiar, it should. It was the same story last month and the month prior to that. Indeed, ever since early January when unemployment and oil prices started ramping in earnest, reporting on SSS has been akin to being the beat reporter for the Harlem Globetrotters.

A lot of floppin’ and choppin’ this morning, as retail numbers roll in and Bennie and the Hank do their singing up on Capitol Hill. The indices are dancing around the flat line as the advance/decline lines are split, red on the NYSE but slightly green on the Nasdaq. The groups are split as well, with gold and silver stocks, REITs, chemicals and software leading the green team, and HMOs, retail, brokers, steel, paper, homebuilders, airlines and banks leading the losers.

Treasuries are fairly flat. Energy prices are higher. The dollar index is just a bit higher than where we left it yesterday afternoon. Gold is off to a strong start, with silver higher as well.

Barry says that this Bloomberg column on Fannie and Freddie is this morning’s “must read”. I suppose that’s true, if you want to start your Thursday off with a good dose of disgust:

Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won’t have enough capital to weather the worst housing slump since the Great Depression. The company’s credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in the interview yesterday.

—

“At some point we’re going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,” Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. “We’re getting to that point where a decision has to be made by Washington.”

—

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies’ charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

“We know in a crisis the Federal Reserve tap would be open,” said Poole, now a senior fellow at the Cato Institute.

—

“I worry about those institutions,” retired Richmond Fed President Alfred Broaddus said. “They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don’t know how you do it other than extend money and the public takes the loss.”

As Mish says, we’ll all be homeowners - and he agrees with Poole.