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.

If these numbers from Bob Hoye are correct, then the main concern isn’t that Fannie and Freddie are “too big to fail”.

Sounds to me like they’re way “too big to bail“:

The notion that the GSEs are too big to fail will likely provide only brief comfort as the collapse in asset prices in today’s conditions can render such opinion as futile — the collapse in price and collateral happens too quickly. But the same knee jerk remedies or comforts are always offered in the volatility that marks the initial phase of a contraction. In the 1825 calamity a financial article observed: “All through this bustle and anxiety public confidence has [not] been shaken. The nation is, in its general state, flourishing almost beyond parallel.”

We thought it reckless and naive when the Fed took on $28 billion of suspect instruments on the Bear Stearns disaster. Fannie and Freddie liabilities (mortgage-backed securities and other debt) amount to some $5 trillion. By way of perspective, U. S. funded debt amounts to $9.5 trillion, and the U. S. GDP number is $14 trillion.

Obviously the situation is impossible according to the doctrine of “super agencies”, but it is real and under similar post-bubble conditions the contraction runs until the markets clear all unsupportable positions.

Although it provides no comfort, it is best to keep in mind “Credit is suspicion asleep.”

Update:   More comments on the Fannie/Freddie mess from around the web.

“Regulators close IndyMac Bancorp”:

SAN FRANCISCO (MarketWatch) — U.S. banking regulators said Friday they have closed IndyMac Bancorp Inc., the biggest retail bank to succumb to the ongoing U.S. subprime mortgage crisis. The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac (IMB), which had total assets of $33.01 billion and total deposits of $19.06 billion as of March 31.

Tip from Gary K.’s radio show.

Update:   More from Bloomberg.

	Have you noticed that all of the talk of the Fed raising rates has completely disappeared? From the looks of the 3-month T-Bill rate, the market is starting to bet that the next move just might be down instead (isn’t that what BMB’s been saying all along?).
	After a rough start to the week, both gold…
	…and silver have busted out of their consolidations and the moving averages have turned back up. Can they hold the breakout?

Charts courtesy of StockCharts.com

Are ya seasick yet? Here, let me shake you around a little more…

Wow. Another wild day to finish up a wild week. It started off bad, and just got worse, with the indices tagging their lows around midday. Then an afternoon rally attempt got going with only limited success, until the supposed Fed-FNM-FRE news came out. That sent the shorts scurrying for cover, and ramped the indices back up to the flat line. But that move lost steam, and things fell back down back where they had started the move, and then wandered up and down into the close.

What a mess that was. Amidst the chaos, the Russell held up the best - it was only down 11 at its lows, ramped up with the rest and held the green:

Treasuries were mixed, with yields coming down at the 3-month point, but jumping higher on the long end:
6-month: 1.96%    2-yr: 2.60%    5-yr: 3.28%    10-yr: 3.95%    30-yr: 4.52%.

Internals started a deep red and stayed very red until the big ramp, when the Nasdaq A/D line touched the green, but the NYSE line never came within sight of positive territory. Volume was higher than yesterday’s levels. Advances/declines were 1 to 2 on the NYSE and 9 to 10 on the Nasdaq, with up/down volume 1 to 2 on the NYSE and 3 to 7 on the Nasdaq. You can rack up more than 1000 new lows for the day, as highs/lows came in at 11/766 on the NYSE and 12/358 on the Nasdaq.

The group picture was pretty ugly, with only the gold and silver stocks (+4.0%) posting solid gains. But there was lots of red: airlines (-5.6%), homebuilders (-3.5%), paper (-2.8%), banks (-2.2%), retail (-2.1%), brokers (-2.0%), drug stocks (-1.7%), disk drives (-1.7%) and transportation (-1.7%).

Energy prices were mixed again. Crude pulled back from more record highs, but finished at a hefty $145.08/barrel. Gasoline ran up another nickel to $3.56/gallon, but natural gas continues to pull back, falling another 40 cents to $11.90/mmBTU. The dollar index took a dive down to 71.80 or so before bouncing back up to 71.97. The precious metals finally broke free of their nearly four-month trading range, opening up the chance of another move higher. Gold gained another 19 bucks to $965/ounce and silver jumped more than fifty cents to $18.82/ounce.

BMB Note:   Geez, talk about thrashing.

Another rough day for stocks - well, at least for half the day. Then we got a Friday afternoon rumor/news ramp, and a lot more bouncing and chopping around. But I still don’t believe we’ve seen convincing signs of that ‘washout’ we’re looking for to signal a possible end to this leg down. Obviously there has been a lot of news and concern over the financials that has helped fuel this move down. The problem is, we still haven’t had that ‘climactic event’ that might provide some sort of ‘closure’ on one or two of these issues - we haven’t had that “Bear Stearns” day. Although with all of the rumblings around Lehman, Fannie and Freddie, there very well could be one of those days around the corner.

The Russell is left as the only major index that didn’t take out its lows from early in the week - the rest are back at square one as far as any ‘rally’ attempts are concerned. The precious metals remain a bright spot - despite continued ‘whack-downs’, gold and silver have been putting in higher lows over the past few weeks, and today busted out of their trading range. We said the other day that they might be buyable on pullbacks if you don’t already own them - it’s looking even more like that now (disclosure: long GLD, SLV, DBP).

As for stocks, I just don’t see much to do here until things settle down and become a little clearer. With all of the chopping around, we may be getting somewhat closer to some sort of a turning point, but until then, it looks like it’s going to be a pretty bumpy ride. Please remain in your seats and keep your seat belts fastened.

At the Fed’s check cashing and pawn shop…

If you’re wondering what that last 100-point ramp was all about, it was your typical Friday afternoon “save” news (hey, where’s Charlie ‘Gossip’arino??) - apparently the Fed is opening the discount window to Fannie and Freddie (but wait, I thought they were “well capitalized”). The problem there is I’m not so sure there’s any money left in the register…

More if/when available. Well, CNBC says they’re quoting Reuters, so we may as well go right to the source:

Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, said a source familiar with a conversation between Bernanke and Freddie Mac chief Richard Syron.

Bernanke and Syron spoke by phone Thursday afternoon and in that call the central bank chief said he intended the discount window to be open to the two companies, said a source familiar with the phone conversation.

Note that this may or may not be true, as the Fed is declining comment.

As stocks continue their descent today, it just goes to show that there’s no real need to jump the gun by trying to pick a bottom.

From today’s Five Things:

1. Careful Anticipating the Anticipators

We began the week watching the NYSE High-Low Index, courtesy Investor’s Intelligence, which at the time was at levels last seen in March of this year, from which a decent relief rally began. The problem is we’re still watching this indicator and it still hasn’t reversed up yet. In fact, it has moved lower and is now down at levels last seen at the September 1998 Long-Term Capital Management Low.

Certainly, a relief rally is on the way, but we have no way of knowing from what market level. That is why we wait for this indicator to reverse up telling us market risk is, at least temporarily, reduced.

Tom Dorsey of Dorsey Wright (author of “Point and Figure Charting” - BMB) used to always tell me, “Don’t anticipate the anticipators.” There will be plenty of time to entertain “capital building” strategies once the indicators reverse up, signaling a change in the market’s supply-demand relationship.

And speaking of bottoms, here’s ‘thing’ number two:

2. Cause Versus Symptom

Without question, the September 1998 low was a good time to be buying stocks… for a trade. Since September, 28, 1998, the S&P 500 has returned 19.5%, excluding dividends. Adding dividends makes the return of stocks over that nearly 10-year span almost competitive with Treasuries, albeit with significantly more risk.

Regardless, given the news this morning that the U.S. government is weighing takeover options for Fannie Mae (FNM) and Freddie Mac (FRE), it is tempting to think we may be finally have reached an important capitulation point in equity markets, especially with many technical indicators and sentiment indicators at negative extremes.

There is a key difference between LTCM and FNM and FRE, however. LTCM was, at that time, a potential cause of market dislocations. Fannie and Freddie, despite their massive size, are still merely symptoms of market dislocations that began a little more than a year ago. The real virus is two-fold: excessive debt combined with excessive leverage.

The process of deleveraging will be a long one. There will be periods of market rallies, but they will be followed by periods of severe market declines as the deleveraging process results in a slowing of the velocity of money and a re-pricing of financial assets.

For those not familiar with LTCM, you might want to take a look at “When Genius Failed”. Certainly an interesting story.

A rough start to the last day of the trading week. Futures were indicating a lower open, and that’s exactly what we got. Though the indices have bounced up off their lowest levels, seen in the first few minutes, A/D lines remain well into the red as do most groups.

Commodities are the lone winners, with gold and silver stocks, natural gas stocks, oil services and metals and mining in the green. Leading the losers are the airlines, transportation, paper, HMOs, banks, retail, brokers, hospitals, networkers and defense stocks.

Treasuries are lower, yields up. Energy prices continue their big move up that started yesterday. The dollar is getting smacked, and the precious metals have moved higher again, finally breaking above the upper boundary of their long trading range.

Larry McMillan hasn’t been swayed out of the bearish camp by his indicators just yet (click here for column with charts):

One of the nastiest bear markets in memory continues to grind its way lower. Even though the market — by many measures — has been very oversold for some time, it keeps going lower. That is typical of bear markets at their strongest. Rallies have been short-lived, followed quickly by more selling.

Significant support at 1270 was violated, and new closing and intraday lows have been made this week on $SPX. That area represents the first level of resistance, while 1235 is support as it has been tested three times in the last two days and has held. Any move outside of that range 1235-1280 would likely be significant. The $SPX chart remains a very negative one. The 20-day moving average is declining although it’s well above current prices at about 1305 or so.

The equity-only put-call ratios remain on sell signals. The standard ratio is particularly sluggish — a feature which indicates that traders haven’t bought the massive number of puts that they usually do at a market bottom. Neither ratio has reached extreme oversold levels (heights) yet, so there appears to be more selling to come before these roll over and give new buy signals.

Market breadth is extremely oversold and thus is the main harbinger of an oversold rally. Many traders thought Tuesday’s strong rally was the beginning of such an oversold rally, but it didn’t even last one full day before new lows were made. What spurs these oversold rallies is short-covering, and the bulls count on that short-covering to fuel rally attempts. So far the shorts have been reluctant to do much covering. As a guide, though, if $SPX trades above 1280, the short-term rally thesis should probably be given the benefit of the doubt.

Volatility indices ($VIX and $VXO) continue to rise, and so they remain in bearish uptrends. However, they haven’t formed the spike peaks that have generally accompanied market bottoms in the past. Is a spike peak in $VIX mandatory for a bottom? No, nothing is ever mandatory — one must “listen” to the market. But without a capitulation panic, we would expect that any rallies would not be very long-lasting.

In summary, we remain negative, but mindful of the fact that oversold rallies could spring up. Breadth is potentially oversold enough to denote a major bottom, but none of the other indicators are. However, rallies have been meek, so bears should retain positions as long as $SPX remains below 1280.

The NY Times reports - surprise, surprise - that the government is considering taking over Fannie and Freddie. From MarketWatch:

Senior Bush administration officials are weighing a plan that would see the government take over one or both of the two largest U.S. mortgage finance firms — Fannie Mae and Freddie Mac — if a recent deluge of problems worsen, The New York Times reported Friday.

Citing unnamed people who have been briefed on the plan, the report said the plan would place the companies in a conservatorship, under which the shares of Fannie (FNM) and Freddie (FRE) would be worth little or nothing. Any losses on mortgages owned or guaranteed by the two government-sponsored enterprises would be paid by taxpayers.

Here’s a link to the Times article.

Oil’s up another three bucks. Lots of jitters over the Iran mess, as well as potential problems in Brazil and Nigeria.