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.

Oh, how times have changed.

That was then, this is now - from the LA Times blogs via Calculated Risk.

The financials are still dictating market policy.

The banks got slaughtered today, as the market wonders who’s next in the FDIC soup line:

The brokers aren’t looking much better:

Charts courtesy of StockCharts.com

Well. Wasn’t that interesting? I would imagine that Ben and Hank are feeling quite ineffective now.

The ‘big rally’ that was expected as a result of the ‘big save’ of Fannie and Freddie lasted all of about 35 minutes. Stocks started off with a bang, but the mini-euphoria quickly evaporated, and the gains were gone in less than an hour. The rest of the day was spent chopping around, mostly in negative territory, with the indices getting periodic boosts from wherever, but the financials were once again in massive meltdown mode.

The final numbers for the indices don’t look that bad, but the internals and group action were not pretty:

Treasuries rallied, and rates came down. Remember how we said the next Fed rate move would be lower? Check out the 3-month T-Bill, now back down around 1.43%. Other yields:
6-month: 1.86%    2-yr: 2.47%    5-yr: 3.18%    10-yr: 3.86%    30-yr: 4.46%.

Internals started a healthy shade of green, but stayed there less than a half-hour, and finished the day a deep red - much worse than the indices let on. Volume came in a bit lighter than the levels we were seeing last week. Advances/declines were 1 to 3 on the NYSE and 3 to 7 on the Nasdaq, with up/down volume 3 to 7 on the NYSE and 2 to 7 on the Nasdaq. Another day of almost 1000 new lows - highs/lows were 11/654 on the NYSE and 24/332 on the Nasdaq.

The group picture was mostly red, with the commodity areas being the only places of refuge: gold and silver stocks (+3.2%), oil services (+2.1%) and metals and mining (+2.0%). On the negative side, it looks like the IndyMac news trumped the Fannie news in the financials - some big, bad numbers there as the banks (-8.5%) and the brokers (-4.9%) continue to melt down. Those were followed by the REITs (-3.7%), airlines (-2.7%), insurance (-2.6%), hospitals (-1.9%), internets (-1.7%) and software (-1.4%).

Energy prices were fairly quiet, considering that there was news of disruptions in production, etc. Crude gained all of a dime to $145.18/barrel, gasoline was flat at $3.56/gallon and natural gas got back six cents to $11.96/mmBTU. The dollar index fell back to flat at 71.96 after a slight overnight bounce. The precious metals put in another strong day, with spot gold rising to $973/ounce and silver jumping another thirty cents to $19.12/ounce.

BMB Note:   There are no silver bullets. As a matter of fact, I’m not sure there are any bullets left at all.

The market has seen the government’s hand, and it isn’t impressed. There were many in the futures market who thought that this might be a replay of the Bear Stearns bounce, but nothing doing.

PPI number out tomorrow morning, but I’m not sure that any of the economic numbers will have much of an effect on the psyche of the market at this point.

As Gary K. said earlier today, the market is speaking loud and clear. I hope you’re getting the message.

From today’s Five Things, more on the subject of the day weekend week:

2. What, Exactly, Is Fannie Mae?

Meanwhile, the day after suggesting in Five Things that we are seeing the groundwork laid before our very eyes for the nationalization of Fannie Mae and Freddie Mac, the mail came rolling in saying we were obviously wearing tinfoil hats. But let’s step back for a moment and consider just what Fannie Mae really is, and how it came to be in the first place.

Fannie Mae was actually created as a government institution. It was de-nationalized (privatized) in 1968 in order to balance the budget, which if we really think about it is hilariously ironic. Fannie Mae was basically one of the first government “off balance sheet” vehicles.

As we wrote in March:

“Now, after 40 years of enriching private shareholders via the company’s government sponsored and enabled business model, the reality, given the debt crisis and the magnitude of the collapse of the real estate market, is that Fannie Mae will almost certainly necessitate being re-privatized and returned to its original owner.

Put another way, the government will be forced to take this off balance sheet vehicle back onto its balance sheet just like banks are being forced to do with a wide variety of their own off balance sheet vehicles.”

That no one cares about this, or is upset by it, and that most consider anyone who suggests there is anything wrong with this picture is “wearing a tinfoil hat,” speaks to the depth of denial in the marketplace.

We really have no problem with private citizens profiting from their investments in Fannie Mae, as has been the case for most of the past 40 years; we just have a problem with the company’s debt and future obligations being forced onto the backs of taxpayers now that the ability for private citizens to profit from the company’s business model has run its course.

Like it or not, that is what is happening with Fannie Mae and Freddie Mac. And that’s why we should all be outraged over it.

3. What It Means

Let’s clear up exactly what this means going forward. First, this action by the Federal Government is not unprecedented, as we shall see in just a moment. Second, this is a long-term process that will have the following very real ramifications going forward:

1) It will slow the eventual recovery as we enter a Japan-style deflationary credit contraction with the government committed to propping up various non-productive financial entities rather than allowing liquidation.

2) It will result in the eventual downgrade and reduced confidence in U.S. debt.

3) On the other side of the deflationary credit unwind, several years from now, that lower rating and lower confidence will result in sharply higher interest rates and a further stagnation of the economy… very likely right as it looks as if the economy is recovering.

We have been here before.

See if this sounds familiar:

“If the federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash - the final week of October - and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state.“
- America’s Great Depression, by Murray N. Rothbard

This is a long-term process. In our sound bite world it is all too easy to fall into the trap of thinking that a deflationary credit unwind is something that will have just happened one Monday when we walk in the office. I always come back to a statement made by someone who lived through the Great Depression: “Just when we thought it was over, it was really only beginning.”

Gary Kaltbaum tells us to let the market be our guide - and that the message the market has been sending is pretty clear:

Wow…big news this weekend! Angelina and Brad had twins! Whoops…wrong report!

Everything I have been warning you about in our nauseating financial industry chiefed by the greedy…is now coming to fruition. I am in hopes you have listening. The latest debacle is FNM and FRE. I noticed a few analysts downgrade them in the past week. You need not have listened to them as a few very savvy people saw this coming in advance…anyone ever heard of Jimmy Rogers? FNM and FRE have been “insolvent” for years. I know Dodd and Paulson were out last week to say fundamentals were fine. If they were fine, why the rescue? Everyone needs to know that FNM couldnt even report their numbers for 2 years because of all the fraud. Just add this to another in the long list of cesspools caused by the the over-the-top greed by people who unfortunately will get away with all the spoils while an unwary public loses their rear ends. This did not have to happen if Greenspan had done his job and if the regulators were not asleep at the wheel. Again, everything you are seeing happen is a result of ridiculously easy credit…brought to you by Greenspan. I am not so sure I blame Bernanke that much as I think the box was already there for him to be in.

I have no clue what happens here but if the market is indeed smart, then we are going to see a slew of bank failures over the next year. I have no clue which but just start scanning smaller to mid-size regionals that have dropped 90% plus and you have your list. The news is going to be fluid and the action in the market will be all over the map. Speaking of all over the map, did you see Friday’s action? The ramp late in the day was caused by Reuter’s report quoting a “source” that the Fed would open the discount window to them. The Fed then disavowed the report. So…who is the source? And why is this person not going to jail? There is too much of this going on right now…and it warmed my heart to read that the SEC is now going to go after the rumor-mongerers in strong fashion starting now. Rumors are started for one reason…agendas…and it is about time someone takes these slimeballs to task.

As far as the market, you need not have me tell you what is going on. The only good news is now there is a realization of the bear market by the masses. Bear markets do not end until this occurs. But that doesn’t mean it is close to being over. I am hearing talk that average bear markets are only down a little bit more than what we have seen. Well…what if this bear market is going to be worse than average? After all, we have not seen a credit crisis like this one…EVER! We have not seen a housing crisis like this…EVER! So…be careful of that talk. Let the market be your guide and as of now:

I am down to a select few groups doing well here:

GOLD continues to shape up as it comes up the right side of a 4 month base.

HEALTHCARE continues to show relative strength as the market goes defensive. Scan the BIOTECHS as I am seeing good action in names like CELG, DNA, MYGN and a few others with good money flows.

UTILITIES…again defensive…showing a decent bid with a few names like FPL, FE, ETR in good bases.

On the negative side: EVERYTHING ELSE!

Many RETAIL names which were building bases at the lows…broke the lows. JWN, JCP, KSS, TGT and many others saying bye-bye. That support now becomes resistance.

What happended to “TECH IS DEFENSIVE?” TECH is now in big big trouble and would completely avoid. I make note that big leaders like RIMM, BIDU, PCLN, AMZN and others have now broke longer term 200 day averages. The SOX is back at yearly lows.

WORLD MARKETS have been crushed with the all-important FTSE back to late 2005 levels.

How about this little nugget? There have been more new yearly lows than highs on the NASDAQ 170 out of the past 174 trading days with the NASDAQ ADVANCE/DECLINE in all-time lows.

OIL STOCKS are now underperforming the oil prices. Many are now below the 50 day average while OIL is at new highs. Something to watch.

Past leading STEEL STOCKS also are in a topping process and would now get a little more defensive on them. They are overowned and overloved…so would step lightly.

As far as the short term for the market, anything is possible. The market remains oversold but it is telling that that condition has not led to any rallies. I gather we get one eventually. But that would only work off the extended, stretched and oversold condition before sellers show up again. I would continue to be defensive as possible. I have been in cash since I saw the market fail at resistance at 13,000 and feel darn good about it.

Again, I hope you have been listening because the market has been speaking loudly and clearly.

Well, the Fannie/Freddie “rally” that was in the planning stages in the futures market all night long is already over. The major indices have surrendered all of their early gains, and both A/D lines are back solidly in the red.

The market now knows that Ben and Hank are powerless to save it.

Commodity stocks lead the gainers - oil services, gold and silver, metals and natural gas - while the stocks that were supposed to gain the most from this ‘effort’ - the financials - lead the losers: banks, brokers, airlines, REITs, hospitals, internet and insurance.

Treasuries are slightly higher, pushing yields down. Energy prices are mixed. The dollar index a few ticks higher, gold and silver are higher as well.

Jim Rogers, on the Fannie/Freddie “rescue plan”.