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.

Andrew Jeffery on Fannie and Freddie:

All eyes now turn to Paulson, who just weeks ago asked for — and received — a blank check from Congress to support the beleaguered government sponsored enterprises, should the need arise. He had hoped the mere existence of the backstop would calm Investors’ nerves such that he wouldn’t need to step in.

Reality, it appears, had other plans: Shares of the 2 companies have slid back down to where they were when markets feared they’d collapse under the weight of their massive loan portfolios.

Fannie and Freddie are hopelessly levered to the U.S. housing market, which slides deeper into disarray every day. The 2 companies collectively back over $5 trillion of American mortgages, which are going sour at a record pace.

As I wrote earlier this week, after Freddie announced equally dismal results, it’s no longer a matter of if they collapse, but when.

It turns out buying mortgages with nothing but a superficial glance at the paperwork — something Fannie and Freddie excelled at during the housing boom — just isn’t good business. (Who knew?? - BMB)

Although the 2 firms only lightly dabbled in subprime loans, originators easily duped their automated risk engines into buying fraudulent or otherwise shoddy loans.

But since banks like Citigroup (C), Bank of America (BAC) and Wachovia (WB) are saddled with troubles of their own, Fannie and Freddie have been asked to expand their role in the market. They now provide the only liquidity left for new mortgages.

The government has little choice but to bail out their wayward children. If it doesn’t, Hank will need a lot more than just a bazooka to save the ship.

A look inside what’s going on in the commodities markets, from trader Dan Norcini:

Gold continues heading lower as speculators are systematically being driven out of the market due to money issues. Losses can rapidly spiral out of control as leveraged positions inflict enormous pain on speculative longs which leads to more forced selling, which takes out one support level after another, resulting in a massive, margin-related meltdown. As more and more speculators are forced out, the liquidity then begins to shrink, resulting in fewer and fewer traders to take the opposite side of a trade. That in turn causes huge spreads between the bids and offers, with the result that more often than not, there is nothing but air underneath the market.

My guess is that quite a good number of hedge funds are now history, not that this particularly distresses me all that much.

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To give you an indication of the extent at which specs are fleeing this market, open interest collapsed 26,500 contracts yesterday. No doubt a great many more are gone after today!

I’m sure that not only is this liquidation taking place in the gold market, but in the crude oil and other markets as well. This is the type of forced selling that the Fed is trying to prevent, however, when it comes to the banks and their garbage assets…

Today’s move pushes the S&P up above its recent highs, and right up to the 50-day. But the chart still has that ‘bearish rising wedge’ look to it - not to mention that it’s been bouncing all over the map.

Chart courtesy of StockCharts.com

They say the week before options expiration can be wilder than the expiration week itself. They sure got that right this time around.

Nutso stuff. The Dow was up 300-plus, down 200-plus, and now up 300-plus, just in three of the last 4 days. Looks like ‘thrashing’ to the extreme, with a lot of help from big moves in the currency and commodities markets.

You figure it out. I can’t.

Surprisingly, despite the big moves in stocks and commodities, Treasuries were fairly quiet, with yields edging just slightly upward:
6-month: 1.94%    2-yr: 2.50%    5-yr: 3.21%    10-yr: 3.94%    30-yr: 4.55%.

Internals turned right back around to the positive side, but since volume pulled back, the big day didn’t quite register as an official ‘accumulation’ day. Advances/declines were 3 to 1 on the NYSE and 7 to 3 on the Nasdaq, with up/down volume 3 to 1 on the NYSE and 7 to 2 on the Nasdaq. But while the indices made big moves up, we still saw more new lows than highs: highs/lows were 39/58 on the NYSE and 58/79 on the Nasdaq.

The action in the groups was mostly green, but again we see those big-bouncing-bear-market areas topping the list: airlines (+8.3%), homebuilders (+6.7%), retail (+6.2%), paper (+5.0%), transportation (+4.6%), REITs (+4.2%), brokers (+4.1%), HMOs (+3.7%) and banks (+3.5%). Not a surprise to see the commodites heading up the short red column: gold and silver stocks (-4.4%), metals and mining (-3.9%), steel (-3.0%), oil services (-2.8%) and natural gas (-2.3%).

Energy prices took it on the chin again today, continuing their month-long slide. Crude can’t find a friend, falling almost five bucks to $115.20/barrel. Gasoline dropped 11 cents to $2.89/gallon, and natural gas fell to $8.24/mmBTU. The dollar broke out against nearly all currencies, running the dollar index up to 75.78. Gold and silver slid along with oil, with spot gold back at $857/ounce and silver tumbled to $15.31/ounce.

BMB Note:   Rather than settling down, the markets - all of them - are getting wilder. When that kind of stuff is going on, I’ll back off and watch from what I believe is a safe distance - and even then, I’m likely to get hit by some of the flying debris.

The markets are having spasms - all of them. The dollar and stocks are overbought, and commodities are very oversold. I’m not going anywhere near this mess until things quiet down a bit and the smoke starts to clear, so I can get a better view of where things stand.

Larry McMillan still sees no sell signals - but he doesn’t sound anywhere near ‘wildly’ bullish yet, at least to me.

Click here to view column with charts.

This is a market that has had plenty of opportunity to rise strongly, but has really been unable to do so. Even so, the current trend is mildly bullish. $SPX has carved out a series of higher lows — at 1234 and 1247 — which, when connected with the July bottom at 1200, form a rising trend line. As long as that trend line exists, the situation is positive. However, considering that nearly all of our indicators have simultaneously been on buy signals, the current rise is a weak one. It is perhaps most reminiscent of what happened just a few months ago — in January (see Figure 1). At that time, the market bottomed in mid-January, after a massive oversold condition arose (partly as a result of Societe Generale dumping the positions of a rogue trader). That oversold rally generated only meek gains but lasted until the end of February, before another bout of selling (surrounding the run on Bear Stearns) took the market to new lows amidst another oversold condition.

The equity-only put-call ratios are both still bullish, and as such they represent perhaps the most positive thing about this market right now. These buy signals came from fairly high levels on their charts, and that should be helpful. They will remain bullish until they roll over and begin to trend higher once again.

Market breadth (advances minus declines) has been lackluster on this rally. Typically, if this rally were the start of a new, truly bullish leg of the stock market, breadth would quickly register overbought conditions and remain overbought for quite some time during the initial phase of the rally. That has not happened.

Volatility indices ($VIX and $VXO) have acted more bullish than most of the other indicators. $VIX has fallen sharply from the July highs, and that is bullish. Furthermore, it clearly made new relative lows (in contrast to $SPX, which has not clearly made new relative highs). Thus this down trend in $VIX is bullish. $VIX will remain bullish as long as it remains below 24.

In summary, we don’t have any sell signals from our indicators. In fact, most of our indicators are bullish — although some are rather tepid. As a result, we are retaining a bullish attitude — an attitude, I might add, that has gone from enthusiastic to reluctant — as long as $SPX remains above its bullish trend line. A close below 1247 would be negative, and a close below 1200 could be significantly bearish.

The big move in the past week or two has been into the dollar - and that’s been affecting commodity prices, and indirectly (or directly), the stock market.

From today’s Daily Pfennig:

Chuck has written about these types of markets in the past. The currency market starts looking for a reason to move one way, and no matter what the data look like, they spin it to fit the direction they want the currencies to move. Earlier this year, traders were looking for a reason to sell the dollar, now they are looking for reasons to buy it. But have the fundamentals changed? Is the US economy any stronger now than it was a few months ago?

Nope. Numbers released yesterday show US consumers borrowed more than twice as much as economists forecast in June as a decline in home equity forced Americans to fund purchases with credit cards and other loans. Consumer credit rose by $14.3 billion, the most since November, to $2.59 trillion. Consumers here in the US are using credit cards and loans to cover expenses as falling home values cause banks to restrict access to home-equity lines.

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No, the underlying economic fundamentals of the US economy have not improved. In fact, they have actually worsened. Last week I reported how the administration is projecting a record high deficit in 2009. The 2008 fiscal deficit forecast of $289 billion equals 2.7% of GDP, while the 2009 fiscal deficit estimate of $482 billion is equivalent to 3.3% of GDP based on a 2.2% GDP growth projection for 2009. And if you take the IMF’s projection of only .8% US GDP growth instead of the administrations overly optimistic 2.2% GDP rate, the fiscal deficit would stand at 3.5% of GDP, matching the 2004 high.

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But the currency traders have a shorter outlook, and their current interest rate expectations have caused them to push the dollar higher. Even long time Euro bull Bill Gross, who manages the world’s biggest bond fund, is sounding more like a dollar bull. “The economy in euro land is not sinking, but it’s moving closer to the zero line than one would have expected only several weeks ago,” Goss said yesterday on Bloomberg TV. The ECB has “got to factor in the economy. I would expect at some point in the next six to 12 months for the ECB to even lower interest rates. The recession in the US has been factored in and the weakness in the euro land is just beginning to be factored in,” Gross said.

Yes, the markets are all talking about the ECB lowering rates and once the euro moved through major support at $1.53, the technical traders took it down to below $1.51. And the dollar didn’t just rally vs. the European currencies, it gained vs. the Asian and commodity based currencies also. Even the Brazilian real, the recent darling of the currency markets, fell for a fourth day as traders moved funds back into the US$.

I wonder how those same currency traders will react when the US government finally steps in and takes on the debt of Fannie and Freddie.

A pretty interesting morning, ignited by a rise in the dollar/drop in the Euro. That had commodity prices gapping down big, and prompted stocks to shoot up. The indices are currently showing gains of more than a percent, with A/D lines solidly in the green as well. Leading the move are airlines, homebuilders, transportation, retail, paper, brokers, HMOs and REITs, while the commodity stocks are at the end of the line again: metals, gold and silver, steel, oil services, natural gas.

Tresuries are slightly lower, yields higher. Energy prices took a big dip early, but are now coming back off their lows. The dollar index spiked higher, gold and silver gapped lower.

Fannie joins Freddie, posting a big loss and slashing their dividend.

So how are these companies planning to issue more stock (or preferred stock), if they can’t afford to pay dividends now? In case you haven’t notice, FNM and FRE stock prices are already back down near the low points, right before Hank came along with his big plan.