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.

Bennet Sedacca, in a two-part series (part 1 and part 2) on the difficulties financial institutions are having raising capital at reasonable prices, says “NO”:

“Are we there yet?” is about as common a phrase as one can imagine. We’ve either said it or heard our children ask it during a long car trip. Obviously, this piece isn’t about car trips, but about the secular economic and market cycle that we’re currently living through. Many say that we’ve hit bottom in equities, and that the worst of the credit crisis is behind us. Everyone’s entitled to their opinion; I’ve certainly made mine rather clear over the past few years, particularly of late.

When I survey the economic landscape and business owners, review economic data, and study the credit market, I continue to come up with the same answer: We’re not there yet. In fact, I‘ve never seen the credit market, economic data and the stock market at such odds in my career.

What I mean by that is this: Given the data and given the state of the credit market, the stock market is the most over-valued it’s been in my career.

And yes, that includes 2000, when the secular bear market in stocks began. At least in 2000, the credit market was operating normally, many stocks were actually cheap, the wonderful world of Credit Default Swaps (CDS), Collateralized Debt Obligations (CDOs) and other esoteric securities were in their infancy.

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So when I ask myself, “Are we there yet?” — where “there” means the point at which we can take on loads of risk — I continue to get a resounding NO.

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Over the years, I’ve written extensively about the historic build-up of credit. Now, we’re at Zero Hour: Credit builds, the economy slows, the ability to finance debt ends and debt creation ceases to have a positive impact on the real economy.

While I thought this day would come, I admit that it came a bit faster than I was expecting.

Financial entities like banks, broker/dealers, regional banks, finance companies and insurance companies need credit at reasonable rates in order to finance themselves. I’ve been concerned for many years that the door to raise new capital in debt markets would finally shut on banks, brokers and others.

For many regional banks like KeyCorp (KEY), Zions (ZION), Regions (RF) and National City (NCC), the door is already shut; if they wanted to raise capital in the debt market at the levels at which their outstanding issues regularly trade, they would have to pay 12 to 15% - hardly economic levels. GM (GM) bonds trade near 27% yields. Washington Mutual (WMU) trades north of 15%.

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As I sit and wait for Tropical Storm Fay (likely to be Hurricane Fay by the time it arrives here in Florida), I keep thinking back to a piece I wrote called Credit Crisis, Part 2. There, I referred to a hurricane scenario, in which we’re hit with the first wave, followed by a bit of a lull; then comes the full-fledged frontal assault.

The credit market, to be sure, has dramatically worsened since that time. As I’ve stated, it’s ceased to function normally in the financial space. I now think it’s the stock market’s turn.

When will we be “there”? When everyone stops asking if we’re there yet.

At least that’s how Frank Barbera sees it:

For now, the problem at hand remains the Housing Crisis and the Banking–Credit Crisis, but in our view, as time passes, the odds will continue to grow that all of these problems morph into an even more serious Currency Crisis. In this vein, we view the current strength in the US Dollar as ultra transitory, and opening the door for the Federal Reserve to begin its next wave of interest rate cuts aimed at supporting the banking system and Wall Street. As more defaults are seen in coming months, the Fed in our view will have little choice but to begin monetizing these problems and creating fresh doses of digital dollars, all out of thin air. For Helicopter Ben, the new Super-Duper Helo is about ready to lift off, with one mission and one mission only — paper over all of the bad debts and keep the system from bursting at the seams. For the US Dollar, the path of least resistance will once again be a relentless slide to new lows, this time likely accompanied by rising long-term interest rates as foreign capital abandons the long ensconced patterns of mercantilism and vendor finance. The torpedo explosions now resonating throughout the bulkheads of the sinking GSE’s cannot be ignored, as the unwinding of derivative positions at these institutions could well be the trigger event to place foreign capital into full retreat. With balance sheet impairment and collapse, will follow debt downgrades and the beginning of a potential exodus – a run from US GSE Agency paper. Fingers have been plugging up the dam thus far, but the pressure behind the walls appears ready to burst. For those who think the markets have been volatile in the last few weeks, get ready, cause we believe you haven’t seen anything yet.

The Russell has pulled back sharply after touching those June highs last Friday morning, and the Nasdaq has pulled back as well. Just a pullback? It is until proven otherwise.

But things look a bit different for the other indices, as the S&P has fallen out the bottom of its wedge and the NYSE Comp broke through those recent lows.

The banks are back where they were just two days up off the lows, and the REITs look like their move up may be done for now:

Charts courtesy of StockCharts.com

Another rough day for stocks, as the groups that led the bounce up off the July lows have started to fade, and commodity prices are trying to bounce back after being pounded for weeks.

For the second day in a row, it was only the Utilities index that managed a green finish:

Treasuries were mixed, with yields moving just slightly:
6-month: 1.91%    2-yr: 2.30%    5-yr: 3.06%    10-yr: 3.83%    30-yr: 4.47%.

Internals were negative again, and volume edged up above yesterday’s levels. Advances/declines were 1 to 3 on both exchanges, up/down volume 1 to 3 on the NYSE and 1 to 4 on the Nasdaq. There were almost no new highs to speak of, with highs/lows at 8/126 on the NYSE and 5/78 on the Nasdaq.

Most of the commodity groups came off their lows to lead a short list of winners: natural gas stocks (+3.5%), oil services (+3.1%), metals and mining (+2.3%), gold and silver stocks (+2.3%), oil stocks (+2.0%) and steel stocks (+1.8%). And the recent ‘winners’ topped the losers’ list for a second day: airlines (-7.8%), homebuilders (-4.3%), banks (-3.4%), transportation (-3.1%), brokers (-3.0%), retail (-2.7%), paper (-2.5%), semiconductors (-2.3%) and REITs (-2.2%).

Energy prices bounced up a bit, and stocks didn’t care for that much. Crude oil rallied above $115 mid-morning and slipped back, but gained more than a buck and a half to $114.53/barrel. Gasoline got back yesterday’s four cent loss, back to $2.86/gallon, and natural gas rose nine cents to $7.98/mmBTU. The dollar index pulled back, slipping to 76.79. Gold got a bump up mid-morning and another one late in the day to finish at $815/ounce and silver at $13.22/ounce.

BMB Note:   We’d been looking for the dynamics in the market to change a bit, and we’re seeing some of that happening so far this week. The worst bear-market areas that had bounced so strongly off the July lows are starting to weaken. The decline in commodity prices looks to have slowed, and they may even be in for a bit of a bounce after a prolonged decline.

The NYSE, Dow and S&P remain the weakest of the indices - the NYSE is already hanging just above the July lows, while the other two have broken their mini-uptrends. But the downdraft still isn’t severe, and the Russell and Nasdaq look like they’re just in pullback mode.

If we do get a weak bounce back up from here, it might be an interesting time to probe a short position or two, but it still doesn’t seem practical to get too aggressive at this point. This market hasn’t been real generous when it comes to handing over money, and I don’t expect that it will change all that quickly.

I’ll continue to look for opportunities on both sides, but I just haven’t been seeing much, so I’ve been laying low.

PS. In case you haven’t noticed, we’ve tweaked the design of the BMB site just a tiny bit. Not a lot has changed, so it shouldn’t be a huge shock to the system.

Not a lot of change where the indices are concerned, but commodities have bounced since earlier this morning.

And the Russians are really pushing their weight around - this could easily turn into something bigger than what we’ve seen so far:

Russian soldiers took about 20 Georgian troops prisoner at a key Black Sea port in western Georgia on Tuesday, blindfolding them and holding them at gunpoint, and commandeered American Humvees awaiting shipment back to the United States.

The move came as a small column of Russian tanks and armored vehicles left the strategic Georgian city of Gori in the first sign of a Russian pullback of troops from Georgia after a cease-fire intended to end fighting that reignited Cold War tensions. The two countries on Tuesday also exchanged prisoners captured during their brief war.

However, Russian soldiers took Georgian servicemen prisoner in Poti — Georgia’s key oil port city — and commandeered the U.S. Humvees.

Russian forces blocked access to the city’s naval and commercial ports on Tuesday morning and towed the missile boat Dioskuria, one of the navy’s most sophisticated vessels, out of sight of observers. A loud explosion was heard minutes later.

Several hours later, an Associated Press photographer saw Russian trucks and armored personnel carriers leaving the port with about 20 blindfolded and handcuffed men riding on them. Port spokesman Eduard Mashevoriani said the men were Georgian soldiers.

Another weak start for stocks, as the indices dip a bit further, and A/D lines flounder deep in the red. Worst off are the banks, homebuilders, REITs, brokers, retail, transportation and airlines, while oil services, natural gas stocks and metals get a bit of a bounce to the upside.

Treasuries are fairly flat at the moment. Energy prices are also flat. The dollar index is flat, with gold and silver just slightly lower.

Producer prices up more than expected, 1.2% vs 0.3%, and housing starts hit new 26-year low - CR has the chart.

The real question, from yesterday’s Five Things:

The Federal Reserve’s Crisis Management Game Plan is simple: prolong and extend the unwind for as long as possible to avoid sharp(er) financial market dislocations. There’s nothing fancy or glamorous or particularly intellectual about it; so far, the playbook is virtually identical to the 1930s.

With that in mind, every story quoting a talking Fed Head can be contextualized as an operational piece working toward the scenario of crisis extension and market preparation, nothing more.

The same goes for the chiefs of the banks involved - Jamie Dimon of JP Morgan (JPM), for example, or Merrill’s (MER) John Thain. None of these firms adequately prepared for the crisis, so why should we expect their CEOs to be able to navigate successfully through the heart of it, except by accident or happenstance. Those who go back and read the financial press during the Great Depression will see many, many similar pronouncements of optimism and encouragement from doomed financial chieftains… all the way to the end.

The latest piece of groundwork being laid by the Fed appeared on Bloomberg this morning - “Bernanke Tries to Define What Institutions Fed Could Let Fail.”

“There is some hard thinking that needs to be done,” Philadelphia Federal Reserve Bank President Charles Plosser told Bloomberg in an interview last week. “The Fed has a terrific reputation as a credible institution. We have to be cautious not to undertake things that put that credibility at risk.”

That last part may or may not be true. The question equities investors should be asking is not which institutions are too big to fail, but which are too small to save.

“The Fed has a terrific reputation as a credible institution.” Umm, I hate to break it to them, but…some would beg to differ.

As long as they’re at it, I wonder if they’re interested in Fannie and Freddie:

Venezuela’s government extended its control of the economy with accords to take majority stakes in the local units of cement companies Lafarge SA and Holcim Ltd. and by physically taking over the factories of Cemex SAB.

The government took control of the plants of Cemex, the largest producer in Venezuela, after failing to reach an agreement with the company in at least 10 meetings, Energy Minister Rafael Ramirez said at a midnight ceremony at a Cemex plant in the state of Anzoategui shown on state television.