Bear Mountain Bull

…which adds even more stress:

The Federal Reserve will postpone the release of stress tests on the biggest U.S. banks while executives debate preliminary findings with examiners … The results, originally scheduled for publication on May 4, now may not be revealed until toward the end of next week … A new release date may be announced as soon as tomorrow, they said.

Aren’t these ‘findings’ numbers? How can you ‘debate’ numbers? Last I checked, 2 plus 2 is 4, no matter how long you debated it. Or in this case, it’s more like 2 minus 4 is a negative number…

Can the government do anything right?

Millions of Americans enjoying their small windfall from President Barack Obama’s “Making Work Pay” tax credit are in for an unpleasant surprise next spring.

The government is going to want some of that money back.

The tax credit is supposed to provide up to $400 to individuals and $800 to married couples as part of the massive economic recovery package enacted in February. Most workers started receiving the credit through small increases in their paychecks in the past month.

But new tax withholding tables issued by the IRS could cause millions of taxpayers to get hundreds of dollars more than they are entitled to under the credit, money that will have to be repaid at tax time.

Some charts are really in need of a rest:

Good for you if you owned this one…

…but sorry for you if you owned this one:

Charts courtesy of StockCharts.com

No more fireworks today — I think they got rained on.

The indices tried to jump out early and ride the wave that started yesterday and rolled around the globe overnight, but the rally ran into some speed bumps mid-morning and started to fade — by lunchtime, the gains in the indices were all but gone, and things bounced around for the remainder of the day.

The Transports hung on and continued their run up:

Treasuries were a little quieter today, and yields were mixed across the curve:
6-month: 0.27%    2-yr: 0.91%    5-yr: 2.01%    10-yr: 3.11%    30-yr: 4.04%.

Internals were mixed but leaned positive despite the reversal, with volume higher than yesterday’s levels. Advances/declines were 5 to 4 on the NYSE but just below flat on the Nasdaq, with up/down volume 5 to 4 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 12/2 on the NYSE and 28/10 on the Nasdaq.

The groups were split, with a few more finishing red than green. Leading the winners were the paper stocks (or stock, that being IP) up 15.0%, followed by steel stocks (+5.3%), semis (+2.8%), disk drives (+2.6%), metals (+2.6%), chemicals (+2.5%), computer hardware (+2.1%) and hospitals (+2.1%). On the losing side were the biotechs (-2.5%), gold/silver stocks (-2.2%), banks (-2.1%), airlines (-2.1%), insurance (-1.4%), oil services (-1.4%) and brokers (-1.3%).

Energy prices were mixed, near flat. Crude ended up just a few cents at $51.12/barrel and gasoline added a couple of cents to $1.47/gallon, but natural gas slipped back to $3.38/mmBTU. The dollar index was a bit higher, up to 84.78. The precious metals were a little lower, with gold back down to $888/ounce and silver to $12.38/ounce.

BMB Note:   We’ve been saying for a while that this rally needs a rest — things like the Nasdaq and the Russell have been on straight-up paths, and those routes don’t travel well over time. Maybe today was an indication that things have run out of steam and are going to pause and/or pullback a bit, though we’ve had signs of that before that haven’t really worked out.

That S&P “breakout” above the 875 mark still hasn’t been able to hold — it made it all the way up to 888 this morning before giving it all back and finishing at 873. Maybe that resistance is a little stiffer than the bulls thought.

We’ll see. As we said yesterday, we’d be a bit cautious about getting too long right now, as the market still looks overbought from many angles (yeah, I know, we’ve said that for a while now, but the market isn’t listening…that doesn’t mean it isn’t true!). But that doesn’t mean you stand in front of the train and go short either.

…just as was announced last night.

My question: why is Obama announcing this? It just goes to show how big the gov’t hand in business has become.

So Nardelli couldn’t save Chrysler after destroying Home Depot. Now there’s a surprise.

A couple of comments swiped from Tim Knight’s Slope of Hope…

First, from “Master Shake”, some good advice:

Know what you are looking for and what you will do if/when you see it.

I find this to be an extremely helpful way to look at things.

“I think X will happen, so I’m going to do Y” is totally different than saying “when I see X happen, then I’m going to do Y.”

Then there was this (said tongue-in-cheek, of course) from “godfather28″ — I feel the same way when I see someone put up a chart with 500 lines drawn on it and 25 indicator panels beneath it:

From my basic study of EW and from reading EWI for the past few months I’ve determined that what we’re experiencing is an 8th leg of an x wave 3 – 2-3 sideways double zig zag correction. Of course if 880 is breached again before 11:20 a.m. tomorrow but not after 11:45 a.m. then this is all null and void and I’ll have to take into account that this could have all been one big move of primary 2 which should top out somewhere between now and october at a high greater or less than by 50 points in the ES at 1050. Now we do have an alternate count which could place this as a second double secret zig zag and if so this could lead to a plunge to 6 on the S&P,,,that’s right I said 6, not 600,,,of course we must wait for confirmation of the break in the bearish trend that started with the great tulip craze of the 1800’s. Mostly that’s all I see for now, but if anything changes I will send an immediate update and let you know. Also on a side note it appears that tomorrow could be up based upon where we closed today, but if it doesn’t close up then this was just an overthrow and down was the likely scenario.

Of course this is all IMHO and I encourage you to do the analysis for yourselves.

And in his latest post, Tim wonders, “Is it sustainable?”. The market rally being the subject. BMB says: certainly not at the current pace, which I think is Tim’s point.

That’s where we are, in the year of the ‘W’, in Todd Harrison’s view. Is that the same as the eye of the hurricane?

In no particular order:

• A smart man once said you can game the market direction or nail the timing but you’ll rarely capture both.
• From a big picture perch, my sense is that 2009 will look like a “W” and we’re somewhere near the middle peak.
• Through a pure technical lens, an upside breach of S&P 875 should power the tape higher. How far—and for how long—is the question I’m currently wrestling with.
• Paradoxically, technical affirmation is a likely precursor to maximum downside frustration.
• As I learned in 2003, agendas must be respected. No matter your view, we would be wise to remember that a cornered animal has little to lose.
• We must remain conscious that technical analysis is but one of our four primary metrics (fundamentals, psychology and structural being the others).
• We’ve long respected the other side of our Wishbone World should the dollar meaningfully debase. Understand, however, that the velocity of money can’t be artificially manufactured.
• At the end of the day, it comes down to one thing: debt. There’s too much of it and inducing more is masking the symptoms rather than curing the disease. That is the single greatest flaw in the recovery thesis—that our current stroke is swimming backwards.
• A word to the wise. When in doubt, wait it out. If opportunity cost is our greatest loss, we should consider ourselves fortunate. There will be easier trades and better days and our goal as Minyans is to achieve financial staying power so we can prosper when they arrive.

That’s the right answer for GM, as far as Eric Englund is concerned:

General Motors and the U.S. government have several characteristics in common. Both are unwieldy behemoths which have become debt-laden, wealth-destruction machines. Their workers are overpaid and under-productive (for Federal employees, counterproductive is a more apt description). Foolish creditors have kept these monstrosities afloat and will eventually end up regretting ever having lent these debt addicts a dime. Yet, each one is a public-relations machine preaching to the citizenry that it is indispensable. The Federal government, accordingly, is working with General Motors on a rescue plan which entails exchanging debt and other liabilities for equity. If this exchange offer is successful, President Obama will be hailed, by the mainstream media, as a visionary leader with the good sense to override the impersonal phenomenon known as the free market. Isn’t it true, after all, that what is good for General Motors is good for the country? Not anymore.

—

In all my years as a financial analyst, I have never seen a company as grossly mismanaged as General Motors. This automaker’s financial destitution indicates GM’s management team, laborers, and related union executives may be the most incompetent in U.S. history. It is abundantly clear Americans love automobiles. Hence, it is a no-brainer that the U.S. is a market where a company could become hugely successful and wealthy by manufacturing and selling cars. Since GM’s founding in 1908, it has managed to accumulate – as of fiscal year-end December 31, 2008 – a deficit working capital position of $32.7 billion and a deficit equity position of $86.2 billion. So in the course of 100 years, General Motors has sold millions upon millions of automobiles and has managed to become profoundly insolvent. The Three Stooges could have done a better job of running an automaker.

—

…I cringe when I hear politicians and financial reporters mention any kind of reorganization for General Motors (including Chapter 11 Bankruptcy reorganization). Any such reorganization would automatically imply massive Federal guarantees that will come at enormous taxpayer expense; which also indicates that productive citizens are viewed, in Washington, D.C., as mere abstractions born to serve the needs of America’s political elites.

The marketplace has spoken; GM has failed and it should be liquidated. New entrepreneurial and wealth-creating opportunities most likely will emerge from such a liquidation. To continue down the present path assures more wealth will be destroyed by the financial black hole known as General Motors.

But we live in a new era — one where success is taxed and punished to prop up and bail out failure.

Tomorrow?

Stolen from Zero Hedge:

April 29 (Bloomberg) — President Barack Obama plans to announce tomorrow that Chrysler LLC will be placed into Chapter 11 bankruptcy, leading to an alliance with Italian automaker Fiat SpA, people involved in the matter said.

Administration officials are still resolving outstanding issues, and the plan is not finished yet, said one of the people, who declined to be named. Any bankruptcy filing could come as soon as tomorrow, people familiar with the matter said.

Chrysler’s best assets would be sold to a new entity that would have an ownership structure similar to that envisioned in an out-of-court deal between the Auburn Hills, Michigan-base automaker and Turin, Italy-based Fiat, the people said.

I don’t know who writes for Bloomberg, but the whole “people said” thing is just classic, and they use it all the time.

Here’s the link to the Bloomberg piece.

While the indices are trying to edge out to new multi-month highs, they haven’t spent any time forming bases…

…but bond yields are trying to break out after basing for three months. Ben had better ramp up his buying if he’s going to try to keep rates down:

Charts courtesy of StockCharts.com

The Fed fireworks came early in the day, as stocks moved higher out of the gate. The morning bump got a spike after the actual announcement, but that move faltered and things started to slide in the final hour, but another jam job boosted the final scores back up in the closing minutes.

The Russell, Transports led the way:

Treasuries continue to slide despite the Fed’s buying efforts, and yields are now starting to break out of their recent ranges — the 5, 10 and 20 year moving above 2, 3 and 4 percent:
6-month: 0.28%    2-yr: 0.94%    5-yr: 2.01%    10-yr: 3.09%    30-yr: 4.02%.

Internals were positive, with volume higher than yesterday’s levels, but a bit subdued for a big Fed day move. Advances/declines were 4 to 1 on the NYSE and 3 to 1 on the Nasdaq, with up/down volume 17 to 3 on the NYSE and 4 to 1 on the Nasdaq. New highs/lows were 9/1 on the NYSE and 32/12 on the Nasdaq.

Nearly all the groups were green, with the hospitals (+6.5%), disk drives (+5.4%), banks (+5.0%), paper (+5.0%), metals (+4.9%), oil services (+4.3%), REITs (+4.3%), networking (+4.2%) and insurance (+4.0%) leading the way.

Energy prices were higher. Crude moved up about a buck to $50.97/barrel, gasoline gained six cents to $1.45/gallon, and natural gas jumped back up to $3.40/mmBTU. The dollar index slid again, down to 84.59. The precious metals were a bit higher, with gold up to $899/ounce and silver to $12.77/ounce.

BMB Note:   The indices are now edging above their recent highs, most still without any sort of significant pullback since the March lows. The Nasdaq and Russell ‘moon shot’ charts might make you think twice about entering new long positions at these levels — of course, we’ve been looking for some sort of pullback for a while now, and we have not gotten it.

Today’s move even had CNBC talking ‘resistance’ levels, noting that the S&P had broken above 875, though it couldn’t hold there. We’ll have to see, during the next bear phase, if they start noting when support levels are broken. Fat chance.

It’ll be interesting, once we get into next week, to see if the market can keep this happy face on, with earnings, Fed day and end-of-month out of the way. So far, so good, though I still think some pullback would be a good thing. It just isn’t happening.

What did you expect? They won’t lower the Fed funds rate below zero, will they?

Here’s the statement. They still intend to buy up billions in bad debt and millions in Treasurys, also not a big surprise. And they expect the economy to improve. Yeah, whatever. They never expected it to get bad, so why believe them?

From CNBC.com:

The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted.

Surprising? Maybe to those who have been eating up all this ‘green shoots’ talk.

The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter.

GDP, which measures total goods and services output within U.S. borders, has now dropped for three straight quarters for the first time since 1974-1975.

Of course, GDP gets reported about nine times for each quarter — they keep munging the numbers until they think they’ve got it right, then they continue to revise them later.

Calculated Risk points out (from MarketWatch) that business investment dropped significantly, and has a discussion and charts addressing “The Investment Slump”.

From The Big Picture:

Of the many issues that arise via the banking bailouts we have seen, perhaps the most pernicious is how corrosive the process becomes. It corrupts even the most well intended parties.

The latest example is the stress tests, which run the risk of being window dressing. As noted last week, the Stress Tests themselves weren’t very stressful. And, now that some of the results are coming in, the cure for inadequate capital is not more capital, but an accounting trick — converting preferred stock to common. As Paul Kasriel of Northern Trust described it, this amounts to nothing more than Accounting Alchemy — the financial equivalent of lead into gold.

Thus, we see the major test for the sector was inadequate to cleanly identify potential weakness. And even by that soft standard, the cure is inadequate.

US banks are suffering a solvency problem, and what they need is more capital, not an accounting sleight of hand. Yet that is precisely what they are getting — the same clever financial engineering that led to the crisis in the first place. All Treasury needs is more leverage and a few derivatives and the transformation into the financial Borg will be complete.

Accounting tricks? Oh, you mean like the relaxed rules for mark-to-market?

One of the big problems with our politics these days — Congress, specifically — is that the members have become ‘lifers’. Seeing the things that have happened in the last few years has convinced BMB that it’s time to consider term limits in the House and the Senate.

And in considering Sen. Specter’s reasons for switching parties, Power Line sees the point:

…it seems to me that Specter’s switch highlights a non-partisan institutional issue that is more fundamental than the one-vote swing in the Senate. What is striking to me is Specter’s unwillingness to give up power. At age 79–he’ll be at least 80 by November 2010–he would rather change parties than retire. We have seen this determination to remain in office, no matter what, time after time. It seems that for many politicians, retirement is like death–they cling to office the way the rest of us cling to life.

Does anyone doubt that if Specter had remained a Democrat, but with a centrist voting record in the Senate, and polls showed him trailing by 20 points in the Democratic primary and scoring better with Republicans in Pennsylvania than Democrats, he would have jumped to the Republican Party with equal alacrity?

One of the basic problems with our democracy is that once we elect someone to office, it often takes a jackhammer to get him out. I’ve never been a big advocate of term limits, but the spectacle of Specter desperately maneuvering for one last term in office reminds me why so many believe they are necessary.

Problem is that would be one tough bill to get through Congress to change things, wouldn’t it?

The saying goes — hope for the best, but prepare for the worst.

Frank Barbera suggests that we be ‘on guard’, just in case we’re only in the eye of the storm:

…there is no surprise that with the stock market at least temporarily on the mend, that the crowd psychology has begun to improve with some leading economic gauges showing material upticks. Unfortunately, the economic ‘rebound(?)’ of the next few months will very likely plant and water the seeds of its own self-destruction, which in turn could quickly lead the global economy into the next, much deeper level of economic collapse. How could this be so? The answer lies in understanding the pendulum nature of crowd psychology. When crowd psychology reaches a negative extreme, it is the norm for psychology to mean revert. This is “the pause” in the underlying trend. This ‘mean revert’ pause produces the “eye of the storm.” Yet, IF there is no solid foundation for the underlying bounce, then like a shanty house in a hurricane, everything gets blown apart.

In an economic hurricane, just like the real deal, the high winds and waves show no mercy to those unprepared.

The Dow is the weakest of the major indices, having been range bound for more than three weeks now.

The flu bug has hurt the airlines, but helped keep health care stocks from falling further:

The hospitals didn’t need the help — they were already on a roll. And what the flu has to do with the networking stocks is beyond me:

Charts courtesy of StockCharts.com

Stocks wandered around for a second day. The big three indices again overcame an early dip and spent much of the day in the green before slipping back down below the flat line in the last hour.

The Russell, Transports and Utilities kept their heads above water:

Treasuries were lower, yields higher:
6-month: 0.30%    2-yr: 0.95%    5-yr: 1.94%    10-yr: 3.02%    30-yr: 3.97%.

Internals were mixed, with volume pulling back again. Advances/declines were positive, at 10 to 9 on the NYSE and 11 to 8 on the Nasdaq, but up/down volume was negative, at 8 to 11 on the NYSE and 2 to 3 on the Nasdaq. New highs/lows were 7/4 on the NYSE and 17/11 on the Nasdaq.

The groups were split, with a bit more red than green. Amongst the losers were the gold/silver stocks (-3.4%), banks (-2.9%), steel (-2.6%), airlines (-2.6%), housing (-2.3%), metals (-2.2%) and oil services (-1.8%). Leading the winners were the hospitals (+2.5%), HMOs (+2.5%), biotechs (+2.3%), paper (+1.7%), networking (+1.5%), insurance (+1.4%) and REITs (+1.2%).

Energy prices were mixed. Crude dribbled back to $49.92/barrel and gasoline lost a penny to $1.39/gallon, but natural gas gained 7 cents to $3.32/mmBTU. The dollar index fell back to 85.16. The precious metals were lower as well, with gold backing down to $893/ounce and silver to $12.48/ounce.

BMB Note:   A couple of days of meandering now for stocks, as they digest a 7-week rally and the latest swine flu news. Not a lot of momentum in either direction at the moment.

Fed day tomorrow, whether it has an effect on the market remains to be seen. We close out April this week, and we’ll soon find out whether they’re going to “sell in May and go away” or not.

Arnold says. And surprisingly, he wasn’t talking about the California state budget.

Another non-surprise.

Prices are still falling and will probably decline for some time.

—

This is near the worst year-over-year price declines for the Composite indices since the housing bubble burst started.

So, does this surprise anyone at all?

Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital…

Where those two are concerned, their stocks got a pop in this last move, but they’re both still under 10 bucks — they’d have to float an awful lot of shares to raise capital on a stock offering.

…who thought this was a good idea? Flying a plane over NYC, and telling the authorities to keep it quiet. Pretty stupid.

And the idea had to have come from the White House — after all, the plane was a backup Air Force One.

…or won’t they?

Will the GM bondholders swap for stock?

MarketWatch says:

GM said it would offer 225 shares of common stock for each $1,000 of debt. If not enough debt holders agree to the plan before June 1, GM said it would file for bankruptcy.

Calculated Risk says the bondholders aren’t thrilled:

This morning GM offered to exchange equity in the restructured company for the outstanding $27 billion in debt. The bondholders responded negatively …

Statement from ad hoc committee of GM bondholders via WSJ:

… The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and essentially no cash.

The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue.
…
This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate.

Apparently the bondholders are preparing a counteroffer.

A GM bankruptcy is still not out of the question.

From The Big Picture:

Fascinating stuff:

“All of this garbage paper that’s going bad — the troubled residential mortgage backed securities (RMBS), the commercial mortgage backed securities (CMBS), the asset backed securities (ABS), the Fannie Mae bonds, the corporate loans, and so on — hasn’t just gone “Poof.”

Instead, more and more of it has been landing on the Fed’s doorstep — either through direct ownership or as collateral against Fed loans that keep getting rolled over.

The result? The Fed’s once pristine balance sheet is starting to look more and more like the balance sheet of a troubled financial institution.”

The quality of the balance sheet of the U.S. central bank is deteriorating. The Fed is now heavily burdened by the same kind of crappy paper that has been hammering private U.S. banks for several quarters.

And the Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets, meaning the Fed is leveraging its capital 48-to-1. That compares to only 27-to-1 two years ago…

For today’s charts, BMB would like to defer to Mish’s site and his post titled “Technical Indicators Scream Caution”, where he’s gathered the charts of a number of indicators he watches.

His comments:

Please remember these indicators are not a precise timing device. Nor do they indicate magnitude of a move. They do however indicate direction, and in this case, a potential change in direction.

The key point to note is these and many other similar indicators are flashing warning signs that this rally is getting very long in the tooth. With that in mind, bulls may wish to consider reviewing their risk reward setups and stop loss positions.

Bears who have not been blown out of the water may have an opportunity at hand.

We’ll find out in time. Enjoy the charts.