Bear Mountain Bull

GM becoming “Government Motors” will no longer be just a joke:

General Motors Corp (GM.N) and the U.S. government finalized plans on Sunday for the battered company to reorganize, setting the stage for America’s largest-ever industrial bankruptcy and heralding a new and uncertain era for the No. 1 U.S. automaker.

GM will file for Chapter 11 bankruptcy protection on Monday at the U.S. Bankruptcy Court in the Southern District of New York before markets open, according to sources with direct knowledge of the preparations.

Al Koch, a managing director at advisory firm AlixPartners LLP, will be appointed Chief Restructuring Officer at GM, a source familiar with the matter said.

U.S. President Barack Obama is expected to outline GM’s next steps on Monday as the federal government prepares to take a more than 70 percent stake in the company in exchange for $60 billion in financing. Nearly half of that money has already been extended this year in emergency aid.

I don’t recall the president ever personally guiding a company through bankruptcy before. Maybe that’s the ‘change’ they were all talking about, huh?

A look at what’s ahead for the housing market — and the ’shoots’ aren’t real green:

Here’s the good news:
The Wave of Resets from Subprime Loans Is Mostly Behind Us.

Here’s the bad news:
There Are $2.4 Trillion of Alt-A Mortgages and Their Resets Are Mostly Ahead of Us.

If you’ve got a few minutes, head on over to Personal Finance and Investing and check out Brad’s latest post on “Debt and Moral Hazard”. I think he nailed it on this one:

For decades now the American approach to debt has been to worry about it later. We’ve essentially kicked the problem down the road. While some points in our history may have suggested somewhat higher debt levels, we’ve done nothing to reduce them in more booming times. Ultimately we’ve just turned a blind eye to a growing problem and it may be too late.

Many people are talking about moral hazard these days, but strangely they all seem to think it’s something that applies to someone else. Bailouts of millionaire bankers strike us as outrageous, while we personally hold an absurd amount of debt. Somehow the country got all screwed up without any of us being at fault.

Our politicians seem to suggest that their opponents are the ones rewarding negative behavior and that they themselves would never commit such an act. This doesn’t hold up to much scrutiny however. Throughout the booms of the previous decades, neither Democrat nor Republican has ever used fiscal policy to “cool down” a boom. Nor have they used any of the booms to reduce our debt to increase our capacity to deal with the next bust.

For all those clamoring for ‘national health care’, you really need to stop a minute and think about what it is you’re wishing for.

From John Mauldin’s letter this week:

I want to pass on this quick note from Dennis Gartman’s eponymous letter. It should give all of those who favor a nationalized healthcare system pause, before they jump right in. Quoting Dennis:

“Canada is a wonderful place to have a nasty gash on one’s forehead stitched, or to break one’s nose in a game of pick-up baseball; but have cancer, or need eye surgery, or want an MRI, and the business of medicine in Canada and/or the UK breaks down badly in favour of medical care here in the US. For example… and we wish to thank The Investor’s Business Daily for the data noted here this morning…

“… here in the US men and women survived cancer at an average of just a bit better than 65%. In England only 46% survive. In the US, 93% of those diagnosed with diabetes receive treatment within six months; in Canada only 43% do, and in the UK only 15% do! For those seniors needing a hip replacement and getting one within six months, 15% get it done in the UK; 43% get it done in Canada … and in the US 90% do! For those waiting to see a medical specialist, 23% of those in the US get in within four weeks, while 57% in Canada have not yet done so, and in the UK 60% are still waiting after four weeks.

“When it comes to proper medical equipment, in the US there are 71 MRI or CT scanners available per million people. In Canada there are but 18, and in the UK there are only 14! Ah, but the best figure of all is this: 11.7% of those ’seniors’ in the US with ‘low incomes’ say they are in excellent health, which in and of itself sounds rather low … rather disconcerting … and an indictment of the system itself, doesn’t it? But in Canada only 5.8% do!

“Yessiree bob, ya’ jus’ gotta’ luv that collectivized, socialized medical care! Let’s all go break a collective arm and enjoy the benefits of socialized medicine in the Commonwealth! (Canada) … but heaven help you if you’ve got something really, really wrong. If that’s the case, you’ll be running south to the border faster than you can reach a specialist anywhere in Canada; of that we are certain.”

Do we pay too much for health care here in the US? Everyone says yes. And there is a lot of waste (and waist) in the system. But if you are the person who needs treatment, maybe the answer is “not really.” If you can’t get the medical help you need when you need it, maybe the fact that it is theoretically free doesn’t mean anything.

As an aside, I have two friends who have had immediate family members diagnosed with Lou Gehrig’s Disease. For all practical purposes, it is a death sentence. Yet one family was told (at a top-five cancer hospital) there could be a cure within a few years, or at least clinical trials. But just not now. Unfortunately, the prognosis is less than a year.

I can guarantee you, if that was me or my family, I would like to be able to make the decision whether to try a radical treatment. What’s my downside if I die a little earlier? Shouldn’t that be my choice?

And if I don’t want some nameless bureaucrat dictating who gets to live or die in the name of his scientific system, why in God’s name would I want a bureaucrat deciding to ration my access to health care? But that is what the majority in Congress are planning for our future. And bluntly, I find that far harder to swallow than my taxes going up.

You should probably go read the first part of the column for more on those taxes, and Mish talks about the housing part of the piece. I guess there’s plenty there for everybody…

More on the health care issue in this post, and then there’s my old rant on health insurance in general.

Notes on the latest moves in the industry groups:

• Just the numbers this week, with the YTD figures tossed in for good measure. If you want to take a stroll through the group charts, just follow the yellow brick road: set #1 — set #2 — set #3 — set #4.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page., the Industry Group Tracker at WSJ Online, or the industry group tools at Finviz.com.

As BMB said in the comments yesterday, “if we knew the all of the reasons and/or impetus for every late day pop in the market, none of us would probably ever be willing to trade again.”

Here was the reaction to yesterday’s late launch at Zero Hedge:

Going back to today’s ridiculous close, the chart below shows it all: the complete tape painting volume spike at the very end of the day speaks for itself. And as computers now simply issue forced stock recall orders to each other, painting the tape wet with manipulative intent and volume spikes into the last 20 minutes of trading every day, their human creators are left on the sidelines, trying to outshout each other as to the reason for why the market keeps rising while the economy keeps tumbling.

Is there ever going to be any transparency in this market again?

I doubt it. Not if we continue to let our financial institutions run the world in an effort to mask the real truths.

More trading lessons from Janice Dorn, “The Trading Doctor”:

There is a Korean martial art called Kum Do. This is a brutal game that involves a fight to the death with very sharp swords. The way it is practiced today is with bamboo sticks, but the moves are the same. Kum Do teaches the student warriors to avoid what are called “The Four Poisons of the Mind.” These are: fear, confusion, hesitation and surprise. In Kum Do, the student must be constantly on guard to never anticipate the next move of the opponent. Likewise, the student must never allow his natural tendencies for prediction to get the better of him. Having a preconceived bias of what the markets or the opponents will do can lead to momentary confusion and—in the case of Kum Do—to death. A single blow in Kum Do can be lethal, and is the final cut, since the object is to kill the opponent. One blow—>death—>game over.

Instead of predicting, anticipating, and being in fear and confusion, you must do exactly the opposite if you are to survive a death blow from the market movements. You must watch with a calm, clear and collected attitude and strike at the right time. A few seconds of anticipation, hesitation or confusion can mean the difference between life and death in Kum Do—and wins or losses in the stock markets. If you are not in tune with the four poisons of fear, confusion, hesitation or surprise in the markets, you are at risk for ruin. Ruin means that your money is gone and the game is over.

How can you avoid the four poisons of the trading mind: fear, confusion, hesitation and surprise?

Replace fear with faith—faith in your trading model and trading plan

Replace confusion with the attitude of being comfortable with uncertainty

Replace hesitation with decisive action

Replace surprise with taking nothing for granted and preparing yourself for anything.

Lost in all the hubbub about green shoots and the big bear market rally is the fact that only three of the Sector SPDRs are at or near new high points on the six-month charts. Those are the techs, materials and discretionaries:

The financials, industrials and energies are still trying to get to that point:

While health care, utilities and staples are still lagging:

The numbers as we close out the month of May:

Charts courtesy of StockCharts.com

We were discussing the Fed’s attempt to keep interest rates low this morning in the comments section. This guest post at naked capitalism explains why, as I believe, that the Fed’s attempts to keep rates down will be unsuccessful — that if indeed rates DO stay low, it will be because the market chooses to have them there:

The Fed knows long-term rates can’t be allowed to rise because that would run their economic “recovery” off the rails. Enter “quantitative easing,” the policy by which the Fed prints money to buy fixed-income securities like Treasurys and MBS. By printing money to inflate demand, they hope to hold interest rates down.

Sounds great, right? Why can’t the Fed just keep printing money to buy bonds in order to hold interest rates artificially low?

Because bond investors call bullsh*t. As the Fed prints money, inflation expectations rise. When investors anticipate higher future inflation they demand higher interest rates to buy debt. After all, they don’t want to hold fixed-income securities when fixed-incomes lose their purchasing power to inflation.

And so we have a great game of chicken between the Fed and the bond market. The Fed prints money to keep interest rates down while bond investors zip tight their wallets because Fed printing makes bonds less appealing. What is the Fed going to do, become the lender of last resort to the federal government? Print whatever cash is necessary to literally displace vanishing private demand for government debt? This is no solution of course; in the long-run it implies hyperinflation.

Mr. Winkler continues:

And so we return to the question Keynesians like Krugman simply won’t address when they advocate government “stimulus:” How do we pay for it? If we run up additional debts without making some provision to pay them, then in the long-run interest rates have to rise.

You could raise taxes to pay down debt, but that would destroy the positive impact of additional government spending.

The point is there’s no way to financially engineer our way out of this crisis.

Economists love the idea that the Fed is all powerful, that it has some magic wand to wave which can rescue Americans from debt deflation. I suspect this is because, deep down, they harbor ambitions to be Fed Chairman themselves. For most economists, the Fed’s printing press is the ultimate toy….one they’ve always wanted to play with.

And it is a powerful one. Most recessions are easily “solved” because the Fed can always use that printing press to inflate a credit bubble, to inflate demand artificially. This works great until it doesn’t. Eventually the credit bubble becomes so big it’s simply impossible to sustain with more printing.

I suspect this is why Keynesians never bothered asking how we’d pay for stimulus. The answer—”we can’t”—shatters their economic theory.

Bottom line? We’re still in a big mess there is not an easy way out of.

None so far — but the two last week were late arrivals.

A very lethargic session for stocks today — until the last 20 minutes. The indices (with the exception of the Transports) hugged the flatline for nearly the entire day, until that late surge pushed them up to new highs for the day.

The Transports led the way by far, for no real reason that I could determine:

Treasuries finally got a bounce after getting beaten up earlier in the week, and yields started to pull back:
6-month: 0.29%    2-yr: 0.95%    5-yr: 2.44%    10-yr: 3.65%    30-yr: 4.52%.

Internals were positive. Volume was fairly weak much of the day, but picked up at the end of the month day, and looks heavier than yesterday. Advances/declines were 14 to 5 on the NYSE and 7 to 3 on the Nasdaq, with up/down volume 3 to 1 on the NYSE and 7 to 3 on the Nasdaq. New highs/lows were 21/4 on the NYSE and 45/12 on the Nasdaq.

The final 20-minute push helped put most of the groups in the green, led by hospitals (+3.5%), gold/silver (+3.1%), transportation (+2.9%), homebuilders (+2.8%), steel (+2.8%), metals (+2.7%), biotechs (+2.5%), REITs (+2.5%), airlines (+2.2%) and chemicals (+2.1%).

Energy prices are starting to get a little extended here: crude oil was up more than a buck, again, to $66.31/barrel, and gasoline added another couple of cents to $1.93/gallon. Natural gas pulled back after jumping yesterday, to $3.85/mmBTU. The thumping of the dollar continued, pushing the dollar index back below 80 at 79.39. Precious metals liked that idea — gold moved up to $978/ounce and silver jumped to $15.67/ounce.

BMB Note:   The move down in the dollar and up in commodities is probably due for a rest soon — watch yourself there. Also, it looks like the expected pullback in yields started today — we’ll see where that goes.

As for stocks, the indices remain stuck for now, though today’s late ’stretch run’ pumped them right back up near the top of their ranges.

On a blog note, a bit of advance warning: I’m thinking about taking a much-needed break from the blog someday soon, though I’m not exactly sure when that will be. Quite frankly, after more than 4 1/2 years at the keyboard, I’ve lost some of my enthusiasm for the daily grind. I’m going to need to take a little time off from the site and decide what the future holds for BMB.

Have a good weekend.

No pension is safe:

Lee Iacocca, the car executive credited with saving Chrysler from bankruptcy in the 1980s, is to lose a big chunk of his pension and a guaranteed life-long company car due to the U.S. automaker’s bankruptcy filing two decades later.

On Friday mornings, we like to check in with Larry McMillan and his market indicators. But Larry’s column can be a bit unpredictable as to its arrival time, and as to when it gets posted at Tiger Shark, which is the only site I know of that posts it on a regular basis.

If you’d like, keep an eye on the Larry’s archives page there. It’ll probably show up eventually.

A ‘change in plans’ in the mortgage market. Mish follows up on Wednesday’s mortgage market mess:

…a rate spike this large results in chaos. Weeks/months of purchase and refi loan applications will be lost. Mortgage operations centers are parsing through thousands of loans focusing only on locked loans and purchases mitigating potential losses. The rest are dead wood.

Rates are all over the map as lenders assess the damage and price cautiously. Now, it is a mad dash to only focus upon the loans that are locked and have a chance of funding. If the locked loans are not funded quickly and the interest rate complex continues to experience this extreme of volatility, serious losses can occur.

Lenders will be backing off for a while to see what rates do. Many loan applications will be rejected if rates don’t come back down, as the applicants may no longer qualify.

Bloomberg says “GM Will File for Bankruptcy June 1″.

“We intend to get in and out very soon,” he said today at an Automotive Press Association luncheon in Detroit. “The U.S. government wants its money back, and our plan is to pay it back as quickly as possible. The U.S. government doesn’t want to own auto companies.”

They may not want to, but they’re going to:

The filing shows the U.S. Treasury owning 72.5 percent of equity in the new GM, a union health-care trust with 17.5 percent and 10 percent going to the old GM to hand to creditors in the bankruptcy process.

Did you want to buy stock in the new GM? Neither did I. Looks like I don’t have much say in the matter.

Sounds like yesterday’s spike in rates caused more than a bit of stress in the mortgage market.

From Mr. Mortgage live, via Mish’s site:

With respect to yesterday’s episode in the mortgage market — yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.

—

The bond and mortgage market got complacent with the ultimate in moral hazard’s — the Fed’s got my back. Complacency is a killer. Where we stand in two weeks in unknowable.

Can’t beat fun. And as we’ve learned, the credit markets tend to see trouble before the stock markets take notice.

Commodity areas are holding up nicely — energy and metals, both precious and otherwise:

But combined weakness in retail and housing…

…adds up to a big top in Home Depot.

Charts courtesy of StockCharts.com

The indices bounced all over today, up, down, up, down and then finally up for good on a post-lunchtime surge. The small-caps lagged way behind their big brothers today, holding the Russell to the smallest gain:

The beaten-up Treasuries finally found a few buyers, and yields took bit of a rest, though they were higher at the 5-year mark:
6-month: 0.29%    2-yr: 0.95%    5-yr: 2.44%    10-yr: 3.65%    30-yr: 4.52%.

Internals turned back to the positive side, with right near the same levels we’ve been seeing. Advances/declines were 21 to 11 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume 3 to 1 on both exchanges. New highs/lows were 11/7 on the NYSE and 32/8 on the Nasdaq.

Most groups were green, with the commodities leading the way: oil services (+4.3%), gold and silver (+4.2%), natural gas (+4.2%), paper (+3.6%), oil (+3.2%), banks (+2.9%), steel (+2.6%), brokers (+2.6%) and REITs (+2.5%). Topping a short list of losers were the homebuilders (-2.4%) and retail stocks (-1.3%).

Energy prices continue to cruise upward. Crude oil was up more than a buck to $65.08/barrel, gasoline added a couple of cents to $1.91/gallon, and natural gas zoomed up to $3.95/mmBTU. The dollar came down after an overnight bounce, leaving the dollar index just barely higher at 80.48. Precious metals continued their run, with gold moving up to $960/ounce and silver to $15.13/ounce.

BMB Note:   The indices remain rangebound (with maybe a bit of help from end-of-the-month window dressing), with the commodity areas holding up well, consumer-related areas still slipping, and housing stocks breaking down for the umpteenth time.

For now, it’s becoming a little more important to be in or out of certain areas, as a number of stocks are now turning back below their 50-day moving averages — these charts show the percentage of stocks above the 50-day on the Nasdaq and NYSE. We’re no longer in ‘everything is going up’ mode.

Fairly unimpressive, from what I see in this chart. The seasonal trend is already flattening out, which doesn’t look like real good news for the rest of the year, if that trend holds true — and higher mortgage rates aren’t going to help.

Calculated Risk has some updated charts, with a follow-up post to come later:

Update: Here’s the follow-up post from CR, on the widening gap between new home sales and existing sales. Very interesting…

So how are those ‘green shoots’ doing? Maybe starting to wither in the summer heat…

“Another week, another record for continued claims.”

One of the biggest — and dumbest — mergers of the dot com days is finally going to be unwound:

“Time Warner to spin out AOL”.

I think it should have said “spit” out.

(Hmm. “Undone”. In my opinion, one of the best songs The Guess Who ever did. Ok, they called it “Undun”, but close enough.)

Yes it is.

Gary Dorsch:

…a coordinated slide of the US-dollar and slumping US-Treasury notes is now apparent, indicating that a significant exodus of foreign money from the US-debt markets is underway, (contrary to Fed and Treasury propaganda). Earlier today, the Fed bought $6-billion of T-Notes to stabilize the sliding bond market, but at the same time, it’s weakening the US-dollar, and preparing the groundwork for the next big wave of inflation. Within an hour of the Fed’s $6-billion money printing operation, the US Treasury bond market resumed its downward spiral, plunging in a free-fall.

In reaction to the Fed’s QE (quantitative easing) scheme, Brazil and China are working towards bypassing the US-dollar in bi-lateral trade transactions, challenging the status of the greenback as the world’s leading international currency. “We don’t need dollars,” said Brazilian President Luiz Inacio Lula da Silva. “It’s crazy that the dollar is the reference, and that you give a single country the power to print that currency.”

Some of the solar stocks are lighting up…

…but so are bond yields — and interest rates along with them, to Ben’s frustration:

You can talk all you want about ‘green shoots’ and consumer confidence — the airlines just ain’t feelin’ it:

And while we’re looking at Transports, UPS is looking like it could be in a wee bit of trouble here…

Charts courtesy of StockCharts.com

Stocks started fairly slowly this morning, and chopped around the flat line until about mid-day. But then the bond market choked on its lunch, sending yields to new multi-month highs and sending stocks lower, with the indices giving back a hefty chunk of yesterday’s gains.

The sputtering Transports got the worst of it:

Treasuries took a dive, and yields jumped higher on the long end:
6-month: 0.29%    2-yr: 0.95%    5-yr: 2.39%    10-yr: 3.70%    30-yr: 4.60%.

Internals turned negative, with volume maybe just a bit above yesterday’s levels. Advances/declines were 3 to 7 on the NYSE and 1 to 2 on the Nasdaq, with up/down volume 1 to 4 on the NYSE and 4 to 7 on the Nasdaq. New highs/lows were 14/5 on the NYSE and 36/7 on the Nasdaq.

Nearly all of the groups turned red, with paper (-8.2%), airlines (-4.9%), REITs (-4.1%), banks (-3.8%), insurance (-3.5%), brokers (-2.8%), chemicals (-2.6%), homebuilders (-2.4%) and retail (-2.2%) leading the dive. Only the semiconductors (+1.6%) and steel stocks (+0.3%) managed a green day.

Energy continue to move higher. Crude oil was up another buck to $63.45/barrel, gasoline added another few cents to $1.89/gallon, and natural gas was a penny higher at $3.54/mmBTU. The dollar index chopped around and moved slightly higher, to 80.40. Precious metals were mixed — gold down a couple of bucks to $951/ounce but silver up to $14.79/ounce.

BMB Note:   Supposedly the Treasury auctions of the past couple of days went fairly well — but the bond market doesn’t care. They’re selling bonds, Treasury yields are rising quickly, and mortgage rates are rising even faster. Maybe the bond market is finally rebelling against the massive government spending and money printing.

What’s your next move Ben? This isn’t the way you had the play drawn up, is it? If the ‘quantitative easing’ idea backfires in your face, what’s plan B?

The headlines say the numbers were up for April, and they were. But sales are really just following the seasonal trend perfectly, and are still lower YOY.

As we always do, we turn to Calculated Risk for the full story and all of the charts (see here and here):