The Bond Bubble

The Dow Industrials dipped below the psychologically
significant support point of 10,000 early in yesterday’s sell-off. But
interestingly, buyers stepped in and drove the index as 10,111 before
weakness resumed.

Yes, the Dow still closed weakly at 10,040. But yesterday
was the first day in several where there was any significant buying interest.
And it makes sense, when you consider we are dealing with a range bound
market.

At 10,700, stock prices are expensive and there’s no
incentive to buy. At 10,000, however, stocks begin to look cheap and buyers
step in.

Who’s Profiting Now?

Stocks have been unable to make any headway over the past
few sessions. And late-day sell-offs have been a common theme.

I often refer to oil prices as a proxy for growth
expectations. And with oil prices set to drop below $72 a barrel today, it’s
clear that investors are not bullish on growth. Of course, recent economic
data has indicated that economic activity in the
U.S. has slowed down.

Perhaps the biggest drag on the economy is housing. That’s
nothing new. But New and existing home sales have been weaker than expected
after the expiration of the homebuyer tax credit in April.

What the Potash Buyout Tells Us

The bidding war for fertilizer company Potash Corp of
Saskatchewan (NYSE:POT) is getting very interesting. Last week, the company
rejected a $34 billion buyout bid from mining giant BHP Billiton (NYSE:BHP).
BHP countered by saying it would make the bid a $38 billion hostile bid,
which means BHP takes its offer directly to the shareholders.

To counter this move, Potash Corp has been in talks with
other companies to see if they can get the buyout bid higher. China’s
Sinochem and Brazil’s Vale have been mentioned as having interest. And
Potash’s board is already saying that a “superior offer” is expected. That’s
good, because Potash Corp. currently has a market cap of $44 billion, and
rising
.

Now, this buyout process is interesting in its
own merits. As a company, Potash is a cash cow, throwing off $1.42 billion in
net earnings and $2.58 billion in operating cash flow on $4.9 billion in
revenues. One might look at the forward P/E of 19 and conclude the stock was
expensive. But when you consider that earnings would pay for the buyout in less
than 20 years (based on forward estimates), maybe it’s not so expensive.

What will the Fed Do?

2 of the 3 economic reports we got yesterday were
disappointing, to say the least. New claims for unemployment jumped to an
8-month high and the Philadelphia Fed’s manufacturing survey made a huge
swing lower. Only leading indicators for July came in as expected.

The results of the manufacturing are worrisome. Business
activity retreated for the first time in over a year in the Philadelphia
area. That’s caused at least one investment bank, JP Morgan to lower its 2010
GDP estimate.

Even though July’s leading indicators still point to slight
growth, there’s no doubt the U.S. economy has weakened considerably in the
last few months. Of course, that’s not news to many Americans. Fidelity
Investment is reporting that hardship loans from 401K accounts are on the
rise.

Pushing on a String

Our discussion of the GM IPO has been timely: the company
filed with the SEC for its IPO yesterday. Now, we can answer some of the
looming questions.

First of all, it sounds as though GM will not issue new shares, but rather
simply sell more of the existing ones. That means the current common
shareholders will not be wiped out. It also means that individual investors
will be able to buy GM shares on the first day they are available.

A Losing Race

The United States is
losing the renewable energy race. And as you might guess, it’s

China that’s out in front.

China has pledged $738 billion for
renewable energy projects over the next 10 years. The
U.S.? Well, not so much.

Our $700 billion stimulus plan set aside a paltry $36
billion for renewable energy projects. And Congress has already started eating
into that allotment to fund other spending.

A Little Confidence

As expected, the Fed didn’t have much to say about
the
U.S. economy or future
stimulus plans that could be construed as positive. The Fed acknowledged that
the economic recovery has slowed in recent months. But I think we all knew
that.

The Fed also announced it will reinvest the proceeds of its
mortgage-backed securities into Treasury bonds. The $10 billion a month the
Fed is making off these assets is quite literally a drop in the Treasury bond
market’s bucket. It will do little to effect interest rates or
liquidity.

Investors are disappointed with the Fed’s reaction to the
recent downturn in economic growth. That’s evident in the futures market, where
Dow Industrials futures were down 145 points in pre-market.

Bakken Buyout

Here’s something you don’t see every day: stocks, Treasury
bonds and gold all sold-off yesterday.

One might think that when investors sell, they sell
everything. But the financial markets are all about money-flows. When
investors sell stocks, they put the cash in bonds for the safety and the
quick yield.

That’s one reason the Fed is keeping rates exceptionally
low for an extended period of time: Bernanke is actively trying to reduce the
incentive of owning bonds. In fact, if he can get bond yields below inflation
rates, then owning bonds is a punitive position because you’re effectively
losing money.

The Truth Behind Tech Revenues

Up, down, up down. To say that the stock market has been
volatile over the last week is like saying King Kong was big monkey. It’s
true, but it doesn’t really give the complete picture.

Investors and traders really don’t seem to know what’s
coming next. I’ve tuned into
CNBC a few times during the trading day recently, and you can see the
frustration on the commentators’ faces. It’s as if they know that, no matter
what they say, they will be wrong.

This market is experiencing indecision in its purest
form.

What to do about BPs Dividend

It finally happened.
Yesterday, BP (NYSE:BP) announced that it would suspend its dividend for the
remainder of 2010. After that, it will probably depend on how much the oil
spill costs as to whether, and at what rate, the dividend is reinstated.

Cost estimates for the spill
are rising. One analyst was out with a $63 billion estimate. That’s based on
the $7,942 a barrel Exxon paid for clean up and fines for the
Valdez spill. To put things in perspective, the Valdez leaked 257,000 barrels of oil. BP’s Gulf of Mexico spill is expected to reach 5.3 million barrels.

BP has annual cash flow
around $30 billion. It will also have to lower spending and sell off some
assets. And it will hit the bond market to raise cash.