Wednesday, March 7, 2007

Blind Men Leading the Clueless: Late Day Selling Sinks US Equities

Yes, indeed, the dead cat bounced yesterday, but it lost its legs in the process. The follow-up to Tuesday's one-sided trade up was a complete dud. While the Dow briefly traded nearly 50 points higher, at the end of the day the sellers took all US equity indices back into red territory.

Dow 12,192.45 -15.14; NASDAQ 2,374.64 -10.50; S&P 500 1,391.97 -3.44; NYSE Composite 8,999.20 -6.81

The short leg today signify little buying interest. Any other explanation should be viewed with appropriate skepticism. Following the meltdown of Feb. 27, yesterday's rally was simply relief, as I said clearly and emphatically yesterday.

But here's a direct quote from (I believe), which posts directly to the market overview page on Yahoo! Finance, a site that is probably the most frequented of any in the financial world.

Since yesterday's huge rally was based as little on fundamentals as was last week's meltdown, and indicative of short covering activity amid an increasingly pessimistic mindset, today's breather wasn't overly disconcerting. In fact, some semblance of stabilization provides some hope that a bottom may have been put in place.

Now, I have a couple of problems with this. First, it's sugarcoating the past two weeks+ of trading in which the Dow has fallen in 9 of the last 11 sessions. The other indices have generally followed suit. February 27 was not an isolated event, even if it was somewhat contrived. Second, I don't know exactly how the author squares "short covering activity amid an increasingly pessimistic mindset" with "based as little on fundamentals as was last week's meltdown..." because if there is an increasingly pessimistic mindset, shorts wouldn't bother to cover and last Tuesday's meltdown was based on fundamentals - a fundamentally overbought market.

Third, that last line is a true gem and should end up in the annals of other official-sounding gibberish. "Some hope that a bottom may have been put in place" is like saying, "we're happy none of the survivors were killed," or "sure Kennedy was killed but Connally was only injured." Serious damage was done last week and it wasn't exactly unforeseen. Anyone hoping that a bottom is now in place is really pushing the envelope of stupidity right into the face of investors they hope are clueless.

There's more evidence that corporate media thinks the American public is stupid. As if we needed any more proof, writers Robin Farzad and David Henry penned the cover story for this week's edition (dated March 12, 2007) of BusinessWeek. In it they and their editors actually have the raw nerve to use this as a sub-head: "Volatility is back. Ominous signs loom. But the outlook for U.S. markets is surprisingly upbeat."

For them, maybe, but there are thousands of people with money in 401k's and other investments who aren't exactly rejoicing over a 400-point one-day drop on the Dow. The trading sessions which preceded and followed that ugly Tuesday aren't exactly joy-inspiring either.

The authors cite a glut of private equity money and other cash sitting on the sidelines and the fact that overseas markets still seem riskier than US stocks as examples for the "upbeat" feel. They also cite that the market was up on Feb. 28, as another reason not to worry, which certainly is reassuring, especially when it was down the following day, the day after that and so on...

These authors have an amazing nerve to think they can accurately read the market's signals and then tell us everything is OK. It truly is the blind leading the clueless.

Meanwhile, reports that the housing bubble has burst into full-blown collapse are beginning to emerge. It's not just sub-prime loans that are going bust, but buyers who purchased homes via adjustable rate vehicles at grossly inflated prices with little or no equity are being dragged into foreclosure as well. It's simple math. If you bought a home in 2003, 2004, 2005 or 2006 for $500,000 and today it's only going to fetch $400,000, you lose. And it's happening all over the country, but especially in Florida and California, which just happen to be two of the largest real estate markets in the USA.

The real culprits are interest-only adjustable-rate mortgages, which spread like wildfire through the mortgage industry as housing prices ramped beyond the reach of most Americans. Insidious lending practices let the buying boom continue, until every last loser with a job had his or her own home, affordable or not (most times, not).

Well, if our homes don't kill us, we can count on our cars taking every last nickel. Oil was up another $1.13 today to close at $61.82. The beneficent big oil companies just can't get enough, can they?

Gold gained 6.70 to 652.90; silver followed dutifully along, rising 12 cents to $13.11 per Troy ounce.

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