Friday, September 14, 2007

Stocks Gain Amid Turmoil

There hasn't been much good news concerning the US economy of late, yet investors - or maybe the goodfellas at the PPT - saw fit to boost stocks over the course of a slow trading week.

Oil prices reached an all-time high; the internal, arcane, technical and highly-secret credit malaise has reached astonishing proportions; consumer spending is disappointing and capacity utilization is flat. Add to those list of ho-hums the bailout of Northern Rock, the U.K.'s fifth-largest mortgage lender, by the normally stoic Bank of England. The BofE will prop up Northern Rock with an undisclosed infusion of credit and capital as a "lender of last resort."

Dow 13,442.52 +17.64; NASDAQ 2,602.18 +1.12; S&P 500 1,484.25 +0.30; NYSE Composite 9,673.65 -4.47

While markets in Europe were roiled by the news, US markets barely skipped a beat on a very slow trading day. Stocks for the week experienced excellent gains in hopeful advance of a Fed rate cut when the FOMC meets on Tuesday. With expectations high and largely priced-in, anything short of a 50 basis point cut by the Fed in the Federal Funds rate - from 5.25 to 4.75 - will send markets reeling.

One look at a 5-year chart of the Dow (see right) will reveal that we may be looking at the final run of a very long bull market. The last rise, from 12,000 to 14,000 was spectacular, though interrupted by a serious hiccup in February, which should have served as notice that the end was in sight.

The recent volatility amid now slim trading markets indicates that the credit crisis fomented by sub-prime loans and packaged mortgage investments gone bust has spread throughout the economy and is still growing. A rate cut next week will only exacerbate the condition rather than heal it.

Nonetheless, advancing issues outpaced decliners by a 4-3 margin again today, though new lows retained their lead position over new highs, 224-137. This broken metric continues to indicate a fundamentally weak market, spurred higher by unwise speculation.

Oil fell back 99 cents after setting a record high price on Thursday,
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closing at a still-unsustainable $79.10. Gold was down a piddling 10 cents while silver gained 3 pennies. It truly was a day to stay home.

Looking ahead to next week, don't expect much action until the Fed release at 2:15 on Tuesday. After that, it's anybody's guess and highly dependent on what the Fed decides. The market and various analysts (who have shown time and again how wrong they can be) are predicting at least a 1/4-point cut by the Fed, though most would prefer 1/2-point. Either way, they are all wrong and a Fed cut, or worse, a series of them, will send the economy into an even deeper and longer tailspin. Count on it.

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