Monday, November 5, 2007

Wall Street's Ponzi Scheme Blowing Up

What's really going on with Wall Street?

We keep hearing news that the economy is OK, but then, a day later, there's more disturbing data from the housing sector, or some consumer confidence poll. GDP is strong (+3.9% in the 3rd quarter), labor markets are solid, but stocks seem to be dawdling along and November is usually a good month.

The bottom line truth is that nobody really knows, or those who do aren't saying, and matters were made muddier last week when the Fed lowered the federal funds rate, then more sub-prime fallout at CitiGroup, then stocks took a nosedive without warning.

On Monday, it looked like a meltdown in progress right out of the gate, then a slight recovery, another slump and a recovery into the close. Same old broken record with this kicker, Fed Governor Frederic Mishkin spoke extensively on the economy and the Fed, saying that the recent cuts could be reversed.

How about that monkey wrench? How would Wall Street react to a 25 basis point increase after celebrating the last two cuts of a combined 75 basis points. If you want to see turmoil, just wait and see.

Dow 13,543.40 -51.70; NASDAQ 2,795.18 -15.20; S&P 500 1,502.17 -7.48; NYSE Composite 9,958.82 Down 93.44

The internals shed more light. Today's decline was more broad-based than most other run-of-the-mill -50 point declines on the Dow. Declining issues led advancers by a nearly 3-1 margin. New lows continued to dominate new highs, 633-165. That's a pretty large gap and signals again that the market is in for more downside pressure.

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The selling pressure is coming from everywhere because stocks have been so magnificently overvalued while returns from the 3rd quarter were shoddy in most sectors.

Gas prices took another huge rise over the weekend, up nearly 12 cents in most areas. Naturally, this has much to do with politics in the Middle East, especially with Pakistan now under what amounts to martial law. What's interesting is that Western democracies are more concerned than Pakistanis themselves, by and large, probably because most Pakistanis aren't accustomed to real democratic rights, they've only recently experienced some of them.

The price of crude actually eased off a bit on Monday, dropping $1.95 to $93.98, which is really not any kind of relief. Meanwhile, gold gained another $2.30, to $810.80 and silver priced 19 cents higher to $14.79.

So, what's really the matter? I continue to hold to the theory that credit markets are frozen, lots of money is being lost on a daily basis, there are no merger and acquisition deals going forward and companies are paying with their eyeteeth for expansion funding. Private equity deals, all the rage over the past few years, are about to blow up in the faces of the funders and bank failures are not far in the future.

While the day-to-day wheels of industry grind on, wealth is no longer being created, but rather destroyed in a vicious cycle of bad loans, tight credit, a falling dollar and excessive pricing in energy. It's an absolute mess that has no other final resolution but a massive re-valuation of just about everything, including stocks, and that means we're going to be stuck in a bear market for some time to come.

Sentiment is turning from unsure to surely ugly and price gains are going to be few and far between. Tech is still the best bet, but only in companies with solid balance sheets and earnings that are growing and are predicted to continue doing so.

I reiterate, anything exposed to finance, banking or money is going to get crushed over the next six to nine months. And when the fall comes to the banking sector, the layoffs in that sector and everywhere else are going to be mammoth. A recession should be a foregone conclusion as government figures have proven, over and over again, to be unreliable and untrustworthy.

If the sub-prime disease that has crushed the credit markets continues unabated - and it will - the effects to the general economy will be long-lasting and severe. Believe whomever you like, but from this corner, the massive Wall Street Ponzi scheme seems to be headed for a watershed event.

NYSE Volume 3,819,302,500
NASDAQ Volume 2,147,749,000

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