Tuesday, December 18, 2007

Bear Market Gains

Stocks staggered to small gains Tuesday, as the major indices weighed current conditions versus future expectations, taking strategic positions three days prior to options expiration on Friday.

Trading in narrow ranges, the major indices opened higher, withstood midday selling pressure and gained into the close, complementing two straight days of solid losses with a technical bounce.

Dow 13,232.47 +65.27; NASDAQ 2,596.03 +21.57; S&P 500 1,454.98 +9.08; NYSE Composite 9,602.55 +73.88

Markets were buoyed at the open by news that the European Central Bank (ECB) made $500 billion available to banks in a 16-day funding. While Wall Street may think an additional 1/2 Trillion in cash is a holiday treat, more sober observations declare concern:
"This clearly signifies some worries," said Gabriel Stein, an economist at Lombard Street Research. "They can't keep doing this forever and ever."

What the ECB (and in the background, the US Fed) is attempting is to avoid a major liquidity crisis before the end of the year. Commercial banks have been reluctant to lend to each other, citing one or the other parties financial stability as the rationale.

The general public doesn't know that this banking crisis has been in play since August and likely won't until some big bank rolls over and depositors are stuck dealing with regulators from to government in order to retrieve their funds.

It should be very clear to anyone witnessing this unfolding financial drama that serious bank failures are only one bad loan or misguided investment away. Unfortunately, our news media keeps the lid on serious news such as banking problems in order to avoid a "panic" in the general population.

For their parts, Wall Street and the foreign exchanges have put on their best smiles in spite of it all, but there's an undercurrent of thought that an economic calamity is not just possible, but likely inevitable. Repeated liquidity injections and interest rate cuts by central banks have yet to solve the burning banking questions: Who is vulnerable and when will they fail to meet obligations?

Stocks, the amusing side-show for now, showed some resilience, with advancing issues holding sway over decliners, 3819-2429. New lows continued to outdistance new highs by a wide margin, 725-71. The indications are such that stocks will remain rangebound with a negative bias.

Oil closed slightly lower, down 14 cents to $90.49, while gold gained $8.10 to close at $807.40 and silver ended at $14.17, up 19 cents.

CNN/Money reports that US demand for gas has fallen in five of the last seven weeks, begging the question of how long high fuel prices can be maintained.

As mentioned in this blog ad nauseum the concern that high fuel prices could push the economy into a recession may be coming to fruition. As consumers feel the pinch at the pump crimping their lifestyle, changes in spending habits are inevitable. Smaller cars, shorter trips and environmentally-sensible measures should begin to take hold, though it's probably already too late to avoid some mid-course disruptions.

NYSE Volume 3,723,687,000
NASDAQ Volume 2,038,324,500

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