Friday, January 11, 2008

Wall Street Imploding over Credit Concerns

Wall Street was in retreat mode from the opening to closing bells on Friday as investors sold stocks amid an ongoing credit and banking crisis.

Today's headliners were American Express (AXP) and Merrill Lynch (MER), both of which were seen suffering the consequences of an eroding US economy.

American Express was down more than 10% as the company warned that it would miss first quarter analyst estimates due to having to bolster reserves for delinquent credit card users. Stocks of other credit card companies such as Discover, MasterCard and CapitalOne also suffered losses on Friday as panic selling took hold of virtually anything even rumored to be close to a financial, banking or credit company.

Merrill Lynch joined a growing number of banking/brokerages that are having to write off billions of dollars worth of near-worthless credit-backed paper, due to the unwinding of subprime mortgages and a gnawing mortgage meltdown which is showing no signs of abating. The company reportedly will have to write down as much as $15 billion in the most recent quarter alone. More losses may be forthcoming for Merrill and other banking/finance concerns.

There was no doubt about the direction of stocks on Friday, as the selling began at the opening bell and did not relent all day long. Investors are finally awakening to the depth and seriousness of the credit crisis engulfing the entire world economy.

Dow 12,606.30 -246.79; NASDAQ 2,439.94 -48.58; S&P 500 1,401.02 -19.31; NYSE Composite 9,347.47 -143.29

While Fed head Ben Bernanke has pretty much promised more interest rate cuts, it's becoming increasingly apparent that the Fed and
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other central banks can do little to prevent consumers from falling behind on everything from mortgage payments to credit card bills as the most basic of necessities, food and energy, continue to rise in price and eat away at family budgets. Easy credit, from 2000 though 2006, is the culprit and easing interest rates to make money even more affordable is clearly not the answer.

In the most obvious indicators that are tracked here, declining stocks beat back advancers by 4344-2020. New lows, which have consistently led new highs since November 1, 2006, expanded the bulge once again, 516-96.

From a technical standpoint, all the major indices closed at or near new lows for the new year, all within the closing bottoms put in on Tuesday of this week. The late-day Wednesday PPT-led closing rally and Thursday's Bernanke bounce were nearly completely repudiated on Friday.

Although 2007 will go down as a positive-return year for US stocks, those gains have all but been eviscerated in the first 8 trading days of 2008, and the worst may yet be forthcoming. According to the steadfast January Barometer, which is 85% accurate, the direction of stocks in January carries a strong correlation to the direction for the remainder of the year. 2008 currently looks like an iron-clad lock to be a negative one for investors, though Bernanke and Co. will have the final say when they will almost surely announce a rate cut of somewhere between 50 and 100 basis points on January 30.

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All of this has somewhat of a snowball effect. As homeowners default and banks and mortgagors suffer losses, equity investors also take a hit. When homeowners and consumers are squeezed, they liquidate assets, including stock portfolios, in order to pay for necessities. Outflows from funds accelerate and there's less money to go into stocks. A declining market is inevitable as is recession.

What's worse, our uninspired leaders in government and finance show little wherewithal in extracting us from this morass. Taking a cue from the political debate, if there ever was a time for change - and we're talking about major changes in policy and implementation - now is the time.

NYSE Volume 4,438,587,500
NASDAQ Volume 2,355,680,750

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