Thursday, February 28, 2008

Bernanke Mentions Bank Failures, Market Swoons

Ben Bernanke, in his second day of testimony to the House Financial Services Committee, finally let the cat out of the bag, saying, "I expect there will be some failures," referring to smaller, regional banks which got in over their heads in mortgage financing.

Pointing out that the larger, money center banks had sufficient capital ratios, Bernanke made it clear that he didn't anticipate "any serious problems of that sort," with larger banking interests.

The only problem with the Chairman's statement is that the bigger banks are the ones with the serious problems, a few of which, including Citigroup, Merrill Lynch, JP Morgan (Chase), have had to scurry to raise funds from foreign governments in so-called "sovereign Funds" from countries such as Abu Dhabi, Kuwait, Singapore, and Dubai.

Smaller, regional banks are generally more circumspect and conservative in their financing and investing operations.

Bernanke's words stunned the markets, but he used a velvet hammer to deliver them, knowing full well that the larger banks are teetering on the brink of insolvency and, so serious are their liquidity and confidence problems, that they are loathe to lend to anyone but those customers with perfect credit portfolios.

Stocks were down across the board, with some of the hardest hit in the banking and financial sector. The Dow ended its streak of four straight positive gains with a pullback from resistance above the 12,725 area.

Dow 12,582.18 -112.10; NASDAQ 2,331.57 -22.21; S&P 500 1,367.68 -12.34; NYSE Composite 9,221.88 -71.01

Those calling for a bottom or resumption of the bull market (HA!) should likely take this as a warning that the January 22-23 lows are there to be retested and likely broken to the downside.

Corporate earnings have by and largely been uninspiring, new unemployment claims were up sharply this week (+19,000) and the banking crisis is hiding behind the housing slump, which only seems to worsen with each passing day.

A couple of notes about housing are worth mentioning. Some estimates put the value of all US households at around $20 million. Thus, if prices dropped 9%, as recently reported, that's a $1.8 TRILLION loss in perceived value. That has a sting.

Secondly, realtors mention that the slump has hut most in large cities, and especially in Florida and California. 2nd and 3rd tier metropolitan areas (cities under 300,000) and many rural communities never experienced the dramatic rise in real estate values and thus are not witnessing severe discounting in prices.

Overall, the action on Thursday was decidedly negative. Losing issues beat gainers by a hearty 5-2 margin, 4323-1944. New lows continued to hold the upper hand on new highs, 233-135, a condition which has now persisted for some four months.

Oil priced at a new record of $102.60, up a whopping $2.95 on the day. Gold gained $6.50 to close at another record high of $967.50. Silver continued to skyrocket, up another 38 cents to $19.71.

Those guys who were telling you to buy gold last year, the year before and the year before that? They were right. And, judging from the looks of things, it's still not too late. Many experts are expecting the precious shiny stuff to easily reach $1500 over the next 18-24 months.

NYSE Volume 3,814,476,250
NASDAQ Volume 2,017,081,000

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