Friday, February 8, 2008

Not Such a Good Week; Stocks Continue to Tank

Friday capped off another ugly week for stocks, as the late January rally - built on the back of a whopping 1 1/4% in federal funds rate cuts - has proven to be nothing but a mirage. That's not surprising, considering the historical impact of rate cutting in the face of a depressed business cycle, which happens to be little to none.

On the other side of those rate cuts inevitably sits inflation, which will become the next bogey man to confront the balding and bespeckled geniuses at the Fed. The natural reaction to inflation is to raise rates, and since the Fed won't be doing that soon, expect to pay more for just about everything as the value of the US dollar on world markets continued to erode.

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In any case, stocks fell for the 4th day out of 5, with the notable exception of the NASDAQ, which managed to finish marginally positive two days this week.

At the final bell, the Dow lost 551 points for the week; the S&P gave back 64; the NASDAQ dropped 99 and the NYSE Composite fell 454. It certainly wasn't pretty, but investors are beginning to get the idea that the US is already in a recession and the only reasonable thing to do is to sell stocks and get out of the way until some safe bottom forms.

Dow 12,182.13 -64.87; NASDAQ 2,304.85 +11.82; S&P 500 1,331.29 -5.62; NYSE Composite 8,823.12 -35.92

That bottom could be a distance off, as our brilliant leaders in congress decided to pass a stimulus package that will cost roughly $168 billion - money that will produce a deficit - in rebates to a large swath of individuals and families.

The plan is ridiculous. Consider a family I know well. Husband and wife both work, and have three kids in school, ages 10, 11 and 12. The kids go to public schools and both earners are making upwards of $45,000. They're pretty comfortable. This plan gives them $1200, plus another $900 for the kids ($300 per child) for a total of $2100. They don't absolutely need the money and much of it will likely go directly into the bank or to investments for the future (read: retirement or college funds). Nice country. Free money.

How an additional $168 billion of borrowed money is going to save the nation from the ravishes of recession is a good question, one which nobody in congress bothered to ask. After all, it's an election year and the incumbents saw an easy path to more votes for themselves. Hoo-rah!

Market internals were expectedly in-line with the headlines. Declining issues bettered advancers, 3679-2611. New lows topped new highs, 226-75.

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The oil barons apparently grew tired of not making so much money over the past couple of weeks and drove crude for March delivery up $3.66 to $91.77. Traders were so busy selling off stocks, they barely noticed. Gold leapt another $12.30, closing at $922.30. Silver gained 34 cents to $17.11. There's still time to buy before the metals really take off.

The recession is here, and normally, I'd say there's nothing to worry about as it's just part of the normal business cycle. However, this one looks rather ominous and has rough edges to it, especially considering the dearth of leadership in Washington. Whomever inherits the White House in the fall, they'll be getting a very, very raw deal in an economy that's retreating quickly from 8 long years of wild excess.

Be sure to read the story directly below this for a better understanding of why US equity markets were not another 2-4% lower this week, as they should have been.

NYSE Volume 3,768,491,500
NASDAQ Volume 2,275,363,250

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