Friday, March 14, 2008

Bear Stearns Blows Up, Stocks Slide

For the past week, the denials had been adamant. Officials at Wall Street brokerage Bear Stearns contended that their business was sound and their liquidity position stable.

On Friday, all of the bluster was gone, replaced by admissions that the company was in the throes of a severe credit squeeze and a bailout plan was devised by JP Morgan and the Federal Reserve.

For its part, the Fed trotted out Chairman Ben Bernanke, who once again warned that home foreclosures were damaging to neighborhoods and to the overall economy. Naturally, what the Chairman failed to delineate was the utter failure of the Fed and the banking community to provide safeguards against defaults all through the explosion in risky mortgage vehicles during the past decade.

Now that the banks themselves have their necks in the guillotine, Bernanke and his friends want reforms. How quaint. How reactive and how completely artless are the supposed "rescues" and "solutions" promoted by the Fed.

Bear Stearns typifies the kind of hubris and delinquency rampant in the banking and finance sector of the economy. Bear Stearns, which traded for as much as 159 per share as recently as May of last year, closed down 26.15 (-45.9%) at 30.85. Surely, the financial services firm is facing dire times ahead.

Essentially, Bear Stearns, like many other major players on the Street, is currently unable to finance their ongoing operations because nobody will loan them any more money. They've mismanaged their business and now the Fed is promising to hold their worthless paper. Sadly, the burden will eventually fall upon every living American. For years we will be plagued with higher taxes, lower living standards and price disruptions in everything from mortgages to loaves of bread.

That will only erode the value of the dollar even further. We are witnessing the evisceration of the US dollar as the de facto reserve currency of the world. Foreign central banks and large financial dealers are increasingly wary of buying our debt or valuing deals in dollar-denominated amounts due to its rapidly-declining value.

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What Bear Stearns, the Fed, the banking community and most of America fails to admit is that years of rampant credit expansion, massive government deficits and a wickedly-lopsided trade imbalance has at last destroyed the value of the currency and shattered confidence worldwide.

The complete failure of the US economic system will have ramifications far and wide throughout the worldwide floating fiat-money system. When the top dog yelps in pain, the smaller dogs whine along in time.

Bear Stearns' condition is nothing new. Bankers, all the way up to the level of the Federal Reserve, haven't managed the wealth of the nation well at all. The most obvious manifestation of their mismanagement is the ever-rising rate of inflation, though stagnation in real wages runs a close second. Wealth, in America, is a fleeting thing. At this very moment, some of the wealthiest individuals in the country are literally losing millions every day.

Bear Stearns marks neither the beginning nor the end of this crisis. We are, by most accounts, still in the early phase of what promises to become a long, drawn-out dramatic collapse.

Dow 11,951.09 -194.65; NASDAQ 2,212.49 -51.12; S&P 500 1,288.14 -27.34; NYSE Composite 8,635.92 -191.24

Stocks followed the lead of Bear Steams in hammering prices lower once again. Tuesday's meteoric rise (over 400 points higher on the Dow), was nearly wiped out by Wednesday and Friday's losses. For the week, the Dow was up less than 60 points, the S&P lost five points, while the NASDAQ finished unchanged, to the penny.

The dollar index continued its relentless decline, off more than 15% since January 2007.

Declining issues hammered advancers on the day, 5064-1213. New lows outnumbered new highs, 527-96. Volume was very high signaling that the selling has not only resumed, but likely will carry on for some time.

Oil backed off an entire 1 cents today, closing at $110.21. Gold finally met the expectations of investors closing at an even $1000 per ounce, up $6.20. Silver also closed at a new record high, $20.66, up 24 cents.

Surely, next week and the months ahead will be difficult ones for investors. There is more and more bad news to come, piled atop an already mountainous heap. Our leaders, both in government and the financial community have failed the US population, and badly.

It is long past time for change. Unfortunately, those in power will not go away quietly.

NYSE Volume 5,344,189,500
NASDAQ Volume 2,574,493,500

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