Monday, April 7, 2008

Consumer Credit Reading Stalls Market

Wall Street was giddy this morning after hearing the Washington Mutual, another beleaguered big-name bank, was about to receive a fresh $5 billion in equity funding from outside investors. The greed patrol on the street absolutely loves fresh cash. They seethe over it like wolves drooling over the blood of an exquisite kill.

With that, the Dow was quickly in the green and up by over 100 points before 1:00, taking the rest of the indices along for the ride. Hitting a wall of resistance in the 12,700-12,750 range, the markets cooled in the afternoon and really took a hit around 3:00 when news crossed the wires that February consumer credit fell to $5.2 billion from a prior reading of $10.3 billion. Expert economists expected a reading of $6.0 billion.

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Not only was consumer credit off dramatically, it was lower than even the more bearish forecasts, giving more credence to the argument that tight credit conditions are spilling over from banking and big business, all the way down to the basic consumer level. Banks aren't loaning money and consumers are loathe to borrow. Caught in the middle are businesses which need financing in order to expand, launch new products, and, in the worst of cases, meet payroll.

That last item - borrowing to meet payroll demands - is going to become a major worry over the next few months should the general credit conditions persist. Companies short on cash are going to be hard-pressed to find funding sufficient to meet current obligations. It's barely on the radar now, but watch for small firms laying off employees and some even shutting down, citing lack of capital or access to it as the main cause for failure.

In other business news, Yahoo head Jerry Yang and Microsoft CEO Steve Balmer spent the weekend tossing barbs back and forth about Microsoft's $31/share buyout offer. Yang insists he's open to negotiation, but at a higher price. Balmer believes Yahoo's value continues to deteriorate and says that if their original offer isn't met within three weeks, the company will embark upon a hostile takeover which would last months and could wreck Yahoo whether successful or not.

The general thinking among investors is that Yang is holding out against the odds, calling Balmer's bluff, and seeking somewhere in the range of $38-40 per share. Wishful thinking on Yang's part, likely, as Balmer and Microsoft have a cash hoard that's the envy of the world and with it could swallow Yahoo whole.

Time seems to be running out on Yang and Yahoo's Board of Directors along with Balmer's patience. A hostile bid would sink the stock into the low 20s and possibly lower. Yahoo ended the day down 66 cents at 27.70.

Dow 12,612.43 +3.01; NASDAQ 2,364.83 -6.15; S&P 500 1,372.54 +2.14; NYSE Composite 9,184.72 +27.19

Getting back to macroeconomic issues, volume on the major exchanges was dull for the third straight session due to a number of factors. First, the market has been witness to a remarkable gain of late and is technically overbought. Second and third, there are few economic reports on which to trade and corporate earnings are just around the corner. Investors are taking a wait-and-see approach as first quarter results dribble out this week and then explode over the next two.

Gainers showed a slight edge over losers on the day, with 3306 stocks advancing and 2986 losing value. New highs bettered new lows for the second straight session, 138-95, a two-day trend that's not likely to last through the week.

Oil gained again, adding $2.86 to close at $109.09. (Keep driving, Americans!) The metals seem to have caught lightning in a bottle again, as gold rose $13.60 to $926.80 and silver pushed ahead 37 cents to $18.12 the ounce.

It's been a very sluggish time over the past three sessions and a pervasive sense of foreboding is enveloping parts of the street. While few still doubt that the US is headed for recession if not already in one, investors are still wary of capital and credit markets which have completely seized up over the past six months.

With home equity largely tapped out, consumers turning to credit cards to meet general obligations is not a healthy sign. Slowing demand will kill corporate profits and stop the wheels of industry (what's left of them in the USA) from turning altogether.

The economy is still in a vulnerable position and signs of recovery remain an illusion. Sooner or later, investors will begin tapping out and the great deluge of selling which began last August and gained tempo in January will resume, resulting in a large thud as traders' jaws hit the floor simultaneously. Forewarned is forearmed.

NYSE Volume 3,700,481,750
NASDAQ Volume 1,778,706,250

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