Wednesday, April 30, 2008

The Joke's On US... and You

I am laughing so hard my sides are about to split after watching the market's silly Fed-watch ritual for the past two-and-a-half days only to see the bottom basically fall out as today's session drew to a close.

What the Fed did was lower the federal funds rate another 25 basis points - essentially a do-nothing gambit - but signal that the cuts were over. What smart investors did was cash in their chips right at the highs. A nice play, if you're big, rich and not stupid.

Anyone not cashing out as early as possible tomorrow is going to be stuck with declining issues. As noted yesterday, today's most important announcement came not from the Fed, but from Commerce, which told us today that we are unofficially in recession.

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The word from Commerce was that "real" GDP was measured at an annualized growth rate of 0.6% in the first quarter of 2008, matching that of the 4th quarter of 2007. Since the term "real" isn't as confident a measure as it used to be, one necessarily has to include some of the inflation over the last six months to offset the gains. Inflation ran at a 3.7% annually in the 4th quarter of last year and 3.5% in the first quarter.

Now, the government will tell you that inflation, or, "prices paid" as they put it, are factored into the GDP question. I'll tell you that inflation is largely: 1) understated, and 2) not factored in correctly.

Without doing all the math and using their "estimates", here's my conclusion. If we "grew" at 0.6% over the past six months, but inflation averaged 3.6%, we're down 3% in "real" terms. In other words, that 0.6% gain didn't even keep pace with inflation. I am assuming that there's very little "reality" in the government's numbers.

It's more smoke and mirrors than anyone can possibly see through without losing one's mind, so you can take my word on it or the government's. Since I'm the one not $9.6 trillion in debt, I'd wager that I'm closer than the truth than the bean counters in Washington.

Plus, if you don't like my analysis, just look around. The Dow dropped almost 200 points off its intraday high once the excitement of a 0.25% interest rate cut ended (insert one hand clapping here). Gas is $3.60 a gallon, bread, milk and most vegetable prices are up at least 20% from where they were a year ago, and your wages simply are not keeping pace.

If you measure a growth rate of 0.6% in terms of a 5-foot-tall 12-year-old, it would amount to .36 inches in a year. By the time the poor kid reaches 18, he or she would still only be a shade over 5' 2" and likely be accused of smoking or engaging in some other kind of growth-stunting activity.

In any case, 0.6% growth is laughably sad. It doesn't even register, so if we're not in a recession, we're at best going nowhere fast.

Dow 12,820.13 -11.81; NASDAQ 2,412.80 -13.30; S&P 500 1,385.59 -5.35; NYSE Composite 9,299.60 +13.69

One other point of emphasis. The Dow (at one time I nearly disregarded it as a solid measure of American industrial and financial strength; today, I believe it is one of the best overall gauges) had gained 1,260 points from the March 10 low to today's intraday high just over 13,000 and it immediately backed off. Technical matters aside, every trader worth his or her salt knew that level was simply unsustainable and the market was severely overbought. Profits were taken and more will come off the table in weeks ahead. There is no bottom in place and won't be for at least another 3-5 months.

Advancing issues actually did better than decliners, though not by much, 3198-3046. New lows superseded new highs, 178-114. This has been the norm for every session except four since October 31, 2007, a span of now six full months. If you don't have some real dogs in your portfolio, count yourself among the lucky few.

Oil traders were obviously paying attention to developments outside their particular realm, sending crude down another $2.17, to $114.69, as were metals bettors, with gold losing another $11.70, to $865.10 and silver down 5 cents to $16.59.

With the world fully focused on higher prices, it would pay to keep an eye on global demand for commodities, which has been under pressure of late, along with credit markets, at a standstill since August. Deflation, not inflation, may turn out to be the more dangerous of those evil siblings.

NYSE Volume 4,508,902,000
NASDAQ Volume 2,219,310,000

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