Thursday, July 10, 2008

Wall Street Getting, Sending Mixed Signals

In yet another volatile session for stocks, the major indices ended slightly higher, amid worries over the solvency of mortgage underwriters Fannie Mae and Freddie Mac, and continuing focus on the price of oil.

While Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson spent the better part of the day testifying to Congress on the state of the economy, equity, bond and currency markets gyrated wildly, seemingly hanging on every word and nuance from the pair.

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In the end, the dollar was higher, then lower, against the Euro and Pound, but higher against the Yen and Swiss Franc. Dow stocks took an up-and-down round trip of 180 points, eventually ending higher by less then 1%.

Bonds rallied then sold off, as the final word from Bernanke was that the credit crisis - which has gripped financial markets since last August - appeared to be easing, with banks borrowing less and investment firms not borrowing at all in the most recent week.

That news came to the markets at the very end of the day, but managed to move the equity indices off break-even or negative to reasonably solid gains.

Dow 11,229.02 +81.58; NASDAQ 2,257.85 +22.96; S&P 500 1,253.39 +8.71; NYSE Composite 8,435.94 +64.31

Signals being sent by the Fed and Treasury were mixed, as were movements on the stock markets. On the one hand, Bernanke wanted broader powers with which to handle financial crises, like the Bear Stearns blow-up in March, while his counterpart at Treasury, Paulson, urged a plan that gave the Fed less control.

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Stocks, difficult to read even in the best of times, were simply impossible today, spending equal parts of the day both over and under the flatline.

Looking at the internals, gainers outnumbered losers by a small margin, 3387-2885. The spread between new lows and new highs, however, was still startlingly high, with 811 new lows to just 55 new highs. This elevated spread between the new low and new highs has been a persistent factor for more than a week now, though it should be pointed out that, with the exception of a handful of days, there have been more new lows than new highs every day since October 31 of last year.

In the way of good news, there simply wasn't much today. Warnings that the nation's mortgage underwriters - Freddie and Fannie - were in danger of default acted as an anchor on the financial sector and the entire market, as did concern over the continued viability of investment banking house, Lehman Brothers.

Fannie Mae (FNM) finished the session down 2.11 at 13.20, while Freddie Mac (FRE) closed 2.26 lower, at 8.00. Stock prices for both firms were at their lowest levels in 17 years.

Recession fears resurfaced in a number of widely circulated opinion pieces and most notably in Great Britain, where expectations of an economic downturn are beginning to look a lot like those in the US, where we are already in a recession, even though official government statistics belie the fact.

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Meanwhile, commodity markets marched higher. Oil reversed the losses of the past few days by adding another $5.61 to the price of a barrel of crude, closing at $142.33. Gold shot up $13.40 to $942.00, while silver gained 15 cents to finish at $18.32.

Finally, RealtyTrac, Inc. reported that foreclosure filings skyrocketed 53% in June while bank seizures were up a whopping 171%.

For what was supposed to be a slow news day prior to the start of earnings season next week, there certainly was a load of data and information for the markets to absorb.

If the United States is going to avoid a complete financial collapse, it won't be by much, and there seems to be more evidence that the rest of the world will suffer a slowdown as well. Some Far East nations may escape the clutches of full-blown recession, but they are few and far between.

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