Commodity Dive Continues; Stocks Join the Party

The price-slashing in commodities continued unabated on Tuesday, but with an added twist. Stocks spent the entire session losing value as well.

What contributed to the overall gloom on Wall Street were a number of items from financial firms that reminded investors that the US economy is far from what would be considered stable.

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Morgan Stanley (MS) had its credit rating cut by Moody's, JP Morgan Chase reported another $1.5 billion in writedowns just in July, Wachovia (WB) and UBS (UBS) reported quarterly losses, and even the venerable Goldman Sachs (GSC) was downgraded by Oppenheimer.

Overall, it was a pretty ugly day to be a banker, broker, trader, investor or financier. Most skid row bums had better days than the suits on Wall Street. At least they didn't lose a bundle of money.

Dow 11,642.47 -139.88; NASDAQ 2,430.61 -9.34; S&P 500 1,289.59 -15.72; NYSE Composite 8,398.71 -94.23

Declining issues took back the advantage over advancers, 3911-2341. New lows also regained their edge over new highs after a one-day respite from that long term drubbing, 200-117.

As mentioned, crude oil fell again, down $1.53, to $113.13. Gold gave back $13.70 in value, dropping to an 8-month low of $814.60. Silver lost just 14 cents, closing at $14.49 the ounce.

This kind of continuing price depression does not bode well for companies or individuals. While price relief is welcome in energy-related issues and staples like food and rent, they are being caused by a severe cutback in demand. People and companies are strapped for cash, and banks are loathe to lend to anyone or any company with less than a pristine credit history.

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As I've been attempting to drive home lately, the point is not to contain inflation, but to slow down price depression. It's simple supply and demand economics in the flesh: too many goods are now chasing too few dollars. Inventories are rising and the solution is to lower prices to an acceptable level.

The real kicker is that consumers, which comprise 70 to 75% of GDP, are distressed over high fuel and food prices, actively seeking lower cost alternatives and finding them. It's the magic of the marketplace at work. If prices become overinflated without justice, the market adjusts and the pricing mechanism is tamped down.

What's fueled the spiral to the bottom thus far has been overpricing, especially in oil, gasoline and other essential commodities. Add in the credit malaise and massive gold and silver positions get unwound as companies, governments and institutions need to raise cash.

The winner in all of this is a strengthening of the US dollar and increased exports, reflected in today's Trade Balance figure for June, which came in at -$56.8 billion. Analysts were expecting something along the lines of -$61 billion, so the lower imbalance came as a pleasant surprise.

On the other side of the coin, it meant that US consumers were spending less on imported goods, which is probably not a very welcome signal to the rest of the world. Either that, or the rest of the world is catching the disease we've already got and realizing that the US isn't so bad off after all.

Economics can get pretty confusing, and these days are confounding even to people who are supposed to know their way around all these numbers and conflicting trends. Eventually, some clarity will emerge, but it's probably not going to be very encouraging.

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