Tuesday, August 19, 2008

Prices Peaking? Stocks Shrivel

The week has not begun well for investors, with the Dow Jones Industrials having shed over 300 points in the first two days and the other major indices following that lead.

On Monday, it was fear of financial firms which led the way, but on Tuesday, prices grabbed the headlines as wholesale prices jumped by 1.2% in July, marking the fastest annual inflation rate in 27 years. The core rate, excluding food and energy, were up a whopping 0.7%, indicating that inflated pricing was seeping into all parts of the economy.

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If rising prices weren't enough to worry about, the Commerce Department obliged by releasing a report on new home construction, noting that builders were breaking ground at the lowest rate in 17 years.

Confused? So are investors.

Home prices are falling, all other prices are rising, but wages are stagnant at best. Meanwhile, the prices of commodities - oil, gold, corn, wheat, etc. - have been going down for weeks.

Dow 11,348.55 -130.84; NASDAQ 2,384.36 -32.62; S&P 500 1,266.68 -11.92; NYSE Composite 8,212.47 -69.39

Here's an explanation, though I offer it only as one of possibly many: prices have peaked. We're likely to see a slowdown in August, if not an outright decrease (a very rare occurrence). In a cooling worldwide economy, prices are not going to rise, and if they do, they won't rise quickly. The years of overexpansion of money supply to accommodate the needs of greedy bankers and corporations are over. We're about to backslide into a general slowdown. If your wages don't go down, or you're able to keep your job, you'll survive nicely.

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The crash in commodities has been telegraphing this all along, so, get over the inflation fear and start dreading deflation, because it's a thornier economic condition. Besides, those inflation figures are compiled by economists and statisticians, who aren't really well known as bargain hunters. They're looking at wholesale prices, which nobody - outside of manufacturers - actually pays.

As with Monday, declining issues overwhelmed advancers on Tuesday, 4494-1724. New lows expanded their edge over new highs, 286-43. The abnormally low number of new highs belies the real weakness in stocks. The number of companies actually thriving in this environment is becoming more minute by the day. The stresses of a long-overdue recession, held in abeyance by politicians with tax rebates and regulators such as Federal Reserve Chairman Ben Bernanke's emergency interest rates and borrowing rules.

Following the briefest of bumps in late July and early August, stocks are now poised to retest those mid-July lows. Get ready for serious drops in the indices over the next 3-6 weeks, during which the president (and the Republican candidate for that office) will assure us that the economy is still basically sound.

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Commodities continued to rebound, though it's hardly a trend. Crude oil for October delivery added $1.65, to $114.54. Gold leapt another $11.10, to $816.80, though silver was unchanged at $13.22 per ounce. The recent run-up in commodities is largely an effect of falling stocks. With nowhere else to turn for profits, speculators are moving into the market of last resort. When the commodities market finally fails, along with the rest of the asset classes, the perfect storm for global recession will be in place.

The news for the past few weeks has been one of a strengthening dollar. What's generally been untold is the story of how the dollar has been beaten down below fair value in relation to other currencies and consequently propped up by foreign governments in a vain effort to avoid a complete economic collapse. The truth is that the economies of other countries - particularly those in Europe - are not all that sound either. Far Eastern economies - China and Japan - are going to fare much better than the West in the coming downturn, which is expected to bottom sometime in late 2009.

With those concepts in hand, investors should be aware that gains in stocks are going to be difficult, if not impossible, to attain.

Once again, volume was on the very low end of the scale, indicating an aversion to US equities - one which has been growing over the past year and is now reaching fruition. Stocks have much further to fall, but much of the big money is already on the sidelines and into fixed investments or other equity markets.

NYSE Volume 1,012,756,000
NASDAQ Volume 1,748,704,000

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