Monday, August 18, 2008

Truth Hurts: Financials Slammed Again

Sometimes the media actually gets it right.

Unfortunately for investors, Jonathan R. Laing's feature story in Barron's The Endgame Nears For Fannie and Freddie was a truth many did not want to hear, much less see published in one of America's premier business weeklies.

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Laing makes the case for the "inevitable" recapitalization of the two mortgage underwriting giants as they have continued to flounder during the ongoing US mortgage mess.

The article was enough to send financials and the rest of the stock market into a funk on Monday. The selling began early in the financials, but by afternoon had spread to the broader market, resulting in another bloody Monday on Wall Street, wiping out last week's tiny gain in the S&P and a more substantial one in the NASDAQ.

Dow 11,479.39 -180.51; NASDAQ 2,416.98 -35.54; S&P 500 1,278.60 -19.60; NYSE Composite 8,281.86 Down 101.81

With the markets already in a state of suspended animation, volume virtually dried up. Monday's losses would probably have been deeper had more traders not been on vacation or otherwise away from their desks.

If last week's volume data was to be considered anemic, today's was downright desolate and pallid.

Advancing issues were overwhelmed by the number of decliners, with losers ahead, 4375-1845. New lows were also boosted to a larger margin than in recent days, beating new highs 194-84.

If there was any good news, it was the rebound in the metals. Gold shot up $13.60, to $805.70. Silver gained 29 cents, closing at $13.22. Alternately, oil slipped $1.05, to $112.85, which is $35 below its all-time high, set just this past July.

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Any moves in commodities are likely to be short-term and reactionary for the time being. Until the general understanding becomes one in which a global slowdown is accepted, the metals should bounce around, though trend lower. Oil, and, by proxy, gas and petrol, should continue to weaken over the short term on slack demand.

And what about stocks? Well, if all assets classes are going to take a hit, another 15% decline on the indices is not out of the question. The Dow could easily break below 10,000 within the next six months as the presidential race takes center stage and the rhetoric from the left (Barack Obama) becomes more pronounced and understood as the honest reality.

The Republicans - but mostly the Bush administration - has made a shambles of the US economy and increasingly, it looks as though the next president is going to have to clean up the mess. Usually, that's a sure sign that a sea change in Washington politics is coming.

...and not a moment too soon.

NYSE Volume 985,302,000
NASDAQ Volume 1,665,853,000

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