Wednesday, December 17, 2008

Abundant Disappointment

US equity markets failed to follow-through on Tuesday's massive Fed-induced rally. There is still ample concern that the global economy is undergoing a fundamental de-leveraging and deflationary shift.

Judging by the tenor of the trading, there was profit-taking right at the open, followed by sucker buying through middle of the day, briefly pushing the major indices into positive territory, and a pronounced selling bias at the close, with the Dow Industrials losing more than 80 points in the final 10 minutes.

Dow 8,824.34, -99.80 (1.12%)
NASDAQ 1,579.31, -10.58 (0.67%)
S&P 500 904.42, -8.76 (0.96%)
NYSE Composite 5,769.80, -35.17 (0.61%)

Also figuring into the equation was the price of crude oil. On the heels of the largest production cut ever announced by OPEC - 2.2 million barrels daily - prices sank below $40 per barrel in trading on the NY Mercantile Exchange, and closed at a four-year low of $40.06.

The rationale for the spirited selling of oil futures is the perception that - repeat after me - the global economy is in or heading into a prolonged period of deflation. Demand for fossil fuels is expected to actually fall by as much as 4% globally next year. That people and organizations would curtail their consumption in light of the ridiculous prices for petroleum and its derivatives should come as no surprise. The hidden factors are the promulgation of alternative, renewable sources of energy and conservation measures which went full-bore as the price for oil spiked to unsustainable levels. The drain from the pricing structure of the past four to five years on economies worldwide has never been accurately calculated, though it is certainly sizable. Overshadowed by the systemic collapse of the banking system (it has already collapsed and been resurrected by central banks, though nobody wants to admit that) oil's impact on wealth and disposable income has not been adequately understood nor explained by either the financial or mainstream media.

Nonetheless, investors continue to view stocks as very risky, and with good reason. A recent survey found that 74% of all questioned said that they planned to spend less this year on Christmas presents than last. Percentages varied, but if three quarters of the population is going to be engaged in Scrooge-like penny pinching, then the retailers, at the top of the food chain, are toast. In the middle, the manufacturers will see profits slide and at the bottom, raw materials providers and service industries will be negatively affected to various degrees.

It's going to be a nice Christmas for most consumers. Business owners and executives may have a different set of results.

Interestingly enough, market internals told a different story which bears notice. Advancing issues finished comfortably ahead of decliners, 3762-2943. Could this have been a stealth rally? Perhaps. Selective selling would be a more appropriate term. New lows were muted, registering only 166 - a multi-week low - to 48 new highs. This is the kind of trend bulls have sought. Increases in new highs are the function of a variety of factors, main among them, speculation and momentum. This could very well signal an extension of the rally, though 9000 on the Dow should prove to be tough to crack. With as much excess capacity as exists today, and given the new-found disposition for saving, betting on a long term rally is about as safe as shooting craps in Las Vegas. The internals are probably reflecting nothing more than some recovery of stocks which were sunk during the downturn in late 2007.

Volume was average.

NYSE Volume 1,340,071,000
NASDAQ Volume 2,150,876,000

Commodities carried on as they have over the past couple of weeks, with oil closing lower, down $3.54, to $40.06. Precious metals continued their relentless march higher. Again, this is unsurprising due to the Fed's Zero interest rate policy, which, at its core, is inflationary (and, I should add, rather pointless and ill-advised). Gold gained $25.80, closing at $868.50. Silver was up 72 cents, to $11.42. Both of these were massive upticks and may indicate a near-term blow-off top. Then again, the gold bugs of the world say their metal should be worth $2000 and $35, respectively. The reality is that they are only another asset class and have no viable place in modern economies. Unless the global economy collapses, of course. Then, people will be cutting off each other's hands for their jewelry. That is an unlikely scenario in most civilized nations, though I'm certain that anecdotal evidence will emerge to demonstrate the civility of all, and soon.

One might surmise from reading some of my daily rants, that I should carry around a sign stating that "The End is Near." That's actually close, as I believe the end is already here.

It's the holiday season. Peace. Joy.

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