Wednesday, December 3, 2008

Afternoon Surge Results in Winning Wednesday

US stock indices recorded another positive day - the second in a row - as investors shook off dismal job projections and focused on what seem to be bargains all over the markets. stocks have been so severely hit in recent days that speculators have little choice but to jump in, though more cautious types continue to resist the temptation to dive into equities as the year enters its final month.

Trading wasn't as broad-based as yesterday's action, and the results were a bit less inspiring, but the major indices have regained 70-80% of what was lost on Monday as fear of a continued recession shook markets to their core, sending the Dow Jones Industrials to its 4th-worst point loss in history.

The past two days have seen the now-normal volatility, with indices and individual stocks making wild swings over the course of the session. Today's ride on the Dow was a 390-point swing from the lows to the highs. The Dow ended near the highs of the day, which were achieved in the final ten minutes of trading.

While congress dithers over what to do about the Big Three automakers, Wall Street is busy doing its own handiwork, though the trading recently has devolved into what looks more like insider churning or day-trading, with no real establishment of positions and quick exits from both profitable and losing positions. Traders are certainly on their toes as we wend our way to the conclusion of 2008, one of the worst ever for the stock markets.

Dow 8,591.69, +172.60 (2.05%)
NASDAQ 1,492.38, +42.58 (2.94%)
S&P 500 870.74, +21.93 (2.58%)
NYSE Composite 5,405.55, +96.60 (1.82%)

Things got off to a dreadful start when ADP - a private firm which tracks employment - said their November report showed that the economy shed 250,000 jobs, the worst one-month number since 1991.

Stocks quickly recovered from that somewhat expected news and spent most of the remaining session after 10:00 am in positive territory.

Advancing issues outperformed decliners for a second straight day, though the margin was not overwhelming, at less than 2-1: 4280-2414. New lows were greater in number than new highs, 273-36. While this has been a persistent indicator for 13 months now, we are beginning to see a small increase in the daily number of new highs. Though the numbers are tiny, they are heading in the right direction, but it must be cautioned that some of the companies making new highs are those recovering from the first wave of declines near the end of December, 2007. An increasing number of stocks making new highs should not be seen, in and of itself, as an indication of anything other than the mere fact that some beaten-down stocks are beginning to recover.

The markets remain highly bearish and will remain so for what appears now to be a very long time. There is little hope that the US economy can begin to pull itself out of recession before the middle of 2009, at the very earliest. Severe damage has been done to the very structure of the system, and thus far, efforts to repair it have been inconsequential or ineffective. The condition of the economy since September of this year and August of 2007 has continued to deteriorate. There is no indication that this erosion is coming to an end.

Volume was on the high side, but it should be with the year coming to an end. There are a plethora of reasons to sell at this time, and not many good ones to induce buying, but there is still some speculation, despite dire warnings all around.

NYSE Volume 1,551,506,000
NASDAQ Volume 2,279,699,000

One area which continues to trend lower is in commodities of all kinds. Lower prices for all manner of raw materials eventually is going to wend its way through the supply chain and into finished products. There is going to be a prolonged period of price uncertainty and outright deflation, which could last through 2009, 2010 and beyond. Ability to adjust pricing on-the-fly, so to speak, will be critical to success at almost any level. This kind of pricing flexibility favors smaller companies with established expertise in technology, which is why internet retailers are not suffering as much as their brick and mortar counterparts during the holiday season.

Oil closed at or near multi-year lows, down 8 cents, to $46.88. Gold tumbled another $8.50, to $774.80, while silver gained 2 cents to $9.63.

The equity markets remain somewhat in suspended animation, awaiting the inauguration of President-Elect Barack Obama on January 20th. A new congress will be sworn in days earlier, but the hope that somehow government, the creature responsible for much of the current catastrophe, will come around with a quick fix is looking more and more like a pipe dream.

The economy has suffered more than a couple of body blows over the past two years. The damages was the result of many more years previously in which the Fed and government allowed loose credit, fiscal and monetary policy to cause structural damage to the underpinnings of the system. The kind of damage inflicted is not going to be repaired in short order. There is going to be a long period of transfusion, rest and recovery, because the "patient" nearly died on the operating table.

If you were not prepared for the long haul, you would do well to relocate outside the US for the next few years, but choose carefully. This economic disaster has spread around the globe.

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