Tuesday, January 6, 2009


Economic reports dominated the headlines on Tuesday, where weakness in manufacturing, an all-time low in pending home sales and a release of the Fed's December meeting minutes were offset by a better-than-expected ISM Services reading for December of 40.6, up from 37.3 a month ago.

Preliminary figures provided by the US Census Bureau on manufacturers' shipments, inventories and orders was unsurprising but sobering. Following a 6% decline in October, new orders fell 4.6% in November, the 4th consecutive month of declines. Further, the inventories-to-shipments ratio rose again, from 1.33 to 1.41. Inventories are piling up on producers' shelves and in stores as the holiday season failed to produce a break in the negative trend in spending.

The Fed minutes (linked above) from the December meeting were released at 2:00 in the afternoon, just in time to rally the markets, though one would be hard-pressed to produce any positive spin, save that the Fed was prepared to expand its own balance sheet and make hefty open-market purchases of a wide range of mortgage and agency debt. While those purchases might alleviate some strain on stressed-out bankers, it only prolongs the drag on the economy until such a time that it becomes impossible to contain the downward price pressures of outright deflation.

Those minutes are an interesting read, if only to characterize the FOMC and the entire Federal Reserve as a roomful of fat, impotent old men in suits who think the economy can be maneuvered in whichever way they like through monetary policy. It's also useful in realizing that the Fed is essentially hell-bent on inflation as a major tool for their stated dual goals of full employment and price stability. The unfortunate reality for the fools of the Fed is that Keynesian economics never advocated outright inflation (or money creation out of thin air) as a tool for price stability. Proponents of the Austrian school of economics, in which no intervention is the preferred model, is probably going to have the last laugh when this episode of economic and moral turpitude has run its fatal course.

With the uneven news came an unsteady market, which opened higher, collapsed just after 10:00 am and staged a late-session recovery, with the major indices finishing moderately higher.

Dow 9,015.10, +62.21 (0.69%)
NASDAQ 1,652.38, +24.35 (1.50%)
S&P 500 934.70, +7.25 (0.78%)
NYSE Composite 5,968.84, +60.41 (1.02%)

The good news is that better volume has finally returned as volatility continues to decline. The entire day's range for the Dow was a mere 148 points. More good news came from the internal data showing advancers far ahead of declining issues, 5010-1661. New lows remained stubbornly ahead of new highs, 94-40.

NYSE Volume 1,334,630,000
NASDAQ Volume 2,179,892,000

As for direction, there are dithering indicators. The new high-new low metric refuses to break and stocks seem to be stuck at resistance in the 9000-9100 level on the Dow. There will need to be a significant catalyst to break through said resistance, and the December Non-farm Payroll report, due on Friday prior to the opening bell, isn't likely to produce anything approaching good news. Therefore, the emphasis must be on safety and risk aversion, as the market now seems poised for either a rally continuation or a sharp reversal. Something is going to give, and soon.

There seems to be a little more of an appetite for stocks, now that the average investor has lost a bundle and now sees equities as just about the only way out. It's a natural occurrence, as the old saying, time heals all wounds works equally well for investments as for romances. With stocks staging a slow recovery, investors may well be licking their chops over what seem to be enticing valuations.

Surely, stocks are cheap, but they are that way for a variety of reasons. As mentioned in previous posts, the rationale to steer clear of stocks at this juncture consists of interlinking parts: 4th quarter numbers are likely to be poor and will be reported - for the majority of companies - within weeks; the US and global economy are in the midst of the worst setback since WWII and recovery will be slow; government attempts to reinvigorate the economy have failed and have been costly; nothing has been done to affect the hundreds of thousands of people losing their homes and/or jobs, and whatever will be done will likely not be enough to offset the prevailing headwinds of slack demand and price deflation.

So, go ahead and jump in at your pleasure, but don't tell anyone you heard that advice here. I have been completely out of buy side positions since September, 2007, and continue to advise against stocks. Cash is the very best friend you've ever had right now. Real bargains have not yet begun to appear and won't until the housing market bottoms out and then stabilizes. That pair of events is still a good 12-18 months away.

I am so negative on stocks that I'm considering not even reporting on them any more as we move further toward a cash-based - as opposed to credit-based - economy. Distortions, disruptions and price permutations are going to be all over the map for the next two years in everything from car prices to used comic books. Value investors will have a field day buying distressed assets at rock-bottom prices.

Wall Street committed suicide by holding their own toxic blend of mortgage-backed securities (MBS) and structured investment vehicles (SIV) and is thus DEAD AS A DOORNAIL. The major banks are insolvent (as is the US government), lending is still occurring at a snail's pace and capital formation has been nearly entirely wiped out. 2009 will be remembered as the year in which globalization failed completely and all of the excesses of the past 20 years began to unwind in recognizable ways. Real job growth will not take place until at least October of this year, though probably later than that. There's nothing the government can do to prevent the unwinding, which is necessary and real, though they will spend $$$ trillions trying to stem the inevitable tide of foreclosures, liquidations, defaults and bankruptcies which must occur in order to restore function to both the financial and societal structure.

On the day, commodity prices see-sawed to a mixed close. Oil ended down slightly, by 23 cents, to $48.58. Precious metals reversed earlier selling to finish the day with gains. Gold was up $8.20, to $866.00, while silver added 18 cents, to $11.45.

At 5:00 pm, an hour after the close, Alcoa (AA) announced plans to slash 13,500 jobs and 1700 contractors in a cost savings measure.

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