Wednesday, February 4, 2009

Bye, Bye, Bank of America

There was a rally underway on Wall Street, until, that is, around 10:30 am, when President Obama announced that executive pay for bankers whose institutions receive TARP funds would be capped at $500,000. That's when stocks peaked, eventually losing more than 200 points from top to bottom on the Dow, which was the worst affected of all indices.

Dow 7,956.66, -121.70 (1.51%)
NASDAQ 1,515.05, -1.25 (0.08%)
S&P 500 832.23, -6.28 (0.75%)
NYSE Composite 5,242.75, -25.27 (0.48%)

The blue chips were aided in their descent by 4th quarter earnings reports from Disney (DIS) and Kraft (KFT), in addition to Bank of America (BAC), which reportedly lost 12 investment bankers on the Obama announcement, jumping ship to join Deutsche Bank (DB), which has received no TARP funds nor money from their home, German government.

Among the three big losers on the Dow, Kraft posted a 72% earnings decline year-over-year, losing 9% on the day as traders punished the stock, sending it to 26.13, down 2.61 at the close. Disney suffered through a troubling fiscal first quarter, earning 45 cents a share in the quarter ended Dec. 27, compared with 63 cents a share, in the same quarter a year ago. Disney finished at 19.00, off 1.60, a 7.8% loss.

Bank of America was hit with massive selling, with more than 600 million shares changing hands, almost 4 times the average daily volume. shares fell to 4.60, a 17-year low, off 0.60, a decline of more than 11%. The number of shares trading is significant in that many funds, by charter, cannot maintain positions in stocks valued under $5 per share. The rout of the bank's backers should continue as long as the company's shares remain at depressed levels.

In truth, Bank of America should already have filed for bankruptcy protection as its operations have been underwater for quite some time. Continuing to shovel money into the bottomless pits of BofA and Citigroup, particularly, has been a mistake from the very start. No business is "too big to fail" and pouring taxpayer money into these obviously failed institutions is a monumental blunder on the part of the federal government, more likely to prolong and deepen the financial crisis than repair it.

A very astute rendering of the current economic malaise is offered by Ismael Hossein Zadeh, in "Too Big to Fail:" a Bailout Hoax at This article should be required reading for all of our elected federal officials, who, as a group, are poorly prepared to handle any kind of economy, especially one which is in dire straits.

Sadly, most of them will not read it or any other tract on economics, being that, for most of them, their major accomplishments involve using other people's money to land big-time government jobs. Of all the 650 or so congresspeople there is maybe a handful (10 to 20) who really have a grasp for economics of this scale. The rest simply are led by their noses by supposed government "experts" who dictate policy. There's little doubt that the worst enemy of the United States of America does not domicile in Afghan or Pakistani caves, but in tony residences around the Capitol. The lot of them and their predecessors has led America down this path of destruction since 1980 at least. Those currently holding office in congress will certainly finish the job in a smashing manner, impoverishing the nation in a manner never before seen.

As for the president who promised change, little has. Instead, he has surrounded himself with the very same people who are responsible for the whole mess. Yes, I voted for him, thinking he could turn around many of our mistakes, but, thus far, he has been a huge disappointment, favoring massive deficit spending over actual, practical solutions, like cutting the payroll tax, surely the easiest and quickest way to stimulate the overall economy.

Interestingly, and probably not coincidentally, today's morning rally stalled out just above my magic 8149.09 mark, the level which cannot be penetrated before lows are retested. This number is turning out to be a very strong resistance point, one that could endure for months, if not years. The Dow needs to fall further and our economy needs to find a solid footing before advancing in any meaningful way. That, sadly, is also months, or years, away and seemingly getting pushed further along the horizon every day.

The sooner the pols in Washington realize that decentralization of everything from the energy grid to banking to politics is at the heart of recovery, the sooner various parts of the country can begin to function well again. What's interesting and even amusing about this economic era is that the people being damaged the most are, not in any particular order, the rich, Wall Street, and Washington politicians, the last of which is rapidly losing credibility and relevance.

Recovery will begin more on local levels than at the federal. Communities with forward-looking. realistic activists will be better prepared to deal with the downturn and offer solutions for recovery. Those solutions will be more proactive and less involved with government and other macro-style solutions. They are likely to be based on models of sustainability, conservation and localism. The ideas are emerging. Many of them will be featured on this very blog as they become evident.

On the day, market internals confirmed the absolute pummeling the markets took on Wednesday. Declining issues overwhelmed advancers, 3732-2766. New lows expanded their edge over new highs, 235-17. Volume was strong, indicating that the decline is gaining momentum.

NYSE Volume 6,413,953,000
NASDAQ Volume 2,187,395,750

Commodities continue to trade in mixed fashion with oil falling 46 cents to $40.32, while gold gained $9.70, to $902.20, and silver posting a 17 cent gain, to $12.47. This is likely a trend which will continue. Commodities which are used widely - energy and food stocks - should continue to feel the pinch of deflation, while the safety of the precious metals will attract smart money seeking safety. Naturally, when the real effects of government overspending become evident in a weakened dollar, those same commodities should rise, and the metals will go parabolic. That eventuality is likely 2-3 years away, maybe longer.

In the interim, the US and world economies are undergoing a massive shift from globalization to localization. More and more people every day are understanding that their basic needs are not being met by government and ultra-national corporate entities, but by local economies, farms, businesses and people. This could be the beginning of the absolute end of big government in its many layers. From towns and villages all the way up to the federal level, the American public is increasingly weary of being overtaxed and underserved, harassed and obligated to the very institutions which are supposed to support and protect us.

Wall Street and Washington has screwed us all the way down. The American people will fix this on the way up, but, like a drunk with a problem, the first step is bottoming out, and we haven't done that yet. Mostly, we are still in denial.

More tomorrow.

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