Wednesday, February 25, 2009

Stress and Confusion on Wall Street

Is this Wall Street's week of reckoning?

Monday, stocks slid near 12-year lows. Tuesday's snap back rally offered some relief, but it was back to selling for most of the session on Wednesday. There isn't a trader alive who can tell where stocks will go Thursday and Friday.

Paramount among the issues yet to be resolved is the fate of the nation's 19 or 20 largest banks (The press and the government can't even agree on a number, that's how confused the condition is.) as the government commits them to various and sundry "stress tests."

According to what's been gleaned from two days of congressional testimony by Fed Chairman Ben Bernanke and the infrequent mutterings from Treasury Secretary Tim Geithner, government authorities will go into banks this week armed with accountants, number-crunchers and statistical models in an attempt to determine the general health of these mega-banks (over $100 billion in assets; are there any left?) and their ability to function normally under severe economic conditions.

Once these stress tests are completed, the government then should have a clearer understanding of what's needed to fix them, or whether they should be taken over by regulators, broken up, forced into bankruptcy or left alone. All of this has left Wall Street in a very confused condition, and the very thing the market appreciates least is uncertainty.

Stocks took on water early on, retracing most of Monday's decline by the noon hour. After that, there were a number of rallies, all of which eventually failed, despite stocks peeking into positive for about half an hour near the close. By 3:40 pm, however, the charade was over, and stocks sold off in a decided fashion.

Dow 7,270.89, -80.05 (1.09%)
Nasdaq 1,425.43, -16.40 (1.14%)
S&P 500 764.90, -8.24 (1.07%)
NYSE Composite 4,753.17, -68.57 (1.42%)

Other factors entered into the decision-making of investors, not the least of which was the report from the National Association of Realtors on January Existing Home Sales, which showed continuing deterioration in the real estate market with both the number of sales and the median price falling - a continuation of trends which have persisted for 14 months.

Granted, the general economy is not pretty, but the global economy is still standing. The questions posed by investors are precisely how well the economy is functioning and how well it will be in the near future. Nobody has yet offered solid answers to those important queries, and that's exactly what's causing investors to flee from stocks.

When the government does finally provide some further clarity, it should cause some soothing, though prospects will still remain mostly uncertain. It's what the government actually plans to do with the banks that will have the most impact, though the field is pretty well split on that judgment as well.

So, get used to wild trading swings, directionless markets, interpretations of news and then interpretations of the interpretations, punditry, thin analysis, politics and more nonsense about how to "fix" things than the market can bear.

Eventually, there will be resolution, but most humans being impatient when it comes to their financial futures, the waiting part is the hardest. And we are waiting. Get ready for at least six to nine more months of this before the market finds a floor (nice word for bottom), washes out the weak hands and moves ahead. Unless the government stimuli are completely worthless, at some point the market will simply revert back to fundamentals and investing can revert to something approaching normalcy.

For now, however, US and world markets are about as far removed from normal as they can be.

On the day, losers outdid gainers, 4193-2341, while new lows finished ahead of new highs, 489-13. Volume was on the high end, owing to the frenetic nature of the trading.

NYSE Volume 1,800,731,000
Nasdaq Volume 2,404,619,000

Oil priced higher by $2.54 a barrel, closing at $42.50. Gold continued to suffer from profit-taking, losing $3.30, to $966.20. Silver presented itself as a buy, losing 12 cents, to $13.91. Other commodities finished mixed, in keeping with the overall tone of the day, which was confused.

If you are in this market, you are on your own. I continue to only buy silver sporadically, on dips, and, despite mentioning that one could not be faulted for venturing into equities at this juncture, I am in no way advising anybody to do so. It's still a very dangerous, still bottomless, environment.

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