Wednesday, July 29, 2009

Stumbling Along Wall Street

Stocks extended their prolonged stagger into a fourth consecutive session. Trading was murky, directionless and, in many cases, pointless, as the debate over whether or not the economy was improving continued amid mixed signals from corporations posting earnings and generally positive tones from economic news and data. Meanwhile, the hoodlums in congress sounded downright belligerent as Barney Frank, Chairman of the House Financial Services Committee threatened the banks with forced writedown on mortgages if the banks don't stop the flood of foreclosures themselves.

Frank must think he's running for re-election soon (even-numbered years, Barney) to make such a blustery statement as he did today.

Dow 9,070.72, -26.00 (0.29%)
NASDAQ 1,967.76, -7.75 (0.39%)
S&P 500 975.15, -4.47 (0.46%)
NYSE Composite 6,280.57, -48.10 (0.76%)

The tone was definitely more to the negative today, however, as decliners raced past advancing issues, 3909-2416. New highs continued their dominance over new lows, 138-53. Volume was sluggish again, a trend which has persisted for months.

NYSE Volume 1,258,526,000
NASDAQ Volume 2,126,488,000

While stocks were just dawling along, commodities were taking it on the chin in a big, deflationary way. September crude fell $3.38, to $63.35. Gold was off sharply for the second straight day, losing $12.00, to $929.70. Silver also slid 48 cents, back down to $13.26. In the raw materials of the commodity world, where reality has a definite price, the outlook continues to sour. Due to the worldwide slowdown in industrial output, there is a glut of everything on the market; from livestock to oil to precious metals to grain, copper and natural gas, the abundance is evident on the ground, in the ground and above the ground. The deflationary spiral the Fed and other central banks have so stridently attempted to avoid is now becoming an unmistakable fact of life. Nobody's buying. All prices will fall, and continue to fall, for at least another six to twelve months.

The absence of pricing power will continue to cause economic disruptions, especially in areas in which prices are fixed, such as taxation. Property values have plunged, but governments have been slow and/or reluctant to re-assess property in accordance with the new reality. Thus, the coming wave of foreclosures will not only include mortgages, but municipalities are facing an avalanche of tax deliquencies and, subsequently, revenue shortfalls. The dance of death for governments across the landscape is only in the third inning of a nine-inning game and the big hitters are just beginning to get a bead on the ball. Upside-down balance sheets for towns, cities and states are quickly becoming the norm and not all the money created out of thin air by the Fed will save them.

This is the catastrophe which cannot be fixed by stimulus or bailout legislation. It will take an actual reordering of priorites by governments of all size, to stop the bloat at every level and make drastic cuts in expenses, personnel, pensions and benefits. If you thought the economy was on the mend, just wait until the end of the third quarter when the facts of life become naked to the eye. Americans are wallowing in seas of red ink in both the private and public sectors. Manufacturing has completely crumbled. Cottage indutries and home businesses will sprout from coast to coast in order to bring in extra cash or merely to survive.

Stocks are only a part of the bigger picture. The government has failed miserably and still won't admit it. Our political structure has been poisoned by lobbyists and liars in high position. Our social fabric is being held together with string and safety pins. Be prepared for another dip in the economy which may come out of the blue this time, not as well telegraphed as the October surprise of 2008.

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