Friday, May 7, 2010

Wall Street Whacked Again; Europe Overwhelms Positive Employment and Gulf Oil Spill

Following the worst recession since the Great Depression, the bulk of Americans still suffering through the slow, painful "recovery" process probably is cheering every daily decline in the stock market. Where Main Street to a large extent has plumbed the depths of poverty, Wall Street has had the pleasure of using taxpayer dollars to dig their way out of the mess they themselves caused, so it's not surprising that after Thursday's "fat finger" debacle many Americans are throwing a fat finger right back at the titans of finance and their profligate ways.

News outlets claimed that a mistaken trade, hitting a a "B" instead of an "M" - as in billions vs. millions of shares - caused yesterday's 998 point plummet, thus the "fat finger" excuse, which, by the way, has been largely discredited. The truth of what happened on May 6, 2010 may never be fully known, but the idea that insiders purposely sold huge quantities in a coordinated assault has some merit.

The goal of the traders causing the plunge (probably computer programmed) was to sell enough shares of enough companies to trigger momentum trading by other computers and individuals in addition to triggering stop loss trades that would exacerbate the situation. Then, as the market plunged, notably to almost a 1000-point loss on the Dow, scoop up quantities of the same stocks after their values had been decimated, in effect, reversing the old saw of "buy low, sell high," on its head, selling high and the buying low.

If this was a coordinated, widely-spread-out trading scheme - and there's no evidence indicating that it wasn't - it seemed to have worked to perfection. Two other elements lead one to believe that it could also have been a staged event. First, the near-1000-point drop bottomed just after 2:30. Had it occurred before that time and gone down more than 1000 points, the NYSE would have shut down. Likely not wanting to tempt fate, the schemers plied their scam just after 2:30 and stopped the skid just before the 1000-point-down level was attained.

Second, CNBC and networks worldwide were airing scenes of protesters in Greece being beaten back and dispersed by riot police at precisely the moment the stock market was skidding out of control. If this were labeled a terror attack, it would fit the definition precisely, because it terrorized not only people invested or watching on TV, but the traders on the floor and in brokerages around the world.

Additionally, CNBC had commentators in place in Greece and on the Iberian peninsula, plus they brought Jim Cramer (Mad Money) onto the set for a rare appearance. At the depth of the decline, host Erin Burnett brought up a chart of Proctor Gamble, which had plunged some 20 points in a manner of minutes. Cramer cooly called it a buy and it immediately reversed course and headed back near the unchanged mark.

Commentators on CNBC also started the "fat finger" rumor and produced an additional three hours of coverage later in the evening, complete with "Markets in Turmoil" graphics and coverage from around the financial universe.

So, was the sudden collapse and subsequent, immediate 600-point rally all about finances or all about ratings? The timing seemed to synch perfectly with the anarchist overtones emanating from Athens, and the swiftness of the entire affair (less than 20 minutes) was riveting television. CNBC reported today that their web site traffic shot through the roof during and after the event.

Whatever the cause of Thursday's melt down and up, the message was loud and clear: something is amiss on Wall Street when stocks can go to zero in the space of a couple of heartbeats and nobody knows exactly why. Investors were skittish and tentative on Friday, even after the government produced the best non-farm payroll report in four years.

The employment report for April showed the US economy creating 290,000 jobs in April, with only 66,000 of those coming in the form of temporary census workers. The BLS also upgraded the previous two months, showing even more job growth than had previously been reported. That kind of upbeat news still could not shake off the tremors from Thursday's wild ride nor the unsettled affairs in Greece and across Europe, where LIBOR (London InterBank Overnight Rate) - the rate of interest banks charge each other for overnight loans - shot up dramatically.

As the European overtone kept markets subdued, US bond yields held steady or declined and the dollar gained against most other currencies, expressing the view that the United States was the best of a bad bunch as far as investments were concerned. With all the reporting on Wall Street and Europe overwhelming the news wires, the story of oil continually gushing into the Gulf - with the oil slick making landfall yesterday in Louisiana - was sadly sent to a back burner.

Traders were extremely cautious though not entirely on the sell side. The Dow dropped 279 points early in the day before rallying briefly into positive territory just 45 minutes later. The rally had no momentum, however, and stocks sold off in jumpy fashion through the remainder of the session.

Dow 10,380.43, -139.89 (1.33%)
NASDAQ 2,265.64, -54.00 (2.33%)
S&P 500 1,110.88, -17.27 (1.53%)
NYSE Composite 6,916.18, -95.74 (1.37%)

Market internals confirmed the ugly truth. Advancers were once again beaten severely by decliners, 4838-1775, and new lows exceeded new highs for the second straight day, 184-94, a significant development, signaling, in very certain terms, a continuance of the downturn. Volume was once again at fantastic heights, similar to Thursday's trading. It's obvious that much of the smart money has been heading for the exits en masse over the past two weeks and now the dumb money is following.

NYSE Volume 10,830,781,000.00
NASDAQ Volume 4,174,408,500.00

The unsettled nature of trading and uncertain future for Europe took oil down yet another notch, with crude futures closing down $2.00, to $75.11. The metals have divorced themselves from the energy complex, with gold rallying another $13.40, to $1,210.00, and silver adding 94 cents, to $18.43. Wall Street's high-velocity, highly volatile trading suggests that gold will continue to be a safe haven for wealth.

The week was among the ten worst ever for stocks, with the Dow suffering a 628-point decline. All of the major indices closed today at levels below the start of the year. They are all in negative territory for 2010.

The Dow Jones Industrials are down 7.4% from their April 26 high of 11,205.03. The NASDAQ is already technically in a correction, having fallen 10.5% from its recent high, while the S&P 500 is off 8.8%.

Stop losses? Maybe it's time to stop trading equities for the relative safety of bonds and metals. Unless conditions in various locales improve remarkably over the coming weeks, this slide should eviscerate much of the progress made in 2009. Think Dow 9000 and possibly lower, near-to-medium term.

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