Wednesday, June 9, 2010

The Sucker Rally that Was; Bernanke Spins Congress; BP Might Mean Bankruptcy Proceedings

The sharp rally which comprised much of the past two sessions ended abruptly at 11:30 am ET today. The Dow Jones was up by 125 points on the day, and including Tuesday's sharp, 123-point gain, had added 248 points in less than one and a half sessions, typical of short-run, bear market rallies, of which this was the garden variety.

News flow had little to do with Wall Street's dithering and eventual compromise to drift prices of stocks lower. Pricing power being non-existent in almost all asset classes, going down is becoming something of a fad across all parts of the spending spectrum. From meat prices to fuel to interest rates to stocks and even what brokerages charge to buy and sell them, everything is going down - not exactly in flames, but in spurts and fits - in the essential unwinding that has been underway from the piercing of the banking and mortgage bubble in 2007.

Chairman Ben Bernanke had some nondescript comments on the economy before the House Budget Committee, saying things like, the economy is not growing "as fast as we would like," and that the Fed was prepared to counter an ill effects of the current debt and liquidity crisis overhanging the entire European continent. Berhanke's little speech and answering of various questions from house members didn't really supply much reassurance; rather, the Chairman's tone was measured and a bit downbeat. He, like many in the financial industry and government regulatory bodies, seems to have been worn down by more than two years of continuous strain. The Fed has managed itself into a box, as has congress, Wall Street and much of the macro players in the global economy.

While growth is the desired result, policy decisions have not made any noticeable dent in either the residential housing market nor the unemployment condition. Economies worldwide seem to be running in place, turning dials and lifting levers here and there, all seemingly without much effect. Such is the nature of a long, slowly-developing deflation. Monied types don't like seeing asset values decline, and resist at all levels while consumers reap the benefits of lower costs across a range of products and services.

All the trillions spent trying to maintain the status quo in the banking and political circles has come to naught. It has begun to dawn upon even people as supposedly smart as CEOs, investment bankers and even Fed chairmen that there is no quick fix - if there's even a fix at all - to a global debt blowout. The solution eventually involves winding down bad assets, notes, investments and businesses, moving to a cash basis instead of reliance on debt and generally finding a base from which to restart.

Unfortunately for Wall Street and most governments, those bottoms have not yet been plumbed. Main Street, on the other hand, has used its usual combination of savvy, street smarts and determination to make do with whatever is available, a condition largely seen among the smallest of small businesses, which are flourishing amid sour conditions.

Former employees of large corporations are striking out on their own, homeowners are weighing the relative advantages of owning a home (and paying their mortgage) or letting it go and renting at more reasonable rates. In terms of the housing market, the situation is fluid. As more homeowners default - by choice or out of necessity - the value of homes overall falls. As the value of housing declines, so do rents, though this process is somewhat artificially slowed by taxes and government subsidized rents, keeping home prices and rents anywhere from six months to two years behind the curve.

As with every economic convulsion, there are winners and losers, heroes and villains, survivors and victims. Until now, the banks, bailed out by the federal government's use of taxpayer money, seemed to have been the winners, though the tide has now turned. From here on, until this economic calamity runs its course over the next three to five years, small business, individuals and entrepreneurs with guts and courage will carry the day.

Since banks are going to do what it is they always do when they fear the worst, that being the unbridled stupidity of tightening lending standards beyond reasonable terms, and governments will do what they always do at similarly-critical times: cut payrolls and raise taxes, those who understand local markets and can initiate business without the need of bank financing will prosper.

In the long run, it is the people who will survive, not banks, nor governments, nor unscrupulous intermediaries. Everybody needs a place to live and a means of support. The failings of globalization, banking and semi-regulated markets are being exposed for all to see. Individuals will manage as best they can without paying heed to any edicts of authority, be they from government, financial institutions or media.

What the general market, guided by GDP forecasts, can most reasonably hope for, is growth in the range of one to two percent over the next four to six quarters, though the fear that another downturn (double dip) could occur has morphed from mere speculation to generalized apprehension. One percent growth should be considered a positive development; of course, wall Street will see that in an entirely different light.

Dow 9,899.25, -40.73 (0.41%)
NASDAQ 2,158.85, -11.72 (0.54%)
S&P 500 1,055.69, -6.31 (0.59%)
NYSE Composite 6,559.71, -36.41 (0.55%)

Advancing issues beat decliners by the slimmest of margins, 3244-3210, though new lows exceeded new highs once again, 187-94, a trend which should continue for some time, as year-ago comparisons off the March, 2009 bottom are not favorable to breakouts in the upper range. Volume was flat as downside risk re-emerged.

NYSE Volume 7,101,356,500
NASDAQ Volume 2,146,749,250

Crude oil was just about the only winner on the day, gaining 2.39, to $74.38. Gold slipped $15.70 on profit-taking, to 1,229.90, while silver was not as badly damaged, losing 19 cents, to $18.19.

British Petroleum (BP) was under pressure once again, amid speculation the the company may seek bankruptcy protection and/or suspend its dividend payable in late July. The stock lost another 15% in value, dropping to a 14-year low.

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