Monday, August 16, 2010

Equities Remain Stuck in Liquidity Trap

What would you do if you threw a party and nobody showed up?

Well, that's how brokers on Wall Street must be feeling, because there's a serious lack of trading going on these days. For well over a week now, stocks have been stuck within the deafening silence of a liquidity trap, bought about by an overwhelming amount of distrust, absence of investable capital and uncertainty about the future.

Individual investors - and, to a growing degree, some fund managers - have found safety and serenity in the simplicity of cash. Others have opted for money market returns of less than one percent, still more have waded into the refreshing bond waters or ventured into gold or other commodities.

Stocks, for better or worse, have fallen out of favor in the aftermath of the 08-09 meltdown, aided by government programs which were designed to spur demand but instead have only created one-off events, like the cash for clunkers fiasco or the failed stimulus that gave $8000 tax breaks to home owners.

Sure, the people who took advantage of government largesse got their new cars or their new homes, more than likely at inflated prices (we'll know for sure in another 12-18 months), but there was no appreciable overall gain in new buyers. Maybe most folks just like keeping what they have, secure in the fact that - especially in the case of cars - it's paid for or, with a house, knowing what it's roughly worth.

Still others are stuck with properties at inflated values. Recent home-buyers of 2003-2007 vintage are nearly universally upside-down, stuck with payments on outrageous mortgages while the value of their real estate continues a precipitous decline.

In this disheveled state of affairs, the last thing on people's minds is putting more money into the stock market, either by buying individual stocks, mutual funds or increasing the funding of their 401k plan. The average American has gotten the message loud and clear: save and save more. Non-essential purchases are being put on hold more often and investment decisions are based upon more immediate needs rather than with a long-term perspective. Besides, there's a real feeling that Wall Street is rotten and crooked and that stocks, as they have gone nowhere for the past ten years, look more and more like losing propositions.

Trading volumes on the major exchanges have been in a prolonged decline, and even for August, the recent volumes speak of something more sinister and pernicious than simply everybody being on vacation. There's no excitement or impetus for stocks to rise, and Monday's trade was more than likely bolstered by a fresh infusion of cash from the banks and brokerages. The Dow dipped 70 points right at the open before a sudden reversal just minutes into the session.

Once the averages found a more suitable footing, they just churned in a narrow range of about 50 points on the Dow before another minor blip downward and another round of funding from the "masters of the universe" at Goldman Sachs, JP Morgan and Merrill Lynch, BofA's trading arm.

This is a very serious condition which is not going to be solved without another blood-letting in stocks. The absence of confidence has spread all the way from Main Street to Washington to the canyons of Wall Street and now it's locked in place. Until somebody proves that stocks are safe and the economy is really on a rebound (impossible), the direction will be down, down and then down some more. Today's minor gains are overshadowed by the paucity of trading.

Dow 10,302.01, -1.14 (0.01%)
NASDAQ 2,181.87, +8.39 (0.39%)
S&P 500 1,079.38, +0.13 (0.01%)
NYSE Composite 6,871.58, +10.54 (0.15%)

Advancing issues took command over decliners, 3980-2440. There were 311 new highs and 223 new lows, but nobody is really bothering to keep score. Volume reached a new low on Monday, below the abysmal numbers from the previous Monday, which was off-the-charts ugly. People simply aren't interested in stocks right now, and for many good reasons.

NASDAQ Volume 1,636,439,375
NYSE Volume 3,569,886,750

Oil was down again, losing 15 cents, to $75.24, but gold gained $9.60, to $1,224.50. Silver was also up, better by 32 cents, to $18.42.

There was some small economic data, including the NY Fed's Empire Manufacturing Index, which came in with a reading of 7.10 for August after a 5.8 posting in July. The index is stuck at extreme low levels, indicating very modest growth, if any, with falling prices and negative future outlooks. It's not a pretty picture and New York is one of the better-performing areas of the country.

Prior to the open Tuesday, a number of important economic indicators will be released, including July PPI, housing starts and building permits. The numbers are expected to be flat or even down from June, which is just the kind of news Wall Street does not need at this juncture.

The true picture being painted by this low-volume regime is one bereft of confidence and capital. Like just about everything else in the current climate, it is unsustainable for more than a very short period of time, one which will be coming to an abrupt end shortly.

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