Thursday, August 26, 2010

Relentless Bear Market Continues; Dow Closes Under 10,000

After taking a day off on some short-covering, stocks continued their relentless selloff on Thursday, sending the Dow careening to a close below 10,000 for the first time since July 6, nearly two months ago. While the 10,000 mark is not an important line of support nor resistance, it is still a valuable psychological level which many traders and even more casual observers will note with unease.

Stocks are trading within a fairly tight range, though the bottom of that range now begins to come into focus. On the Dow, the close of 9686 should be viewed as short-term support. A break through that level, which now seems highly likely within the upcoming days and weeks, would send an even stronger signal than the one that's currently flashing that the stock market and, by inference, the US economy, is failing on many levels.

Bad news continued to berate Wall Street, the latest being new unemployment claims - slightly better than last week's, coming in at 473,000 - and more distress on the home front, with the Mortgage Bankers Association reporting that "after declining since the beginning of 2009, the rate of short-term delinquencies is going up and the increase in these short-term delinquencies may ultimately drive the foreclosure measures back up."

The MBA said that the percentage of homes either already in foreclosure or behind by at least one payment on their mortgage was 13.97 in the second quarter of 2010, a number only marginally better than the 14.01% reported in the first quarter of 2010.

This steady stream of dour economic news had, until recently, been offset by fairly positive earnings reports from publicly-traded companies. Now that the season for corporate quarterly reporting has passed, there's nothing to buoy up stocks and investors - those not already out of the market - are increasingly trimming exposure and heading to either the sidelines, cash, bonds or precious metals. Thursday's beat-down marked the 10th day in the last 12 that the Dow has finished the day lower. From the start of the year, the Dow is down 443 points, or about 4% from where it ended 2009. The NASDAQ is off 150 points, or 6.6% for the year, while the S&P has suffered losses so far this year of 68 points. or 6.1%.

With prospects for the second half of the year not offering much in the way of hope, chances are good that 2010 will go down as another bad year to own stocks. Analysts cite a growing raft of concerns, including the Fed being unable to kick-start the economy; upcoming elections creating confusion; continued disappointing readings on unemployment and housing; banks not lending, consumers not wanting to borrow; the end of he Bush tax cuts; potential sovereign defaults in Greece, Ireland, Spain and Portugal; federal budget deficits and lower tax receipts; strained state and municipal budgets; and a host of other related and intertwining issues which are keeping the US economy in a straight jacket.

Naturally, everybody is seeking a way out, a solution, to put the economy back on a positive growth path, but few have examined the demographic and social implications of 30+ years of stimulation, easy credit and an upward trajectory in population. With baby boomers closing in on retirement and much of the population saving rather than spending, the traditional growth patterns since the second World War are unlikely to be replicated, so expectations should be ratcheted down instead of holding to the quaint - but incorrect - notion that the economy will return to "normalcy" once certain issues are worked out.

The entire stance of the federal government and the Federal Reserve has been one of keeping the credit spigot open and has wasted valuable resources and time fighting for a sustained growth pattern that probably will nor re-emerge for many years. Asset values, from stocks to houses, were artificially inflated for years, but now that trend is in reverse and nothing - even massive stimulus spending, 0% interest and backstopping the too-large-to-fail banks - is going to stop the economy from wringing out all of the malinvestment of the previous epoch.

Prices of homes and shares of almost all stocks will continue to fall until some balance is restored between wages and affordability. A little common sense from our brain-dead leaders in congress would certainly help, though it appears that the United States is plunging headlong into a depression that will rival or exceed the Great Depression of the 1930s. A combination of poor choices by consumers, investors, business leaders and the government has brought us to the brink of economic extinction. Over the coming two to three years, major business failures will occur, with a solid 10 to 20% of publicly-traded corporations filing some form of bankruptcy or reorganization. The financial firms, especially Bank of America, which fell today to another 52-week low, should be at the top of the list for bankruptcy court. The toxic assets which were the catalyst for the general decline and that they continue to keep off their books due to lax accounting standards are tied around their collected necks, albatrosses that will weigh them down and keep the economy from functioning in a reasonable manner.

There are going to be hard choices ahead for most Americans. It is time our leaders in government begin making some real decisions instead of playing politics and continuing to kick the can of economic distress further down the road. Solutions are needed now and these elected officials will not make them for fear of losing power. Their risk is that they will lose power no matter what, either through the voting booths or other, more draconian, traditional means.

Dow 9,985.81, -74.25 (0.74%)
NASDAQ 2,118.69, -22.85 (1.07%)
S&P 500 1,047.22, -8.11 (0.77%)
NYSE Composite 6,665.26, -30.86 (0.46%)

Declining issues beat down advancers, 3770-1946, though new highs moved back ahead of new lows, 210-129, though the numbers seem oddly skewed. Volume remained at the same distressed levels as the previous two sessions, with little improvement.

NASDAQ Volume 1,824,585,375
NYSE Volume 3,913,177,000

Oil gained 84 cents to close at $73.36. Gold traded down $4.10, to $1,235.40 and silver slipped 4 cents, to $18.98.

Friday offers the first revision to second quarter GDP, which is really beginning to appear like an imaginary number. The illuminati of the financial world already expects the figure to be revised from 2.4% to 1.3%, though the reality is that the way GDP is expressed today anything less than 2% growth should likely be considered a decline in real terms. The government shades the figures on almost every important statistic to make the economy appear to be better than it is. That also isn't helping matters.

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