Friday, August 20, 2010

Stocks Finish with Wide Losses as Financial Continue Decline

For the third week in the past four, the major indices recored losses, which is especially poignant this week as the expiration of stock options usually encourages some upward momentum, but there was little to be found as another drab session marked the close of the week.

Stocks bottomed out just at the noon hour before rallying back somewhat, with fresh cash being put to use in what some must surely consider "bargains." There was some discussion on the internet Thursday about buying into Bank of America as the stock hit fresh 52-week lows, but broke down again on Friday to even lower levels.

Consistently the second most traded stock on the NYSE, Bank of America crumpled to a close of 12.87, marking a 34% decline from its closing high of 19.47 on April 15. In the span of four months, one of the most heavily traded stocks in the world has lost more than one third of its market cap. Something is definitely not right, and investors are voting with their feet, running away from the zombie bank as fast as they can.

What is wrong with Bank of America is also wrong with Citigroup (C), JP Mogan Chase (JPM) and Wells Fargo (WFC) to varying degrees. They are all victims of their own fortunes, made during the bubbly sub-prime housing boom days from 2003-2007 and crushed by the onslaught of those loans - and many more - going sour. These four banks share a raft of common themes, in that they all made fabulous amounts of money during the housing boom, executives were enriched grandly, all were TARP fund recipients and all were aided in the Spring of 2009 when the FASB allowed banks to employ significant judgement in "mark to market" accounting.

The rule allowed the banks enormous leeway in how they valued assets while at the same time reducing writedowns on impaired investments, including mortgage-backed securities. The rule change saved the banks from untold billions of dollars in impairment charges, but the same rule, as long as it remains in force, keeps bank capital bottled up and unable to be lent.

Honest accounting would probably put the nation's largest banks into receivership or bankruptcy and unleash a financial tsunami that would make the 2008 crash look like a gentle summer rain. In the meantime, many investors are apparently not about to wait for BofA and its counterparts to work out all of their bad, toxic and otherwise broken down investments. They are leaving the stock in droves.

BofA's brethren are in similar straits, taking on losses since mid-April of between 25-35%. Wells Fargo has dropped from 34.25 to as low as 24.27. JP Morgan Chase has gone from a high of 48.20 to as low as 35.16. And Citigroup, usually the most actively-traded stock on the NYSE, has dipped from 5 in mid-April to 3.75 today, a neat, 25% haircut.

While Wall Street pounds the table over Washington's inaction on the fiscal front, lawmakers in Washington are eerily quiet about the fate of the nation's largest banks, seeming to want the nightmare scenario of another Japan-style deflation to just go away. The truth is that they have no clue what to do next, relying on the Federal Reserve to sop up excesses in the default markets and keep interest rates at ZERO until something good happens, whatever that might be. Washington politicians are only interested in keeping their jobs, meaning that they will purposely mislead the public into a false sense of stability until the elections this November.

In the meantime, the nation suffers and America's fiscal problems become worse by the day as the corrective measures that would have already kicked these banks to the collective curbs have not been even mentioned. Bad assets need to be written down and the companies need to take their licks, but that solution is seen as messy and untenable by the ruling elite.

The entire situation reeks of insider deals, secrecy, mismanagement and falsehood, and it is killing the US economy, little by little, day in and day out.

Dow 10,213.62, -57.59 (0.56%)
NASDAQ 2,179.76, +0.81 (0.04%)
S&P 500 1,071.69, -3.94 (0.37%)
NYSE Composite 6,813.15, -37.30 (0.54%)

On the day, there were more losers than winners, by a 3567-2778 tally. Tellingly, new lows surpassed new highs, 259-226, signaling that those who were buying all afternoon were either delusional or just misguided. The markets appear ready to break down once again to fresh lows. Dipping below the 9680 mark on the Dow over the next month is certainly in the equation. Volume was a little better than most of this week, though that's another negative. Higher volume on losing days indicates, quite simply, that more stocks are being sold than bought.

NASDAQ Volume 1,913,865,250.00
NYSE Volume 4,309,225,000

Stocks were not the only asset class being beaten down. Crude oil for September delivery fell another 97 cents, to $73.46 on the NYMEX. Gold lost $6.60, to $1,227.20, and silver was hammered down nearly 2%, losing 37 cents to close the week at $17.98 the ounce.

Deflation has come, and has actually been pushing on stocks, bond yields and home prices for the past three years. Only the federal government's ability to throw large amounts of money around has kept the economy from complete collapse, though the band-aid approach seems to have failed miserably and the eventual downturn will be more severe than anyone can imagine.

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