Wednesday, February 23, 2011

Oil Tops $100, Drifts Back; Stocks Hammered Again; Bank Runs in S. Korea

At some point, everyone knew this was going to happen. Stocks were so ridiculously overvalued - and have been for many months - that a pullback was inevitable.

The culprits, it appears, are Middle East sovereign despots, losing their grip on their populations which are largely demanding freedom and a democratic voice. But it goes much deeper. Many blame the Federal Reserve, which has fostered a dual policy of federal funds rates approaching zero while simultaneously printing dollars by the billions.

Those cheap dollars flood the markets, causing speculation and inflation, and that's been particularly acute in the poorest nations, where the percentage of income spent on basic survival - food, housing, clothing - is much higher, approaching 100% and often more. Hungry people being angry people, they've taken to the streets in countries where unemployment and government corruption have outpaced the economy, resulting in popular uprisings.

Add to that the declining value of the dollar, as expressed in the rising price of crude oil, and you have today's recipe for disaster. And all of this comes before the morons in congress and the White House and various state capitols attempt to come to some sort of meeting of the minds on their budgets.

The states have to find ways to balance theirs, while the federals fight over how much spending is enough to keep the government just barely functioning, if at all.

If it feels like the United States is running rudderless on fumes, you get the idea and the nervousness has been manifested in trading the past two days. Despite the usual pumping by the Fed, sellers are out in force and it doesn't take much to move stocks hard to the downside. Missing earnings estimates - normally a sin punishable by a few points off the top - has become a mortal wound, such as what happened to Hewlett Packard (HWP), following their quarterly report, released after the close on Tuesday.

Investors scurried out of the stock on Wednesday, propelling a nearly 10% decline. Vloume was five times normal.

Most of the rest of the market didn't fare much better. Holders of gold and silver are grinning ear-to-ear.

Dow 12,105.78, -107.01 (0.88%)
NASDAQ 2,722.99, -33.43 (1.21%)
S&P 500 1,307.40, -8.04 (0.61%)
NYSE Composite 8,292.92, -32.94 (0.40%)

Decliners led advancing issues again, 4470-2093. On the NASDAQ, the flip: there were 54 new lows and only 44 new highs. At the NYSE, 60 new highs and 27 new lows, though it seems the tide has turned, at least for the present. The question now becomes how long will this downturn last before the hoards of money from the Fed overwhelm all fears and make stocks and risk appear palatable again.

Volume, which hit its best levels of the year on Tuesday, topped that on Wednesday, giving a clue that the selling is only gaining momentum.

NASDAQ Volume 2,498,464,250
NYSE Volume 6,623,988,500

Crude oil - specifically WTI (West Texas Intermediate) on the NYMEX hit $100 in midday trading, but backed off to close up a mere $2.68, at $98.10, marking the highest price seen since 2008. Since the US gets most of its oil from Canada and other Western Hemisphere sources, WTI has fallen well behind the pace in Brent Crude, tied mostly to Europe and Asia. Brent prices topped $110. Spot is quoted at $111.83 per barrel.

Gold had another banner day, rising $12.90, to reach $1,414.00, closing in on all-time highs. Silver continues to be the stellar commodity performer, up another 44 cents, to $33.30. Specialists in gold's cousin say this is nothing and $50 per troy ounce is not only possible before the calendar turns over to 2012, but likely. There simply is not enough physical supply to meet growing investor demands, much of which is causing tightness in industrial applications.

If silver demand continues, look for rising prices in many electronic devices, especially cell phones, though the price rise should not be severe since only small amounts of silver go into the overall manufacturing price.

Turmoil and popular revolt in the Middle East and across many states in America over budget issues and union busting don't exactly set up well for smooth sailing on Wall Street. Until the noise quiets, expect fear to have its way with investor confidence. Nobody wants to catch the proverbial falling knife, and with short interest at record lows, a small tumble could easily turn into an overwhelming cascade.

Meanwhile, silver and gold investors are sitting pretty as the strain on fiat currency is being felt worldwide. What nobody wants to talk about in our civil society are the bank runs in South Korea.

Nothing funny about that story.

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