Wednesday, May 16, 2012

Volume Up, Stocks Down As Malaise in May Exhibits the Results of Bad Karma

With higher and higher volumes showing up on individual stocks as well as the major averages virtually every passing day, the idea that there's something basically wrong with the markets and the global economy is beginning to build into a self-defeating, repeating, cyclical tailspin.

The major indices did another midday about-face, in classic bear market fashion, even though economic data in the US was relatively positive.

Housing starts were up - at an annualized rate of 717K on expectations of 675K, though building permits were lower than anticipated. That stocks, especially those of home builders, would rally on such news was not unexpected, though just because somebody puts a shovel in the ground does not necessarily imply that these newly-constructed homes will eventually be bought, much less completed.

However, two more broad measures of the economy were also positive. Industrial production grew at a rate of 1.1% in April, while capacity utilization for the month printed at 79.2%, a very strong and encouraging number.

Investors simply cannot shake the co-mingled issues of Europe, especially Greece, the falling Euro and rising dollar, all of which contributes to what could be a tough state of affairs for many of the US markets' global entities, which ship and sell around the world. Exports from the US will be especially damaged as the weaker foreign currencies and stronger US dollar make for pricier goods in faraway markets where demand has been slowing.

Following along the same logic, commodity prices are trending lower as well, which would help companies' bottom line cost structures and help keep them competitive, though traders are not confident there will be strong enough demand to produce meaningful pricing power and sustainable profit margins.

Underlying all these concerns are three major issues: Greece and the Euro, the upcoming presidential and congressional elections, and, political implications of US policy: the expiration of tax cuts at the end of 2012 along with uncertainty regarding President Obama's health care bill (now in the hands of the US Supreme Court) and a closetful of unwritten regulations, many of them centered on the financial industry through the Dodd-Frank legislation.

Further below the surface lies the uncertainty regarding the Fed's next move, as Operation Twist, aka QE3, expires at the end of June. Thus far, Fed chair Ben Bernanke nor any of the Fed's governors have hinted whether further easing would be forthcoming, and, at the end of the day, that is simply a nightmare scenario for the general economy and the banks, because without easy money, the fears are that global commerce will grind to a halt.

Markets hate uncertainty, and there's an abundance of that commodity in the flow right now, so there's no reason to believe that stocks will do anything but decline as profits are taken and few new positions are being staked out until there is resolution on some of these issues.

In the meantime, consumers are enjoying a bit of relief at the pump, as oil has fallen in just the past two weeks to its lowest level since December of last year and show no signs of bottoming. At the same time, housing prices keep declining and therein lies the conundrum of deflation. Everything costs less, but nobody is willing to pay now, because prices will likely be lower in a few days, weeks or months.

Obviously, there's no quick fix to any of this and behind closed doors, the leaders of the world's great nations and their central bankers are scared stiff.

The bad karma that's been spread worldwide by the political and monetary leaders is coming full circle it seems.

Dow 12,598.55, -33.45 (0.26%)
NASDAQ 2,874.04, -19.72 (0.68%)
S&P 500 1,324.80, -5.86 (0.44%)
NYSE Composite 7,592.80, -43.01 (0.56%)
NASDAQ Volume 1,842,974,250
NYSE Volume 4,254,574,000
Combined NYSE & NASDAQ Advance - Decline: 1843-3756
Combined NYSE & NASDAQ New highs - New lows: 76-255
WTI crude oil: 92.81, -1.17
Gold: 1,536.60, -20.50
Silver: 27.20, -0.88

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