Major Pain on Wall Street

Stocks took one of their worst losses of the year on Thursday, as more economic news showed the US and world economy slowing to a crawl and new unemployment filings up sharply. Retailers also reported sluggish back-to-school sales at a time when investors are desperate for some cheerful news.

Dow 11,188.23 -344.65; NASDAQ 2,259.04 -74.69; S&P 500 1,236.82 -38.16; NYSE Composite 8,008.25 -261.00

Adding to the already dire circumstances and dour news was a note from PIMCO's Bill Gross, manager of the world's largest bond fund, saying that the government needed to do more to shore up not only financial markets, but mom and pops who are suffering under heavy mortgage debt.

According to Gross,

"Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning."

Gross points out that financial firms have been dumping assets in an effort to maintain liquidity in the absence of a stable lending environment. With credit markets close to a a state of seizure, financing has become almost non-existent in corporate and capital markets.

Interestingly, those same points have been made right here on this blog for many weeks and months. What Gross sees is nothing more than worldwide asset deflation and massive wealth destruction, the same circumstances that held sway during the Great Depression.

Gross' comments are interesting in that he is urging even more government interaction. These kinds of suggestions from a person of his stature suggest that a full-blown economic crisis is at hand. While the government can assist in many ways, others are suggesting a "laissie faire" or "hands off" policy to allow the excesses to be worked off by the markets.

Naturally, neither policy alone is correct. The government, through the Fed and Treasury, is acting as well as one could expect under such extreme pressure. Having a lame duck president and a congress focused on nothing more than the upcoming elections isn't helping matters, and it's unlikely that Americans, investors and financiers will see any relief from falling asset prices any time soon.

It will be January before a new president and congress is sworn in and another 60 days - at the very least - before any meaningful legislative action would take place. Expectations for a very slow 4th quarter and 1st quarter of 2009 cannot be underestimated. It will be something of a miracle if stocks don't decline another 10 to 20% by then.

Whichever candidate succeeds in taking over the White House - be it Obama or McCain - he will inherit the worst set of economic circumstances since FDR. Burgeoning federal debt (nearing $10 Trillion), extreme deficits, continuing job losses and an economy limping toward collapse await the winner. Godspeed to whomever it may be.

On the day, declining stocks overwhelmed advancers, 5108-1144, nearly a 5-1 ratio. New lows dominated new highs, 401-54. What's amazing is that any stocks reached new 52-week highs.

Volume, though better than the past two weeks, is still on the light side. Investors and large funds are holding back as best they can, seeking to avoid an all-out panic, though today's activity bordered on a crash with losses on the major indices right at 3%.

Deflating commodity prices continued without pause. Oil dropped another $1.46, to $107.89. Gold fell $5.00, to $803.20. Silver slipped a penny to $12.94. Further slippage in the metals may produce a rout, as much of the buying in gold and silver was speculative and near the top. With most of those gains already wiped out, investors in losing positions may soon capitulate if some stability is not brought to bear. Without any support apparent, gold could easily fall to $600 and silver under $10. At those points, speculators may become much more interested, though by no means would those levels constitute bottoms.

Speaking of bottoms, the Dow is now within 200 points of the July lows. The NASDAQ is also less than 100 points from its March 10 low of 2169.34, while the S&P 500 is dangerously close to its most recent bottom of 1214.91 at the close on July 15.

Since no bottom has yet to be put in place, expect these levels to fail, and soon. Tomorrow's Non-farm employment report is likely to show another 60-80,000 jobs lost in the month of August, triggering more selling. Today's action may be seen as prologue to the 8:30 am release of the employment data.

NYSE Volume 1,301,593,000
NASDAQ Volume 2,360,495,000