Wednesday, October 22, 2008

Markets Worried; Second Shoe Dropping is Earnings

Third quarter earnings, especially among selected, poorly-managed internet companies like Yahoo and eBay, have been weaker than expected so far, though that's not surprising considering how top level executives of those companies have mangled their businesses.

Coupled with continuing (somewhat unfounded) fears of a global recession, investors got cold feet once more and sent stocks tumbling in a mid-week rout. Markets across Asia and Europe recorded large losses, confirmed by another round of selling in the US.

While it's apparent that there's little appetite for stocks at this juncture, much of the fear and softness in the market is due to the slow response from government, but also to widespread reports of coming job losses and tight employment conditions.

There is some anecdotal evidence that companies will be tightening their belts to a large degree in coming months, but the targets for layoffs are those usually hurt: retailers, recreation and consumer services. To a greater extent, multi-national companies in core industries outside of banking, discount retailers and business services companies will weather the storm without much disruption.

With third quarter earnings looking increasingly sad and a reallocation of priorities on the horizon, some analysts and the usually-wrong financial media are already forecasting a 4th quarter full of missed expectations, such as this Business Week article, The Coming Pink Slip Epidemic.

The headline is noisy, but there's little meat in the actual story other than citing already-known statistics and positing that economic conditions will worsen considerably over the next 90 days. In the meantime, however, companies will be making assessments and adjustments to ameliorate problems. Layoffs happen all the time, but how related they are to current credit conditions has yet to be established.

At the bottom of it all is how well the banking bailout is handled, and, of course, who wins the elections less than two weeks away.

The problem with throwing more money at banks which have already mowed through hundreds of billions of dollars via bad investments, is that they'll make more investments of equally-dubious quality. Bankers, by breed, are numbskulls who have never been very good at evaluating risk, but very good at overcharging and otherwise abusing customers. If any proof is needed, just listen to Henry Paulson speak, like he did on Charlie Rose last night, putting everyone to sleep a little early by saying, as he usually does, nothing of merit.

Giving bankers any taxpayer money at all is essentially a bad idea, but that horse has already left the barn and Americans are signed on - via our elected morons - to what is likely to be recorded in history books as one of the worst financial schemes of all time.

When one views the conditions of the world's economies, one need look no further than government and big business to find the culprits for the ongoing malaise. The longer banks and government continue handing out IOUs instead of creating real wealth through the creation of products, jobs and sensible tax policies, the longer Americans run the risk of seeing the American dream burst like all the bubbles before them. In some respects, death of the dream may already be written in stone, as much of the damage will take years and many laws to reverse.

But, we are in the midst of a slowdown, not a complete collapse. People still need to eat, work and carry on. 80% of the population will experience few negative effects through next year.

Dow 8,519.21 -514.45; NASDAQ 1,615.75 -80.93; S&P 500 896.78 -58.27; NYSE Composite 5,630.47 -420.87

For the session, volume was elevated but not at panic levels. Advancing issues were outdone by decliners in a big way, with just 958 winners to 5389 losers. The number of new lows expanded again, to 864, against just 11 new highs.

NYSE Volume 1,553,994,000
NASDAQ Volume 2,620,218,000

Commodities continued to reflect expected declining demand. Despite the near-certainty of production cuts by OPEC nations, oil fell by $5.43, to $66.75. The good news for drivers and bad news for wealthy oil barons is that the drop in the price of oil is showing no signs of finding a bottom. Gold also was hard hit, losing $32.80, to $735.20. Silver dropped another 62 cents, to $9.46. The metals, along with oil, are officially in bear markets. Deflation, people, deflation.

On the bright side, Amazon reported earning that beat expectations and were 46% better than the same period a year ago, though their outlook for the 4th quarter was dim.

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