Friday, July 30, 2010

Limited Market Reaction to 2Q GDP

Released an hour prior to the opening of the markets on Friday, the Bureau of Economic Analysis, U.S. Department of Commerce said second quarter GDP in the US was running at a 2.4% annual growth rate.

That was unsurprising. What did raise some eyeballs was the revision, by an entire percentage point, from +2.7% to +3.7%, of first quarter GDP. The large increase was likely due to the annual three-year revision the BEA undertakes each July. Since 2007, 2008 and 2009 were mostly revised downwardly, that made the first quarter of 2010 look better than it actually was, since the increase was based from lower overall figures.

It's a nice accounting trick, though in real terms, it means that the first half of the current year was hardly worthwhile. Real, unadjusted growth was likely negligible once one wades through the various modeling and statistical fudging done to the numbers.

Oddly enough, the whiz kids on Wall Street didn't quite know what to make of it all, settling instead to just churn stocks around the flat line after rebounding from a nearly 1% loss at the open. Being the final trading day of July, it was a little too neat to take seriously. The best that could be said is that nobody was in a mood to panic, at least not just yet.

Dow 10,465.94, -1.22 (0.01%)
NASDAQ 2,254.70, +3.01 (0.13%)
S&P 500 1,101.60, +0.07 (0.01%)
NYSE Composite 6,998.99, +4.42 (0.06%)

Market internal were a whole other matter, as advancers clocked past decliners, 3708-2708, and new highs were once again well ahead of new lows, 280-90. Volume was just a touch under average for mid-summer.

NASDAQ Volume 2,168,665,750
NYSE Volume 4,697,753,000

Oil finished another 59 cents higher, at $78.95, for the September contract. Gold added $12.20, to $1,183.40, and silver tacked on 38 cents to close at an even $18.00 in New York.

For all the emphasis put on the first GDP estimate for the second quarter, the resulting trade was anything but exciting. The Dow traded in a range of 160 points top to bottom, but mostly in a tight pattern which deviated less than 30 points in either direction off the previous close.

One can safely assume that markets will experience more volatility come Monday and in ensuing sessions, as current market conditions remain quite unsettled.

Thursday, July 29, 2010

The "D" Word

Geez, the cat is finally out of the bag.

No sooner does Federal Reserve Bank of St. Louis President James Bullard utter the word "deflation," then the whole market gets all quivery and queasy. It's as though nobody wants lower prices or even a temporary restraint on runaway excess credit expansion.

Well, here's the news: We've been experiencing deflation - depending on how loosely you wish to interpret the definition - since about August of 2007.

Really? You ask, stunned by not being aware of current financial conditions. Yes, really, since August, 2007, like three years, when stocks began to deflate (or, go down). And real estate prices deflated. Remember when they called residential real estate prices a bubble? What happens when you prick a bubble? It deflates. If there's any indication of deflation, just ask homeowners in vast areas of California, Michigan, Florida or Nevada, where home prices have fallen by as much as 60% or more.

Technically speaking, there are two definitions of deflation, though since economics is more art than science, the two are often blended into one, such as this definition from Investopedia: "A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending."

Over on Wikipedia, deflation is described as. "a decrease in the general price level of goods and services." Pretty simple, and correct, though some economics adherents will insist that deflation is a decrease in the supply of money.

There are very good discussions on both of the above linked references, and each of them makes salient points which overlap and intersect in such a way as to make my argument - that we've been in deflation since August, 2007 - pretty darn accurate.

So, let's take a look at conditions since the summer of 2007, and see how we Americans are doing on the deflation scale. First, we know that houses aren't as expensive as they were back then, so the residential housing market is definitely deflated.

How about other assets, like stocks? Well, the Dow Jones Industrials were tickling the 14,000 mark back then, and are barely able to maintain a level over 10,000 today. Sounds like about a 30% deflation there.

Here's one nobody gets: wages, which haven't generally risen since 2002 and even before that were pretty stagnant. So, if you're an employer, you like deflation - or, at least stagnation - in the price of labor.

As for money supply, it may have been increasing, though according to these charts from, the rate of growth of the various popular money supply definitions (M1, M2, etc.) seems to have been slowing, so that would qualify, technically, as "disinflation," not deflation. Hey, I can't be 100% right all the time, no?

And, lest we forget, the Spring and Summer of 2008, when gasoline prices hit upwards of $3 and $4, so, since everything doesn't all go down at once, and some prices actually have gone up (like gold, or silver), I believe it's safe to say that deflation has been the dominant economic theme for the better part of past three years.

If you're unconvinced, just try raising prices on consumer goods and see how quickly your customers will become those of your competitors. Deflation, while it isn't an evil thing (in fact, it's probably preferable to inflation), is not regarded as generally good for businesses, especially the kind whose stocks are traded on Wall Street, who have to keep increasing their profits every quarter, which, when you think about it, is a pretty absurd concept. Most people who own small businesses are fairly happy just making the same profit over and over and never becoming billionaires, just "comfortable."

Deflation really scares the bejesus out of Wall Street types and with god reason. The companies they hype will die in a prolonged deflationary environment.

As for how the markets responded to the dreaded "D" word, the response was rather muted. Being fairly bright people, many traders already know that deflation has already been in effect for some time, and they also don't jump the shark and sell everything on the word of one Fed President, so the markets did a little dip, then rose, then sold off at the close, producing a chart probably more closely related to fears of what the second quarter GDP estimate will be tomorrow morning than anything else.

Dow 10,467.16, -30.72 (0.29%)
NASDAQ 2,251.69, -12.87 (0.57%)
S&P 500 1,101.53, -4.60 (0.42%)
NYSE Composite 6,994.57, -4.61 (0.07%)

Advancing issues barely beat decliners on the day, 3296-3093, and new highs continued to dominate new lows, 280-85. Volume was better than average.

NASDAQ Volume 2,332,617,500
NYSE Volume 5,247,904,500

The forces of deflation seemed to have little effect on commodities. Oil surged $1.37, to $78.36 per barrel. Gold was up $8.10, to $1,170.50 per ounce, with silver gaining 18 cents, to $17.62.

Initial unemployment claims came in slightly lower than the previous week, though still unacceptably high, at 457,000.

The first estimate of second quarter GDP will be announced at 8:30 am on Friday.

Wednesday, July 28, 2010

Trend is Lower for US Equities

Stocks gave back some of the outsize gains of the past two weeks in another sign that the summer rally is at an end. Earnings reports are dwindling down, though a few key companies are still releasing figures. For the most part, however, investors are looking beyond the earnings numbers and taking closer inspection of overall economic data, like this morning's June Durable Goods report showing a 1.0% decline after a downwardly-revised 0.8% drop in May.

That report put a pall over the markets and stocks struggled throughout the session. Most of the losses came after the release of the Fed's beige book at 2:00 pm, which confirmed what many already knew: the US economy is slowing down, though not yet experiencing negative growth. With this weighing on the minds of investors, some were quick to take profits, though there still seem to be plenty of buyers keeping stocks at elevated levels.

Dow 10,497.88, -39.81 (0.38%)
NASDAQ 2,264.56, -23.69 (1.04%)
S&P 500 1,106.13, -7.71 (0.69%)
NYSE Composite 6,999.18, -45.81 (0.65%)

Declining issues held their edge over advancers for the second straight session, 4357-2048 (2:1), though new highs continued their advantage over new lows, 203-68. The divergence, not only in the high-lows vs. the A-D line, but also in the relative out-performance of the Dow over the NASDAQ, signals a good deal of confusion in the markets, and the markets generally don't appreciate confusion. Tops on the list of confusing issues is the decoupling of listed companies from the US economy. Companies have shown strong performance in their most recent earnings reports, but all of the US economic news has been on the sorry side. This is emblematic of US-based companies actually deriving major portions of their revenue offshore, particularly in Asia and Latin America, two areas which are on the opposite side of the Euro-Us debt collapse.

NASDAQ Volume 1,865,542,625
NYSE Volume 4,554,030,500

Adding to market woes was the announcement - late in the day - by California Governor Arnold Schwarzenegger that the the Golden State was now in an official "state of emergency" triggering an executive order which calls for state employees to begin mandatory 3 day per month furloughs without pay starting in August.

The issue is the state's $19 billion budget shortfall, and the legislature's unwillingness to bring spending and revenue into equilibrium. With states across the country gearing up for fall semesters of schooling and teacher unions refusing to budge on key wage and benefit issues, California has effectively fired a warning shot across the collective bows of state capitols, many of which are facing serious budget shortfalls and intransigent government worker unions.

The commodity space was unsettled as well, with oil down again, by 51 cents, to $76.99. Gold gained a paltry $2.40, to $1,160.40, while silver declined 20 cents, to $17.42.

Market inconsistency should come to a head by Friday, when the government releases its first estimate of second quarter GDP prior to the opening bell. Thursday's initial unemployment claims will also be closely watched.

Tuesday, July 27, 2010

Dull Summer Session May mark End of Rally

With the passing of the Tuesday session, it appears that the recent rally in stocks has pretty much run its course. More than 75% of the S&P 500 companies having already reported, there are fewer opportunities for quick scores on earnings rises and investors are now looking seriously forward to Friday's initial estimate of 2nd quarter GDP due to be released prior to the opening bell.

Now that the European credit crisis has been put down for at least a nap, the market has been able to focus on earnings for much of the past two weeks, and the results are obvious. All of the major indices have experienced significant bounces since the start of the month, with gains in the range of 7-9% overall.

In particular, the Dow is up a whopping 850 points since its interim bottom on July 2nd (9686.48), though it is still some distance from the most recent high of 11,250 in late April. While the major averages have all found comfort zones above their respective 200-day moving averages, chartists will note that criss-crossing the 50 and 200-day MAs are not uncommon circumstances, especially in periods of economic uncertainty, like the current markets conditions.

Thus, it's unsurprising that many analysts are taking a rather dim view of the currently-stalling rally, seeing it as transitory and temporary. After all, markets became severely oversold by the end of June, and perceptually, stocks were cheap, even if they remain well above traditional norms.

Projections for what the government will report 2nd quarter GDP as are all in the range of 2.3 to 3.5% annualized growth, which would be a slowdown for the second straight quarter, and therefore, not helpful in alleviating stresses over a return to recession. With just about anyone who matters already resolved on slower growth for the remainder of 2010, it's difficult to imagine stocks breaking to new highs any time soon. The rational bet is for the major averages to continue trading in the same ranges that have prevailed since last October, though risk is skewed to the downside quite prominently.

Dow 10,537.69, +12.26 (0.12%)
NASDAQ 2,288.25, -8.18 (0.36%)
S&P 500 1,113.84, -1.17 (0.10%)
NYSE Composite 7,044.99, -1.01 (0.01%)

Declining issues held sway over advancers, 3618-2812, but new highs ramped far ahead of new lows, 401-63. Volume was slim.

NASDAQ Volume 1,940,649,125
NYSE Volume 5,330,884,000

Part of the reason for Tuesday's lackluster performance can be tied to consumer confidence, which fell again in July, to 50.4, from an upwardly revised 54.3 in June. The dour outlook by consumers is keeping a lid on prices and profits.

Commodities seemed to have been struck with liquidity issues on the day. Crude oil for September delivery fell $1.48, to $77.50, but continue to be range-bound, between $70 and $80 per barrel.

Gold was zapped lower by $25.00, to $1,158.00, it's lowest price in three months. In concert, silver dropped 57 cents, to $17.62.

Companies reporting strong earnings included DuPont (DD) and Cummins (CMI), both of which beat earnings and revenue forecasts.

The prolonged slump in residential housing and employment continue to weigh on the minds of consumers and investors alike.

Friday, July 23, 2010

Euro Stress Tests a Joke and Wall St. Loves Them

Apparently, according to the central bankers of the world, and especially those in the US and Europe, banks are well enough capitalized to easily survive any kind of future monetary event.

That was the official word from Europe, where it was announced today that only seven of 91 banks in the region failed the European Union's stress tests. The other 84, for the most part, are not only well-capitalized, but strong, vibrant and growing.

After much hand-wringing and posturing over the past four months and with the goading and encouragement of not only Treasury Secretary Tim Geithner, but Fed Chairman Ben Bernanke (who, incidentally is currently on a visit to Europe), Europe followed the lead set down by its American counterparts in 2009 and conducted their own rather flimsy and opaque tests to determine how the largest banks in the region might fare under certain - supposedly bad - economic conditions.

The tests, as in America, revealed very little about banking in the Eurozone. Except for giving European leaders and banking executives a little more breathing room by taking media focus off of them, the stress tests were designed wholly to persuade the general population that all is well in the world of global finances, which begs the question, "why all the fuss in the first place?"

In the broadest, most general terms, what the conduct of the combined central banks of the nations of Europe and the US, plus the mega-banking operations scattered around those countries shows is that the entire financial calamities of the past two years were either made wholly of flimsy cloth or that the economies of many of these nations, and the USA, are in perilous conditions.

Choose whichever poison suits you best, but keeping the banking system and sovereign debt structures at status quo is probably grand for bankers - for now - and pretty much meaningless - for now - for the general populations. Later on, within months, most likely, the truth shall be exposed for all to see, that the nations and their central banks have been painted into a liquidity corner from which many cannot escape without severe austerity measures or default on scads and scads of debt.

With an entire global structure built upon fiat money with nothing to back it except a nation's good word, the eventuality of final collapse is assured, the only remaining question being a matter of timing. The politicians, bankers and associated ruling class participants will keep the charade going for as long as they can. In the meantime, in towns and cities and states across America and across Europe, the dismantling of the middle class will continue apace. Credit cannot and will not be extended to anyone with less-than perfect credit histories and sufficient collateral. Major corporations will continue to flourish at the expense of smaller rivals. Stocks will head up, and then down, and then repeat the pattern. Slowly, almost imperceptibly, the structure of governance and the prosperity of individuals will fall prey to the ravenous appetites of massive governments and business structures working hand-in-hand.

All that one can hope for under these conditions is for a continuance of the deflationary spiral which has been fought at every chance by the central bankers, though mostly in vain. Some of the largest economies in the world continue to limp along with interest rates at or near zero and credit choked off to the general public. Obfuscation and new regulations will only serve to exacerbate the situation until the populations finally give up or rise up.

In Europe, surrender is not so easily assumed. In the United States, it is almost certain, except for a very small percentage who will fly under the radar of the government, skirting the laws and rules, until they too are caught in the widening liquidity trap.

It's not a pretty picture going forward and it may take years to fully play out, but the absolute scurrilous nature of Europe's attempt to mollify the public is handwriting on the wall, writ small, but with larger implications.

As for Wall Street's role in the continuing dance of fools, stocks waited patiently on Friday, hugging the unchanged mark until after the stress test results were released. Once assured there would be no serious blow-back, the major indices took off on a tear toward and beyond their 200-day moving averages, as presaged right here on these pages in yesterday's post.

After the results were announced, traders took a few breaths, some supposedly went out onto their terraces for a smoke, and when they resumed trading, about 12:45, proceeded to take stocks higher in a hurry, pushing the Dow Jones Industrials up more than 100 points in the nest 45 minutes. The die already cast, the trades were executed.

All closed higher, and especially important, the S&P 500 finished the week above the 1100 mark, yet another sign that there's absolutely nothing to be concerned about. Your jobs are safe, your pensions in good hands, with the government and the Masters of the Universe on Wall Street continuing to monitor the health of your and your children's portfolios.

If it wasn't for all of this being so neatly wrapped up on a glorious summer Friday afternoon, one might presume that it was all preordained, completely organized right down to the final neat detail.

Dow 10,424.62, +102.32 (0.99%)
NASDAQ 2,269.47, +23.58 (1.05%)
S&P 500 1,102.66, +8.99 (0.82%)
NYSE Composite 6,965.11, +63.20 (0.92%)

Advancing issues led decliners, as expected, by a healthy margin, 4992-1425. New highs exceeded new lows, 298-80. Volume was at almost the exact same level as that of the previous two sessions; not surprising, since these days it's just the same people moving the same stocks back and forth, to and fro.

NASDAQ Volume 2,263,999,250
NYSE Volume 5,161,690,500

Commodities markets were a bit more rational, with oil closing down 22 cents, at $78.98; gold losing $7.80, to $1,187.70; and silver dipping two cents, to $18.10.

With the indices all closing above their 200-day MAs, one might assume that the bulls are off and running once again, but I purport that it is only a temporary condition, based entirely on strong earnings reports (notwithstanding everything else, a very positive sign, but wholly in contraction with economic reality) which will come to a sudden end next week. This looks every bit like a temporary summer rally, which end as quickly as they begin.

Thursday, July 22, 2010

Stocks Explode to Upside on Earnings

Well, apparently whatever it was that Ben Bernanke said on Wednesday to the Senate Committee, spooking the markets into an immediate and swift pullback, was not all that important because prior to the opening bell three Dow components - 3M (MMM), AT&T (T) and Caterpillar (CAT) - released second quarter earnings above expectations and sent stocks off to a roaring start.

The enthusiasm for equities was not in the least tempered by higher initial unemployment claims, which came in at 464,000, well ahead of last week's 427,000. So long as companies were turning sizable profits, nothing was holding back investors from buying.

Even existing home sales being down 5.1% for June or the Index of Leading Indicators dipping 0.2% had no effect on the rush to buy into the good news from corporate earnings.

Dow 10,322.30, +201.77 (1.99%)
NASDAQ 2,245.89, +58.56 (2.68%)
S&P 500 1,093.67, +24.08 (2.25%)
NYSE Composite 6,901.91, +170.75 (2.54%)

Advancing issues reversed Wednesday's drubbing, leading decliners, 5498-1017, and new highs soared ahead of new lows, 278-82. On a day which held such unbridled enthusiasm, there were more new highs (46) on the NASDAQ than new highs (39), reversing a three-day counter-trend. Volume was roughly at the same level as the previous session, though for bulls, it was a positive sign.

NASDAQ Volume 2,264,130,750
NYSE Volume 5,504,649,500

Oil futures were really the big winner on the day, with the September contract rising $2.74, to $79.30, the basis for which was unknown. Gold and silver were ahead only slightly, with gold gaining $3.90, to $1,195.50, and silver up 32 cents, to $18.12.

Every sector showed positive results as earnings season finally produced some results on which traders could trust with their money.

Despite the high quality of earnings, the major indices have yet to break through their 200-day moving averages, which are providing fairly stiff resistance, though corporate earnings continue to defy economic indicators.

At some point, possibly as early as tomorrow, stocks should break out from their recent range, tossing aside the cockeyed government reports and focusing on profits and valuations, like today.

Anecdotally, valuations may be as rich as they may get. For instance, 3M, which reported earnings of $1.54 for the most recent quarter, is trading at a multiple of 16.5 times trailing earnings, fairly rich.

AT&T is trading at 11.5 times earnings, while Caterpillar sports an ultra-rich multiple of 25.75 times earnings.

Traditionally, stocks trade in a range of 12-15 times earnings. Considering the headwinds into which companies are running, the low end of that range may be more appropriate at the present. That kind of metric is keeping a lid on stocks currently.

Wednesday, July 21, 2010

Our Curious Stock Markets: Bernanke Speaks, Markets Tank

So, what did Federal Reserve Chairman, Ben Bernanke, say that markets, bond traders and equity traders didn't already know?

Hardly a thing, except for this statement slipped neatly into the fourth paragraph of his prepared remarks:
Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years.

In other words, deflation, not inflation, has been the overwhelming economic force since just before the market malaise of 2008.

Now, that may come to news to some, though not to regular readers of this blog, as I've been reporting and indicating - for probably than anybody wishes to recall - that deflation has been the dominant trend since markets began their decline in August, 2007. That's three years ago, so maybe Mr. Bernanke and the minions of stock traders, analysts and "economists" (what a bunch of bozos these types have proven to be!), are just catching on, and maybe they're still behind the curve.

There are good reasons to enjoy and promote deflation, especially if you are not either wealthy, a banker or otherwise dependent on rising asset values. Those reasons include, but are by no means limited to, potential for significant capital appreciation (hard money) by correctly pricing and purchasing assets through forced liquidations, general lower prices for all manner of daily use goods and services, significant arbitrage situations, lower costs for everything from business startup to attorney fees, and the list goes on and on.

As asset values fall, as they have the past two years, and as there seems to be no end in sight for the continuance of deflation as the dominant trend, it is wise to be always in a strong cash position, with as little debt as possible, and on the look out for price dislocation.

The stock market and individual stocks have been ripe ground for wide variances (volatility) in pricing value, though stocks are not generally for individuals (until the past twenty years or so) and should only be employed for income or capital growth as a small portion of one's overall portfolio. I continue to recommend raw land, preferably arable, cash, cash equivalents, tools of trade and transportation devices, with the bulk of one's allocations in cash (anywhere from 40-80%).

If you own a home, you should be doing everything in your power to own it free and clear. Despite the headlines detailing the horror of the housing market, there have been few times better than the past six months to invest in one's own home. It is an asset, in addition to providing a secure environment for oneself and one's family, that can enhance one's overall financial position and provide leverage for any manner of transaction. All it takes is a little ingenuity, some papers supporting your strong position and a little persuasion to counter-parties of any given transaction.

But the tiny sentence in Bernanke's testimony before the US Senate Committee on Banking, Housing, and Urban Affairs apparently came as somewhat of a shock to astute followers of Fed-speak. The stock market dived and bonds improved on that phrase, and the move extended through and beyond the extent of his statement and for the rest of the trading day.

The move from the start of his testimony, at 2:00 pm ET, through its conclusion and well into his question and answer period at about 3:00 pm, took the Dow from 10,250 all the way down to 10,065, a 185-point drop, erasing Tuesday's gains and putting the Dow up just 22 points from where it ended the previous week.

Dow 10,120.53 109.43 (1.07%)
NASDAQ 2,187.33 35.16 (1.58%)
S&P 500 1,069.59 13.89 (1.28%)
NYSE Compos 6,731.16 88.88 (1.30%)

As expected, decliners overwhelmed advancers, 4497-1970, though new highs remained well above new lows, 239-106, but, for the third day in a row, NASDAQ stocks showed more new lows (56) to new highs (31), a troubling trend underscoring tight credit conditions for smaller, younger, more speculative firms. Volume was at its best level of the week, another disconcerting data point for bulls to ponder, as the previous two days of gains were on lower volume. Obviously, there is a great deal of risk intolerance in the markets.

NASDAQ Volume 2,245,542,250
NYSE Volume 5,465,722,000

Commodities felt the pinch of deflation as well, with crude, after hitting a one-month high on the expiration of the August contract yesterday, slipped $1.02, to $76.56 on the first day of the September contract. It doesn't take a genius to understand what that means, though in futures trading parlance, it's known as "backwardation," a condition wherein the cash price is higher than the futures price. It's been seen in gold and silver recently, and, though not a textbook case here, one contract ending on a high and the next day's new contract selling immediately lower, constitutes the same dynamic.

Gold was up just 10 cents, to $1,191.60, with silver higher by 11 cents, at $17.80, though both traded lower following the New York print around 1:30 pm.

Earnings reports from a wide variety of companies were mostly in line, with few surprises to either the upside or down, though Morgan Stanley (MS) was particularly outstanding, especially in comparison to their chief rival, Goldman Sachs (GS). bank of America, the nation's #1 zombie bank, fell again, losing 41 cents, to $13.36 (3%). The stock has fallen 31.4% since its high of 19.47 on April 14, 2010. Not only does BofA suffer from enormous loan losses and continuing deterioration in their loan portfolio, they are not making new loans of any substantial size and will be under pressure from the newly-passed financial reform legislation - along with most other large banking institutions - for a considerable period of time, which, were I Ben Bernanke, might easily be interpreted as meaning three to four years.

Tuesday, July 20, 2010

Clueless? You're Not Alone on Turnaround Tuesday

From the most grizzled veterans to the baby-faced nubians, nobody was able to put any kind of story or spin on the dramatic turnaround stocks made Tuesday.

After IBM and Texas Instruments both reported revenue misses for the second quarter Monday after the close, Goldman Sachs continued the trend with an earnings report that had traders scrambling for the exits before the market had even opened. When stocks did begin trading, they fell off a cliff, with the Dow down by more than 145 points within the first 15 minutes.

Stabilizing in the red, all indices were trading lower, but gained strength throughout the morning and accelerated into the afternoon session. As 2:00 pm approached, stocks had staged a stunning reversal on nothing but momentum. By the close, all of the major indices sported solid gains, keeping hopes alive that this earnings season would offer some value and momentum for the second half of the year.

Even though IBM ended lower for the day (-3.24, 126.55, -2.50%), it had pared losses substantially, after it had opened with a loss of more than 5%. Goldman Sachs, on the other hand, possibly the true catalyst behind the entire market rally, ended the day higher (+3.23, 148.91, +2.22%) after initially trading down by more than 3 1/2 points from its previous close.

Dow 10,229.96, +75.53 (0.74%)
NASDAQ 2,222.49, +24.26 (1.10%)
S&P 500 1,083.48, +12.23 (1.14%)
NYSE Composite 6,820.04, +80.40 (1.19%)

Headline numbers were supported by strong internals, with advancing issues beating back decliners, 4846-1552. New highs remained atop new lows, 214-136, though once again the disturbing trend in the NASDAQ - more new lows than highs, 67-26 - appeared for the second straight day. Volume was light, but much better than Monday's dismal showing.

NASDAQ Volume 1,944,221,875
NYSE Volume 5,323,317,000

Crude oil closed out the August futures contract up 90 cents, at $77.44, the highest price in a month. Gold rallied for a gain of $9.80, to $1,191.50. Silver added 15 cents, to $17.68.

After the bell, Yahoo! and Apple reported, with Yahoo missing on revenue though beating consensus bottom line EPS by a penny at 15 cents per share. Apple beat on almost all metrics, including gross revenue and earnings per share, setting up a potentially powerful open for tech shares on Wednesday.

Everybody Up for Fund Manager Monday

Dow 10,154.43. +56.53 (0.56%)
NASDAQ 2,198.23, +19.18 (0.88%)
S&P 500 1,071.25, +6.37 (0.60%)
NYSE Composite 6,739.64. +30.13 (0.45%)

Volume was absurdly low. Advancer beat decliners, 3971-2424. New highs surpassed new lows by a count of 163-133, which, due to the skewed NASDAQ readings (78 new lows, 16 new highs) bears more consideration. In wide, absurd, general terms, NASDAQ companies are younger, more intuitive and more likely to be managed by entrepreneurial types with less business knowledge and experience than their peers in, say, the Fortune 500.

If the case is that these companies are unable to meet obligations because of the horrid and deplorable banking situation in the US, thus scaring off investors and fomenting failure, then it should come as no surprise that the banking, credit and financing system in the United States of America is a miserable failure, and that the only companies receiving funding of any kind are the largest and most-deeply-entrenched in the hopelessly-corrupted and dysfunctional political system.

It is an untenable condition that cannot continue without severe repercussions, to business and polity alike. Innovation and enterprise cannot be constrained by either governmental will not banking constriction. As necessary as mother's milk to newborn creatures, capital remains essential, and without it, no enterprise can prosper, much less survive.

The ridiculous situation into which the Federal Reserve Bank has painted itself - free money and no lending - can, and actually has, maintained itself for much longer than most financially-minded individuals would have thought possible. How much further the Fed and its other friendly central banks can sustain the pantomime performance is a matter of pure conjecture. It could end tomorrow as easily as sometime in the next year, but it will end, as do all performances, good, bad or otherwise unremarkable. And when it does, there will be chaos, and all assets will lose value, some more than others.

US stock markets, and by inference, global markets, are headed for a spectacular crash within the next two days to six months, almost with 100% certainty. The imbalances in the global economic diaspora are too great for anyone rational to come to any other conclusion. By November, equities should be flattened to levels heretofore unthinkable. If there's any need for proof, simply follow the travails of Bank of America (BAC), a company too big to fail, which has failed.

There is no amount of money (it being all of the fiat variety and based upon nothing other than the good word of a given government, almost all of which have been proven to be utterly craven, corrupt and transitory throughout history) that can save Bank of America. The company owns enormous amounts of non-performing loans and continues to operate with a balance sheet in which most of the "bad" assets are not accounted for, those being on off-balance instruments and subject to laughable "mark-to-market" accounting rules.

Bank of America should have been liquidated last year or the year before, surely as soon as it acquired Countywide, the absolute root of the financial collapse, but, by government fiat, it was allowed to continue along with a good number of its large banking brethren, "for the good of the country" or some other brackish backwash as that.

It is a dead entity, a zombie, and of no further use to the general welfare of either its investors or its creditors. It should be broken up, dismantled and sold for parts. I believe Dr. Nouriel Roubini stated this very same argument, possibly as long ago as early 2009, maybe even sooner.

Wipe Bank of America and Citigroup off the landscape of corporations and the rebuilding of the global economy can begin... after a few thousand other banks go down in a heap with them.

Oh, and by the way, if our weenie Attorney General Holder doesn't put the screws to BP for the life of their company, then the American people should simply stop paying taxes. The damages to our sovereign lands and waters done by this company are already in excess of $100 billion, to say nothing of the harm to commerce. If AG Holder isn't up to the task of holding this rogue company responsible, then he has no place in his position.

NASDAQ Volume 1,759,521,250
NYSE Volume 4,697,778,000

Oil was higher by 53 cents, to $76.54. Gold lost $6,30, to $1,181.70. Silver fell 24 cents, to $17.53. Check with me later, but by October, oil should be below $65 a barrel, gold should be around $1045 or lower and silver should be hovering around the $14 level.

That's all I've got for now. See you tomorrow.

Friday, July 16, 2010

SMASHING! Stock Hammered as Banks, Google Disappoint

The first week of second quarter earnings season actually came to an abrupt end on Tuesday, when all the major indices topped out after a six day rally. Wednesday and Thursday were flat-lined, as nervous investors jockeyed in and out of equities. With options expiring on Friday, the stage was set for a near-panic sell-off, and it was a doozy.

When Bank of America (BAC) and Citigroup (C) followed JP Morgan Chase's lead with unsettling results prior to Friday's open, the trade was set and sellers pounded stocks in the opening minutes. Just before 10:00 am, the university of Michigan's Consumer Sentiment Index delivered another in a series of economic blows, as the gauge fell from 76.0 in June, to 66.5 for the current month. The rout was on, as the Dow soon dipped down 200 points from the previous close.

There was no relief for stockholders in a relentless grind lower which lasted through the end of the session.

For the week, all f the major indices ended with losses, as the Dow finished 100 points lower, the NASDAQ shed 17 points, the S&P 500 surrendered 13 points and the NYSE Composite dropped 99 points.

Dow 10,097.90, -261.41 (2.52%)
NASDAQ 2,179.05, -70.03 (3.11%)
S&P 500 1,064.88, -31.60 (2.88%)
NYSE Composite 6,709.51, -207.30 (3.00%)

As expected, internals told the same stark story. Decliners pounded advancers, 5321-1154, with losers beating winners by a 7:1 margin on the NASDAQ. New highs managed to stay ahead of new lows, 150-124, though that trend is weakening and about to roll over again. Volume was not spectacular, though it was far better then the previous three sessions.

NASDAQ Volume 2,183,108,750
NYSE Volume 6,016,648,500

Stock investors were not alone in their desperation. Commodities were also pummeled in concert with the CPI reading (0.2). Crude for August delivery fell another 61 cents, to $76.01. Gold continued its recent shaky form, losing $20.10, to $1,188.00. Silver followed that lead, dropping 57 cents, to $17.77.

Gold hit its lowest level since May, though it is still well above its 200-day moving average. Silver continues to flirt with its 200-day MA, touching it again today. Any further deterioration in precious metals prices might just spread the panic through the commodity space in a deflationary sell-off.

Bank of America was the Dow's worst performer, losing 1.41, to 13.98, a decline of 9%. Citigroup fell 26 cents, to 3.90, a 6.25% loss. Google, after announcing a slight miss on earnings per share Thursday after the close, was punished with a 7$ decline, off 34.41, to 459.61.

All of this in the middle of earnings season does not bode well for bulls. The next two weeks will be interesting, to say the least, and challenging to see where any support might appear.

Thursday, July 15, 2010

Yes, That Was the End of the Rally

As queried yesterday, the split decision by the major indices, resulting in paltry gains and losses across the board, appears to have signaled at least a pause of optimism for the markets.

News flows were both good and bad (depending on one's perspective) prior to the open, highlighted by JP Morgan Chase (JPM) trying to get away with reporting second quarter results which included unusual one-time gains. The usual protocol is for one-time charges or gains to be stripped out, as the vast majority of analysts predict on such a basis.

The Financial Times reports that JPM's earnings "Signal end of Wall St. rebound" and even Wall Street darling CEO Jamie Dimon couldn't get away with reporting $1.09 per share, when analysts were seeking 70 cents, excluding one-time charges. JPM decided to pad earnings by lowering their loan-loss reserves by $1.5 billion. Stripping those out, the venerable House of Morgan made 75 cents per share in the quarter, though there were likely other crafty accounting tricks employed.

For their efforts, investors sold off the nation's second-largest bank to the tune of a little more than a point at the lows of the day. When all was said and done, however, and the Wall Street connivers couldn't stand a little decline, all stocks were boosted in a furious final half-hour, which saw the Dow gain about 70 points and JP Morgan close 11 cents higher on the day, closing at 40.46.

The final push was attributed to passage of the long-overdue Financial Regulation bill by the Senate, but stocks finished mixed again. As the Dow and NASDAQ finished higher on Wednesday, today's two winners were the S&P 500 and NYSE Composite, a complete reversal. So, for the past two days, all the markets did was vaporize a lot of money.

Also prior to the open Initial jobless claims for the week reportedly totaled 429,000, down 29,000 from the previous week. Following last week's precipitous drop, continuing claims climbed by almost 250,000 to 4.68 million. Separately, the Producer Price Index (PPI) for June fell 0.5% month-over-month, another sure sign that deflation is well-entrenched.

The NY Fed Empire Manufacturing Index fell to 5.08 in July, from 19.57 in June, a seven-month low.

Industrial production gained 0.1% in June, while Capacity Utilization stalled out at 74.1% over the same span. All of these indicators cause stocks to sell off at the open, but career further and deeper into the red after 10:00 am when the Philadelphia Fed announced that their manufacturing index fell from 8.0 in June to 5.0 in July.

If there isn't a double-dip or recession headed our way, you sure can't tell it from the spate of negative statistics sprouting from every corner of the economy.

Dow 10,359.31, -7.41 (0.07%)
NASDAQ 2,249.08, -0.76 (0.03%)
S&P 500 1,096.48, +1.31 (0.12%)
NYSE Composite 6,916.81, +13.45 (0.19%)

Decliners again led advancing issues, 3601-2789, and new highs remained ahead of new lows, 172-71. Volume was weak, owing to the uncertainty of the marketplace.

NASDAQ Volume 1,980,588,625
NYSE Volume 5,214,455,500

Crude oil sold off, losing 66 cents, to $76.62, but gold was higher once more, up $1.30, to $1,208.10. Silver gained 7 cents, to $18.35. All traders in commodities are due for a rude awakening at some point, when deflationary forces can no longer be contained and demand eventually falls off a table. Those not in cash (unlike myself and ardent followers of this blog) should begin shedding all semi-liquid assets, including futures contracts, as all signs point to a resumption of the bear market, though this time bottoms could be severe - far lower than expected.

After the final bell, Google (GOOG) was ravaged as it missed analyst expectations of $6.52, by seven cents, or $6.45 per share. To understand the absurdity of Wall Street, one must realize that Google is among the most profitable companies in the world. GAAP operating income (revenues after expenses) was $2.37 billion, which is a pretty good sum of money for any three-month period. Nonetheless, some traders saw fit to wallop the stock down more than 20 points in after hours trading, or, by more than 4%.

Maybe it was a touch overvalued at $494 a share, or, 22 times earnings. Live and learn.

This earnings season can't be over with already, can it? We've just gotten started. There are sure to be wild gyrations tomorrow on options expiration and over the next two weeks, which will only be fun if you're winning.

Wednesday, July 14, 2010

Is This the End of the Rally?

Stocks may have gotten a little ahead of earnings schedule, as there was absolutely no lift to the markets, even after Intel's (INTC) blowout quarter, announced last night after the close.

Struggling all day to find any buying interest, Dow and S&P stocks sent the majority of the day trading just below the flat line, with the NASDAQ sporting slim gains.

After the FOMC minutes were released at 2:00 pm, stocks abruptly turned lower, but traders boosted them back to nearly positive by the end of the session, ending with two indices up and two down, though marginally. Overall, the FOMC minutes may have had the most impact, as the opinions expressed revealed that a majority of Fed governors felt that while the economy would not fall into recession again, growth would be moderate and it would take five or six years for the US economy to regain a solid footing.

That kind of sentiment cannot be encouraging to the general sentiment and it showed up immediately in the lackluster trading and rocky internals.

What seems to be most disconcerting to stocks are technical n nature, as the indices are all toying with the space between the 200-day moving average and the 50-day. In each case, the two have crossed, with the 200-day now declining, along with the 50-day. Moving past the 200-day line will take some very positive news, though any gains in such a sloe environment are unlikely to be lasting. It seems as though the entire earnings season has already been wasted on the past six days, in which the indices already gained 7-8%, a big enough move in any environment. Adding to the confusion is options expiration this Friday, which has no doubt contributed in a big way to the sudden upside surge.

Dow 10,366.72, +3.70 (0.04%)
NASDAQ 2,249.84. +7.81 (0.35%)
S&P 500 1,095.17, -0.17 (0.02%)
NYSE Composite 6,903.36, -4.42 (0.06%)

Declining issues led advancers, 3535-2828, though new high remained well beyond the reach of new lows, 176-41. It should be noted that at this time last year, stocks surged powerfully, and that should negate any strengthening of new lows for a considerable period. Volume was just about average.

NASDAQ Volume 2,165,528,750
NYSE Volume 4,653,667,000

Stocks weren't the only assets stuck in neutral. Commodities hugged the unchanged mark most of the day. Oil lost 11 cents, closing at $77.04. Gold dropped $6.50, to $1,206.80, while silver added 4 cents, to $18.27.

Financial stocks are next up on the calendar, along with PPI and CPI on Thursday and Friday, respectively. JP Morgan Chase (JPM) reports prior to the open on Thursday, with Bank of America (BAC) and Citigroup (C) releasing on Friday.

There have been no major surprises, though retail sales were reportedly weak (not surprising) and Intel's earnings - in an ordinary environment - would have ignited a powerful rally in techs, though none was forthcoming.

An air of extreme caution and pessimism about the future seems to have fully enveloped Wall Street.

Tuesday, July 13, 2010

All Aboard! CSX Prompts 6th Straight Day of Gains

This is what earnings season is all about.

Investors and traders have waited patiently through two months of severe selling for days in which stocks could outshine a slew of negative economic reports, and it appears - for some, at least - that the waiting is finally paying off.

Stocks surged for the 6th straight session after rail operator, CXS reported strong earnings after Monday's close, citing net income gains of 36% in the second quarter, beating analysts' expectations. Revenue grew 22% to just below $2.7 billion.

Despite the strong report, shares of CSX were lower by about 1.5% on Tuesday, but the upbeat sentiment associated with the company, which hauls coal and countless other raw materials, parts and integrated supplies across the United States, gave traders confidence to bid a wide array of stocks higher.

Dow 10,363.02, +146.75 (1.44%)
NASDAQ 2,242.03, +43.67 (1.99%)
S&P 500 1,095.34, +16.59 (1.54%)
NYSE Composite 6,907.78, +113.30 (1.67%)

Gains were solid across all of the indices and internals were in line with the headline numbers. Advancing issues pummeled decliners, 5486-1025 (5:1), and new highs soared past new lows, 179-48. Volume, however, was not particularly strong, as reticence among potential stock purchasers remained high.

NASDAQ Volume 2,140,849,750
NYSE Volume 5,288,201,500

Commodities trended mostly higher on the day. Crude oil, on the August futures contract, rose $2.20, to $77.15. Gold gained $14.80, to $1,213.30, while silver was up 34 cents, to $18.24.

Announcements after the close on Tuesday were forthcoming from two important companies in vastly different sectors: Intel (INTC) and Yum Brands (YUM).

Intel achieved a smashing success in the second quarter, the best ever in the company's 41-year history, with gross revenue of $10.8 billion, 67% gross margins, operating Income of $4.0 billion, net Income of $2.9 billion and EPS at 51 cents.

The results were well ahead of Street estimates, and completely overturned year-over-year results. For instance, the 51 cent EPS was 183% better than the second quarter of 2009. The company also was very positive about the remainder of the year, with growth expected across all business units.

Stock players were impressed, as shares rose more than 5% in after-hours trading.

When YUM Brands (YUM), owners of KFC, Taco Bell and Pizza Hut, reported second quarter results, sentiment turned decidedly negative. The company beat analyst estimates narrowly, posting EPS of 58 cents, 3 cents better than the 55 cents anticipated, but revised its full-year forecast to $2.43 a share, with Wall Street expectations at $2.48.

This sent the stock tumbling more than 3% in after-hours trading.

These two bellwether stocks demonstrate the cross-currents in the markets quite adequately. While general economic reports - especially those concerning housing and employment - remain a drag on the economy, companies insist that they are lean and profitable, as shown by the results from YUM Brands and Intel.

What is a conundrum for many, however, is the multiple, or PE at which specific companies are trading. Across the S&P 500, the current cumulative PE is about 15, historically high. Intel is right on that number, including this quarter, at 14.45. YUM's trailing PE (using the most recent past four quarters) is an astronomical 19.22.

In other words, it would take 19 years to recoup an investment in YUM Brands based on earnings per share, and just shy of 15 to break even in Intel. In an economic environment beset with an overburden of debt still growing (government) and some being worked off in the private sector, investors may not feel comfortable with such high multiples. That will keep sentiment on the negative side until these multiples come down to levels more in line with the reality of a slow-growing economy. Something in the neighborhood of 9-12 might be suitable, perhaps even lower.

In the small business world, which is arguably more risky, companies rarely sell for more than six times earnings. More often than not, companies sell for three to four times annual earnings, as small business owners seek minimization of risk and quickly recoup their capital. The big business world of Wall Street, operating on a far loftier basis, may be overpriced by a wide degree. Small investors will not stay put in longer term equities with questionable outcomes.

A return to more reasonable valuations would send stocks into a tailspin, though, following on the deflationary backdrop which has been the dominant trend for the past two to three years, a severe correction, on a valuation basis, may be forthcoming.

Stocks Stall on Aloca Waiting Game

Ahead of earnings from Alcoa, officially kicking off 2nd quarter reporting season, stocks were flatter than paint on a wall. Additionally, volume was at levels not seen in many months, completely lacking in conviction from buyers or sellers.

Still, three major averages managed to post their fifth consecutive day of gains, while the NYSE Composite surrendered a fractional loss.

Dow 10,216.27, +18.24 (0.18%)
NASDAQ 2,198.36, +1.19 (0.06%)
S&P 500 1,078.75, +0.79 (0.01%)
NYSE Composite 6,794.48. -14.23 (-0.22%)

Declining issues finished well ahead of advancing ones, 4185-2170, though new highs registered well in excess of new lows, 158-65. It's likely, as earnings reports begin to appear with regularity, that stocks will get a reprieve from the previous two months of fairly-uninterrupted selling. While corporations may report excellent second quarter results, the underlying economies - in the US and Europe, especially - remain under pressure from excessive government spending and overall flagging economic statistics.

NASDAQ Volume 1,329,977,875
NYSE Volume 2,923,618,750

In the commodities space, gold gained $6.70, to $1,205.20; silver added 18 cents, to $18.08, but crude oil slipped $1.14, to $74.95, as oil continues to show reluctance to move past the $75 per barrel mark.

Alcoa (AA) announced a .02 beat of street estimates, which is just barely good enough to satisfy skeptics.

Friday, July 9, 2010

Forget Double Dip, the Next Bottom May be Deeper

Stocks continued their now four-day rally with the weakest volume of the week on Friday. Most of the buying - mostly positioning for earnings releases beginning next week - occured in the final two hours of the session.

Nonetheless, it was a stellar performance for the holiday-shortened span, with stocks rebounding sharply after two months of relentless selling.

Dow 10,198.03, +59.04 (0.58%)
NASDAQ 2,196.45, +21.05 (0.97%)
S&P 500 1,077.96, +7.71 (0.72%)
NYSE Composite 6,808.71, +52.90 (0.78%)

Advancers buried decliners, 4901-1497, and new lows were trampled by an onrush of new highs, 168-72. Volume was the lightest it has been in weeks, typical for summer trading, though potentially disconcerting to some trend-watchers who have noted many recent higher moves on inadequate volume. It's called speculation, and there's still plenty to go around.

NASDAQ Volume 1,601,902,625
NYSE Volume 3,999,371,000

Commodities were again positive for sellers, with oil up 65 cents, to $76.09, gold rocketing higher by $13.80, to $1,209.60 and silver tacking on 20 cents to the price of an ounce, at $18.05.

Following up on a recent post - June 1, US Markets the World's Laughing Stock; Second Great Depression Still Looming in which I compared current stock market conditions to those of the Great Depression, along come two esteemed commentators, Donald Luskin of Trend Macrolytics LLC, writing for the Wall Street Journal, and Daryl Guppy of to solidify my position and rationale.

Luskin's article, Why This Isn't Like 1938—At Least Not Yet, carries my argument about the similarities a step further and somewhat in another direction, comparing today's stock market, and economy, to that of 1937-38, a recession within the Great Depression which exhibits an eerily-similar pattern to the recent S&P 500. Offering an over-imposed chart of the two periods, it's difficult to argue against his analysis, especially when he mentions:
In 1937 the economy was in a strong recovery from a severe crisis, and there was complacency that the worst was over—much like the exuberance about a "V-shaped' recovery this April. But after 1937 the economy relapsed into what historians call "the recession within the Depression," a downturn so severe that in any other context it would qualify as a depression itself.

It was triggered by a set of very specific policy mistakes. The Fed tightened by raising reserve requirements. Consumers were hit with new taxes to pay for the then-new Social Security program. Worried about excessive deficits, Roosevelt cut government spending. At the same time, his administration accelerated antibusiness rhetoric and regulation.

Those conditions sound quite a bit like what is directly ahead for the US economy, some of the same policies already set in motion.

Guppy's point is that there's a head-and-shoulders pattern developing that looks just like the one at the start of the Great Depression, the period to which I referred in my June 1 post. His analysis was released on July 5, when most of us were still enjoying the tail end of a three-day weekend, so it's unsurprising that many missed it.

Whether or not anyone agrees with history repeating itself, charting or comparisons, it certainly seems worth considering what might happen over the next 6 months to 6 years. Using reasonable market assumptions being a key tenet of any sound financial plan, might it not be time for people to begin using models which predict lower rates of return, possible deflation - instead of inflation - and benchmarks taken from actual conditions rather than the rosy assumptions (7-9% y-o-y gains, 3% inflation) usually thrown around by "respected" financial planners and analysts?

Which brings up yet another point of contention. Bull or Bear, optimist or pessimist, everyone has to have some kind of time horizon for investments, and, there being no better time than the present to plan for the future, one wonders just how long it might be before stocks return to the all-time highs of October, 2007.

I'll toss out a number here, just for argument's sake. With the Dow right around 10,000 today, I'll say that the index won't return to the 14,164 number (October 9, 2007) for maybe thirty years. How's that for perspective? Too gloomy? Bear in mind that it took more than 25 years years from stocks to recover from get back to the previous pre-crash high. The Dow Jones Industrials closed at 381.17 on September 3, 1929 and didn't rise back to that level until November 23, 1954, when they closed at 382.74. Surely, conditions were dire during the Great Depression and through world War II, but, considering the massive amount of debt overhang (still growing) and unfunded liabilities of around $130 Trillion (unfunded and unresolved), one might suggest that economic conditions are far worse, by degree, than they were some 80 years ago.

Just using a simple formula of 7% gains, compounded annually, it would take five years to retake the 14,164 level, and is anybody predicting five straight years of 7% returns? None that I know of, and if you know of any, do yourself a favor and seek out other opinions. With the ten-year treasury hovering around 3% and the 30-year around 4%, we all should be well aware that explosive growth is not in the near-term cards.

That's why I keep saying that cash is king, because if stocks and other assets decline in value, your cash will buy more down the road. That's what deflation is all about.

Thursday, July 8, 2010

Summer Rally Lifts Stocks for Third Straight Session

Just a week ago, stocks appeared to have lost much of their appeal, as US economic data and problems in Europe prompted fears of a "double dip" (another recession) or slow growth for the United states and much of the developed world.

Apparently, not everybody got the memo, as this first week of the third quarter has traders snapping up stocks by the truckload. The major indices recorded their third straight day of gains, following seven sessions in negative territory. While concrete proof of better economic conditions have yet to be affirmed or even ascertained, traders have felt the need to dive headlong into stocks at a crucial juncture.

For chartists, one of many significant patterns developing right now is what's been termed the "death cross," wherein the 50-day moving average falls below the 200-day moving average. The last time this particular pattern occurred was at the very end of 2007, when (using the Dow Jones Industrials as a guide) the Dow failed to surpass the October, 2007 high of 14,164. Through the end of December, 2007, the Dow was trading in the low to mid-13,000s, but by the end of January the index had fallen to the low 12,000s range. Even though by June, the index had made its way back to 13,000, the 50-day MA remained below the 200-day, there was not enough commitment in the market to reverse the trend, and the subsequent crash in Autumn of 2008 finally dashed all of the bullish camp's hopes.

What is notable about the "death cross" is that it is not an insignificant event. As the market is normally an efficient discounting mechanism, the crossover of the two major moving averages correctly forecasts deteriorating economic conditions, though sharp rallies, bringing the averages back above the 50-day, and sometimes touching the 200-day, normally end in failure.

The key area of resistance at this juncture is two-fold, and that dichotomy bodes ill for the bulls. The first level is at the 200-day moving average, roughly at 10,300. A break above that level would be a boost for optimism, though the second level, at 11,200 - the height of the most recent rally and also the level at which the market broke down severely in 2008 - is more important. Failure to exceed the previous high can mean only one thing: stocks are overvalued and moving lower.

This entire panacea will likely take place over a lengthy time span of six to eight months before it is finally resolved, though there seems to be little doubt - from a technical point of view - that the bears will eventually feast upon overpriced securities, likely by November and almost surely by january 2011.

Not to put too much of a pessimistic tone on the delightful little three-day rally, but it's well-known that the averages never move in straight lines, sentiment can turn on a dime and there's no discernible difference between economic conditions today and those which prevailed for the prior eight weeks. Housing, unemployment and financial fears - not confined to just europen banks, but to US banks and the entire global financial system - will continue to pressure those on the long side of trades.

Chartists usually get it right, and while there are surely no guarantees, recent economic data suggests at least a slowdown in GDP growth from the first and second quarters of this year to the third and fourth. While individual names may report stellar earnings, the underlying data is signaling a tough time to grow profits and revenues.

Despite the glowing headline numbers, today's trade was a disaster in a number of ways. First, the galloping gain of the morning were nearly completely vaporized by noontime, and, second, most of the day's gains (80 points on the Dow) were achieved in the final hour. There's a good deal of buying going on, but there's surely no dearth of selling, either. The rub is that institutions may very well have been unloading stocks midday, forcing another bout of short-covering at the tail end of the session. It was a very sloppy-looking chart.

Dow 10,138.99, +120.71 (1.20%)
NASDAQ 2,175.40, +15.93 (0.74%)
S&P 500 1,070.25, +9.98 (0.94%)
NYSE Composite 6,755.81, +70.03 (1.05%)

Advancers dominated declining issues, 4658-1738 (nearly 3:1), and new highs surpassed new lows, 145-84, breaking a streak of seven straight days of wins for new lows. Volume was below par.

NASDAQ Volume 1,958,669,750
NYSE Volume 5,208,361,000

Oil gained again, now eraing most of the declines from the prior two weeks, higher by $1.37, to $75.44. It's doubtful that oil can or will break out of this $70-80 range any time soon, unless there's a serious disruption in production or demand falls off a cliff - unlikely during the busy summer months.

Metals were little changed, with gold dipping $2.80, to $1,195.80, and silver losing 13 cents, down to $17.85.

The most relevant stat for the day came prior to the open, when initial unemployment claims were estimated at 454,000, down from the previous week's total of 475,000. A good many analysts saw this as a positive, though the reality of the situation must be viewed in a larger, longer context. Using a simple round figure of 450,000 initial claims a week, that would extrapolate to over 23 million claims in a year, or a turnover of roughly 30 percent of the total workforce.

With jobs scarce, that kind of turnover is simply not supportable from available data, insinuating that the weekly claims numbers are very faulty and probably disguising an even-worse employment condition than many believe exists. The government's own non-farm payroll actually put unemployment at 9.5% in June, down from 9.8% in May, even though the number of jobs created was a negative. Clearly, the response was that the workforce had shrunk, as many longer-term unemployed entered the ranks of "discouraged," and thus, not counted.

It's a complete fallacy to believe that employment is in anything but a disastrous state of affairs and that the official numbers are masking the truth. The real unemployment rate, or U-6, which captures underemployed workers and those completely discouraged and without benefits, at 16.6%, another government statistic probably undervalued by 5-10%.

Of course, the employment condition is only part of the story, but a large part, as it also impacts retail sales and housing in major ways. Anyone who believes we're out of the woods just because the stock market rallies for a few days might just ask a few of their unemployed neighbors how they feel about things.

Wednesday, July 7, 2010

... And Now, the Rally That Was... a Real Phony

Viewing the market over the past two trading sessions, a comparison to an olympic athlete might be apropos, say, that of a high-jumper, like Dwight Stones back in the day, sailing over the bar at 7'1", but then failing at the next height, and again, until finally getting his steps and takeoff and velocity all right on the third attempt, at which point he flies into Olympic history.

That's what the market appears to have done, after failing badly on Tuesday, finally getting the commitment and the volume and the lack of bad economic data points and the short sellers all lined up in the proper order to propel the Dow back over the 10,000 bar, taking the antecedent indices along for the joyful ride.

With the level of short interest in the marketplace, there's no doubt that the push higher in the final minutes of trading on Monday continued into Tuesday on the backs of the shorts, who, like it or not, have been having their way for the past two months running. Anybody getting squeezed here was either in too late or was already well in the money and made profits when they covered their bets. Worse yet, many of the same players who profited today on the upticks were the same people making hay on the way down. It's just the way Wall Street works these days, now that the buy and hold investment strategy (the one which our fathers and grandfathers used to make money slowly and honorably) have been relegated to the dustbin of market history in favor of "quant" trading and electronic push-button charting and graphing which the investment houses are now all shoving down our throats.

Sure, you can trade right from your iphone, computer or other electronic instrument, as though it's a race to see who squeeze the last few pennies on execution, but is that any way to treat your money? Not really, though the masters of the universe running the funds and brokerages are generally using OPM (other people's money), so who cares? And that's why today's rally pushed higher and higher. The money masters flicked the switch at the open in the US, abruptly turning around all of the European markets - which were suffering severe declines until late in their respective trading days - and sending US stocks soaring.

One can only be amused by the cheerleading nature of the financial press, despite mountains of data that not only suggest, but verify, that the "recovery" was something of a chimera, and that global markets are still fundamentally unsound. Reading a headline like, "European bank stress tests and U.S. retail sales lift the Dow" gives one reason to probe deeper, as we come to find out that the stress tests to be performed on European banks haven't actually been started, but that a few details about what they may entail were released. Also, we find out that the esteemed group known as the International Council of Shopping Centers reported same store sales in the ICSC-Goldman Sachs (hmm, those guys again) weekly index, which is "constructed using sales-weighted geometric average growth rates to preserve long-term consistency and is statistically benchmarked to a broad-based monthly retail industry sales aggregate" (in other words, it's bull-$^%#), was up 3.9% year-over-year, the best level since May.

Well, that being only two months ago, why did the market go straight down then? Also, one may recall that retail sakes a year ago were pretty dismal, so, being up nearly 4% is not even back to what anyone would consider "good," though it apparently works for the fraudsters and con men who populate the equity trading markets.

And, by the way, that ICSC-Goldman Sachs index excludes restaurants and vehicle sales, which, unless you have consumers who neither eat nor drive, seems to be an important element in tracking retail sales performance. They have plenty of other modifiers with which they can interpret the data seemingly any way they like, such as the "Piser Method, which was popular in the early 1930s." I guess they tried lying to people back in the Great Depression, too, and we all know how well that worked out.

One should not overlook - though everybody trading stocks apparently did today - that vacancies at large malls in the top 80 U.S. markets rose to 9 percent in the second quarter and open-air center is now at 10.9%, that data coming from the same web site as the cheery same-store sales index.

So, the market cleared the bar of 10,000, but only until maybe tomorrow, when initial unemployment claims for the most recent week are released. Maybe the government can fudge those numbers a bit, as they've been downright depressing lately. Of course, this rally could go on for another few weeks, especially since earnings begin flowing to the street in short order, and, of course, options expire on Friday of next week. Getting the picture yet?

The real kicker to the whole "rally" story is what happened to Family Dollar (FDO) after it released its earning report. Quarterly profit jumped 19%, but earnings guidance disappointed as the CEO said consumers remained wary. No surprise there, but the stock lost 8% on the day, down 3.18 to 36.26. And you thought retailers were doing well.

Dow 10,018.28, +274.66 (2.82%)
NASDAQ 2,159.47, +65.59 (3.13%)
S&P 500 1,060.27, +32.21 (3.13%)
NYSE Composite 6,685.78, +199.66 (3.08%)

Internals told a mixed story. Advancers eviscerated decliners, 5351-1212, but new lows led new highs, 205-121. Volume was at average levels for the second straight session, another indication that this was more a relief rally or a knee-jerk reaction to oversold conditions, or a combination with short-covering mixed in for good measure.

NASDAQ Volume 2,190,606,000
NYSE Volume 5,861,473,500

Crude oil for August delivery rose $2.06, after falling for six consecutive sessions, to $74.07. Gold snapped back to life, gaining $3.80, to $1,198.60, with silver adding 15 cents, to close at $17.98.

Considering that financial and energy stocks (including, notoriously, BP) - the two most beaten down groups over the past few weeks were the rally leaders, one shouldn't put too much trust in this one-day wonder rally, as it appears to be contain more bark than bite, more reflection than reality, and no fundamentally good reason to have happened at all except for a one-day dearth of economic reporting.

Tuesday, July 6, 2010

The Rally That Wasn't

Nothing like a three-day weekend to revitalize the spirits of bullish investors, thus, the markets opened in the US on a strongly positive note the day after Independence Day festivities expired.

The Dow rocketed ahead 172 points in early going, but the high of the day was reached just moments after ISM services were reported lower for June, down to 53.8, after a reading of 55.4 for May. The market's reaction to the economic data was the opposite of what one would have expected, but it was fleeting, with the markets beginning a serious day-long downturn less than an hour into the session.

By 2:00 pm all the of indices had given up their gains, with the NASDAQ trading in the red the rest of the way into the close. Stocks finished mixed, which, along with the strong open and sloppy finish, are tell-tale chart patterns of bear markets. Only a final push - likely the result of short-covering - kept the markets from ending the session fully in the red.

With nearly all of the economic data over the past three to four weeks being on the weak side, there's an abundance of anxiety over upcoming corporate earning reports, which are expected to be strong enough to pull stocks out of their prolonged slump, which has persisted since the start of May.

Alcoa (AA) will officially kick things off on Monday, July 12, but investors aren't currently inclined to play much of a waiting game. The consistent mood has been, "sell now, ask questions later," as stocks have been beset by doubt and uncertainty in global markets.

Dow 9,743.62, +57.14 (0.59%)
NASDAQ 2,093.88, +2.09 (0.10%)
S&P 500 1,028.06, +5.48 (0.54%)
NYSE Composite 6,486.12, +51.31 (0.80%)

While today's headline numbers look good on the surface, a peek beneath the hood reveals the extent of the damage. Declining issues outpaced advancers once again, 3626-2884. New lows continued to dominate new highs, 304-122. Volume was average.

NASDAQ Volume 2,170,274,250
NYSE Volume 5,480,022,000

Surely, some will take comfort in the fact that the string of seven consecutive days on the downside has been broken, though many more will point to the manner in which the streak was ended as being servile and cynical.

Commodities also evidenced signs of strain. Oil dipped to $71.98, down 16 cents, while gold fell another $12.60, at $1,194.80. Silver, perhaps as people appreciate how undervalued it has become in terms of gold, gained smartly, up 14 cents, to $17.83.

It's a short week for trading, but an important one, to see whether traders can hold it together until earnings reports come riding to the rescue. Even that's a dodgy proposition, with so much uncertainty in so many corners.

Friday, July 2, 2010

No Conviction After Jobs Report

Although highly-anticipated, the June non-farm payroll report landed upon Wall Street with less than a thud, but hardly more than a whimper.

The BLS reported a loss of 125,000 jobs across America during the month, though the overwhelming bulk of the losses were temporary Census jobs - 225,000 in all - while the private sector gained a reported 85,000 new hires. The remainder - 15,000 - were attributed to added temporary positions in the private economy.

While that number was not as bad as feared, it still was not good enough to lift Wall Street's dour spirits. A half-hour into the trading session, another dose of reality struck, sending stocks to their lows of the day by 1:00 pm. May factory orders declined by 1.4%, reversing 9 straight months of gains. Full Report [PDF]

Stocks quietly ended one of the worst weeks in a year which has seen stock prices and indices improve significantly off the bottoms reached in March, 2009, but worries persist that the recovery has lost its footing and the global economy is beginning to drift back towards a prolonged period of either slow growth or another recession.

The major indices recovered during the afternoon, briefly registering positive numbers for the day, but a bout of late selling sent the Dow and other indices to their seventh straight down day and fresh closing lows. Each of the major averages have settled well below their 200-day moving averages, a definitive signal of a turn in fortune for the economy.

Dow 9,686.48, -46.05 (0.47%)
NASDAQ 2,091.79, -9.57 (0.46%)
S&P 500 1,022.58, -4.79 (0.47%)
NYSE Composite 6,434.81, -27.22 (0.42%)

Decliners beat down advancers once again, 3909-2534. New lows exceeded new highs for the fourth straight session, 248-95. Volume was extremely light, owing not only to an unwillingness to institute new positions, but also to the upcoming Independence Day holiday.

NASDAQ Volume 1,647,075,750
NYSE Volume 4,676,019,500

Commodities didn't fare much better. Crude oil continued its descent, losing 81 cents, to $72.14. Just a week ago, oil was approaching $80 per barrel, but the supply-demand scenario has worsened considerably. Also, many hedge funds operating in the commodities space have unwound positions in order to raise cash. It's a fearful trade.

Gold was about the only gainer, rising $1.10, to $1,207.40, but it wasn't much of a bounce off the dramatic pull-back midweek. Silver lost another six cents, settling at $17.70.

The three-day Independence Day holiday could not have come at a better moment for stock traders, who need to clear their heads and develop strategies for dealing with a resumption of the financial crisis which - in reality - is now closing in on three years running.

While there are still bulls a-plenty, the argument between those who see another recession and more optimistic appraisals of just slow growth are more compelling. Hardly anyone can discern a silver lining within the seas of red data that was dumped upon the markets over the past three weeks.

The next major hurdle will be corporate second quarter earnings, which begin in earnest right after the break. It's almost certain that there will be an inordinate share of hits and misses and surprises on both sides of the ledger.

Until then, remember what the 4th of July is really all about: Independence. For a people and a nation.

Thursday, July 1, 2010

ISM Data, Home Sales Rattle Markets: Deflation Clearly Evident

The relentless slide in the markets continued on Thursday as the series of data releases evidencing poor economic performance across the entire global swath of markets added even more dour numbers.

Prior to the opening bell, the government-affiliated PMI for China fell to 52.1 in June from 53.9 in May and 55.7 in April, and the HSBC China Manufacturing PMI fell to 50.4 in June from 52.7 in May. HSBC reports their figure the lowest in a year, even though readings over 50 do indicate expansion.

First time unemployment claims came in at 472,000, a rise above the prior week's revised reading of 459,000 new claimants.

Once markets were open for trading, matters turned even worse when the US ISM Index dropped to 52.6 in June from 59.7 in May and pending home sales registered a 30% decline month-over-month.

Revealing in the ISM data was the 20.5% decline in prices. Overall, production slipped 5.2% and new orders were off 7.2%.

Much of the decline in housing starts was credited to the end of the government's tax credit on home purchases in April, but the 30% decline was more than twice what was expected, sending the index to an all-time low of 77.6 from a reading of 110.9 in April. The index is also is 15.9% below the May 2009 figure.

Stocks plunged when that disastrous duo came off the news wires, with the Dow quickly plummeting to its intra-day low of 9,621.89, with other indices following the path lower.

Markets tore through all levels of support, but regained composure midday and closed with relatively minor losses.

But serious technical damage had been done this day, as in days past. Concern over the shaky health of the US economy continued to dog investors at every turn and tomorrow's release of non-farms payroll from June hasn't offered much hope, though many are wondering whether or not the market is seriously oversold and the impact of the employment data already factored into prices.

More than likely, that is not the case, but rather the market was guided by insiders on the short side of many trades, covering today and re-instituting positions in anticipation of a tepid report before the beginning of Friday's trade. while that may seem cynical to some, it's how the market has been running for some time. It's a big boy's game and small investors do not stand a chance.

Unless, by some miracle of accounting, the government shows 50,000 or more private sector jobs created over the month just past, the markets are on course for one of their worst weeks in quite some time.

Dow 9,732.53, -41.49 (0.42%)
NASDAQ 2,101.36, -7.88 (0.37%)
S&P 500 1,027.37, -3.34 (0.32%)
NYSE Composite 6,462.03, -7.62 (0.12%)

Giving more credence to the bearish camp, decliners outstripped advancers by an unhealthy margin, 4052-2496, and new lows ramped past new highs, 439-101, the third straight day in which the lows have buried the highs and the largest margin of the three. Volume was also very heavy, the best showing of the week.

NASDAQ Volume 2,678,066,750
NYSE Volume 7,533,900,500

Today's sudden decline caused liquidation and winding down of many trades, particularly in the highly-hedged commodity arena. Oil saw its worst price decline in at least three months, losing $2.68, to $72.95. Gold was completely devastated, dropping $39.00, to $1,206.30 and even further - below $1200 - after the NY close. Silver also disappointed, dropping 91 cents (4.88%), to $17.76. Prices for the precious metals fell to levels not seen in over a month.

Continued weakness in global markets continue to stir fears of widening deflationary trends, particularly worrisome to those who carry heavy debt burdens, such as almost all government entities, hedge funds, banks and other financial institutions.

Global deflation, begun in earnest in August 2007, continues to gain momentum and shake existing financial infrastruture.