Rally Fades After Euro Rift is Exposed; Prepare for Third Quarter Earnings Bloodbath

US markets for equities and commodities have been held captive for the better part of the past three years - by high frequency traders, insiders with more knowledge (and money) than the general public, uninterrupted meddling by the PPT or other quasi-government agencies, but mostly, for the past nine to twelve months, by news from the Euro-zone.

It seems like every day there is a different story coming out of Europe concerning the debts of various nations and how the ECB, EIB, EFSF or any of a multitude of alphabet-soup acronyms react and intend to dispose of or attempt to solve the problem of the day. Today was no different as a late-session story from the Financial Times killed off a perfectly good short-covering, end of month window dressing rally inspired by absolutely nothing.

Stocks had been rolling along after a massive gap-up at the open, with the Dow ahead by as many as 325 points, but everything did an abrupt about-face when news erupted from Europe around 3:00 pm EDT over a rift between the nations aligned to bail out Greece - again.

According to the Wall Street Journal's story:

Stocks pared gains in the final trading hour after the Financial Times reported a split has opened in the eurozone over the terms of Greece's second bailout package. As many as seven of the bloc's 17 members are arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, the FT said, citing senior European officials.

That was enough to finish off all the naked enthusiasm for the day and send stocks reeling into reverse. Though the averages finished the day with healthy gains, the froth at the top - and middle - were blown off by one story concerning something everybody already knows is a financial disaster, the continuing struggle over whether Greece should be allowed to fail or, by keeping it afloat, potentially take down the entire EU and maybe the rest of the global economy with it. The central banking powers and politicians around the globe are about at wit's end over the crisis in Europe, and are seemingly capable of saying or doing just about anything to stave off the eventual collapse of the Euro as a viable currency.

Sadly, for them and for the rest of us, eventualities do occur despite the best efforts of bright people to change the course of reality. It's so obvious to everyone now that Greece has to go, and soon, and they will take down untold numbers of European-based banks and spread the default contagion far and wide. Welcome to the 2008 redux.

For those who make a living trading, this environment is conducive to massive profits if one is nimble, smart and engaged, though at the end of the day all the swaps, hedges and protection aren't going to matter one whit when the financial tsunami crests upon first Greece's pristine shores and continues along the Mediterranean to Italy, Spain and Portugal. Once it races through the Straits of Gibraltar, all nations will be at risk, though the most isolated may be the best-insured. Countries out of the way, like Russia, India, Indonesia and Canada, may be spared the brunt of the blows, though general commerce will be affected globally.

It's coming. Everybody knows it. Most are in denial. That's how we get miracle rallies out of the blue and smashing declines on real news.

What to watch for are waves of large bankruptcies, like that of Saab, recently, sure to be followed by smaller suppliers and next by maybe a Chrysler or General Motors, which has traded below its IPO price for a solid six months after being bailout out by the US taxpayer. Nobody is buying new cars, and they're especially steering clear of GM (aka Government Motors) models. We are in the final stages of financial collapse, the first wave coming in 2008 and truncated by massive capital injections by the Federal Reserve, other central banks and governments from Paris to Beijing.

The financial paradigm of debt-issued money being created out of thin air, fractional reserve banking and crony capitalism has been broken and will soon find itself in complete and utter chaos. Events such as today's turnaround on Wall Street serve as apt reminders that the system is broken beyond human repair. It will take an act of God or an invasion from outer space to fix the mess and neither of those potentialities are on the horizon.

Adding insult to injury, analyst Meredith Whitney cut her third quarter earnings estimates on Goldman Sachs and Morgan Stanley late in the day. Whitney, a highly-respected banking analyst, cut Goldman Sachs (GS) from 3.39 per share to a mere 31 cents, a 90% haircut. Morgan Stanley (MS) was cut from 53 cents to 28, so it would be best to be prepared for a third quarter earnings bloodbath, not only for banking stocks, but for a host of other well-known names. Results from the previous quarter and year-ago will be hard to match for many firms, with the 4th quarter looking even more devilish.

Dow 11,190.69, +146.83 (1.33%)
NASDAQ 2,546.83, +30.14 (1.20%)
S&P 500 1,175.38, +12.43 (1.07%)
NYSE Composite 7,043.12, +102.31 (1.47%)
NASDAQ Volume 2,109,385,500
NYSE Volume 5,515,045,000
Combined NYSE & NASDAQ Advance - Decline: 5195-1451
Combined NYSE & NASDAQ New highs - New lows: 37-102
WTI crude oil: 84.45, +4.21
Gold: 1,652.50, +57.70
Silver: 31.54, +1.56

Stocks Causing a Boom, or a Mirage?

If you're invested in stocks, you'll be happy to know that the Dow recorded its seventh straight gain today. It's been an incredible run from the last day of January through the first six trading days of February, with the most-watched stock index up a whopping 410 points over the seven-session run and up more than 2200 points since this leg of the rally began on September 1, 2010. That's a nifty 22% gain in just over five months - a very neat trick.

Stocks in general have been a great place to be for the last 23 months, since the bottom on March 9 2009, with the major averages all up more than 80%.

Should one argue with such success? Maybe not. Maybe Ben Bernanke knows exactly what he's doing by continuously inflating the money supply, even though his critics argue that he's causing severe inflation and a bubble in commodities or that his practices will eventually implode in a hyperinflationary event that will kill the US dollar.

So far, the commodity trade has been profitable, and it may be nearing bubble status, though it seems to have calmed recently. The long term effects of Bernanke's runaway money-printing policy will not be evident for many more months, since he's planning on continued bond repurchases (his preferred method of handing out the gelt) through June of this year.

Before that, we'll have great gnashing of teeth and showing of fangs by aroused congressmen, mostly of the Republican variety, and a renewed debate over raising the debt limit to something beyond $15 trillion. The show on the hill will no doubt be one for the ages, but in the end will likely amount to little more than theatrics, of which the congress is highly skilled. Many in the chambers of our two legislative branches could have just as easily made themselves famous in Hollywood or Broadway. Arguably, the path to stardom and the ultimate pay scale is much better in Washington, however.

One cannot argue with the stock market performance, however. Whatever your political stripes or economic theory, the gains have been potent and powerful. Whether they will last, once the Fed pulls the plug and stops its endless printing regime, is open to debate.

Dow 12,233.15, +71.52 (0.59%)
NASDAQ 2,797.05, +13.06 (0.47%)
S&P 500 1,324.57, +5.52 (0.42%)
NYSE Composite 8,379.85, +43.21 (0.52%)

As expected, advancing issues soared past decliners, 4978-2538. NASDAQ New highs: 168; new lows: 19. NYSE new highs: 266; new lows: 11. Volume was very low again.

NASDAQ Volume 1,816,377,500
NYSE Volume 4,428,776,000

Commodities piqued some interest today on both sides of the ledger. Crude oil was down 54 cents, to $86.94, continuing a trend. Gold gained $15.90, to $1,364.10, while silver headed again toward recent highs, up 93 cents, to $30.27.

Meredith Whitney has drawn the ire of legislators on Capitol Hill for her call for a Muni bond crash.

Ms. Meredith see looming shortfalls in state budgets fomenting failure in a slew of public works projects, ending in defaulted bond offerings. Others feel there's more to it - like unfunded future liabilities - and that many states face an uphill battle, though their fates could be relieved by a robust economy.

We bring you both Meredith Whitney and James Pethokoukis in the very same video:

All Major Indices At YTD Highs

Each of the major indices - the Dow Jones Industrials, Dow Jones Transports, S&P 500, NASDAQ and NYSE Composite closed today at highs for the year. For all of the indices, these are new 52-week highs as well, as the markets continue to recover from the financial meltdown of last fall.

Of particular interest to traders were the gains on the S&P and Dow Jones Transports - especially the latter, which confirmed new highs on the Industrials, to the delight of the Dow theorists. The S&P closed above the magical 1100 mark, which for many has been viewed as an impenetrable line of resistance. The S&P had failed in three prior attempts to close above that figure.

Stocks were once again buoyed by what's become known as the "risk trade", playing the weak dollar, which works in inverse relationship to stocks. The buck was bashed again; stocks flew. It's that simple.

There were a couple of hiccups which were worth noting. Around 12:00 noon, when Fed Chairman Ben Bernanke's remarks to the Economic Club of New York were released, stocks took a bit of a nosedive on the chairman's comment that the Fed had tools available to promote the US dollar, and again, right after 3:00 pm, when Meredith Whitney announced on CNBC hat she hasn't been "this bearish in a year," and viewed stocks as overvalued, with prices unrelated to fundamentals. Both times the markets dipped, then quickly recovered, but it may be notable that the indices did close off their highs for the day, with some serious tape-painting occurring at right before the final bell. In the case of the DJ Transports, the index finished the day at 1046.50, just a point above the previous high (October 20, 4055.11), hardly a ringing endorsement.

While nobody can deny anything the Fed chairman said, nor, for that matter, Whitney's views on the market, the trade is still based on a fundamentally flawed equation: that of a cheaper dollar making stocks worth more. The disconnect between a cheaper dollar and rising stocks is alarming because, while the lower dollar makes US exports more affordable overseas, it also has the relative effect of higher import prices which will no doubt negatively affect a working population that continues to see its standard of living in decline - again, one of the effects of the drooping dollar.

So, it's entirely possible that the Fed can be right, meredith Whitney can be right, but stocks will continue to go higher regardless, all due to the inverse US dollar - US equities trade.

With a number of key economic reports due out tomorrow before the opening bell, including PPI, TIC outflows and capacity utilization, trader's hope is that the numbers are overall negative toward the US economy, because that would once again slam the greenback and make stocks move higher. It's one of the most perverse trades ever seen, though after the financial implosion of 2008 and the Madoff rip-off, anything that works is simply tolerated and played until it no longer works.

Dow 10,406.96, +136.49 (1.33%)
NASDAQ 2,197.85, +29.97 (1.38%)
S&P 500 1,109.30, +15.82 (1.45%)
NYSE Composite 7,237.10, +117.21 (1.65%

Advancing issues, as expected, far outdistanced decliners, 5156-1410. New highs pounded new lows, 688-96. Volume, however, was again on the anemic side.

NYSE Volume 5,300,401,500
NASDAQ Volume 2,050,422,375

Commodities also took advantage of the weaker greenback. Oil gained $2.55, to $78.90. Gold shot to new records, up $22.70, to $1,139.40, and silver finally took off, adding $1.03, to $18.41, a record close for 2009.

It Was Another Sucker Rally

Answering the question posed on Monday, the suckers are about to be reeled in.

After Meredith Whitney singlehandedly boosted the Dow by 185 points - the best performance in 6 weeks - with her call for an ever-higher, ever-growing Goldman Sachs, Tuesday's follow-through was nothing more than a gaping, loud yawn which could be heard booming down the canyons of Wall Street all the way to the beaches at Del Mar.

Action was spotty and choppy as the indices see-sawed across the break-even line. Eventually, some brave bulls hung in until the final bell, but the sentiment was far from universal. In fact, Goldman Sachs, which reported better-than-expected earnings for the second quarter, and was up 7 points Monday, finished the day up a very modest 22 cents.

Dow 8,359.49, +27.81 (0.33%)
Nasdaq 1,799.73, +6.52 (0.36%)
S&P 500 905.84, +4.79 (0.53%)
NYSE Composite 5,805.58, +44.21 (0.77%)

Although advances were broad-based with winners getting past losers, 4054-2274, new lows retained their edge over new highs, 59-56, and volume was pretty much confined to the boys at Goldman and JP Morgan plus a few hedge funds in New Canaan, CT. Everyone else, it seems, is where they should be: on vacation.

NYSE Volume 978,933,000
Nasdaq Volume 1,890,954,000

On a happier note, Bernie Madoff began serving his 150-year prison sentence at the Butner Federal Correctional Complex, in Durham, North Carolina, today. Bernie will be in good company. The prison also houses John Rigas, the Aldephia Communications scoundrel among other tax cheats, forgers and scammers. I case you want to check on Bernie's well-being, he can be found under prison number 61727-054, at the federal prison system's web site.

Commodity traders apparently aren't sold on either recovery or recession, as prices stalled out on Tuesday. Oil fell 17 cents, to $59.52, gold gained 30 cents, to $922.80, while silver tacked on 7 cents, to $12.86. Most other commodities were traded within small ranges.

The Bureau of Labor statistics released the Producer Price Index for June, showing a 1.8% seasonally-adjusted gain over May, which is a little bit misleading since the finished goods prices declined 4.6% over the past year. While the 1.6% gain in one month may be alarming to some, most of the veterans on Wall Street realize we're in a bit of deflation, so the number didn't engender more "inflation" talk.

After the close, Yum Brands (YUM) and Intel (INTC) both issued 2nd quarter results that beat the street. The rally could have been merely taking a breather, though investors may also be getting pickier with earnings increases slim.