Market Response to Fed Moves More Worrisome Than Reassuring

It's funny how everything seems to work out just as planned, but markets respond in their own unusual ways.

Such was the case today, as the FOMC announced no substantive changes to their ZIRP program and extended "operation twist," designed to spur the economy by having the Fed buy up the long end of the yield curve.

Memo to Bernanke: It ain't working.

All the tricks and ploys the central bankers have up their collective sleeves have now been tried and proven to have failed. Massive injections of liquidity may have temporarily bolstered the balance sheets of some of the world's largest insolvent banks - both here in the US and in Europe - but the one proven method of clearing out bad debt that hasn't been tried - default, repudiation, bankruptcy and restructuring - is the only way the world economy is ever going to get a solid kick-start.

The Fed and its counterparts in Europe, Japan and China seem to believe they can somehow suspend rules of economics and mathematical certainty. They are wrong, and continue to be proven so every day the global economy continues to carouse through its now nearly four-year-old funk.

The action on the stock market today can best be described in horse racing terms: it was what handicappers like to call a "Z." It's when a horse starts slow, rallies in the middle of the race and then fades down the stretch to the wire. Sometimes, it's a sign that the horse may do well in a subsequent race; usually, it means little, other than the horse was ridden badly or suffers from a lack of stamina.

That analogy could easily be applied to the stock market. It has been "ridden badly" by all the desperate attempts to justify prices and it sure looks like it has been running on empty for some time now.

Today's response to the policy decision to keep rates at or near zero and the Fed's tepid reliance on the "twist" program that only produces marginal support for the economy if any at all, is another shining example of the futility of central baking, government overspending and general malaise. Now, even the cheaters, swindlers and fraudsters on Wall Street aren't happy.

Serves them all right, since most of them should have been serving long prison terms by now. Well, maybe there's hope. After all, the price of gas at the pump keeps going down nearly every day. If nothing else, at least it will be cheaper to take the car out when it's time to head for the hills.

Dow 12,824.09, -13.24 (0.10%)
NASDAQ 2,930.45, +0.69 (0.02%)
S&P 500 1,355.70, -2.28 (0.17%)
NYSE Composite 7,747.91, -18.35 (0.24%)
NASDAQ Volume 1,477,882,125
NYSE Volume 3,637,796,250
Combined NYSE & NASDAQ Advance - Decline: 2639-2903
Combined NYSE & NASDAQ New highs - New lows: 156-27
WTI crude oil: 81.80, -2.23
Gold: 1,615.80, -7.40
Silver: 28.39, +0.02

Market Crash Alert... Oops, Too Late, Dow Drops 391 Points

Editor's note: Switching over to first person singular tense for today, as it seems to work when I'm happy and the market is not. Some may be confused as to why I'd be happy over a market crash. That will be explained below.

The Markets

Today was another one of those doozies that come along... well, about once a week these days and I really wanted to issue a crash alert yesterday after the close, but didn't, even though I was alarmed over the number of new lows in relation to new highs. Anybody who reads this blog on a semi-regular basis (that's you, Dan K.) would know that the new lows - new highs is my favorite - and highly reliable - sentiment and direction indicator and it was flashing red at the end of the day on Wednesday.

Sure enough, Thursday turned into an all-out rout for equities on significantly higher volume, to say nothing of what happened to gold and silver (well, you can't have everything). Asian markets started the ball rolling downhill, with losses between 2 and 4%, then Europe kicked in with average losses of about 4.5% on the various exchanges.. The US declines were tempered by the usual late-day rally, in this case taking the Dow up about 130 points off the lows of the day, set at about 3:20 pm EDT.

The catalysts for the sell-off were various, but by no means, exclusive. Most market commentaries are blaming the Fed for their squeamish "Operation Twist" maneuver, which, upon further inspection, is a worse program than originally thought when we noticed this statement from yesterday's FOMC release:

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

The Fed is becoming the buyer of last resort for toxic and other MBS, the Wall Street concoctions which started the whole financial contagion back in 2007. We wish them well with their purchases, especially since housing is about to embark on another 10-15% price decline over the next year to two years. The conditions for residential real estate have not changed much materially in three years, and, despite some cheerleading headlines, prices continue to slide and will until the entire mess is wiped from the books of our favorite zombie banks, which, if the Fed and the banks have their ways, will be never.

The more telling stories came out of China and Europe. China's PMI (Purchasing Managers Index) for the month was 49.4, down from 49.9 in August. In Europe, the PMI dropped to its weakest level since July 2009 with a reading of 50.8. Anything under 50 indicates contraction, so the Chinese are already moderately contracting (read: recession), while Europe is right on the cusp. Their PMI's are at levels very similar to those in the US.

Speaking of the banks, the biggest of them, the TBTF types, took more body blows on the day. Our personal favorite, Bank of America (BAC) sold down to 6.04 at the close, making Warren Buffett's $5 billion investment look pretty stupid, along with the warrants to buy to up 750,000 shares for $7.14. Mr. Buffett used to be one of the wisest investors of all time, but after investing $5 billion in Goldman Sachs - also with similar underwater warrants - and now BAC, he seems to have lost the Midas touch. Of course, Mr. Buffett normally makes better investments than the ones he has been forced into by President Obama.

So, stocks are down big again, and closing in on bear market territory, and the future looks pretty grim. Those of you still putting your money into a retirement fund or IRA, having not heeded my advice from August of 2007 (you can check) when I advised to cash out, take the penalty hit and move on, are probably looking at a 20% loss over the past two months. That is more than the usual early withdrawal penalty, so, sure, you made some dough in 2009 and 2010, but you're about to be giving it back now.

There seems to be little left for stocks to do but go down, so long as the following conditions exist (see if you can find a positive catalyst in this list):

• US banks have been recapitalized since the collapse of 2008, but are still not lending and still are holding scads of bad loans both on and off their books, plus some have significant exposure to Europe - notably Morgan Stanley (MS) which is set to implode on the first whiff of a Greek default.
• Unemployment is officially at 9.2% and heading higher, though the real number is somewhere North of 17% and there doesn't seem to be much of a rush in Congress to pass comprehensive tax reform or jobs program.
• Congress, the President and the leaders of most of the nations of the world are blithering idiots, a fact made worse by the level of inbreeding among the elite class of society.
• Foreclosures are on the rise again, and the glut of homes on the market remains at or near record high levels.
• There is oversupply in just about everything, from gas and oil to houses to computers to automobiles. Prices are being or will be forced down in nearly every consumer class.
• Banks are still reluctant to lend to anyone except the biggest and most secure individuals and companies, leaving little room for start-ups and small businesses, the real drivers of job growth.
• Europe has more problems than one can imagine. The Germans are upset over having to guarantee such a large portion of the Greek bailout, now on its second time to the trough, with Italy, Spain and Portugal waiting in the wings.
• The federal government will continue to run deficits of over a trillion dollars per year for at least two more years.
• State and local governments are just now catching up to the private sector, laying off thousands of employees a month.
• The US poverty rate is at an all time high.
• The number of people receiving food stamps is at an all time high and still rising.
• Did I mention the people in congress and the president are nitwits?

All of this sounds pretty gloomy, like a coming recession and a deflationary depression on the front burner, but there is hope, and that hope explains why I cheer when stocks look like they're about to crash (when they actually do crash, I really start to party!). The reason for this is pretty obvious from my perspective. I've been pretty much out of stocks since August of 2007, and completely out since the fall of 2009. There's too much risk involved for my simple tastes.

I'm also an independent businessman who fights red tape and higher prices constantly in order to keep the doors open. It's a struggle, but, as I say, it beats working for a living.

When the deflation and depression become full-blown, there's a very real possibility that the banksters and politicians will be eating each other's lunches, and I suspect there is some of that going on already. The public backlash against the kleptocracy of fractional reserve banking and ridiculous levels of taxation (like the 15% Social Security tax ponzi scheme) will be ferocious and many of the people in power will be knocked from their perches.

In a deflationary environment, cash and specialized skills will become more valuable. So too, gold and silver, we hope. Oil will - must - go lower, and along with it, gas, meaning more money in everyone's pocket to spend on other things than just basic transportation. Prices and wages will return to more manageable levels and business will eventually boom. It's all relative. If you're making $50,000 a year and you get cut down to $30,000, if prices have declined by 40% in general, it's a wash.

So, yes, I firmly believe that bank failures and a stock market crash will eventually result in a stronger, better-balanced economy, after a lot of pain and suffering, of course, but nothing good has ever come from anything earned without commensurate sacrifice.

(Oh, and I almost forgot, minus signs are easier to type than plus signs - no shift key required.)

Dow 10,733.83, -391.01 (3.51%)
NASDAQ 2,455.67, -82.52 (3.25%)
S&P 500 1,129.56, -37.20 (3.19%)
NYSE Composite 6,726.62, -254.71 (3.65%)
NASDAQ Volume 2,928,526,750
NYSE Volume 7,893,035,000
Combined NYSE & NASDAQ Advance - Decline: 928-5812
Combined NYSE & NASDAQ New highs - New Lows: 10-1385 (yes, you're reading that right)
WTI crude oil: 80.51, -5.41 (yippie!)
Gold: 1737.70, -45.20
Silver: 35.85, -3.84 (buying opportunity)

Quick note on silver. I believe it will go lower, possibly materially lower, as no true support for anything exists in a deflationary environment, of which we are clearly entering. Silver could crash all the way back to the mid-20s, depending on the severity of the overall global crash, so I would advise scaling in at this bargain point, and using dollar cost averaging to keep your basis reasonable. Eventually, silver should top out at well over $100, possibly even more, especially of much of the world finds the wisdom to return to real money.

Stocks Sell Off after Bernanke, Fed Disappoint Wall Street

The Markets

The entire process of Central Bank watching and anticipation is just so ludicrous, especially when a central bank such as the Federal Reserve overtly telegraphs most of their moves well in advance.

The secrecy, the waiting and then the immediate market reaction is simply so annoying, one would almost hope that the process and the players be done away with, once and for all. That sentiment is, in fact, what would happen under a monetary system operating under a gold standard. There would be little need for the Federal Reserve and much less attention paid to their arcane machinations. However, since the United States has been officially off a gold standard since 1971 and under the thumb of the debt-crazed Fed since 1913, hope for change any time soon is slim, though under a monetary breakdown, much like the one begun in 2008 that hasn't yet been resolved, possibilities exist.

After tow days of meeting, the FOMC of the Federal Reserve finally came out today, shortly after 2:00 pm EDT, with another one of their insipid statements, outlining their plans to "save the world" from financial ruin. while some on Wall Street hoped for a resumption of some kind of quantitative easing, what the Fed delivered was not unexpected and something of a disappointment to the money-hoarding bankster types populating lower Manhattan.

In additions to keeping the federal funds rate at ZERO, the Fed announced plans to sell $400 billion of its shorter-term Treasuries to buy longer-term Treasuries through June 2012 in a plan based on a failed 1960's plan known as "Operation Twist," the effect of which will be to bring down longer-dated interest rates. If successful, the program will flatten the yield curve, with short-term rates already well below historical norms, and longer term rates down, but with more room to decline. The economic effect ought to be limited or nearly invisible, which is what sent the Wall Street bears into selling mode after the announcement.

Stocks had hovered around the flat line in anticipation of the announcement and sold off sharply on strong volume afterwards and into the close. All of the major indices finished at or near their lows of the day all but wiping out the gains from last week's phantom, options-induced rally.

Stocks continue to be a very unsound and unsafe choice for investors.

The bond market reaction was swift and decisive, with two-and-three-year bill yields rising and longer-dated bonds, the 10-and-30-year maturities collapsing. The 10-year closed out the day with a yield of 1.85% and the 30-year at 3.01%.

Dow 11,124.84, -283.82 (2.49%)
NASDAQ 2,538.19, -52.05 (2.01%)
S&P 500 1,166.76, -35.33 (2.94%)
NYSE Composite 6,981.33, -236.19 (3.27%)
NASDAQ Volume 2,180,005,500
NYSE Volume 5,446,355,500
Combined NYSE & NASDAQ Advance - Decline: 1135-5427
Combined NYSE & NASDAQ New highs - New lows: 26-562 (OUCH!)
WTI crude oil: 84.76, -2.16
Gold: 1782.10, -22.70
Silver: 39.69, -0.05


A couple of items caught our attention today. One was an excellent summary of decades of manipulation in the price of gold by Chris Powell, Secretary/Treasurer, Gold Anti-Trust Action Committee (GATA) at the 18th CLSA Investors' Forum, Grand Hyatt Hotel in Hong Kong.

For pure emotion and unbridled rage that captures the pent-up feelings of millions of middle and lower-class Americans, nothing beats the Best of walstreetpro2 (greatest f---ing hits) - 3 of 3 Warning: the video cntains great amounts of vulgarity, adult language, truth about the US economy and the destruction of many consumer goods. All in all, a classic.