How dumb can investors be?

Watching the recent activity on the stock market - especially today - offers a glimpse into the mind of the investor. When the Fed released minutes from their last meeting, stocks, which were already down, again, as usual, as they should be - fell even further as investors didn't cozy up to the idea that the FOMC was not seriously considering cutting the federal funds rate.

Hello! Earth to investors! The Fed isn't going to cut rates at this juncture because that would only exacerbate the conditions which afflict this sick market. The Fed is not about to bail out people who lost money on derivatives, packaged sub-prime mortgages, stocks, mutual funds or any other financial instrument.

The idea that supposedly "smart" individuals trading stocks would wait to hear the official word from the Fed that they weren't about to apply essentially what amounts to a band-aid to the economy. The economy will fail or succeed without help from the Fed. It always does, despite the weight people put on the actions of the beloved Federal Reserve.

Plainly, the people working on Wall Street are overpaid mimicking morons who follow, sheep-like, every movement (or non-movement) of the Fed instead of focusing on fundamentals in the stocks they are trading. If it wasn't so sad, the attitude of traders these days would be laughable.

Dow 13,041.85 -280.28; NASDAQ 2,500.64 -60.61; S&P 500 1,432.36 -34.43; NYSE Composite 9,289.49 -239.44

The Dow lost nearly 100 points in just the last hour - after the release of the Fed minutes. It doesn't really matter when the market moves lower, it is simply enough to know that it will and that there's little, if anything, the Fed or anybody else can do about it. Conditions in the credit markets are so entirely warped and information so sketchy that nobody is really sure of how bad the damage is and how severe the fall of the economy will be.

Suffice it to say that when the market - that being made up of mostly clueless traders - is unsure, it will not perform well. The credit markets are of vital importance to businesses and consumers alike and they are in a condition of complete disarray. As I've said here before, a crash is almost a certainty, it's only the exact timing that isn't known.

For every advancing issue today, there were five that were declining in price. There were 58 stocks making new highs and 150 making new lows. The stage has been set for some time now. Shortly, probably after the Labor Day holiday - or maybe just before it - all of the actors will take their places and deliver a hammer blow to stocks, not just in the US, but worldwide. It's going to be a sobering situation.

Oil and gold declined by marginal amounts. Silver was unchanged at $11.92 per ounce. Commodities are now acting as a proxy for the economy. Lower prices mean slack demand and there's a trend forming, though the oil markets, in particular, are still very much detached from reality. When oil falls, it will be a large drop. We could see oil prices down to levels that may actually stimulate the economy instead of acting as a hidden tax. Gas at the pump may be below $2.50 per gallon by Christmas, if not sooner.

The carnage on Wall Street is magnificent and we're just getting started. The next shoe could drop at any moment. Stay tuned and be nimble... and not stupid.

Blue Monday

The markets opened on a lower note and were pushed further into the red by another in a continuing series of bad reports from the housing sector, today's detailing a further decline in existing home sales and lower prices for existing homes.

The actual numbers have now become somewhat irrelevant.

Substantial Wealth and Riches Creation
The Path of Substantial Wealth and Riches: Your Parents' Influence on Your Finances
substantialincomes.com

Anybody with a pulse knows that the housing market has been fractured, though nobody really wants to admit to how badly it is broken and how serious the effect will be on the general economy.

Allow me to be the bearer of bad news. As bad as you think it might be, multiply that by 3 and you may come close. The coming recession will likely be the deepest and longest of the post-war era. Banks, mortgage finance companies, Wall Street brokerage houses, private equity managers the Federal Reserve and various elements of the federal government have unwittingly colluded in producing a near-catastrophic financial environment rivaled only by the crash of 1929 and the ensuing Great Depression.

Dow -56.74, 13,322.13; NASDAQ -15.44, 2,561.25; S&P -12.58, 1,466.79; NYSE Composite-78.11, 9,528.93

I cannot state with any more urgency than to say that the American banking and credit markets are in a liquidity crisis unmatched by anything most people under the age of 80 can remember.

A few points to ponder:

• The US equity (stock) markets were so close to a complete crash at various points over the previous three weeks that not only our own central bank - the Federal Reserve - had to intervene, but so too did the Bank of Japan and the European Central Bank.


• Countywide Financial (CFC), the nation's largest mortgage issuer, faced a liquidity crisis so severe that they were within days of declaring insolvency. Only by tapping a monstrous $11.5 billion line of credit and receiving interim funding of $2 billion from the Bank of America were they able to stave off complete catastrophe.


• Wells Fargo (WFC) had a two-day outage of their online banking and ATM machine network which the company blames on a "computer glitch." The real cause for this shutdown or closure of their banking operations may never be known.


• Citigroup and Bank of America, last week, requested and received an exemption from the Federal Reserve, allowing them to loan more money to their brokerage affiliates which were bleeding cash from bad mortgage loans and a meltdown in derivative positions.


• The price of gold sank $22 in one day as nervous financiers sold the metal in order to raise cash.


• The Federal Reserve lowered the discount rate - the rate at which member banks can borrow - 50 basis points, from 5.75% to 5.25% and also extended the repayment period from one day to 30 days. That window of liquidity opportunity will begin to close within 3 more weeks. At that point, Fed banks will be forced into a position of having either to borrow more or shut down some operations.


• A number of financial institutions - mostly hedge funds and mortgage financing interests - have already been shuttered due to a failure to meet ongoing obligations.

All the while, Congress and the president have been on vacation. There has been only cursory lip service paid to the situation, though anyone who understands finances, and especially debt, knows that the condition of the US economy is grave.

Volume on the NASDAQ today was 1,285,962,361 shares, the lowest figure of the year. Traders are actually afraid to commit to this market. We are approaching a condition of inertia and illiquid markets which could shut down much of the world economy.

Declining issues outdid advancers by a better-than 2-1 margin. There were 130 new lows to 109 new highs, numbers that reflect the serious shortage of both buyers and sellers in the market.

Oil futures continue to be completely detached from reality, gaining 88 cents to close at $71.97, a price that cannot be justified or supported at any juncture in the supply chain. Regular gas has been declining over recent weeks, an unprecedented event during the usually-busy summer driving season. The decline in gasoline prices is an indicator of the general welfare of the US economy. People are driving less - much less in some cases - reducing demand on a current oversupply.

Gold and silver declined by marginal amounts again as the commodity markets continue their slow price disintegration.

There are crossed signals coming from all manner of sources - economic, political, military - that the world is on the verge of a major upheaval event. If recent history - the past 200 years - is any kind of guide, our world, as we know it, is about to be shredded by a combination of various forces of oligarchies, secret societies, ill-conceived government actions and tyrants.

If you are not yet afraid, you should at least be concerned. If you are afraid, your fear has good reason to manifest itself.

Spinning bad news into good (and withholding the worst)

Headlines can be misleading.

Today's big news, courtesy of the AP, is a case in point:

Home Sales, Factory Orders Both Rise in Encouraging Signs for Economy

It's only half true, or maybe less. The part about factory orders is pretty much spot on. Companies spent freely in July. Of course, that was before credit woes hit Wall Street and Main Street like a sledgehammer in August.

As far as those new home sales figures are concerned, there's a real double edged sword in play. Sure new home sales were up 2.8% in July - from June, when they were down 4% - so, isn't that still a net loss?

Additionally, the headline writers took the more optimistic of views concerning housing. Sales of new homes are off 10.2% in 2007 versus 2006.

The bit about "Encouraging Signs for Economy" is nothing more than an editorial, which, in strict journalistic terms, is out of place and out of bounds.

A more realistic headline might have been, "Factory Orders Up, New Home Sales Remain Down as Investors Await August Data."

Dow 13,378.87 +142.99; NASDAQ 2,576.69 +34.99; S&P 500 1,479.37 +16.87; NYSE Composite 9,607.04 +128.42

The financial press is as guilty as the mainstream for spinning news stories to suit a political agenda. Nobody wants the economy to falter, just like we don't want more bloodshed in Iraq, but that doesn't give the AP or any other news outlet carte blanche to adjust the headlines. Facts are facts, and they should be reported as thus, without embellishment. If the AP wants to mold the psyche of the American public, maybe they ought to start up a blog, where the rules are less well-defined.

Nevertheless, putting the smiley face on the news did lift investor spirits somewhat on Friday. Those reckless enough to be buying stocks faced little resistance in the market. Sellers were all too happy to give up their shares at a premium as the market advanced. Volume on the the Big Board was downright anemic. Over on the NASDAQ it was just another sluggish session.

Meanwhile, signs that the worst may not yet be over for the nation's largest mortgage firm, Countrywide (CFC), continued, as traders sent shares lower by 1.02 to close at 21.00, on heavy volume. 60 million shares of the stock changed hands. Average volume for the equity is 25 million.

Advancing issues clobbered decliners by nearly a 3-1 margin. New lows continued to hold sway over new highs, however, 125-87, and that metric is troublesome for bulls.

A commodities shot up on the day as well. Oil caught a bid and rose $1.26 to $71.09. Gold gained $9.10, with silver tagging along with a 30 cent gain.

Forex Beginner's Resource Website
Forex Foreign Currency Exchange Trading Beginner's Resource Center.

forexforexforexforex.com

The commodity moves are foolhardy, just like today's stock market. Within weeks - if not days - these gains will be wiped away as the bad news in the credit sector dribbles out.

The Dow advanced just about 300 points for the week. Despite the impressive move, it should be noted that it was done on slim volume and the index is still more than 600 points below the highs reached in July.

There's a wall of worry to climb, and this market is just getting to the steep part.

Naturally, at 4:40 PM EDT, after the markets had already closed, came news that the Fed had bent their own rules to help member banks in the liquidity crisis.

According to the article, both Citigroup and Bank of America, earlier this week, requested and received an exemption allowing them to loan more money to their brokerage affiliates who were bleeding cash from bad mortgage loans.

Both the timing of the release of this information and the rule-breaking by the Fed and its members smell to high heaven. As usual, the American public is kept in the dark until after the fact. The liquidity crisis, as I've said over and over again, is the most serious financial situation the US has faced since the Great Depresssion.

Acting like pirates

Ahoy, maties! It's time investors shed the wool that's been pulled over their collective eyes and now covers most of their bodies, put on an eye-patch and begin swinging swords at stocks.

Today's rescue of Countrywide Financial by Bank of America failed to ignite the rally hounds on Wall Street. While the stock of Countrywide - which faced a serious bank run last week (see story) - gained in after-hours and pre-market trading, the $2 billion injected by BofA is actually nothing more than a thinly-veiled takeover move.

The "loan", which is, in reality, convertible preferred securities priced at 7.5% which can be converted into common stock at $18 a share. If exercised, that would give BofA a 17% stake in the company, but the nation's largest bank would be unable to sell those shares for a period of 18 months.

So, is BofA really thinking "takeover" as opposed to "bailout"? And why was Countrywide so eager to accept money at 7.5% when the Fed just lowered the discount rate to 5.25% and extended the loan period for member banks to from 24 hours to 30 days.

Countrywide obviously cannot access that Fed money, but the 2.25% spread between what BofA is loaning them and the discount rate is the cost of doing business these days.

With a borrowing cost of 7.5%, Countrywide will have to either charge customers somewhere upwards of 9% to customers in order to remain even marginally profitable or sell off a chunk of the company to a "rival" at a discount. It's not a pretty world Countrywide is looking at these days.

In a few words, they're doomed. The larger banks will take the better loans, offering lower rates than Countrywide, who will be forced into a position of sick sister, having to deal with jumbos, home equities, and lenders of less-than-impeccable quality.

This comes at a time when the screws have been tightened considerably already and Moody's is still considering whether or not to lower Countrywide's bond rating to junk status.

By mid-day the markets had turned to mush. Countrywide, up as much as 2.50 early on, was ahead less than 1 point. By 2:00, the earlier gains had all but disappeared, with Countrywide trading as low as 21.98, only 16 cents better than its previous close. The stock closed up a mere 20 cents, at 22.02.

Dow 13,235.88 -0.25; NASDAQ 2,541.70 -11.10; S&P 500 1,462.50 -1.57; NYSE Composite 9,478.62 +1.49

Surely, savvy investors weren't buying the we're out of the woods story being circulated by the banks, the Fed and various shills in the financial press.

All of which brings me to the pirate analogy. Investors, or at least people with an eye on not getting killed in this market, should be looking at short-selling or buying puts on vulnerable companies. Obviously, those in the financial sector are ripe for plunder, though some have already been slashed to pieces.

Like good pirates, traders should look for shifts in opportunities as conditions on the financial seas change. Companies with high debt levels and shaky balance sheets will be prone to suffer some of the more dire circumstances.

As events warrant, I'll be posting some of the better-looking short stories and puts plays right here. For the time being, I'm keeping a close eye on Wells Fargo (WFC), which suffered a two-day computer "glitch" over the weekend which pretty much shut down online operations.

In the aftermath of the 1929 stock market crash, various states and eventually the United States government ordered banks closed due to a liquidity crisis. At the time, they used the innocuous terminology of bank "holidays" to lessen the impact on the American psyche. Might Wells Fargo's "glitch" auger more such technology-related failures as a cover for systemic financial failure? Time will tell, but it's almost certain that soon, cash will again be king.

On the day, declining issues held a 5-4 edge over advancers with the bulk of the losers on the NASDAQ. There were 128 new lows and 79 new highs on lower-than-average volume. So much for volatility. People are afraid to trade in this environment and the risk that hordes of investors might cash out far outweigh the potential for a meaningful recovery in stock values.

Oil crept up 57 cents to $69.83, while gold lost 30 cents and silver added 7 cents. If a credit and cash crunch is upon us, an implosion in commodity prices may be just a warning shot of what lies ahead.

How sweet is it?

Investors, after taking somewhat of a pause the past few days, piled into stocks like they had no other place to spend their money. Of course, some of them just don't know any better. Some just follow the crowd. Others are desperate for gains and some just like gambling, and that's what this market has turned into - one big, fat, dumb casino.

Dow 13,236.13 +145.27; NASDAQ 2,552.80 +31.50; S&P 500 1,464.07 +16.95; NYSE Composite 9,477.13

Some readers may complain that I have been too negative concerning market realities, suggesting that the US economy is in good shape and that the government will save us from any economic calamity.

While the general economy is not yet a shambles, and the government will make various attempts to stave off meltdowns in the stock market, there are underlying circumstances which cannot be overlooked easily. The swooning housing and mortgage market are going to have serious consequences. Already today, the AP is reporting that more than 40,000 jobs have been lost in the mortgage industry in the past month. More than half of those have been announced in the past two weeks, and there are surely more to follow.

What will those 40,000 white-collar types do for work. Many are used to relatively high incomes and lifestyles, as the housing boom spoiled many of them and, like home buyers and house flippers, they thought the boom would never end.

Well, it has, and all of these people are up against a rising tide of debt. The mortgage industry layoffs alone will push the unemployment numbers higher next month and, be reminded, the mortgage meltdown is still in its early stages. The actual peak for repricing of 2/28 loans doesn't occur until March of 2008.

So, do you still think we're out of the woods and today's gains in stocks are a sign of more good things to come? Don't be fooled by the headlines and smiles on the faces of the likes of Maria Bartiromo and others in the financial press. Remember that these people are reporters, or in the case of the precious Ms. Bartiromo, nothing more than talking heads. Most don't have degrees in economics, but maybe in journalism. That and a willingness to tow company line will get you a job at CNBC or the forthcoming FOX Financial Network. They are not experts, though they do play them on TV.

Today's markets are merely a reflection of a temporary oversold position, not indicative of a rally formation. There is more trouble on the horizon, and you can bet that as soon as it becomes apparent, there will be a rush of selling. The Fed will have to step in and calm markets - oh, by the way, the Fed did add $2 billion in liquidity this morning - though their efforts can only easy pain temporarily, like putting a band-aid on a knife wound. It holds for a while, but soon, the bleeding overwhelms it.

But today was a day of bargain hunting. Advancing issues clobbered decliners by a 3-1 margin, but new lows continued to hold sway, 153-84, over new highs, though those numbers are nowhere near the extremities exhibited two weeks ago, at the height of the credit squeeze panic.

Oil was down again today, with futures for October delivery off 31 cents to $69.26. Since there have been no disruptions to supply, and demand is only moderate at best, paying a premium at this juncture could be a fool's game. By November, the price for a barrel of crude could be closer to $55 than $65 and gas in the US could average something along the lines of $2.40 per gallon. The world economy simply cannot sustain growth with energy prices dragging it down. The oil barons are beginning to awaken to a new reality.

There was some nibbling in the precious metals. Gold rose $2.50 to $668.70, while silver gained 6 cents to $11.73. Both may seem like bargains, but they have to work off the excessive selling from the past two weeks before making serious gains. If they continue to trend higher in the short term, latch on for a nice ride.

Behind the scenes there are major machinations going on at the Fed, the Treasury, in board rooms of central banks and even on Capitol Hill. We're not sure exactly what their plans are, but we can safely assume they will be based on alchemy and black magic rather than serious economic planning.

You do know that economics is taught in colleges as a liberal art, don't you?