Stocks Gain Amid Turmoil

There hasn't been much good news concerning the US economy of late, yet investors - or maybe the goodfellas at the PPT - saw fit to boost stocks over the course of a slow trading week.

Oil prices reached an all-time high; the internal, arcane, technical and highly-secret credit malaise has reached astonishing proportions; consumer spending is disappointing and capacity utilization is flat. Add to those list of ho-hums the bailout of Northern Rock, the U.K.'s fifth-largest mortgage lender, by the normally stoic Bank of England. The BofE will prop up Northern Rock with an undisclosed infusion of credit and capital as a "lender of last resort."

Dow 13,442.52 +17.64; NASDAQ 2,602.18 +1.12; S&P 500 1,484.25 +0.30; NYSE Composite 9,673.65 -4.47

While markets in Europe were roiled by the news, US markets barely skipped a beat on a very slow trading day. Stocks for the week experienced excellent gains in hopeful advance of a Fed rate cut when the FOMC meets on Tuesday. With expectations high and largely priced-in, anything short of a 50 basis point cut by the Fed in the Federal Funds rate - from 5.25 to 4.75 - will send markets reeling.

One look at a 5-year chart of the Dow (see right) will reveal that we may be looking at the final run of a very long bull market. The last rise, from 12,000 to 14,000 was spectacular, though interrupted by a serious hiccup in February, which should have served as notice that the end was in sight.

The recent volatility amid now slim trading markets indicates that the credit crisis fomented by sub-prime loans and packaged mortgage investments gone bust has spread throughout the economy and is still growing. A rate cut next week will only exacerbate the condition rather than heal it.

Nonetheless, advancing issues outpaced decliners by a 4-3 margin again today, though new lows retained their lead position over new highs, 224-137. This broken metric continues to indicate a fundamentally weak market, spurred higher by unwise speculation.

Oil fell back 99 cents after setting a record high price on Thursday,

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closing at a still-unsustainable $79.10. Gold was down a piddling 10 cents while silver gained 3 pennies. It truly was a day to stay home.

Looking ahead to next week, don't expect much action until the Fed release at 2:15 on Tuesday. After that, it's anybody's guess and highly dependent on what the Fed decides. The market and various analysts (who have shown time and again how wrong they can be) are predicting at least a 1/4-point cut by the Fed, though most would prefer 1/2-point. Either way, they are all wrong and a Fed cut, or worse, a series of them, will send the economy into an even deeper and longer tailspin. Count on it.

Credit Crunch Bail-Out

According the Mr. Practical at Minyanville, "World-wide central banks injected $383 billion in credit to the world’s banks just in August. That is just an amazing number. It is unprecedented."

Of course, Mr. Practical is right. World central banks are in a precarious position. All of this money sloshing around is likely to find some places to blow up, and the most likely places are in the US and Great Britain, where the excesses and risk-taking have been phenomenal.

What does this all mean? According to Mr. Practical (and I've noted this as well), the stock markets have seized up and are being kept afloat by the unprecedented infusions of capital from central banks, who may, when this all unravels, face one of two conditions: 1. their own bankruptcy (highly probable in the US), or 2. Ownership of vast portfolios of stocks (the end of free markets).

Neither of these conditions is desirable. Worth noting is yesterday's move by the Senate Finance Committee to raise the debt limit to nearly $10 trillion. So, maybe the federal government will buy up most of Wall Street's troubled stocks with debt, sell it to China and thus avert a bloody war by allowing foreigners to take over all US assets without firing a single shot. That's a very nifty strategy by our nitwit Congress and sly fox administration, though overtly treasonous. They should all be in jail.

Interestingly, today's outsize market gains were led by two of the most debt-ridden companies on the planet, General Motors (GM) and Countrywide Financial (CFC). GM was up 10% on news that UAW president, Ron Gettelfinger, agrees in principle to the creation of a multibillion-dollar health-care trust fund. Countrywide was up 13% on news of another round of emergency funding, to the tune of $12 billion. Neither the names of the creditors nor the terms of the loan were disclosed.

Dow 13,424.88 +133.23; NASDAQ 2,601.06 +8.99; S&P 500 1,483.95 +12.39; NYSE Composite 9,678.12 +79.39

Technology, located mostly in the NASDAQ, lagged the market badly as the Dow Jones Industrials led the way. As large as the gains may have seemed, the breath of the market was rather thin. Advancers held a 5-4 margin over declining issues. New lows continued to lead new highs, 207-155. The fundamentals of this market still are not positive despite a couple of solid sessions this week.

Keeping some perspective, oil was up only 18 cents, though it cracked a new all-time high, closing at $80.09. The gold rally has stalled for the time being, with the yellow stuff down $2.80 to $717.90. Silver eased 11 cents to $12.68. If you're looking to bet on the metals, silver is well undervalued in relation to cousin gold, though price pressures from manufacturers could have some say in keeping the price down for now. It's still a very solid hedge position at current levels and I wouldn't chide anyone buying at any price under $13.25.

It also should be pointed out that trading was light on major exchanges. Key events to keep in mind are tomorrow's nationwide stand down by the Air Command and Tuesday's Fed meeting. There may be major news on the political front stemming from tensions in the Middle East, which have reached a boiling point not only on Capitol Hill, but throughout the region.

No Truth and Fewer Consequences

The markets bounced around the flatline in a day which ended up being of little real consequence.

Dow 13,291.65 -16.74; NASDAQ 2,592.07 -5.40; S&P 500 1,471.56 +0.07; NYSE Composite 9,598.73 +1.12

Losing issues outnumbered winners by a 4-3 margin and new lows defeated new highs, 201-158. The song remains the same. The markets are weak and the trend is lower.

The real action was away from Wall Street, in the oil bourses and at various press conferences. First, oil jumped another $1.68 to $79.91 on - the usual suspect - supply concerns. It's gotten to be such a ridiculous song and dance that there really doesn't need to be a reason, only knowledge that the price is higher.

Oil companies are raking in obscene profits, sheiks and sultans are rolling in cash and the US dollar is crumbling. Without any semblance of leadership in Washington, consumers in the US, and to a degree, around the world, are being raped by higher prices for gas, home heating fuel, jet fuel and just about anything else that involves petroleum. It's a death spin of global magnitude which will eventually price everyone out and send economies everywhere into dizzying tailspins.

Couple high prices with the strained credit markets - now being soothed by Fed-speak and talks between Treasury Secretary Hank Paulson and heads of beleaguered finance companies such as Countrywide Financial - and you have a strangulation effect on the middle class and a morass at the center of global finance.

The remaining mortgage financiers are going to be bailed out by the government, as are a slew of undeserving homeowners who got into bad deals with no money down and could as well understand the terms of their loans as practice brain surgery. For those who have already hit the skids, too bad. It's a horrid solution to a real problem and quite unfair to many parties. One speculator was heard saying, "we have free markets only until there's a problem that needs the government."

Therein lies the rub. The real bailout is for banks, mortgage firms and credit card issuers. Homeowners and consumers will still be on the hook, only for a longer period and at a slightly lower interest rate. It's oligarchy at the extreme.

Gold and silver took a breather, both registering marginal losses. With the Yom Kippur holiday beginning, the next three trading days - through Monday - will experience a slowdown of activity.

Stay tuned. There are fireworks yet to come. The credit crisis hasn't fully blown out and oil prices haven't yet stopped rising. The world needs a savior. Is there one out there?

Another Injection, Please

To commemorate the 6th anniversary of one of America's worst man-made disasters, the Fed and friends decided to pump more capital into the strained and strangled US equity markets. How much? The NY Fed offered up $34.9 billion, but only $3.5 billions was actually accepted and put to use. $2.365 billion of that was mortgage backed.

Turned out that it was more than enough as the markets percolated higher on moderate volume - better than most of the past two weeks' sessions - and closed with healthy gains.

The Fed loves this stuff, and of course, we couldn't be seen as weak on the anniversary of the 9/11 bedlam. Chairman Bernanke gave a speech today and said nothing about lowering the key Federal Funds rate for which Wall Street has been clamoring.

With the FOMC meeting just a week away, the market expects the Fed to lower the rate from 5.25% to a flat 5 percent or even 4.75%. Market players and analysts might as well be whistling Dixie because the Fed sees no absolute reason to do so and probably won't.

Dow 13,308.39 +180.54; NASDAQ 2,597.47 +38.36; S&P 500 1,471.49 +19.79; NYSE Composite 9,597.61 +139.97

Advancing issues overleapt decliners by a 5-2 margin, though the enormous updraft in stocks failed to loosen the grip of new lows over new highs. There were 188 stocks hitting 52-week lows, as compared to just 127 new highs.

These internal figures suggest either that today's gains were mostly short-covering or illusory and that more technical damage has been done in the markets than a one-day wonder is going to erase.

Crude oil rose 74 cents to an all-time high of $78.23 after OPEC agreed to boost its crude output by half a million barrels a day. Apparently, an imminent increase in supply turns classical economy on its head in oil markets. Prices should go lower instead of higher on supply increases. This fully completes the separation from reality in the oil markets.

What was probably more important to oil traders was the further erosion of the US dollar, which hit an all-time low against the Euro. With that, gold shot up $8.90 to $721.10, with silver tagging along, up 14 cents to $12.84.

This is exactly what the Fed doesn't want. Further deterioration of the greenback, which lower rates will encourage, will send inflation through the roof.

So, the question for Ben Bernanke is, which would you prefer, inflation or recession? Most are betting that the Chairman will opt for inflation. We'll see how disciplined a man this capitalist really is in a week (Hint: he should not lower rates).

Market a fickle friend

Monday's market movements were more of the same, with a zig-zag pattern ending slightly on the up side for most of the indices. In particular, the Dow was up on the open, traded 80 points lower just before noon, slowly moved to the highs of the day after 3:00 and faded badly into the close.

One trader was heard to say, "this is like my wife. I never know when her mood will change." And so it is in this most fickle, direction-less market in recent memory. After being hammered lower mid-August, it's been sideways ever since.

Much of today's gain was likely the cause of covert manipulation, short covering or butt-saving, since, with volume so dismally low, the only people trading are Wall Street hot shots and hedge fund managers.

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Sooner or later they will run out of witless fools to buy stocks and the markets will dry up completely, much like those serving corporate credit. In some ways, the stock market has already becoming illiquid, especially for low-priced, low volume stocks.

The S&P came dangerously close to support, hitting a low of 1439, and that's precisely when the trade reversed course. The big money doesn't want a meltdown, even though world markets are dangerously close, and buyers stepped in today to avoid collapse. Major European markets all closed lower, with the credit squeeze becoming front page news in Great Britain as the Bank of England on Friday was forced to make statements similar to our own Fed's, that they would continue to supply liquidity.

Dow 13,127.85 +14.47; NASDAQ 2,559.11 -6.59; S&P 500 1,451.70 -1.85; NYSE Composite 9,457.64 -28.80

Market internals indicated more weakness as declining issues outpaced advancers by better than a 3-2 margin and new lows superseded new highs, 257-92.

Oil priced higher by 78 cents, to $77.49; gold continued its rally, up $2.50 to $712.20, though silver lost 6 cents to finish at $12.70.

The most significant piece of trading information probably came from watching Countrywide Financial (CFC) drop nearly another point on Monday after announcing 12,000 layoffs after the market closed on Friday. Investors are not buying the stock even though the company is making an attempt to reduce costs. Rather, there was widespread selling early on, with institutional holder, AXA, reducing its exposure dramatically. Essentially, Countrywide, the nation's largest mortgage lender, has so much downside risk, that even massive layoffs (25% of their workforce) could not turn it around. The company has so many non-performing loans on its books and no place to sell their new originations that it could face liquidation itself in coming days.

In the spirit of full disclosure, I have a short position via January 20 put options on the stock. I am comfortable that the stock, currently at 17-and-small-change, will hit 12 within a month.

Happy trading.