4th quarter begins with a bang

As though there is no peak too high for the US equity markets, stocks soared to record highs on Monday as the 4th quarter opened with the loud sounds of buy orders.

Dow 14,087.55 +191.92; NASDAQ 2,740.99 +39.49; S&P 500 1,547.04 +20.29; NYSE Composite 10,184.50 +145.22

Whether or not this frenzied pace is sustainable is anyone's guess, but buying stocks when they are at or near their all-time highs has proven - time and again - to be a fool's game. The Dow Jones Industrials soared to a record close on strong volume with the other major indices reaching or close to multi-year highs. The NASDAQ is at a 6 1/2 year high; the S&P 500 within 6 points of its all-time high.

Market internals displayed the obvious. Gainers outnumbered losers by nearly 3-1 while new highs arched over new lows, 451-159, the largest that divergence in two months.

Naturally, the dollar fell again against the British Pound and the Euro, but commodities were tame. Oil futures lost another $1.42, but remain stubbornly high, closing at $80.24. Gold gained while silver lost marginally.

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Not everyone is convinced that this rally is sustainable as most of it has to do with the recent Federal Reserve rate cuts and the promise of more to come. Worldwide, equity markets have had over $1 trillion pumped into them since the recent sub-prime induced liquidity crisis and inflation and recession may be rearing their twin ugly heads sooner than anyone might hope.

For a perspective on why Fed rate cuts are not always good for economies, see this exceptional article on the Mises.com site.

Tuesday will be all the more interesting to see if volume and price remain strong.

End of Quarter Apathy

Friday was the final day of trading for the third quarter. Usually there's quite a bit of trading activity when a quarter ends because mutual funds and institutions generally unload or pick up stocks for their various portfolios, but this day ended with a whimper instead of a blast.

Trading volume was light, and, as the recent market activity continues to suggest, the market has no direction because investors on either side of the buy/sell equation have been spooked and rendered somewhat inert by the credit calamity and the Fed's gigantic rate cut.

Nobody wants to believe or admit that there's still a problem in credit markets, even after central banks injected over $1 Trillion in liquidity over the past six weeks. The Fed cut the discount rate a full percentage point and the federal funds rate by 1/2%. The resultant rally on Wall Street was the expected result, as was the run-up in gold, silver and oil, and the run-down of the US dollar, which continues to reach new lows against the Euro and other currencies daily.

Dow 13,895.63 -17.31; NASDAQ 2,701.50 -8.09; S&P 500 1,526.75 -4.63; NYSE Composite 10,039.28 -17.67

Logic would suggest that a lower value for he dollar would drive stock prices higher (since the money backing those stocks is worth less every day) and logic would, of course, be correct. However, the long term aspect is frightening. Stocks will price themselves to infinity as the US dollar buys less and less of everything. Sure, you'll own 10,000 shares of stock XYZ at an all time high, but you won't be able feed your family with the proceeds because bread is now $400 per loaf.

The Fed rate cut may have been good for multi-national firms and their stock prices, but it is inherently inflationary. More news on that front came in the form of today's core PCE deflator, a favorite inflation indicator for the Fed, being up only 0.1%.

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However, year over year core-PCE is 1.8%, close to the high end of the Fed's "target range" of 1-2%. This serves only as more evidence of the fraud in statistics and the Fed's overall rationale. Core-PCE (personal consumption expenditures) covers everything except food and energy, the two items that have more impact on everyday life than anything else and the two areas which have been rising the most over the past two years.

Analysts say the Fed will be able to justify more rate cuts in coming months with inflation so low, but the idea that inflation has or is being contained is a figment of some very dull economic minds. Adding in fuel and food expenditures, inflation has been running at a steady rate of over 4% for at least the last three years.

But, using the Fed's numbers, we'll all be told that inflation is not a problem as the Fed cuts rates again and again, debasing our currency even further. If you thought Alan Greenspan was a master economist, you'll love Ben Bernanke. Greenspan only damaged the economy with his boom and bust strategy. Bernanke intends to break it permanently.

Declining stocks once again held sway over advancing issues, by a 4-3 margin. New highs ruled the day, beating new lows, 310-172, a fairly slim advantage.

Oil dropped $1.22 to a mere $81.66, but gold and silver had banner days, with gold up a whopping $10.10 to close at an even $750.00 per ounce and silver adding 28 cents to $13.92.

The money's in the metals, the dollar's in the toilet, but the DJI is just $105 points away from the all-time high. For a holistic, humanistic view of economics, I suggest taking a drive to buy a gallon of milk. That's where it's really at. Thanks, Mr. Bernanke. Sleep well, you bastard.

Stocks Gain on GM/UAW Pact

The most significant event in terms of stocks came in the form of a labor/management agreement between General Motors and the United Auto Workers (UAW), ending a one-day-old strike of 73,000 union members. Nobody - not the company, the union, the government or the financial community - was in the mood for a protracted job action, and concessions from both sides lifted investor spirits.

Dow 13,878.15 +99.50; NASDAQ 2,699.03 +15.58; S&P 500 1,525.42 +8.21; NYSE Composite 9,980.12 +46.30

Advancing issues outpaced decliners by an 8-5 margin and new highs retook the lead over new lows, 304-187. The see-saw battle continues as the market seeks direction.

Oil gained 77 cents to close above the $80 mark again, at $80.30. Gold and silver took a brief respite from their recent heady advances.

While the housing and debt markets are still in a shambles, Tuesday was a day of gains built largely on the backs of labor and management negotiators. Tomorrow, reality may set in once again.

Paralysis

Consumer confidence for September dropped to 99.8, after registering a revised 105.6 in August; existing home sales dropped to a 5 year low according to the National Association of Realtors. The markets barely budged.

It is entirely possible that the news was expected or hardly damning enough to put a major dent in investor confidence. There's also the suggestion that if the economy continues to struggle, the Fed will simply rate cut its way out of any possible problems.

Then again, maybe the market is suffering from paralysis and inertia, manifestations of the deeper illiquid conditions in the credit markets. Apprehension and fear have the effect of freezing the target - deer in the headlights syndrome.

Dow 13,778.65 +19.59; NASDAQ 2,683.45 +15.50; S&P 500 1,517.21 -0.52; NYSE Composite 9,933.82 -12.60

Market internals show a much different and more bearish picture. Declining issues led advancers by better than a 3-2 margin for the second straight day. More importantly, new lows took the lead from new highs - flipping the previous short-term position - 244-163. That's significant because it's indicative of weakness at the bottom of the market, and weakness usually spreads itself upward. Once the worst positions are eviscerated, the sellers move up the ladder, inducing indecision on a more widespread platform. Without any catalyst to take markets higher (outside of an emergency rate cut) stocks should drift lower the rest of the week.

Intensifying the concept that markets are becoming more and more torpid, November crude contracts fell by a whopping $1.42 to $79.53, but gold and silver maintained their positions of strength. Gold dropped just 50 cents; silver lost 2 pennies.

There was little ambiguity in the Dow stocks, split right down the middle with 15 higher and 15 lower. Wal-Mart (WMT) and Home Depot (HD) led the decliners, while defense stocks, Honeywell (HON), United Technologies (UT) and Boeing (BA) paced the winners.

The rest of the week includes a modest economic calendar, with reports on Durable Orders on Wednesday; Final 2Q GDP, New Home Sales and initial unemployment claims on Thursday.

Ho-hum. We're going nowhere fast.

Let the selling begin!

Since the Fed sought to rescue markets and savage the US dollar with a 50 basis point cut in the federal funds rate last week, US indices have floundered, and Monday displayed in clear view, the handwriting on the wall. Stocks struggled between positive and negative most of the morning until finally succumbing to selling pressure in the afternoon.

Dow 13,759.06 -61.13; NASDAQ 2,667.95 -3.27; S&P 500 1,517.73 -8.02; NYSE Composite 9,946.42 -35.41

Once again, the financial sector was front and center in the selling front as banks, mortgage lenders and brokerages variously took hits in advance of Tuesday's key reading on new home sales (10:00 am).

The credit markets are still unstable, though a little improved since the calamitous days of July and August. Still, deals are not being done in the M&A departments of major brokerage houses, dampening third quarter profits. With earnings due out for the majority of the market in the coming 3-5 weeks, analysts are busy revising estimates accordingly.

While most stocks outside the housing, building and financial sectors may fare reasonably well, the overhang from the housing, mortgage and credit situations will not make for a pretty earnings season.

The walkout and strike of 73,000 UAW workers at GM plants also acted as a damper on Monday and may become to a considerable drag on the economy if the strike is not settled quickly.

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That doesn't seem to be in the cards, as union leaders say they and GM negotiators (acting as the lead for Ford and Chrysler) are far apart on a number of considerations, not the least of them being how much GM and other automakers will contribute to a UAW-managed health care fund.

Monday's trading saw declining issues take the lead over advancers by better than a 3-2 margin. New highs remained temporarily afloat over new lows, 266-171. That gap is narrowing, boding ill for bulls, again.

Oil eased 67 cents to $80.95, while gold and silver added negligible amounts. Gold is poised to break through multi-year highs should the markets (equity and/or credit) begin to rupture.

Tomorrow's reading on new home sales will likely send equities into a tailspin, along with the understanding that the UAW strike will be an extended experience lasting weeks and maybe months, instead of days.