Markets Lower; Has Sanity Returned?

In light of the recent market movements to record highs on the Dow and S&P, today's sharp, broad-based selloff should come as a somewhat welcome reaction to recent and ongoing events.

Despite serious tape-painting in the final half hour (the Dow gained back 80 points of the day's losses), markets were dramatically lower. The one guiding stock was that of giant Citigroup, which reported prior to the open that 3rd quarter net income slipped to $2.38 billion or 47 cents a share, down from $5.51 billion, or $1.10 a share in the same period a year ago.

Based on massive writedowns in securitized instruments (marked to model) - mostly related to sub-prime mortgages - Citigroup set the tone for the entire session, and it wasn't very upbeat.

Dow 13,984.80 -108.28; NASDAQ 2,780.05 -25.63; S&P 500 1,548.71 -13.09; NYSE Composite 10,216.29 -85.20

Citi said revenue generated in its US markets and banking business declined 87% in the quarter. That's the kind of message US equity investors feared to hear. The truth about the sub-prime slump and credit calamity is beginning to find the light of day.

In a related story, Citigroup, JP Morgan, Bank of America (both of which report later this week) and other major financial institutions plan to create a super-fund (off their books, off course) to pool about $80 billion to buy complex structured investment vehicles (SIVs) linked to subprime mortgages and other types of debt.

The bankers basically are buying back their own debt.

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It's not a very nifty trick - repricing the investments at full value away from their own balance sheets - and obviously didn't fool investors today. The banks want to prevent a catastrophic fire sale on the debt, some of which is worth less than 25 cents on the dollar.

Decliners beat advancing issues by a 5-2 margin overall, though new highs maintained their long-standing edge over new lows, 291-203, though their edge has been seriously eroded over the past week.

The price of oil certainly didn't help matters. Crude for November delivery closed at a new record, $86.13, up $2.44 on the day. Gold advanced $8.40 to $762.20, while silver declined 5 cents to $13.86 on industrial consumption concerns.

Also prior to the open, toy maker Mattel (MAT) reported third quarter earnings of 61 cents per share, far below analyst expectations of 70 cents, based largely on multiple product recalls from Chinese factories.

All of this wonderful news weighted stocks down. Prospects for the remainder of the week aren't exactly buoyant.

Tomorrow's earnings reports include CSX Corporation (CSX), Delta Air Lines (DAL), Intel (INTC), Johnson & Johnson (JNJ) and Yahoo (YHOO).

Reality may be returning to the markets after weeks of Fed-induced faux-euphoria. If that is the case, expect the Dow to test 13,400 by week's end.

NYSE Volume 2,660,809,000
NASDAQ Volume 1,990,618,500

Choppy Waters

Any canoeist or kayaker worth his or her oars knows the difficulty in navigating choppy water. One must constantly be making adjustments, small moves here, quick moves there, in a never-ending battle to keep the craft on track and moving in the proper direction.

Such was the situation of the stock market on Friday as investors moved variously in and out of stocks, monitored positions and eventually found a path home to a higher close. But, it wasn't without mishap as on the Dow, for instance, nearly half of the day's gain was garnered in the final fifteen minutes. That's what kind of a day it was, and, to a large degree, how the week was shaped as well.

Dow 14,093.08 +77.96; NASDAQ 2,805.68 +33.48; S&P 500 1,561.80 +7.39; NYSE Composite 10,301.49 +56.24

For the week, the Dow gained a full 26 points, less than the entire move in Friday's last 15 minutes. (Hear the sound of one hand clapping.) Hurrah! Cheers!

If this is what today masquerades as some kind of exuberance, either rational or otherwise, many are not impressed. On the cusp of the biggest week of earnings reports for the quarter, the market displayed a tangible sense of caution.

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Clearly, investors are not confident about corporate America's ability to deliver quality profits.

The one notable company reporting on Friday was General Electric, which, despite reporting stronger than expected profits was pounded down 0.57, to 41.03, after releasing a strong quarterly, with profits rising 14% over the same period a year ago. Apparently, this is the quarter of higher than high hopes and one in which traders will lock in profits immediately after reports, good, bad or otherwise.

Concerning yesterday's shakeout, my skeptical mind was on the right track. The melt-away apparently involved financial giant Citigroup, which announced a major shake-up Thursday evening. The bank said it would combine two units into one division to be led by former Morgan Stanley executive and Vikram Pandit. The likely cause of yesterday's massive, volume-driven selloff, was a rumor that CEO Charles Prince was about to step down. The rumor proved false, re-igniting the rally on Friday morning, albeit without as much gusto. Volume Friday more resembled a sleepy summer day than a brisk earnings season session.

On the day, advancing issues outstripped decliners by an 8-5 margin. The surprise set-up for Monday, when earnings begin to flow with increasing rapidity, was in the new highs-new lows reading. New highs checked in at a paltry 197, to 133 new lows, the closest this gap has been in many weeks. This solitary indicator shows how nervous the market is, how quickly investors will close out positions and that there is little follow-through or confidence in any rally.

Next week clearly - especially with all of the largest financial companies, such as Citigroup, JP Morgan and Bank of America reporting - is indicating a rough road and quite possibly the beginning of a serious correction in US equities.

Elsewhere, commodities moved in opposite directions, though, as usual, we reiterate that oil prices are not reflective of any kind of reality, being largely manipulated by major players in the futures market. Crude rose 61 cents to $83.69, and whether or not that's a record, it's sure close and far too high to be sustainable for long.

Gold and silver continued to back off, though slightly, reaffirming the idea that credit conditions are still troublingly tight and various financial concerns are selling precious metals to raise cash. It wouldn't be the worst one-line analysis of the metals and may be much closer to the truth than even I would like to admit.

Next week, roughly a third of the S&P 500 will be reporting earnings and it's likely to be raucous. Any misses will result in severe punishment. Options players should be especially attuned to the opportunities present as Friday is expiration day for October options.

Countrywide "PROTECT OUR HOUSE" Wrist Band on eBay

With the current malaise in the mortgage and credit industry, Countrywide Financial, the nation's largest mortgage lender (and sub-prime abuser), recently initiated a PR campaign designed to improve employee morale and boost the company's image.

The plan included a pledge, to be signed by loyal employees and a cheap rubber wristband with the Protect Our House slogan.

Some employees are taking advantage of the public's fascination with the sleazy, rah-rah tactics by Countrywide management and have decided to auction their wristbands on eBay. This one has already rung up bids of $165.00 and nearly 10,000 hits and ends on Saturday. There are at least 6 more available on the popular auction site.

Mystery Market

If, unlike James Bond, you like your martinis - and markets - shaken and stirred, then today's trading action was right up your secret agent alley.

The Dow, NASDAQ, S&P and NYSE Composite were all floating gaily in the green - with all except the NASDAQ at all-time highs - until about 1:51 pm, when out of the blue the markets were suckered with a left hook that knocked them for a loop, sending everything into a dizzying tailspin over the final two hours of trading.

Dow 14,015.12 -63.57; NASDAQ 2,772.20 -39.41; S&P 500 1,554.41 -8.06; NYSE Composite 10,245.25 -19.25

If volatility is your bag, how about a 250-point swing on the Dow for starters? The NASDAQ traveled up and down more than 76 points from the highs of the day to the lows.

And what was the impetus for these major movements? Profit taking. Or, at least that's all the financial news is about to tell us. That explanation simply will not wash. Not with the incredible decline from just before 2:00 to about 2.30. In less than 45 minutes, the NASDAQ knocked off all of its 22-point gain and fell 30 points into the red. The Dow went from a gain of 110 to a loss of 47 points. But they weren't done yet.

The Dow eventually bottomed out at a loss of 127 points before recovering in the final half hour of the session. This was no ordinary profit taking. Insiders know that something is afoot and they aren't telling. The volume over the final two hours was magnificent, as though somebody had dropped a bomb and everyone needed to flee for the exits.

Another scapegoat for what could only be described as panic selling was Axel Weber, a member of the European Central Bank Council (ECB). Weber stated that although the ECB has temporarily paused rate hikes, he was of the opinion that the ECB may need to raise rates to a level he considered restrictive due to European inflation risks.

Nobody should be buying such a lame excuse to send stocks into an all-out hysterical selling frenzy. There's more here than meets the eye, especially at the start of the 3rd quarter earnings season. There's been ample speculation that more than a handful are going to report weaker-than-expected earnings, especially in the banking sector, though the deficiency will not be confined only to that portion of the market.

Market internals were decidedly on the negative side. Declining issues beat advancers by a healthy 2-1 margin though new highs (reached before the meltdown) swamped new lows, 593-156. That's a pretty wide margin for the high-low reading, which, coupled with the market movement, may indicate a blow-off near-term top today.

On the earnings front, M&T Bank (MTB), which reported prior to the open, narrowly missed their earnings estimate but only lost 47 cents on the day to close at 104.84. Other than Pepsi reporting better-than-expected results before the market opened, there were no earth-shattering announcements from any major (or minor) firms.

The only notable company reporting tomorrow is General Electric (GE), though unless their banking unit is about to take a major writedown, they could not have been the cause for today's frenetic selling.

The commodities caught a significant tailwind on Thursday. Oil for November delivery ramped up $1.78 to close at a near-record $83.08. Gold gained another $10.70 to $756.70 and silver jumped 32 cents to $13.99, though the closing readings for the metals were at 1:30 pm, prior to the sell-off on equities. Gold, at last reading, had given up its gains, selling at $747.00 following the equities lower.

The selling in gold could indicate another credit squeeze, similar to that which occurred in August, when all manner of assets were sold to raise cash to meet obligations. That would explain the simultaneous declines of stocks and gold and is a more plausible explanation than "profit taking" or selling on the opinion of one ECB member.

Whatever the cause of today's turnaround retreat, most investors are going to be kept in the dark, but one thing is almost a certainty - it's not over. Events like this do not occur in vacuums. There's an almost palpable gut feeling that all is not well for the US economy, global economy or US stocks.

Friday may offer more clues, but Monday, when Citigroup (C) kicks off earnings reports from major banking interests, should tell us the rest of the story.

Tech Wins; Earnings News Disturbing

The Dow took it on the chin today after Alcoa (AA) missed the mark, announcing their 3rd quarter results on Tuesday after the bell. The S&P and NYSE Composite took minor hits, while the NASDAQ actually had a nifty little gain.

Dow 14,078.69 -85.84; NASDAQ 2,811.61 +7.70; S&P 500 1,562.47 -2.68; NYSE Composite 10,264.50 -15.81

Here's the rub: Techs are good bets even if the economy falls into recession, while larger, mainstream corporations will have trouble maintaining profitability. Outside of the giants like Microsoft, Cisco and Intel, which have huge employee bases, many tech firms are already lean, plus, technology has become essential to our day-to-day existence.

Big retailers, banks, consumer, industrial and manufacturing outfits, like many of the Dow stocks, are abundant employers, have heavy legacy and pension costs and will struggle if the economy takes a nosedive.

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Truth be told, the economy isn't so hot to begin with, Wall Street knows this and Alcoa was just the very tip of a rather large iceberg. Alcoa's number was an easy one to hit and they missed - narrowly (.02), but missing an easy target is punishable by... well, investors treated the company to a 2.5% haircut on Wednesday (-0.99 to 38.73).

Larger misses of easy targets will result in near-death penalties and tech will become the new flight to quality, that being quality of earnings. By and large, techs are still growing, industrials are staid and solvent, but profits may become tough to find.

Losers outnumbered gainers by an 11-9 margin, though new highs still held a rather sizable edge over new lows, 408-131. The latter measure may be stalling out. If earnings are generally lackluster, it tells investors two things: 1. the whole economy may be in need of a rest (recession), and, 2. stocks are overpriced. Result: widespread selling. Don't say you heard it here first. Many others are saying the same thing.

Commodities continued to trend higher. Oil rose $1.04 to $81.30. Gold was up $2.90 to $746.00. Silver added 0.09 to $13.67.

On the earnings outlook, Chevron (CVX) warned prior to the market open; international Paper (IP) and PetSmart (PETM) also warned during the Wednesday session; Valero (VLO) warned after the close, and Thomson Financial advised that the S&P 500 will likely post, "third-quarter earnings growth in the low single digits." Overall, it's not a pretty picture as this earnings season gets underway.

Monsanto, predicted to lose 0.17 cents in their fiscal 4th quarter, actually lost 0.18, without counting one-time charges. Shares dropped 0.74.

Ruby Tuesday (RT), operator of a chain of mid-priced restaurants, reported after the close. The company saw its quarterly profit trimmed by 49% and lowered their annual estimate. The stock was being pounded in after-hours trading, down nearly 10%.

There was good news. Host Hotels (HST), Infosys (INFY), and Costco (COST) all posted results beyond Street estimates, but the good is being overshadowed by ominous signs from more than just a few companies.

Boeing (BA) was the major mover on the Dow, losing 2.77 on the day after the company announced delays in the delivery of their 787 airliners due to supply disruptions.

If you're short this market, you stand to do well. Others, most of whom have standard positions via funds or 401k's, would be advised to move to safer positions. If this first salvo of earnings news is any indication, cash will be king throughout the remainder of the year and into '08.