More Reality Checks

US equity markets suffered through a second straight losing session on Tuesday, amid skyrocketing oil prices and mixed earnings reports.

Dow 13,912.94 -71.86; NASDAQ 2,763.91 -16.14; S&P 500 1,538.53 -10.18; NYSE Composite 10,125.40 -90.89

It was another dose of reality for the largely-overpriced markets. Fed Chairman Ben Bernanke and Secretary of the Treasury Hank Paulson both jawboned about the continuing housing and credit crises. Bernanke chided bankers from expecting a "bailout" from the Fed on Monday night, while Paulson encouraged the same bankers to figure out ways to save strapped homeowners from falling into foreclosure.

In effect, they both told the banking segment that they were on their own, as it should be. The actual condition is that Fed and Treasury have both been supplying assistance to the banks. These men aren't stupid. They know a banking failure could be catastrophic, however, reading into their words, one wonders what they really know, and whether they actually believe the situation to be much worse than it appears.

Obviously, the bankers know the fix they're in, but they're not telling either. The best they can come up with is a joint fund to repurchase their own lousy paper, which they are unable to unload at this time. I don't know the technical term for their off-the-books repurchasing of faulty investment paper, but it certainly smells a lot like Enron. It's entirely possible that a very big name or two in the financial business could find itself in deep, deep water as early as the first quarter of '08.

As the markets churned in negative territory all day long, declining issues outdistanced advancers by better than a 2-1 margin and the new highs-lows finally rolled over, with 221 new lows appearing against 168 new highs. That particular indicator has been trending lower over the past week and finally is giving a clear signal that more losing sessions are ahead for stocks.

In other words, in a series of shouting headlines I'd like to see, SELL! EVERYTHING! NOW!

Commodity prices continued to dog stocks. Oil was up to another record high, up $1.48 to $87.61. Experts are now calling for 20-30% higher heating bills throughout the winter. God bless Al Gore for giving us GLOBAL WARMING!

Oddly enough, gold lost 20 cents while silver declined by the same amount, closing at $13.36. BUY PRECIOUS METALS

Stocks are offering a mixed picture.

Before the open: Delta Air Lines (DAL) reported better than expected third quarter earnings of $0.56 per share, compared with the consensus estimate of $0.41.

Wells Fargo missed by $0.02, misses on earnings of $0.68 per share, $0.02 worse than the Reuters Estimates consensus of $0.70. Shares of the bank's stock were hammered down to 34.55, -1.40 by the close.

Johnson and Johnson earned 88 cents per share, compared with 94 cents per share during the same period a year ago. Analysts sought .90 cents per share. The stock fell 58 cents to 65.07.

After the market closed on Wednesday, IBM beat estimates by a penny. Apparently, this was not good enough for investors, as the stock was being punished - down nearly 2% - in after-hours trading.

Holders of Yahoo (YHOO) were treated to the first quarterly results with co-founder Jerry Wang as CEO and they were pleasantly surprised when the company announced earnings of 11 cents per share, beating the street estimate by 3 cents. The stock price was down 1.17 prior to the announcement. Shares traded nearly 10% higher in after-hours activity, up 2.59 to 29.28.

Intel (INTC) reported a 43% rise in profits after the close and investors sent it soaring after hours, up more than 5%.

BUY TECHS!

Actually, I've been recommending techs over financials and just about everything else for most of 2007. This market, as a whole, however, is headed lower.

CIT Group (CIT), Coca-Cola (KO) and United Technologies (UT) report before the market open on Wednesday, and their reports should influence early trading.

NYSE Volume 3,181,638,250
NASDAQ Volume 2,093,682,500

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.