Day-Trading with the Fed

Every day, investors take risks.

Implied in the buying and selling of stocks is the gamble that shares of the stocks in question will go up or down, lose or gain value, based often on little more than the whims of the market.

However, it's a rigged game. The Fed routinely pumps money into the markets through their daily repurchase agreements, or "repos" as they're known. Today's "fun money" - $10.5 billion - arrived precisely 10 minutes after the market had opened, just in time to stave off a massive sell off which had the Dow down more than 100 points right out of the gate.

As the day wore on, the effect of this "money out of thin air" had on the psyche of the market was apparent. The Dow took a nearly 200-point round trip, eventually ending the day with a gain of 45 points, ending a five-day losing streak.

Dow 13,566.97 +44.95; NASDAQ 2,753.93 +28.77; S&P 500 1,506.33 +5.70; NYSE Composite 9,930.78 +10.51

So, effectively, the Fed took most of the risk out of buying stocks, for today, at least. Tomorrow, and the remainder of this week and next, is likely to be more of the same stumbling around we've experienced for the past few months.

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The market direction is predominantly to the downside, though Fed actions have prevented the essential shakeout to occur in all its fury. Instead, we get the slow motion train wreck with the occasional pileup like we had on Friday.

Stocks really were weak at the open and actually for much of the day. Advancing issues only led decliners by a 7-5 margin, while new lows dislocated new highs, 420 to 94. So, if you're convinced the worst is over, think again.

Oil dipped $1.04 to $87.56, a price so gaudy and absurd that it's painful to print the actual number. Gold lost $8.40 to $760.00, yet another sign of the credit-to-cash trade. Silver dipped 8 cents to $13.56 amid continuing commercial supply-demand usage debate.

Today's market gains were purely Fed-inspired and can hardly be called sustainable into the remainder of the week.

Nearly a third of the S&P 500 components will report their quarterly results this week. More than 25% have missed profit targets, many of which were supposed to be easy marks.

After Monday's close, 36 companies will report their earnings including Apple (AAPL), American Express (AXP) and Texas Instruments (TXN).

There are 71 companies reporting their earnings prior to Tuesday's open.

The off-balance-sheet fraud inspired by Enron has now spread fully to the banking system. The credit crunch has severely damaged the world economic racket and the banks can do nothing other than hide the losses for now. At some later date, probably some time in the first quarter of '08, those losses will see the light of day and the end-game will commence.

NYSE Volume 3,310,854,000
NASDAQ Volume 1,923,987,125

That Sinking Feeling

US equity investors lost boatloads of money on Friday as weak corporate earnings reports, credit concerns, fears of recession and oil over $90 a barrel sent stocks on a stunning day-long decline.

Dow 13,522.02 -366.94; NASDAQ 2,725.16 -74.15; S&P 500 1,500.63 -39.45; NYSE Composite 9,920.27 -254.34

For the week, the Dow Jones Industrials lost 576 points and did not post a gain on any single day. The Dow is now on a five day losing streak and has closed lower in seven of the last eight sessions. Friday's loss was the third worst of the year for the Dow.

The NASDAQ and S&P 500 also closed decisively lower and the NYSE Composite broke below the 10,000 mark for the first time since September 26.

All 30 of the Dow components were down, a very rare occurrence. The biggest hit was taken by Caterpillar (CAT), which reported net income for the three months ended Sept. 30 of $927 million, or $1.40 a share, from $769 million, or $1.14 a share in the year-ago period. Analysts expected a third-quarter profit of $1.43 a share.

The company lowered its forecast for the remainder of 2007 and warned that 2008 would be "below potential" and that the US economy would be in or near recession next year. That sent the stock reeling, losing 4.26 to 73.40, a 5.5% decline for the day.

Financial stocks also took serious hits. Bank of America (BAC), Citigroup (C) and troubled mortgage originator Countrywide Financial (CFC) were among the loss leaders.

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As might be expected from the dreadful headline numbers, declining issues outpaced advancers by a better than 5-1 margin. New lows catapulted past new highs, 375-143.

After briefly topping $90, crude for November delivery backed off, finally closing down 87 cents to $88.60. Gold was lower, losing 30 cents to close at $768.40/ounce. Silver continued its mini-slump, dropping another 17 cents to $13.64. Despite the lackluster day, precious metals remain a top choice for investors looking for protection against any economic downturn and a hedge against inflation. Both a recession and inflation now appear to be almost certainties in the upcoming months.

After the disaster that this week was, investors probably aren't going to get much relief next week, as more corporate earnings reports continue to flow into the mix. Additionally, reports on September existing and new home sales come out on Wednesday and Thursday, respectively. Durable Goods Orders for September will also be reported on Thursday, October 25.

NYSE Volume 3,531,780,250
NASDAQ Volume 2,371,651,750

The Grand Charade Continues

Prior to the market's opening, Bank of America (BAC) released a dismal set of numbers for the 3rd quarter. The nation's second-largest bank posted profits of $3.7 billion, down 31%, and far short of analyst estimates. The bank's profits in investment banking plummeted 93%, to $100 million, thanks to a $607 million trading loss, another $527 million loss related to mortgage and credit derivatives, and a $247 million write-down for leveraged loans.

Washington Mutual (WAMU) also released similarly-ugly 3rd quarter results prior to the open. eBay reported a loss the previous night.

At the open, the Dow and other indices went straight into the tank. The Dow was down 90 points by 10:00 am. However, the diligent idiots at the Fed repo window were hard at work, granting $28 billion in liquidity to various members. See here.

For the remainder of the trading session, instead of the all-out plunge that should have occurred, traders were treated to the tantalizingly delicious prospect of a completely manipulated market. $28 billion goes a long way towards keeping markets liquid and avoiding catastrophe. Our resident geniuses at the Fed and major brokerages have now managed to not only avoid collapse, but keep honest participants out by constantly pumping in new money and, in some cases, posting gains!

Dow 13,888.96 -3.58; NASDAQ 2,799.31+6.64; S&P 500 1,540.08 -1.16; NYSE Composite 10,174.61 +9.31

I actually began a thread on the Fed's $28 billion in repos. Some interesting commentary followed my lead.

What does this mean? Essentially, the Federal Reserve loans out funds to various member banks, who then turn the money loose - through their brokerage arms - on the general market. This causes a large amount of dislocation in orderly trade, call it manipulation. The brokerages and the Fed have a vested interest in avoiding "events" that could cause panic. But what they are doing is eroding not only their own credibility, but that of the US dollar with capricious market intervention at any sign of trouble.

Orderly markets need to correct when there has been systemic dysfunction, like what we've seen in the sub-prime mortgage market and the spillage into the general credit system.

In August, the market was correcting, on heavy volume, though the Fed decided to change the game by lowering the discount rate (twice) and the Fed funds rate by 50 basis points at their September meeting. Everything since then - including the incredible 1000+ point gain from August 18 to October 1 - has been pure fiction, built with Fed money, essentially OUR money, the public's money, which the Fed and Treasury see fit to debase freely in order to bail out their friendly bankers and corporate CEOs.

The entire scheme only gets worse, and eventually these short-term bandages will cause a complete and total collapse of the economy. We're actually quite close to that now, but don't worry, because if the economy implodes, and prices for milk and gas and heating fuel reach levels where only the rich can afford them, your stocks will continue to go up and up and up.

Thanks, Mr. Bernanke. I thought your predecessor, Mr. Greenspan was a bubble-inducing tool of politicians. But you have shown that he was nothing more than a piker. You, sir, have no scruples and pray at the altar of Wall Street and Broad. You are a complete traitor to the United States and should be in prison along with most of your banking "buddies." You are a complete fraud and a wastrel, a pimp for corporations and politicians. You are, in a word, deficient.

It's almost futile to cite the internals of this twisted market, but in any case, they prove instructive. Declining issues beat advancers narrowly, 16-15, while new lows overcame new highs, 278-223. In other words, this market continues to want to sell off.

Oil for November delivery hit yet another record high, gaining $2.07 to $89.47 per barrel. Gold shot up $6.40 to $768.70. Silver was higher by a nickel to $13.80.

After the close, Google (GOOG), Wall Street's tech darling of the moment, posted third-quarter net income of $1.07 billion, or $3.38 per diluted share. Wall Street was looking for a net profit, on average, of $3.22 per share. Gross revenue rose 57 percent to $4.23 billion. The stock traded higher in the regular session by 6 points and had added another four points in early after-hours trading. Last print was above 644.00.

With today fully divorced from reality, Friday's session could go either way, though betting against the Fed and the Plunge Protection Team's (PPT) pumping strategy, could prove risky to bears who believe the entire market and credit structure to be on shaky ground.

Apparently, the entire planet could be blown to bits, yet the Fed would still pump more money into markets, gaily ringing the "all clear" chime.

NYSE Volume 2,895,854,250
NASDAQ Volume 1,973,083,875

Roller Coaster Day for US Stocks

Talk about volatility! The Dow Jones Industrials took a 21-point round-trip, finally ending the session with the third straight loss for the index of 30 blue chip stocks.

Dow 13,892.54 -20.40; NASDAQ 2,792.67 +28.76; S&P 500 1,541.24 +2.71; NYSE Composite 10,165.30 +39.90

Stocks soared early in the day - with the Dow up by more than 100 points - on earnings reports, primarily, from tech stalwarts Intel (INTC) and Yahoo (YHOO), which reported strong earnings after the close on Tuesday and Coca-Cola, which beat estimates for the 3rd quarter.

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However, the celebration was short-lived as spiking oil prices and continuing concerns in credit and mortgage markets rattled investors. Slow software sales from IBM and a word from the CEO of United Technologies, who said 2008 would be "challenging," sent those two Dow components reeling.

Advancers and decliners finished virtually in a dead heat, with gainers showing a slight advantage. New lows eked out a win over new highs, 259-249.

Oil was lower by 21 cents, gold and silver registered marginal gains.

Earnings continue to come in weaker than expected and with continuing concerns in the housing and credit sectors, investor mood is quite dour. Even though techs remain a bright spot, retailers and mainstream industrials are returning very poor 3rd quarter performances.

Despite pontifications from Sir Alan Greenspan that there's only a 50/50 chance of a recession, one ponders the former Fed Chief's past performance and overall reputation, which has been severely tarnished of late. Concerns are abundant that not only will the US fall into recession, but that it will be a particularly long and deep one.

Keep that in mind with your trades on Thursday and Friday. This is no time to be overly optimistic.

NYSE Volume 3,638,064,750
NASDAQ Volume 2,440,087,250

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