Wall Street's Ponzi Scheme Blowing Up

What's really going on with Wall Street?

We keep hearing news that the economy is OK, but then, a day later, there's more disturbing data from the housing sector, or some consumer confidence poll. GDP is strong (+3.9% in the 3rd quarter), labor markets are solid, but stocks seem to be dawdling along and November is usually a good month.

The bottom line truth is that nobody really knows, or those who do aren't saying, and matters were made muddier last week when the Fed lowered the federal funds rate, then more sub-prime fallout at CitiGroup, then stocks took a nosedive without warning.

On Monday, it looked like a meltdown in progress right out of the gate, then a slight recovery, another slump and a recovery into the close. Same old broken record with this kicker, Fed Governor Frederic Mishkin spoke extensively on the economy and the Fed, saying that the recent cuts could be reversed.

How about that monkey wrench? How would Wall Street react to a 25 basis point increase after celebrating the last two cuts of a combined 75 basis points. If you want to see turmoil, just wait and see.

Dow 13,543.40 -51.70; NASDAQ 2,795.18 -15.20; S&P 500 1,502.17 -7.48; NYSE Composite 9,958.82 Down 93.44

The internals shed more light. Today's decline was more broad-based than most other run-of-the-mill -50 point declines on the Dow. Declining issues led advancers by a nearly 3-1 margin. New lows continued to dominate new highs, 633-165. That's a pretty large gap and signals again that the market is in for more downside pressure.

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The selling pressure is coming from everywhere because stocks have been so magnificently overvalued while returns from the 3rd quarter were shoddy in most sectors.

Gas prices took another huge rise over the weekend, up nearly 12 cents in most areas. Naturally, this has much to do with politics in the Middle East, especially with Pakistan now under what amounts to martial law. What's interesting is that Western democracies are more concerned than Pakistanis themselves, by and large, probably because most Pakistanis aren't accustomed to real democratic rights, they've only recently experienced some of them.

The price of crude actually eased off a bit on Monday, dropping $1.95 to $93.98, which is really not any kind of relief. Meanwhile, gold gained another $2.30, to $810.80 and silver priced 19 cents higher to $14.79.

So, what's really the matter? I continue to hold to the theory that credit markets are frozen, lots of money is being lost on a daily basis, there are no merger and acquisition deals going forward and companies are paying with their eyeteeth for expansion funding. Private equity deals, all the rage over the past few years, are about to blow up in the faces of the funders and bank failures are not far in the future.

While the day-to-day wheels of industry grind on, wealth is no longer being created, but rather destroyed in a vicious cycle of bad loans, tight credit, a falling dollar and excessive pricing in energy. It's an absolute mess that has no other final resolution but a massive re-valuation of just about everything, including stocks, and that means we're going to be stuck in a bear market for some time to come.

Sentiment is turning from unsure to surely ugly and price gains are going to be few and far between. Tech is still the best bet, but only in companies with solid balance sheets and earnings that are growing and are predicted to continue doing so.

I reiterate, anything exposed to finance, banking or money is going to get crushed over the next six to nine months. And when the fall comes to the banking sector, the layoffs in that sector and everywhere else are going to be mammoth. A recession should be a foregone conclusion as government figures have proven, over and over again, to be unreliable and untrustworthy.

If the sub-prime disease that has crushed the credit markets continues unabated - and it will - the effects to the general economy will be long-lasting and severe. Believe whomever you like, but from this corner, the massive Wall Street Ponzi scheme seems to be headed for a watershed event.

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Stocks Take a Breath

After the battering stocks took on Thursday, Wall Street braced for the worst Friday, and early on, it looked as though the bears were going to have another fun day, and, to a large extent, they did.

Just after 10:00 am, the Dow slumped to its low of the day, 13,446, a 121-point decline. Twice, the index struggled into positive territory, for a brief period after 1:00 pm, and for the final twenty minutes of trading, which is where it closed.

Naturally, a see-saw ride such as Friday's is suspicious, and no doubt the President's Working Group, the Plunge Protection Team, was hard at the wheel, boosting all the averages, and the Dow by 120 points in the final 45 minutes.

Dow 13,595.10 +27.23; NASDAQ 2,810.38 +15.55; S&P 500 1,509.65 +1.21; NYSE Composite 10,052.26 +30.18

The internals tell the real story. Losing issues led advancers by a slim margin, 11-10, while new lows swamped new highs, 552-190. That's the largest number of new lows in at least three weeks and augers ill for the rest of the quarter. Even with the Labor Dept. reporting new job creation at the rate of 166,000 for October, nobody was impressed, and skepticism regarding the veracity of the numbers is abundant.

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Meanwhile, the destruction of the dollar continued apace, highlighted by action in the commodities pits. Oil ballooned another $2.44 a barrel, closing at $95.93. Gold broke through the $800 barrier, gaining $14.80 to $808.50. Silver caught a bid as well, adding 27 cents to close at $14.60.

It was somewhat of a disjointed week in equities and finance. Nobody quite understood why the Fed was cutting rates again if the economy was so good. The two main reports of the week, the aforementioned October labor report and the preliminary 3rd quarter GDP data (+3.9%), were both very positive.

The fallout from the sub-prime mortgage debacle continues to cast a long shadow over everything, however, and credit markets worldwide continue in near-panic mode. There's scant M&A activity, another sign that something's just not right, and some of the heavy bets made over the past three years by private equity firms may be on the verge of blowing up. There are literally billions of dollars to be lost should some of the high-profile leveraged buyouts not work out as expected, and a slowing economy is seen as harmful to breakups, IPOs and turnarounds.

It's going to be an interesting November and December, with, no doubt, more shocks from the housing, banking and finance centers.

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Banks Under Severe Pressure as Markets Crack

One day after a 25 basis point reduction in the federal funds rate, Wall Street implodes.

This is not supposed to happen in healthy markets, and it's becoming more and more apparent that the US Equity markets are anything but healthy. Conventional wisdom would assert that investors took the Fed's policy statement - accompanying the rate reduction - to mean that there would be no more rate cuts to follow this year, and also doesn't expect the economy to continue growing at a level pace, despite yesterday's report of 3.9% growth in 3rd quarter GDP.

Dow 13,567.87 -362.14; NASDAQ 2,794.83 -64.29; S&P 500 1,508.44 -40.94; NYSE Composite 10,022.08 -289.53

Considering the massive trading volume, it was more like a rush for the exits rather than an orderly retreat. Stocks were hammered as two major Dow components, CitiGroup (C) and ExxonMobil (XOM) were the bearers of bad news.

CitiGroup was downgraded by CIBC from Sector Outperform to Sector Perform, which was actually somewhat kind, considering that the basis for the shift. In a related note, the analyst reported that CitiGroup would have to raise nearly $30 billion in capital to reach par with its peers in terms of their capital-to-equity ratio.

ExxonMobil, meanwhile, missed estimates for 3rd quarter earnings by 4 cents, at $1.70 per share. One can hardly shed a tear for the company that boasted record profits as oil prices rose dramatically over the past 5 years.

Declining issues trounced advancers by a better than 5-1 ratio, while new lows ruled the day over new highs, 444-194. It was a dramatic reversal of market conditions, which just a day ago, looked bullish.

The question on everyone's lips apparently is, "what's the problem?" Fed chairman Bernanke and Treasury head Paulson have jawboned the market for months concerning the housing situation. What they have not been completely open about is the condition on banks and credit markets, which are in serious straits.

The credit conundrum stems from the toxic paper issued by mortgage lenders, packaged as investments and sold at various face values as SIVs (Structured Investment Vehicles). Many of these packaged offerings were loaded with sub-prime and otherwise non-performing loans and today some are worthless or valued at only pennies on the dollar.

The major banks, such as Citibank, Wells Fargo, Bank of America and countless other smaller lenders were both buyers and sellers of these "investments" through their brokerage and hedge fund subsidiaries and these losses simply cannot be written off quickly enough. What's worse is that there are more of these sloshing around everywhere, and as more homeowners default, more of the investments holding the notes blow up. The bulk of these have not yet hit the market and the banks are suffering the impact.

Today's market action is not one which occurred in a vacuum. The condition of credit markets is deteriorating by the day and astute individuals are getting out of banking stocks and most other equities before the stampede engulfs them all.

Making matters worse is the high price of oil, which actually slipped a bit today, down $1.04 to $93.49, though the move higher was largely the result of the Fed's rate reductions in September and October.

Gold and silver followed suit, losing marginally on the day.

Economic conditions in the United States are terrible, to put it lightly. Between the Fed's constant interest rate tinkering and the government's refusal to curb deficit spending, the value of the dollar has shrunk considerably over the past 6 years. we are paying the price for rampant credit expansion under Greenspan, off-budget expenditures for the conflicts and occupations in Iraq and Afghanistan, lack of regulatory control in mortgage and credit markets and a wickedly overpriced stock market.

A return to a strong dollar standard would be the best and most rational approach, but the Fed and Washington politicians aren't interested in the painful truths of serious fiscal and monetary restraint. The Fed's combined 75 basis point reduction in rates has only exacerbated the problem and Wall Street's crying for more isn't helping.

There's going to be a lot of pain to be doled out and the longer officials saddled with the charge of managing the economy wait to act, the worse the downfall will be.

Tomorrow, non-farm payrolls for October will be reported before the open, though it may simply be a sideshow to the ravages inflicted on the markets by investors with better things to do with their money than to see it slowly, inexorably evaporate.

We may see a dead cat bounce or another day like today, where everyone and anyone is selling just about anything and everything.

If the Democrats had moved for impeachment last winter, and the Republicans in congress actually had a conscience, we may have avoided some of this. But now, with the most incompetent president in the history of the nation still sitting for another 15 months, we may be seeing the beginning of the 21st century's reprise of the Great Depression. God save us all.

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Are the Markets FED Up?

The FOMC of the Federal Reserve Board reduced, as expected, the federal funds rate by 25 basis points, or 0.25% to 4.50%. This was the second consecutive reduction in the federal funds rate, following September's 50 basis point cut.

The markets responded with common bravado, with the major indices up sharply. In the statement released today, the Fed stated that following this reduction, the inflation risks roughly parallel that of economic deterioration, meaning that they may pause when they next meet on December 11.

Read the full Fed statement.

Dow 13,930.01 +137.54; NASDAQ 2,859.12 +42.41; S&P 500 1,549.38 +18.36; NYSE Composite 10,311.61 +146.64

Essentially, the Fed knows they cannot lower rates without regard to the intense pricing pressure from commodities, especially oil, because doing so would risk the erosion of the dollar even further. This puts Bernanke and the Fed in quite the prickly position. Wall Street and the Republicans want softer rates and a solid economy, while economists everywhere are telling them that the US dollar cannot take any more of a beating. Somewhere in the middle is the US population, seemingly stuck between a stagnant economy and higher prices for everything - stagflation.

What stood out in today's trading was the action of the economically-sensitive banking sector and the overall muted reaction to the smallest cut the Fed could make. The Dow, just prior to the release, was already up about 90 points on news that 3rd quarter GDP checked in at a solid 3.9%, so it only added 40 points on the rate news.

Stocks such as Countrywide Financial (CFC), Citigroup (C), Merrill-Lynch (MER) and Bank of America (BAC), actually lost ground following the release. All but Countrywide - which dropped a full point after the release - regained all or most of the ground given up, mostly due to short-covering rallies. The banking sector is in crisis mode and many investors are acutely aware of the condition of credit markets.

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Breadth was actually solid, with advancing issues leading decliners by a 22-9 margin. New highs outpaced new lows, 420-233.

As if to magnify the folly of the Fed's latest move, oil for December delivery advanced by a huge number, up $4.15 to close at $94.53. Gold closed sharply higher - up $8.20 to $796.00 - as did silver, gaining 13 cents to $14.46.

The commodity markets responded even more bluntly than the equity markets to Bernanke's boneheaded maneuvers over the past two FOMC meetings. One has to question both the validity of government data and the wisdom of the Fed as currently composed. On Friday, October Non-Farm Payroll data is announced prior to the open and that data will shed more light on the economy.

Let's all join hands and pray that the Fed did the right thing at the right time.... On the other hand, let's all go out and have a couple of drinks. We're going to need something to stiffen our resolve for what's ahead for the US economy - and it isn't a pretty picture.

Short bank and financial stocks. Bank failures are a sorry possibility and more severe economic disruptions will occur in 2008.

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First Cut the Deepest? Fed Weighs Options

US equity markets sent a bit of a message to Fed Chairman Ben Bernanke and the FOMC board on Tuesday, selling off as a reminder that Wall Street needs another rate cut. Mr. Bernanke has been mum on the topic as the FOMC met today and finishes up their work on Wednesday with a policy announcement due out shortly after 2:00 pm ET.

Dow 13,792.47 -77.79 ; NASDAQ 2,816.71 -0.73; S&P 500 1,531.02 -9.96; NYSE Composite 10,164.97 -91.25

The choices are threefold and each bears considerable consequence. The board may lower rates 25 basis points, lower them 50 basis points or leave them as they be.

In September, the board lowered the federal funds rate 50 basis points and the stock exchanges responded with a two-week rally to record highs on the Dow and S&P before lackluster earnings shook the market back to reality. Another 50 basis point reduction does not seem to be necessary, though the Fed may see more weakness, especially in housing and credit markets, as particularly troubling.

The problem with a 50 basis point cut is that it will surely fuel inflation and send oil futures over $100 per barrel. As a committed fighter (thus far in word only) of inflation, it is doubtful that the Fed will make as bold a move.

The 25 basis point reduction is the most likely of outcomes as the cut will satisfy the Wall Street crowd without fanning the inflation flames much.

No rate cut at all would be the most desirable from a monetarist standpoint, as firmness from the Fed might induce a small rally in the US dollar, which has been pummeled recently.

The Fed must weigh their alternatives carefully and proceed in a diligent, professional manner, else they risk destroying the value of the US dollar even more.

On the trading session, declining issues defeated advancers by an 8-5 margin. New highs maintained their lead over new lows, 268-235, a slim margin, indicating an abundance of concern and uncertainty as to the Fed's next move.

Oil actually took a little off the top, losing $3.15 to close at $90.38. Gold and silver also lost ground, with gold off $4.80 and silver down a dime.

The Fed may want to keep some of its ammunition for the future, as dropping the federal funds rate below 4.50% (it's currently at 4.75%) may auger more ill for the consumer, who registered the lowest confidence reading in two years.

Rate cuts can only do so much, and with credit markets still reeling and major banks restructuring following the sub-prime shakeout, Bernanke and his fellows on the FOMC board may consider other measures, or taking a wait-and-see posture, more appropriate.

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