Fed Reinforces Boom-Bust Market Mentality

Following Tuesday's 25 basis point cut by the Fed, Ben Bernanke and his blundering buddies hooked up with the central banks of Canada, Switzerland and England and the European Central Bank (ECB) and overnight hatched a plan to provide more liquidity to shaky US markets.

The Fed said it plans to inject cash to banks through auctions and provide $24 billion in currency swap lines.

It's important to note that the move came one day after the markets tumbled upon hearing that the Fed was cutting the federal funds rate. The move amounts to just so much pandering, but also points up just how precarious the straits US banks are currently traversing.

Dow 13,473.90 +41.13 ; NASDAQ 2,671.14 +18.79; S&P 500 1,486.59 +8.94; NYSE Composite 9,921.64 +83.38

Investors took their cue at the open, pumping stocks to their highs of the day in the first ten minutes of trading. From that point onward, however, the full import of the Fed's actions took hold and stocks sold off until finally capitulating just after 3:00, when all indices turned negative.

It was only a last half-hour rally that pushed stocks back into positive territory at the close. The trade of the past two days was a massive repudiation of Fed policy. There's little, if anything, the Fed can do to keep stocks from selling off over the remaining 12 days of trading this year.

The Federal Reserve under Ben Bernanke has been buffeted about by the winds and whims of the market, reacting to stock and index prices rather than imposing sound monetary policy. The more they cajole, push, pimp and pump the market with liquidity and various rate cuts and market maneuvers, the more the market barks back, always wanting more.

This give-and-take has reintroduced extreme levels of anxiety and volatility to already nervous markets. The depths of the credit crisis, which has spread from the US to the rest of the world, have yet to be plumbed and the Federal Reserve, along with the rest of the central banks, stand gaping into the abyss of complete financial meltdown.

What has always been at the heart of the matter is easy credit, even though former Fed Chairman Alan Greenspan denies his "emergency" 1% rate in 2003 led to the bubble in housing prices and the attendant low-interest loans made to buyers of questionable creditworthiness, and what the Fed is doing is simply doling out more dollars on easier terms to even more banks.

If the credit crunch was caused by easy credit, how is extending even more easy credit to the worst offenders - abusive and largely unregulated banks - going to solve the problem?

Maybe the Fed and all those white guys in dark suits at central banks around the world know better. Probably not. They're likely just hanging on by threads and ego, hoping the entire derivative-driven, fiat money house of cards doesn't collapse entirely.

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As for investments in US stocks, one had better get out the butter, because they're toast. Advancing issues beat back decliners narrowly on Tuesday, 3468-2903. New lows widened their spread over new highs, 307-127.

Silver was marginally lower, oil and gold were higher, with crude up over $4 per barrel to close at $94.39, following what looked like a healthy pullback over the past few weeks. Now, it appears the relatively inexpensive crude that was expected for the holidays will not arrive at the pre-arranged time, though savvy motorists may be able to fill up prior to the expected holiday gouging to save a bit. After that, it's back to prices of $3.25+ for everybody.

It's becoming increasingly clear that we are in the early throes of a bear market, that a recession is unlikely to be avoided in 2008, and that whatever the Fed does to affect monetary policy isn't working. Further, banks and other quasi-financial institutions are in serious trouble. Somebody other than a Federal Reserve governor needs to speak to the overall risk involved to the US population and spell out exactly what lies ahead. Since the chances of that happening are stuck right between slim and none, the US citizenry is left to ponder the wisdom and righteousness of commentators such as James Cramer, Neil Cavuto and their witless ilk.

As others have said so eloquently before, "we're doomed!"

NYSE Volume 4,394,799,500
NASDAQ Volume 2,311,843,000

Fed Cut Not Enough; Dow Drops 294

The cost of cheap money, the crack cocaine of Wall Street, was lowered again on Tuesday as the FOMC of the Federal Reserve dropped the federal funds rate 25 basis points to 4.25%. The Fed also made borrowing by member banks easier by lowering the discount rate an equal amount to 4.75%.

The Dow Jones Industrial Average, that blue chip basket of 30 stocks which is the most widely-watched index in the investing universe, tumbled 294 points on the news.

The mad selling on heavy volume commenced immediately upon the Fed announcement at 2:15 pm, when the Dow and other indices were at or near their highs of the day, though up only marginally. Watching the ticker was like seeing a huge tsunami lay waste to an island atoll - the tumultuous devastation was nearly total.

Dow 13,432.77 -294.26; NASDAQ 2,652.35 -66.60; S&P 500 1,477.65 -38.31; NYSE Composite 9,838.26 Down 266.16

The final hour and 45 minutes of Tuesday's session wiped out nearly a third of the gains of the past ten sessions in which the Dow spiked almost 1000 points. The massive selloff was neither unexpected nor unprecedented, however, as investors were simply following the ancient adage of "buy the rumor, sell the news." A rate cut had been already priced into stocks, but investors were wishing (as is often the case this time of year) for 50 basis points and treated the Fed's offering like a spoiled child getting less than expected on Christmas Day.

Investors may have bid stocks up in the previous mini-rally on false hope and a good dose of momentum, but that all changed on the Fed news. Stocks made a dramatic u-turn, the kind seen in the midst of bear markets. The correction that began in August on frightening sub-prime news should now continue unabated for the balance of 2007.

What will weigh on the minds of investors for the next few weeks are retail sales, and, unless there's some kind of miracle at the malls across the great expanse of America, stocks are in for a year-end beating the likes of which they have seldom seen. In addition to shocks from the checkout counters, January's earnings season is beginning to look more like a clearance sale than a Saturday stroll down the aisles as 4th quarter and 2008 warnings, like today's from Dow stalwart General Electric, are already to begin trickling out from the board rooms to the streets.

The rate cut, seen by some (including this writer) as completely unnecessary and ineffectual, did have the expected effect on oil prices, which rose $2.16 to $90.02. Gold gained $3.60 to $817.10; silver slid two cents to end the day at $14.87.

Selling was broad-based, sparing no sector in particular. Advancing issues were overwhelmed by decliners, 5167-1212. After being beaten over the past two sessions, new lows took back the lead position, a posture it had previously held for more than a month straight, overcoming new highs, 260-203.

The Dow confirmed a short term bearish trend today. The reversal in the new highs-new lows reading also should be telling. The market's reaction to the Fed's rate maneuver was telegraphic of a very nervous emotional environment. People need to pay particular attention to investments over the next six months. US stocks may not be the best selection due to competitive, dollar-related or pricing issues.

NYSE Volume 3,996,278,250
NASDAQ Volume 2,192,045,750

Stocks Tack on Gains Ahead of Fed

US stock investors couldn't contain their enthusiasm on Monday, bidding up shares in just about every sector, despite revelations of further write downs in the unfolding subprime/credit/SIV spectacle. Overriding every bit of bad news is the hope of another rate cut by the Federal Reserve which will announce their decision Tuesday at 2:15 pm.

Prior to markets opening in the US, European giant UBS announced that it was taking one of their structured investment vehicles back onto their books, effectively resulting in a $10 billion loss, potentially wiping out all of the bank's 2007 profits.

Dow 13,727.03 +101.45; NASDAQ 2,718.95 +12.79; S&P 500 1,515.96 +11.30; NYSE Composite 10,104.42 +80.84

As the market opened, mortgage insurer MBIA (MBI) was halted with news pending. When the news broke, it was ugly: the company's losses for the 4th quarter would likely exceed those reported in the 3rd; but, there was rampant speculation that the company would received $1 billion in emergency funding from Warburg Pincus.

Interestingly, when the stock opened at 11:00 am, it was more than $6 higher than the Friday close (30.00), and traded as high as $38.19.

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UBS traded higher as well, as news that the Government of Singapore Investment Corporation would invest some $12 billion for a significant stake in the operations. Both stocks finished the day well into the green: UBS (UBS 51.66, +1.18), MBIA (MBI 33.95, +3.95).

The trade of late has to be either guided by the most ill-conceived investment strategy ever, or the big money is betting that all will be better soon. While the past few weeks have borne witness to principally bad news, stocks on the Dow have risen nearly 1000 points in just the past ten sessions since the bottom of 12,743.44 on November 26. More and more economists and analysts are predicting at least a mild recession in 2008, the housing solution provided by the White House is little more than a stalling effort, and over eight years there has been no progress in dealing with the twin giant deficits in import-export trade and the federal budget.

Still, investors continue to pour money into stocks. The current rally seems to be nothing more than a last-ditch effort to engender some kind of confidence in the mere fact that stocks are rising. If there ever was a condition of the tail wagging the dog, this is certainly it and, as with all efforts both desperate and foolhardy, this one will end badly as well.

Sadly, the US equity markets, once the proudest, strongest, best-managed and assiduously-regulated, have come to more resemble a bad poker room in an after-hours casino. What the banks, the media and the government aren't telling us is that these bad sub-prime mortgages and their attendant Structured Investment Vehicles (SIVs) and Special Purpose Entities (SPEs) are full of other bad and questionable debts as well.

If it is indeed the case that the bankers have blundered once again, then all of this mad buying begins to make sense. There's not only a credit crunch in which the banks are afraid to lend money to each other, much less private individuals and corporations, but the crisis of confidence is spreading into the stock markets as well.

Most of the money used to buoy stocks over the past ten sessions was more than likely their own, or that of the central bank, the Fed, or central banks worldwide. We are staring into the abyss of bad fiscal management, poor governing and lies, lies and more lies piled on top of lies, deception and at the bottom of it all, false, fiat currency.

What else would explain the recent meteoric rise of stocks or the gains today by UBS and MBIA? The entire market is being cooked to a hard-edged, crusty, inedible, well-done stick of jerky. It will be tough to chew on this and will likely take years to digest. The current genius is to keep the game going until the November elections and then dump the entire mess into the laps of unsuspecting Democrats who are sure to add the executive branch to their lock-up on the legislative. Joy to the world.

On the day, advancing issues once again raced ahead of decliners, by a 3822-2525 margin. New highs expanded their advantage over new lows, though not by much, 225-183.

The day's bright spot came surprisingly from the oil futures market, where the price continued to slide, down another 42 cents to $87.86. Gold soared another $13.30 to $813.50 and silver gained 35 cents to $14.85.

With tomorrow's expected Fed rate cut of either 25 or 50 basis points the two-week-long party may be coming to an abrupt end. If the Fed decides on merely a 25 basis point reduction in the federal funds rate, stocks should sell off through the end of the week and into the next. The only remaining driver for stocks for the rest of the year would then be retail sales, and unless they're surprisingly good, the final two weeks of 2007 could be an unwinding experience.

NYSE Volume 2,863,184,250
NASDAQ Volume 1,776,654,500

The Party... and the Rally May be Over

Equity investors took an early exit on Friday after the government's non-farm payroll data failed to inspire any new-found confidence in the economy, nor in the prospect of a 50 basis point rate cut next week by the Fed.

The November labor data showed a gain of 94,000 new jobs, less than the break-even of roughly 150,000, but better than the estimate of 80,000. So, these numbers suggest that the economy is in OK shape, but that the job market may be shrinking a bit relative to natural population growth.

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The figures were good enough, however, to blunt any talk of a 50 basis point cut when the Fed meets on Tuesday next week. 25 basis points may be all they can muster, if that. Presumably, rate cuts mean the economy is weak, but to Wall Street it means more nearly-free money to toss around. When the Fed announces either no rate cut or just 25 BPs at exactly 2:15 on December 11, this current rally will be officially over and investors will resume worrying about the credit squeeze and subprime mortgage fallout.

It could happen sooner, on Monday, as savvy investors are wont to get out of the way when there's a rush for the exits. After a more than 800-point rally on the Dow and 100 on the S&P since November 26, the rally was a combination of hype and hope, and now the hope (rate cut) is gone. With more sorry numbers expected from the retail sector, the hype will also disappear soon. Happy Holidays.

Dow 13,625.58 +5.69; NASDAQ 2,706.16 -2.87; S&P 500 1,504.66 -2.68; NYSE Composite 10,023.58 -6.57

Trading was especially light for a Friday, as decliners took a razor-thin edge over advancers, 3187-3160, but new highs finally exceeded new lows, barely, 214-212. This marked the first win for new highs since October 31, a span of 25 trading sessions. After such a spectacular run-up, this distribution indicates there's either a load of undervalued stocks or we're still in the throes of a long-term bear market.

It's likely to be the latter. With the Dow just about 500 points from its all-time high, one would expect more new highs than what's being recorded. The new lows are likely to expand slightly for the remainder of the month, then really add to their ranks once earnings reports being to flow in January.

As if taking its queue from the stock market, oil went for a dive on Friday, dropping $1.95 to $88.28. Gold and silver followed suit, with gold down $6.90 to $800.20 and silver losing 12 cents to end the week at $14.51.

Some of the nations largest brokerages kick off earnings season a little early - next week - and the outlook is not very rosy. So, get those fingers warmed up to hit the sell button. Monday could be somewhat of an unwelcome surprise to a week that is fraught with potential pitfalls.

NYSE Volume 3,145,841,500
NASDAQ Volume 1,898,631,750

Straight Up, Non-Stop Stock Buying

Since the ephemeral bottom of the market on November 26, the Dow has, like an old, single uncle gorging on multiple holiday repasts, put back on 876 points. In just eight short sessions, US blue chips have availed themselves an average of nearly 110 points per day.

What changed? Attitude, and little else.

While there were some remarkable productivity numbers thrown out on Wednesday (pretty much more fudged government numbers) and an early indication that November job growth was going to register as nothing short of spectacular, the market blithely overlooked November retail figures which showed a spotty and rather lackluster performance by some of the major participants.

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Instead, investors tripped over each other rushing to buy stocks, especially on Thursday, when the Bush administration announced its plan to help homeowners avoid foreclosure. The plan is fairly laughable, extending the payment period on the interest-only portion of option-ARM loans to five years, from the customary two. The plan merely delays the inevitable, allowing more time for people who shouldn't be living in overbuilt, expensive homes to remain in them.

But what the government plan really does is bail out the banks. They simply do not want all those toxic loans exploding all over the place. Bankers are obviously in a position in which they are willing to accept a little than lose a lot, and that's troubling. The weight of the sub-prime mess threatens the very lifeblood of the global financial system and the bankers have been scared to the point of renegotiation with what are basically nothing but deadbeat borrowers.

So, it's a little bit funny how investors react. It's almost like a self-fulfilling prophecy. If stocks are going up, everything must be A-OK, and they'll continue to go up. For the better part of the past two weeks, they have, and tomorrow's gently-massaged non-farms payroll report for November will indeed supply icing for the top of the cake. Or, if you so please, froth on the head of the elixir they're all drinking down at Wall St. and Broad.

Dow 13,619.89 +174.93; NASDAQ 2,709.03 +42.67; S&P 500 1,507.34 +22.33; NYSE Composite 10,030.15 +142.55

For the second straight session, advancing issue pummeled decliners, 4804-1513. New highs haven't yet gotten past new lows - an edge held by the lows since October 31 - but they're close. New lows carried the day, 260-214. With everything set up nicely for tomorrow's employment numbers, this indicator should turn over, vacillate for about a week, and then head back to dominance by the new lows.

As Christmas rallies go, this one is a little early, but don't be surprised if the Dow and other indices reach new highs within the month. January, however will be another story. The current uptrend is unsustainable, especially in light of the 4th quarter warnings already circulating from the Fed, individual companies and elsewhere.

While stocks were soaring again, the oil merchants figured to get in on the action, hoisting the price for a barrel of crude $2.74 to $90.23. Apparently, the oil futures traders figure that with all the extra money floating around this time of year, consumers might as well pay more for gas, home heating fuel, etc.

Gold gained $3.40 to $807.10. Silver added 17 cents to $14.63. Everything was up today. Doesn't that make you feel good? No need to feel any pain. It's the holiday season, after all. Deck the halls with ticker tape.

NYSE Volume 3,575,942,250
NASDAQ Volume 2,031,019,625