Bernanke Blinks; Big One Forestalled

With markets tanking worldwide on Monday, the calls came in from central banks and economists around the world to Ben Bernanke to rush his rate cuts to the market to avoid a catastrophe.

By Monday night, the Federal Reserve Chairman had made up his mind and folded like a cheap suit, but the markets wouldn't know until around 8:30 am ET. Prior to that, here's what was flashing on trading screens:

06:47 am : S&P futures vs fair value: -57.3. NASDAQ futures vs fair value: -70.8.

06:47 am : FTSE...5586.70...+8.50...+0.2%. DAX...6729.26...-60.73...-0.9%.

06:47 am : Nikkei...12573.05...-752.89...-5.7%. Hang Seng...21757.63...-2061.23...-8.7%.

With the announcement of an emergency cut to the federal funds rate of 75 basis points (0.75%), the markets refused to go along. At the opening bell, the NASDAQ was down 114 points, the Dow fell 450 minutes after the open and at 9:33, the S&P was down 31 points.

From there, stocks took a u-turn, thanks to underhanded funding from the Plunge Protection Team (PPT) which immediately knocked 200 points off the Dow's losses. As the day progressed, the "invisible hand" of the PPT continued to pump money into stocks, nearly erasing the losses entirely.

Trading was highly suspect throughout the session. Volume was explosive in the first hour, then dawdled and dwindled, even though the totals were on the high end. In general terms, the Fed and Treasury pulled off one of the more dramatic and obvious frauds in stock market history.

Dow 11,971.19 -128.11; NASDAQ 2,292.27 -47.75; S&P 500 1,310.50 -14.69; NYSE Composite 8,661.18 -133.68

Even the press was involved in the fraud. In this story from Reuters, headlined on Yahoo Finance at 10:56 am as Wall St. cuts losses in half on bargain hunting, though the Reuters headline actually read, Market falls on recession worries.

From the article:

But by midmorning, major indexes had halved their losses, as investors snapped up beaten-down retailers, home builders and financial services companies after the Federal Reserve cut interest rates by 75 basis points in a surprise intermeeting decision.

That statement is almost certainly untrue and Reuters would be unable to provide proof if required. The story was later pulled from the list of available headlines. Nobody was buying stocks except agents of the Federal Reserve and the Treasury through their proxies at Goldman Sachs, Bear Stearns, Lehman Brothers and Merrill Lynch. This was typical Plunge Protection Team work, stopping the markets from a total washout, which was almost certain to occur, despite the Fed's desperate emergency rate cut of 75 basis points prior to the opening bell.

Stock manipulation was evident throughout the session, with the Dow closing to within 7 points of break-even just after 3:30 before selling off with gusto, losing over 120 points in the final 30 minutes.

While the Fed pumped $10 billion into the markets through their typical open market repurchasing (repo) activity, there was probably another $30-50 billion in secret, "underground" funds through the PPT, which is kept off-the-books and will likely never be revealed except to the inside players who manipulate the market with magic liquidity, flooding the world with fake capital and doing irreversible damage to the US dollar.

The point is that the markets are being falsely pumped to the upside and have been for years. There's likely an overhang of more than a trillion dollars worth of bogus liquidity that's been priced into stocks over the past 8-10 years. The number might actually be larger, and I am using a trillion as a conservative estimate.

Real damage is done to markets when manipulated by secretive bodies such as the PPT. Since equity prices are primarily perceived value, investors are subjected to stock prices that are an illusion. US stocks on average are probably worth 20-30% less than present values due to these distortions.

While the newspapers and internet reports will praise the Fed's "quick thinking" the truth is that stocks will continue to decline. Truly wise investors know that this market - and most other world markets - is teetering on the brink of collapse, and only clandestine operations saved it from total destruction.

The internals were telling. Declining issues pummeled advancers by 4064-2385, but the reading of new lows was literally the highest number I have ever seen. There were 2070 new lows to only 69 new highs. Nearly one in three stocks hit 52-week lows on Tuesday. Clearly, the market averted meltdown... for now.

Oil traded 72 cents lower, closing at $89.85. Gold was up $7.90 to close at $889.80. Silver gained just 2 cents to $16.04.

The view from this outpost is that investors should expect more severe losses over the next 3-6 months. The Fed's magic won't work indefinitely on a global financial system that's essentially broken.

NYSE Volume 6,256,598,000
Nasdaq Volume 3,109,516,000

Stocks Tank Worldwide. Is This the Big One?

Are we setting up for The Big One?

While America was taking the day off in honor of Martin Luther King, Jr., one of our nation's greatest defenders of liberty, equality and justice, markets around the world were crashing from the after effects of the credit crisis and now the looming confidence crisis in the USA.

This article tells most of the story, but the reality won't hit the US shores for another 12 hours. By the time US equity markets open, the Asian markets will have gone through another day and Europe's will be well into their afternoon sessions.

Some of the drops on Monday were shocking:
Britain's FTSE-100 -5.5%
France's CAC-40 -6.8%
Germany's DAX 30 -7.2.
Hong Kong's Hang Seng -5.5%

The meaning in all of this for US stocks is disturbingly real, since all of the declines worldwide are keyed to the fear of a US recession. As the so-called buyer of last resort, the US bears the blame and also will likely suffer consequences equal or worse than those of our fellow capital-intensive countries. After all, the recession is going to happen here first.

Shades of the Great Depression

While the actual causes of the Great Depression are still the focus of argument among economists, what remains clear is that most of the world was plunged into an economic abyss after the market crash in 1929.

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The actual extent of the damage to capital markets is still unclear at this point, and while not wanting to be alarmist, I've remained steadfast that the subprime mortgage blow-up was more of a trigger than an isolated event. So far, with the Dow already off more than 14% since the October peak, I've been right. And now it appears that we are in the second phase of a bear market, where losses are the steepest.

Where this is all headed is in the wrong direction. Using Fibonacci calculations of 33, 50 and 67% declines from the previous gain (roughly 6800 points), the declines would be of the order of 2244, 3200 and 4690 points on the Dow.

With the Dow already close to that 2244-point decline, I had expected a bounce and the gains on Friday morning might have been all there was. That makes the next stop around 11,000, and if that breaks down, somewhere around 9500 may be the bottom.

It could get worse, however, if, as anyone paying attention might recall, the stock market began its tremendous bull run at the start of the Iraq War in March of 2003. Considering the massive fiasco that campaign has devolved into, might there be some coupling of the market gains to the war "effort" and if so, what have we wrought but death, destruction and about a trillion dollars in wasted spending?

The last 4 1/2 years of "prosperity" might have been an illusion. If that's the case, we're in for some hard times indeed.

If the Dow drops below 9500 and begins to head for the 7500-8000 area, it could portend catastrophe, not only for the stock market but for the US and possibly all other economies.

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Retracing the missteps of the Great Depression, government was found either powerless or ineffective in stopping natural economic forces from occurring. We may be seeing a similar scenario today. Despite three rate cuts by the Federal Reserve amounting to a total of 1%, stocks still lost considerable value.

Now, world reaction to the US government's plan has been met with skepticism if not outright disapproval. Since investors and economists are generally better-equipped than government bureaucrats and politicians to read the "tea leaves" correctly, the instinctive selling by the cognoscente may have already begun. As usual, the really smart money has gotten out of the way earliest.

We may be in the earliest stages of a cataclysmic economic event. Remember, during the Great Depression we had the relative security of the gold standard. Such a limiting mechanism no longer exists in the leveraged world of floating currencies.

If we are indeed going to hell in a handbasket, the signs should be easy to discern and some have already appeared: inept politicians, secrecy and distrust within the banking community, a continuing decline in stocks with only brief respites, falling prices, falling currencies, disruptions in trade and commerce, business failures, bankruptcies, municipal budget pressures, massive real estate foreclosures from delinquencies on mortgages or taxes or both.

Inflation may turn out to be the least of our worries. The temporary advance in prices may turn out to be chimeric as the real devastation of slack demand takes hold in coming months. Inflation can be beaten back. A cyclical deflationary spiral is a demon for which nobody is prepared to confront, but we're fortunately not there yet.

A couple of months ago, I mentioned that some people might consider cashing out their IRA or retirement funds, even if it meant losing 20% of the portfolio's value as a penalty. Today, that almost looks like sound advice, especially if you're invested in an indexed fund. Since August or October, you may already be down close to that 20%. Wouldn't you rather have whatever's left in your control, rather than that of a fund manager who is likely to be chasing profits where none exist?

I am not a pessimist. I am a realist and I only present the views as a cautionary tale. If the worst is yet to come and the economic reality is more severe than most of us wish to imagine, it's far better to be forewarned than caught in the snare of an economy biting the dust.

Is sure hope my father reads this. Despite my constant warnings, he continues to play the market long and loses. I fear for his economic fate, but more for the welfare of those under 18 who don't already have a place at the table, but will be picking up the scraps.

Leading Indicators Down; Why Rebates Won't Work

The stock market got the bump it so richly deserved after dropping 600 points on the Dow over the last three days, but it was very short-lived. Shortly after
the Conference Board's Index of Leading Economic Indicators fell another 0.2 in December, the markets retreated from their highs of the day and continued to slide into the red. By 11:30 am all of the major indices were in negative territory, where they would stay for the remainder of the session.

The markets got a boost from IBM, which raised its outlook for 2008, and General Electric (GE), which reported earnings 3 cents better than expectations. The pair of blue chippers were a few of the rare bright spots.

Dow 12,099.30 -59.91; Nasdaq 2,340.02 -6.88; S&P 500 1,325.19 -8.06; NYSE Composite 8,794.86 -24.09

President Bush made a brief appearance just prior to noon, outlining his proposals for tax rebates to middle and lower class Americans. The basic idea is for the government to issue checks of roughly $800 for individuals and $1600 for families to spend as they see fit.

Wall Street responded to the president's sketchy plan by selling off further, as the street believes relief for companies, not individuals, would be more appropriate. One can understand the position of the investment crowd, though everyone would surely be thankful for an extra paycheck or two this Spring.

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The problem with handouts is that they are one-time, short-term quick fixes and will do little to alleviate the core problems facing American business, which are lack of competitiveness, innovation and job creation. Certainly, more long-term good would come from either a jobs program, capital investment incentives, or, better yet, a combination of the two. But the president and congress are hell-bent on a quick fix prior to the elections. Too bad that this plan will fall flat on its face. It's like slapping a band-aid on a gunshot wound.

Also, there's nothing in what the president has proposed that gives a break to small business, which employs nearly 75% of the nation's workforce. Tax credits for new hires or capital spending would easily be more preferable to a one-time check that many people will simply waste on DVDs, plasma TVs or other consumables.

The plan, with which congress is in general agreement falls well short on creativeness and lasting effect. In total, even $140 billion worth of direct checks to Americans is not going to solve anything. Just in case anyone in Washington, DC is paying attention, something should be done about our aging infrastructure, too.

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Consumer-based capital boosting is about as politically-inspired as the numbskulls in DC can get. And you can bet your bottom dollar that it will be self-praised as being a non-partisan effort. It's an election year and everybody on Capitol Hill wants to take credit for something.

As the trading wound through the afternoon, stocks remained solidly in the red, with every small rally immediately expunged by a fresh round of selling, as has been the case since Christmas.

Internals were predominantly tilted to the downside. Decliners clobbered advancing issues, 4064-2343. New lows expanded again and widened the gap over new highs to 1190-48. Those numbers are correct. Only 48 new 52-week highs and about 1 in 5 stocks hit a new low. And some people are still asking what stocks are good buys. Amazing.

For the week, the indices were crushed:
Dow: -506
S&P 500: -76
NASDAQ: -100
NYSE Comp: -552

Only repeated money-pumping from the PPT kept the markets from complete collapse.

Good thing Monday is a holiday and markets are closed. It will give the manipulators more time to devise strategies to delay the inevitable total market meltdown.

Oil was up 44 cents to $90.57; gold priced up 60 cents to $880.50. Silver was higher by 19 cents at $16. 09.

Volume on the NYSE was the highest of the new year.

NYSE Volume 5,924,962,000
Nasdaq Volume 2,937,191,750

Merrill Lynch Wasn't Speaking, Listening or Paying Attention

Thursday's activity on Wall Street more resembled a mad scramble for the exits than an orderly trading session. After a brief excursion into the forbidden land of UP, the major averages all fell into negative territory at 10:00 and remained there for the rest of the day.

The main driver was once again a beleaguered banking and investment outfit, this time the veritable Merrill Lynch (MER). The company ads from years bygone used to tout, "When Merrill Lynch speaks, people listen." Well, Merrill certainly got lynched today, and good, as the company posted a colossal loss of $12.01 per share, the worst in the firm's 94-year history. In actual dollar terms, the total was $9.91 billion. Additionally, Merrill wrote down $14.6 billion in bad debt, mostly mortgage-related.

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Wall Streeters took notice, slamming the stock down to $49.45 (-5.64), a 10% haircut.

During the morning affairs, Fed Chairman Ben Bernanke spoke to Congress about the condition of the economy, wryly stating the obviously false: that the Fed thought the economy would not fall into recession, rather that growth would be slow.

On the other hand, the chairman urged congress to swiftly propose and pass "stimulus" legislation, and those remarks obviously rattled traders as stocks began to tumble as he spoke.

Also contributing to the steep declines, the Philadelphia Fed regional manufacturing survey came in at -20.9, its lowest number since October 2001, and far below the consensus estimate of -1.5. Any negative number reflects a contraction in manufacturing in the region, and this number was serious.

Dow 12,159.21 -306.95; NASDAQ 2,346.90 -47.69; S&P 500 1,333.25 -39.95; NYSE Composite 8,818.95 -254.48

The extent of the carnage was obvious, even to the most casual observer. All of the major indices fell to levels not seen since last March, and, in the case of the S&P 500, the close was the worst since October, 2006.

Certainly, the worst is not nearly over for the US economy nor for stocks. While in November of last year, there were those doubting that we were looking squarely at a market correction, we find today these same types doubting the existence of a bear market.

Let's get one thing clear, right here, right now: We are in the beginning of the second stage of a serious bear market. The second stage (the one we are currenlty in) is where the steepest losses occur.

The next 6-9 months will be extremely challenging to anyone who is either holding or buying stocks for gains.

Only nimble traders playing bounces or astute market adherents going short or playing puts in the options markets will come out of this period unscathed.

On the day, declining issues trampled advancers, 5189-1195. This is not yet at the preferred washout level of a 5-1 or better ratio, so the indication is still heavily biased toward continued losses. New lows, which have held sway consistently over new highs every day save two since October 31, 2007, expanded again. There were 848 new lows to 78 new highs.

In the commodities market, oil eased again, losing 89 cents to $90.13. Gold lost -2.60 to $877.30, while silver dropped 9 cents per ounce to $15.81

With most of the severe investment bank earnings losses now out of the way, the market may be able to take a bit of a breather on Friday, but don't bet the bank on it. This is the worst environment for investors to chase gains and any upward movements will be met with waves of concerted selling.

NYSE Volume 5,536,065,500
NASDAQ Volume 2,836,430,000

No Respite Supplied by Powerless PPT

Traders wore their fingers to the bone on Wednesday in a wickedly volatile session.

The major indices see-sawed their way from losses to gains, but eventually fell prey to the relentless bears stalking Wall Street.

During the session, the Plunge Protection Team (PPT) swung into action on at least two separate occasions, though their presence was evident in the severe swings heading into the close.

On the day, the Dow was both up and down more than 110 points, while the NASDAQ - which spent the majority of the day in the red - swung from a loss of 56 points to a gain of 12, before sellers finished off the techs into the close.

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While the Dow's blue chips were the least affected on a percentage basis, the last half hour was particularly vicious to, as the Dow sold off 115 points heading into the 4:00 pm close.

Dow 12,466.16 -34.95; NASDAQ 2,394.59 -23.00; S&P 500 1,373.20 -7.75; NYSE Composite 9,073.43 -98.74

What investors are trading are all of the ominous signs of recession. Corporate earnings estimates have been slashed - not only in the financial sector, but in consumer discretionary (retail) and technology as well - inflation roared back in 2007 at a pace not seen since 1991 and there seems to be no end to the troubles in the housing and credit markets.

Amidst the chaos, the PPT and the Federal Reserve fight valiantly against the natural forces at play. The economy has either slowed, is frozen or retreating, and all of the money the Fed prints and sends to its agents in the markets does no good. Every rush of buying is followed by vigorous selling.

Most of the carnage was done in the broader markets, with the NASDAQ and the NYSE Composite losing 0.95% and 1.08%, respectively.

Advancing issues actually surpassed decliners, 3324-3070, though new lows maintained their wide gap over new highs, 737-90. All indications suggest the bear is just beginning to show its teeth and a losing bias should be the norm at least until the Fed meeting on the 30th.

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Anyone looking for a bounce after weeks of ravaging is engaged in just so much wishful thinking. The only hope for any kind of positive trend will come on January 30 when the Fed is expected to trim the federal funds rate 50 or 75 basis points.

However, the Fed, like the PPT, is nearly powerless to prevent a full-blown market meltdown as investors shed stocks like worn our shoes. Volume was extremely heavy, nearly matching January 9 as the highest volume session of the year thus far.

Tomorrow could prove to be the bloodiest day yet, as Merrill Lynch (MER) will announce an expected loss of $4.57 per share for the 4th quarter of 2007 prior to the market open. Should Merrill's losses exceed the already ghastly expectations, a 150-point gap lower at the open could occur. Additionally, with options expiration on Friday, volatility should be equal or more erratic than today.

NYSE Volume 5,336,274,000
NASDAQ Volume 3,391,137,750