Early Rally Crumbles on Recession Fear

One thing equity investors cannot escape in this discontented winter of 2008 is the overwhelming fear - bolstered by uniform economic reports and anecdotal examples of doom and gloom - that the US economy is headed for recession and that stocks will take a serious beating later this year.

That is the kind of environment that dominated the emotional trade on Wednesday as stocks struggled in the first half-hour, but eventually found their way to higher ground during the morning session.

By 11:30, the Dow was up 125 points, but that proved to be the high of the day as the hopeful rally fizzled and stocks headed south once more.

Shortly after 2:00 pm, all major indices slipped into negative territory, but it wasn't until an hour later that capitulation became the clear choice and the rout was on. All major indices recorded their third losing session in a row.

The Dow is already down 543 points for the week.

Dow 12,200.10 -65.03; NASDAQ 2,278.75 -30.82; S&P 500 1,326.45 -10.19; NYSE Composite 8,818.11 -56.39

Volume was on the pathetic side once more, which seems to indicate that there is a lot of money on the sidelines, waiting until this current downdraft subsides. That inference may be true, though investors wanting to put capital to work may have already opted for bonds (even though they are currently paying a negative return when measured against inflation), emerging markets or precious metals.

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The last of those is the obvious choice for many as a hedge against inflation, though both gold and silver have met some resistance at their recent highs and have backed off considerably, though many gold bugs view such pull backs as buying opportunities.

Such was the case today, as gold rose $14.70 to $905.00 and silver gained 21 cents to $16.55. Oil, on the other hand, fell another $1.27 to $87.14, as the outlook for demand continues to weigh along with the recessionary calls.

Declining issues beat advancers once more, 4018-2287. New lows ballooned the separation over new highs, 208-57. The number of stocks making new highs remains dismally low, a sign of the times.

After the close, Cisco (CSCO) reported earnings per share before unusual items of 38 cents per share versus 33 cents a year ago. Revenue rose to $9.8 billion from $8.4 billion. Those numbers were in line with analyst expectations.

NYSE Volume 3,861,878,500
NASDAQ Volume 2,362,025,750

Dow -370, Worst Loss of 2008; Top Ten Declines of the Year

This is how it goes n bear markets: sharp rallies followed by devastating declines. As New Yorkers toasted the Super Bowl champion Giants with a ticker-tape parade, Tuesday's action on Wall Street was nothing short of a bloodbath.

By the time the closing bell rang, the Dow had registered its worst performance in what's turning out, so far, to be a very difficult year for bullish investors.

On the Dow, stocks opened 100 points below the previous close and slipped 200 points within the first 20 minutes. From there, all the indices drifted lower for the remainder of the session without even a hint of a rally.

What set the markets on their collective ears was the January reading by the Institute for Supply Management's (ISM) Services index, which drooped to 41.9, from a revised 53.2 the previous month. A reading below 50 indicates contraction; the unexpected decline reignited recessionary fears.

The ISM noted that its new non-manufacturing index measured 44.6% using a new methodology. Nevertheless, the number was devastating no matter how it was computed.

Dow 12,265.13 -370.03; NASDAQ 2,309.57 -73.28; S&P 500 1,336.64 -44.18; NYSE Composite 8,874.50 -327.61

As the day wound to a close, volume accelerated and the indices closed at, or very close to, their lows of the day. Though the weight of trade was somewhat moderate, there was absolutely no doubt as to the direction.

All 30 of the blue chips closed in the red, an indication of the carnage. Leading the way was beleaguered Cititgroup (C) -2.12 (-7.43), with 8 other Dow stocks down more than 4%. The only standout was McDonald's (MCD), which closed only 0.04 lower.

Here's a list of the ten largest losses on the Dow so far in 2008:

Feb. 5: -370 points
Jan. 17: -307
Jan. 15: -277
Jan. 4: -256
Jan. 10: -247
Jan. 9: -238
Jan. 2: -221
Jan. 25: -171
Jan. 22: -128
Feb. 4: -108

Bear in mind, there have only been 24 trading sessions thus far into the new year.

Losing issues beat back gainers, 5022-1275. New lows expanded the gap over new highs, 180-61.

Commodity traders were equally discouraged. Oil futures slipped $1.61, to $88.41. Gold was hammered down $19.10, to $890.30, while sister silver fell 44 cents to $16.35.

After a 1300+ intra-day point run on the Dow, the index has given back nearly 500 points in the past two sessions. All indicators are lining up in favor of a recession. The only people not yet convinced are the hopelessly clueless and the dead.

In a related issue, Downtown Magazine's (parent publication of Money Daily) new Misery News Index showed gains of between 10 and 20% week over week for most of the referenced terms. The Misery News Index tracks news stories containing one of twelve search words, such as inflation, layoffs, recession and homeless.

NYSE Volume 4,142,740,000
NASDAQ Volume 2,435,409,000

Traders Take Profits; Leery Google Cries Foul

A smattering of good news appeared on Wall Street as the week opened, though the comparative numbers still indicated a slowing economy persisting.

On Monday, the Commerce Department reported that US factory orders rose by 2.3% in December, an improvement from November's 1.7% gain and the largest increase since July.

Orders for big-ticket goods were up 5%, but "nondurable" goods, including clothing, textiles and beverages slipped 0.4%.

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For the year, total orders were up just 1.4%, the worst annual performance since 2002. That was a large fall from 2006, when total factory orders rose by 5.1%.

Taken together, the annual numbers carry more weight than the one-month bump in December and investors responded by taking some profits from the previous week off the table.

By 10:00 am, the Dow Industrials were off 75 points and stocks continued to trade in a narrow, lower range for the balance of the session.

Dow 12,635.16 -108.03; NASDAQ 2,382.85 -30.51; S&P 500 1,380.82 -14.60; NYSE Composite 9,202.11 -75.47

Volume was extremely light, an indication that investors are in a wait-and-see mood, with earnings season winding down and only minor economic news scheduled for release this week.

On Wednesday, preliminary 4th quarter productivity figures and crude oil inventories will be released. On Thursday, traders will be watching the initial unemployment claims after a big jump last week. Pending home sales and consumer credit figures are also due for release on Thursday.

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Topping the news is Microsoft's (MSFT) hostile takeover bid for Yahoo (YHOO) and Google's (GOOG) scathing criticism of the potential union of two of the internet's larger players.

The response, penned by one of Google's lawyers, smacks of hypocrisy and fear. Google owns a domineering position in search that borders on a monopoly, though the combination of their two main rivals could pose a serious threat to that dominance.

Yahoo has yet to respond to the roughly $31 per share offer by Microsoft, but analysts are saying it will be difficult to refuse as it represents a 62% premium over Yahoo's price prior to the offer.

With little to move stocks, decliners took command over advancing issues, 3663-2598, though the gap between new lows and new highs continued eroding. New lows held a slim edge on the day, 121-98.

Crude oil priced $1.06 higher, at $90.02, while gold fell $4.10 to $909.40 and silver dropped 9 cents to $16.78. The reduced prices in the precious metals may indicated a prime buying opportunity in these supercharged markets which should only trend higher over the coming months.

NYSE Volume 3,290,565,000
NASDAQ Volume 2,027,786,875

The Bizarre World of Wall Street

Evidence of market and media manipulation is rampant these days along with counter-trend trading patterns on the exchanges.

After the MBIA fiasco on Thursday (see yesterday's post), Friday morning brought more bad news to investors when the Labor Dept. reported that the US economy shed 17,000 jobs in January.

Mindful of yet another set of painful numbers indicating the decline of the American economy and an all-but-certain descent into recession, traders would have been deemed prudent had they made a timely exit from equities of all kinds.

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But what they did on Friday - alas, most of the past two weeks - defies any reasonable explanation. Once again, traders engaged in another day of incessant buying, exactly the opposite of what one might expect. Believe me, there are more than just a few analysts out there scratching their heads and pulling out what little hair they may have left.

Dow 12,743.19 +92.83; NASDAQ 2,413.36 +23.50; S&P 500 1,395.42 +16.87; NYSE Composite 9,277.58 +151.42

The 1240-point rally off the January 22 intraday low should be hailed as a marvel of modern engineering - of the markets and the media. It's almost as though investors actually believe that a 1.25% emergency cut in the federal funds rate over an 8-day period is some sort of signal that nothing but smooth sailing lies ahead.

In fact, the rate cuts, while possibly stimulative to the wild boys on Wall Street, are nothing short of disastrous for the average American consumer, a persona inconveniently left out of the mix, apparently. The eventual inflationary pressures and continuing weakening of the dollar should prove critical to the continued viability of two standards: that of living in America and the dollar as reserve currency. Both are under severe assault and the Fed has done nothing to prevent further erosion.

What's really occurring on Wall Street and in the offices of the Fed and at Treasury is a concerted, continuing bailout of a failed banking system. Today, the Fed announced two more February auctions for bankers in distress and promises of more to come. Under Ben Bernanke, who earned the moniker "Helicopter Ben" for his metaphoric dropping of dollars from flying machines, the Fed has indicated that loose credit policies - the exact same ones which got us into this banking seizure to begin with - will reign supreme.

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No doubt the government is in compliance with this policy and will commence bombing the capitol of any central bank which attempts to call in any US debt, no matter how worthless it is or how shaky our ability to pay. We're a bankrupt, third world nation now. Get ready for runaway inflation for essentials (food and energy), combined with stagnation and eventual deflation, without any way out.

The recent moves of the Fed and Treasury and Wall Street's response signals something much more sinister at work than a mere "down" portion of the business cycle. America is headed for the worst recessionary period since the Great Depression and maybe even worse than that.

Buy gold and silver, get your passport and get out of the country before the borders are closed. Remember what America was like in the 1950s and 60s, when we were truly a great nation. America, in its current configuration, is a failed state being run by an international criminal cabal. Market prices for US stocks are not rooted in reality. Wall Street has morphed into the most perverse, disrupted Bizarro World imaginable.

Heaven help us.

On the day, advancing issues held sway over decliners by nearly a 3-1 margin, 4650-1688. However, for three months running, with the exception of two days in early December, 52-week new lows have outpaced new highs and they did so again, 149-110.

In response to Wall Street's curious trading, commodities sold off. Oil priced $2.79 lower, closing at $88.96. Gold fell $14.50 to $913.50. Silver dropped 13 cents to $16.87. Could we be witnessing the beginning of a deflationary trend? It's far too early to tell, but readings from the labor market indicate a growing tidal wave of layoffs and workforce reductions on the horizon.

Enjoy the Super Bowl (maybe that was the real message from the market: can't have a crash just before the biggest game of the year). Take the Giants and Vegas' generous 12-point spread.

NYSE Volume 4,609,755,500
NASDAQ Volume 3,094,480,750

The Brink of Economic Collapse

Today's rigging of the major stock indices - pushing stocks higher on one of the most potentially calamitous days ever - is one for the history books.

A little background is necessary to understand the measures taken to prevent a disastrous marketwide sell-off.

Prior to the market opening, MBIA (MBI) announced that they had taken serious writedowns due to the mortgage-backed securities that have imploded due to foreclosures. The company, a single line insurer, which only insures financial instruments, primarily municipal and corporate bonds, lost $2.3 billion, or $18.61 per share, in the fourth quarter. There were also murmurings of the company's AAA rating being cut by Standard & Poors.

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This was no run-of-the-mill insurance company. This is the company which has underwritten a large portion of the subprime loans, repackaged as collateralized debt obligations (CDOs) that have been blowing up all over the place. This was serious business.

Two articles cover the importance of MBIA and the weight of a potential ratings cut:

Mike Whitney, writing for Counterpunch has an excellent overview in his recent article, The Great Credit Unwind of 2008 in which he quotes CNBC stock guru Jim Cramer in an interview with Chris Matthews:

"...there are a group of insurance companies which insure all these bad mortgages and, Cris, I think they are all about to go belly-up, and that will cause the Dow Jones to decline 2,000 points."

Then there is Bloomberg's exclusive report, by Christine Richard and Katherine Burton, on hedge fund manager William Ackman, who ran up a $109,000 photocopying bill studying MBIA's business in 2002: Ackman Devoured 140,000 Pages Challenging MBIA Rating.

With that news in the hopper along with an "unexpected" rise in unemployment filings, when the bell rang on Wall Street Thursday morning, the index slumped an immediate 192 points but suddenly stopped in its tracks. For the rest of the day, it was nothing but roses, as all the indices gained, uninterrupted, for the remainder of the session.

What happened? The principals of MBIA came out and vociferously defended their AAA rating, saying they have met all of the requirements.

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Chief Executive Gary Dunton said in a conference call, "Our own conclusion is that the market has overreacted to the real and obvious problems that we've had, as well as to the fear-mongering and intentional distortions of facts about our business that have been pumped into the market."

Naturally, Dunton could not say just who was doing the fear-mongering or distorting facts about MBIA's business (likely because nobody is), but armed with these reassurances and a helping hand from the omnipresent, of late, Plunge Protection Team (PPT), a/k/a the President's Working Group on Financial Markets, it was nothing but blue skies and apple pie for investors in US equities all day.

Interestingly, with five minutes left in the session, S&P announced that it had cut its "AAA" ratings on FGIC Corp's bond insurance arm, and placed its top ratings on the bond insurance arm of MBIA on review for downgrade.

How inconvenient for investors who sent MBIA up 11% (+1.54, 15.50) on the day and dutifully bought all manner of other equities. All of that money "invested" in the bond insurer and elsewhere may just go "poof" when the market opens on Friday.

Consider that over the past two days, we learned that GDP grew by a mediocre 0.6% in the fourth quarter, unemployment claims are rising (the Labor Dept. laughably argued that Thursday's figures were somehow skewed higher by Martin Luther King's day, though they declined to say just how a day off would affect people filing for unemployment benefits), personal spending in December rose by the slowest pace since June, a tail-dragging 0.2%, yet stocks, somehow, continue to price higher.

Before the opening bell tomorrow, at 8:30 am, the non-farms payroll numbers - or labor report - for December will be released. Experts expect to see an increase of a meager 80,000 new jobs created in the month.

Dow 12,650.36 +207.53; NASDAQ 2,389.86 +40.86; S&P 500 1,378.55 +22.74; NYSE Composite 9,126.16 +131.71

Meanwhile, the number of new lows expanded again in comparison to new highs, 251-83, while advancing issues unsurprisingly held the advantage over decliners, 4567-1800.

Oil fell 58 cents to $91.75, while gold gained $1.70 to $928.00. Silver reached $17.00, up 24 cents on the day.

If the December jobs data is dull and there's more evidence of the US slipping into a recession, don't worry. The way the market is currently being manipulated, your stocks are almost certain to go up. (Please, don't take that advice seriously.)

NYSE Volume 5,369,650,500
NASDAQ Volume 2,925,491,250