Bernanke, Paulson Speak, Markets Sink

One would suppose, with three-quarters of the Plunge Protection Team (PPT) busy testifying before congress, that there would be nobody at the controls to prevent a market sell-off.

That's precisely what happened - be it coincidence or otherwise - on Thursday, as Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox delivered testimony on the economy to Senate Banking Committee members.

In their remarks, both Bernanke and Paulson both indicated they felt the economy was in a somewhat delicate condition, owing mostly to a continuing credit crisis in which bankers have had difficulty lending to any but the most credit-worthy applicants.

What their remarks did not reveal, though hinted at, was that the bankers themselves were the cause of the precarious credit conditions, by participating in the massive fraud and deception that is now the subprime mortgage and related derivative investment mess.

And what a mess it is. Bank of America report released today suggested that the losses related to subprime mortgages was more than $7.7 trillion globally.

Another money center was hit with unfortunate fallout on Thursday, adding to the market's woes. Swiss financial giant UBS revealed a net loss of 4.4 billion Swiss francs ($4.0 billion dollars, $2.7 billion euros) in 2007, including an $18 billion writedown in damaged securities.

Dow 12,376.98 -175.26; NASDAQ 2,332.54 -41.39; S&P 500 1,348.86 -18.35; NYSE Composite 8,968.41 -105.07

Today's losses nearly matched yesterday's outsized gains, and even though the markets are higher for the week, momentum has clearly swung back to the bears. Declining issues outpaced advancers, 4720-1530, while new lows expanded the gap over new highs, 203-97.

Friday's economic reports include the NY Empire State Index and capacity utilization, though neither will likely weigh more on investors than today's dire and apprehensive assertions by Paulson, Cox and Bernanke.

Volume continues to be on the tepid side, as money largely sits, awaiting a safe entry point or going elsewhere.

Oil gained another $2.19 today, closing at $95.46. For the second day in a row, precious metals barely budged. Gold was up 80 cents to $911.00; silver lost 10 cents to $17,26.

Here's a tip. Buy sugar futures and sell corn futures. It's seven times more efficient to produce ethanol from sugar than from corn. On top of that, Tata Motors (TTM) is financing in a company which has tested and is producing a car that runs on air. That should serve as quite a blow to the oil barons.

NYSE Volume 3,630,146,750
NASDAQ Volume 2,270,238,000

Tech Drives Stocks Higher

While Tuesday's rally may have been all about perception over reality, Wednesday's massive move had everything to do with tech stocks.

Led by volume leaders Microsoft (MSFT), Cisco (CSCO) and Applied Materials (AMAT), the NASDAQ outperformed the other indices by a wide margin. The NASDAQ was up 2.32% at the close, followed by the Dow (+1.45%) and the S&P (+1.36). The broad-based NYSE Composite gained 1.21%.

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Stocks across the board were aided by consumer spending figures for January which were up 0.3% after losing ground in December, and while the gain is a plus, it's significance is minimal in the overall economic picture.

So too the current rally, which has put this week in stark contrast to the dismal performance of the prior one. Stocks bumped up against formidable resistance in the Dow 12,550 area and backed off going into the close.

Dow 12,552.24 +178.83; NASDAQ 2,373.93 +53.89; S&P 500 1,367.21 +18.35; NYSE Composite 9,073.48 +108.13

All of this sets up an interesting couple of days to close out the week. On Thursday, the only important economic news will be new unemployment claims, which will be released at 8:30 am. Friday, investors will be mulling over capacity utilization figures, net imports and exports, the NY Empire State Index and the University of Michigan's Consumer Sentiment reading.

Thursday could go either way, though breaking through the congestion and resistance could prove difficult. If stocks manage gains, the next level to overcome is in the 12,740 range, at the closing high of Feb 1st.

Advancing issues pounded decliners, 4419-1926, though new lows persisted in their long-standing (back to Oct. 31, 2007) advantage over new highs, 176-85. Expect that gap to decline if stocks stage another strong effort.

Oil gained 49 cents to $93.27 per barrel. Gold and silver were down and up marginally, respectively.

NYSE Volume 3,728,637,500
NASDAQ Volume 2,246,132,000

The Warren Buffet Rally

In typical fashion, the pre-market futures were pumped higher to avoid a massive sell-off at the open. Prior to the opening bell, General Motors (GM), Schering-Plough (SGP) and Credit Suisse Group (CS) all announced 4th quarter earnings that were... well, horrible.

General Motors posted the largest one-year loss in US automaker history, a staggering $38.7 billion for 2007. The company also announced buyouts to some 74,000 employees.

At Schering-Plough, the losses were explained away as charges related to the buyout of Organon Biosciences, but nevertheless were massive. The drugmaker said it lost $3.4 billion in the fourth quarter, or $2.08 per share, compared with a year-earlier profit of $182 million, or 12 cents per share.

Credit Suisse reported profits off 72% from the year ago period due to writedowns in subprime and other bad investments.

So, with that news in tow, the indices rocketed skyward, with the Dow up more than 100 points just twenty minutes into the trading day. This broke a string of six consecutive sessions in which the Dow had not surpassed the previous day's high and, for all intents, it appeared as though a massive short squeeze was underway. In fact, by 10:45, the Dow had surpassed the highs of the previous four days.

Having had their way via juicing the futures, the Fed saw fit to only accept $6.25 billion in repos. With $8.25 billion maturing, it left the investment banks to do the Fed's bidding with $2 billion less than yesterday. This cash shortage would come into play later in the session.

Within the first hour of trading, the Dow was up a whopping 190 points, a 1.5% gain, with the other indices following its lead.

By 11:30, it was clear that the battle lines were drawn at Dow 12,400. The bears kept trying to break it down, but the bulls defended it fiercely until just after 3:00.

Dow 12,373.41 +133.40; NASDAQ 2,320.04 -0.02; S&P 500 1,348.86 +9.73; NYSE Composite 8,965.35 +97.07

The bears finally drove the Dow down to 12,310 before giving way late and allowing the market to float back up to where it closed. It was an odd day, but indicative of a market that is being day-traded by professionals and a very dangerous place for the novice or buy-and-hold investor.

Bias remains to the sell side, and after today's questionable trade, Wednesday will almost surely spend much of the day in the red. Tuesday's rally was built on false promise and only a slight oversold condition, so a resumption of selling is expected.

On the day, advancers topped decliners again, 3838-2529. New lows exceeded new highs, 201-104. Volume was improved over the previous three sessions.

Tuesday's rally was largely tied to investor Warren Buffet who told CNBC that Berkshire Hathaway has offered to assume $800 billion in municipal bond liabilities from MBIA (MBI), Ambac Financial (ABK) and FGIC Corp., the three main insurers of muni bonds and also the companies which insured much of the toxic subprime debt held by the largest banks in the world.

The idea is nice in theory, but Buffet's bold offer neatly avoids the subprime slime, so the market shouldn't really have pinned much hope on it as a rescue measure. Besides, at least one of the insurers has rebuffed Buffet already.

Mr. Buffet is not a savior. He is a skilled financier and investor. The market is obviously full of fools who think that somehow he'll single-handedly fix a world-wide credit dilemma. Buffet made his offer because he thinks he can make money at it, not because he's a beneficent saint.

Commodities all eased. Oil slid 81 cents to $92.78; gold fell $15.60 to $911.10; silver was off 22 cents to $17.25.

NYSE Volume 4,028,390,500
NASDAQ Volume 2,221,637,500

Minimalist Movement

Left to their own devices in a beaten down market, investors generally buy stocks. Such was the case on Monday, a day in which a dearth of news and/or economic reports left traders mostly on their own.

After an early mishap - the Dow was down more than 110 points - traders got just enough urging from the PPT to push stocks into the green and kept them there for the duration of the session.

Volume was once again on the "who cares?" side of the ledger, as all but hard-core day-traders and bullish lemmings are content to sit back and wait for the next economic shoe to fall.

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One feature of the recent market is that today marked the sixth straight day that the Dow failed to reach the previous day's high, an indication that the bears are having their way overall.

The president delivered his annual economic report to congress amid much yawning and little else, restating his opinion that the economy was essentially sound (it's not) but there are short-term concerns (understatement of the year).

With few paying attention, the Financial Times released their version of good news, with this story: A repeat of the Great Depression is unlikely - a commentary that was neither concise nor convincing.

Of the Dow stocks, 11 were down and 19 up, with American International Group (AIG, -5.49, -11.72%) taking down insurers and General Motors (GM +1.32, +5/12%) leading the gainers, mostly on valuation.

AIG, the world's largest insurer, faced renewed calls that their exposure to subprime and other risky credit products had been underreported in filings.

Bargain hunters pumped up General Motors, despite reports of engine fires in Chevy Tahoe and Yukon SUVs.

In the broader market, advancers garnered a slender edge over losing issues, 3305-3009, though new lows continued to dominate new highs, 254-92.

Dow 12,240.01 +57.88; NASDAQ 2,320.06 +15.21; S&P 500 1,339.13 +7.84; NYSE Composite 8,868.28 +45.16

Commodities generally priced higher, with crude oil for March delivery registering a gain of $1.82, to end the day at $93.59. Gold added $4.40 to $926.70 and silver gained 36 cents to $17.47, nearly closing off the bargain window which has only been left open less than two weeks.

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The balance of the week looks to be dominated by Fedspeak, as a number of Fed governors, including Chairman Bernanke himself (slated to testify to the Senate Banking Committee), are scheduled to address a variety of groups.

The guvs should take pains to avoid use of the "R" word so as to not spook the markets. Investors are still clearly on edge and it doesn't take much to trigger an avalanche of selling, as we've seen in recent weeks.

Wednesday's retail sales figures, Thursday's initial unemployment claims and Friday's capacity utilization and NY Empire State Index should provide most of the economic chatter.

Earnings reports continue to flow. On Tuesday, Applied Materials (AMAT), General Motors (GM), Schering-Plough (SGP) and Credit Suisse Group (CS) will give traders plenty to mull over, as all but AMAT report prior to the opening bell. Caveat emptor.

NYSE Volume 3,507,467,750
NASDAQ Volume 2,072,297,125

Not Such a Good Week; Stocks Continue to Tank

Friday capped off another ugly week for stocks, as the late January rally - built on the back of a whopping 1 1/4% in federal funds rate cuts - has proven to be nothing but a mirage. That's not surprising, considering the historical impact of rate cutting in the face of a depressed business cycle, which happens to be little to none.

On the other side of those rate cuts inevitably sits inflation, which will become the next bogey man to confront the balding and bespeckled geniuses at the Fed. The natural reaction to inflation is to raise rates, and since the Fed won't be doing that soon, expect to pay more for just about everything as the value of the US dollar on world markets continued to erode.

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In any case, stocks fell for the 4th day out of 5, with the notable exception of the NASDAQ, which managed to finish marginally positive two days this week.

At the final bell, the Dow lost 551 points for the week; the S&P gave back 64; the NASDAQ dropped 99 and the NYSE Composite fell 454. It certainly wasn't pretty, but investors are beginning to get the idea that the US is already in a recession and the only reasonable thing to do is to sell stocks and get out of the way until some safe bottom forms.

Dow 12,182.13 -64.87; NASDAQ 2,304.85 +11.82; S&P 500 1,331.29 -5.62; NYSE Composite 8,823.12 -35.92

That bottom could be a distance off, as our brilliant leaders in congress decided to pass a stimulus package that will cost roughly $168 billion - money that will produce a deficit - in rebates to a large swath of individuals and families.

The plan is ridiculous. Consider a family I know well. Husband and wife both work, and have three kids in school, ages 10, 11 and 12. The kids go to public schools and both earners are making upwards of $45,000. They're pretty comfortable. This plan gives them $1200, plus another $900 for the kids ($300 per child) for a total of $2100. They don't absolutely need the money and much of it will likely go directly into the bank or to investments for the future (read: retirement or college funds). Nice country. Free money.

How an additional $168 billion of borrowed money is going to save the nation from the ravishes of recession is a good question, one which nobody in congress bothered to ask. After all, it's an election year and the incumbents saw an easy path to more votes for themselves. Hoo-rah!

Market internals were expectedly in-line with the headlines. Declining issues bettered advancers, 3679-2611. New lows topped new highs, 226-75.

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The oil barons apparently grew tired of not making so much money over the past couple of weeks and drove crude for March delivery up $3.66 to $91.77. Traders were so busy selling off stocks, they barely noticed. Gold leapt another $12.30, closing at $922.30. Silver gained 34 cents to $17.11. There's still time to buy before the metals really take off.

The recession is here, and normally, I'd say there's nothing to worry about as it's just part of the normal business cycle. However, this one looks rather ominous and has rough edges to it, especially considering the dearth of leadership in Washington. Whomever inherits the White House in the fall, they'll be getting a very, very raw deal in an economy that's retreating quickly from 8 long years of wild excess.

Be sure to read the story directly below this for a better understanding of why US equity markets were not another 2-4% lower this week, as they should have been.

NYSE Volume 3,768,491,500
NASDAQ Volume 2,275,363,250