Bear Stearns Blows Up, Stocks Slide

For the past week, the denials had been adamant. Officials at Wall Street brokerage Bear Stearns contended that their business was sound and their liquidity position stable.

On Friday, all of the bluster was gone, replaced by admissions that the company was in the throes of a severe credit squeeze and a bailout plan was devised by JP Morgan and the Federal Reserve.

For its part, the Fed trotted out Chairman Ben Bernanke, who once again warned that home foreclosures were damaging to neighborhoods and to the overall economy. Naturally, what the Chairman failed to delineate was the utter failure of the Fed and the banking community to provide safeguards against defaults all through the explosion in risky mortgage vehicles during the past decade.

Now that the banks themselves have their necks in the guillotine, Bernanke and his friends want reforms. How quaint. How reactive and how completely artless are the supposed "rescues" and "solutions" promoted by the Fed.

Bear Stearns typifies the kind of hubris and delinquency rampant in the banking and finance sector of the economy. Bear Stearns, which traded for as much as 159 per share as recently as May of last year, closed down 26.15 (-45.9%) at 30.85. Surely, the financial services firm is facing dire times ahead.

Essentially, Bear Stearns, like many other major players on the Street, is currently unable to finance their ongoing operations because nobody will loan them any more money. They've mismanaged their business and now the Fed is promising to hold their worthless paper. Sadly, the burden will eventually fall upon every living American. For years we will be plagued with higher taxes, lower living standards and price disruptions in everything from mortgages to loaves of bread.

That will only erode the value of the dollar even further. We are witnessing the evisceration of the US dollar as the de facto reserve currency of the world. Foreign central banks and large financial dealers are increasingly wary of buying our debt or valuing deals in dollar-denominated amounts due to its rapidly-declining value.

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What Bear Stearns, the Fed, the banking community and most of America fails to admit is that years of rampant credit expansion, massive government deficits and a wickedly-lopsided trade imbalance has at last destroyed the value of the currency and shattered confidence worldwide.

The complete failure of the US economic system will have ramifications far and wide throughout the worldwide floating fiat-money system. When the top dog yelps in pain, the smaller dogs whine along in time.

Bear Stearns' condition is nothing new. Bankers, all the way up to the level of the Federal Reserve, haven't managed the wealth of the nation well at all. The most obvious manifestation of their mismanagement is the ever-rising rate of inflation, though stagnation in real wages runs a close second. Wealth, in America, is a fleeting thing. At this very moment, some of the wealthiest individuals in the country are literally losing millions every day.

Bear Stearns marks neither the beginning nor the end of this crisis. We are, by most accounts, still in the early phase of what promises to become a long, drawn-out dramatic collapse.

Dow 11,951.09 -194.65; NASDAQ 2,212.49 -51.12; S&P 500 1,288.14 -27.34; NYSE Composite 8,635.92 -191.24

Stocks followed the lead of Bear Steams in hammering prices lower once again. Tuesday's meteoric rise (over 400 points higher on the Dow), was nearly wiped out by Wednesday and Friday's losses. For the week, the Dow was up less than 60 points, the S&P lost five points, while the NASDAQ finished unchanged, to the penny.

The dollar index continued its relentless decline, off more than 15% since January 2007.

Declining issues hammered advancers on the day, 5064-1213. New lows outnumbered new highs, 527-96. Volume was very high signaling that the selling has not only resumed, but likely will carry on for some time.

Oil backed off an entire 1 cents today, closing at $110.21. Gold finally met the expectations of investors closing at an even $1000 per ounce, up $6.20. Silver also closed at a new record high, $20.66, up 24 cents.

Surely, next week and the months ahead will be difficult ones for investors. There is more and more bad news to come, piled atop an already mountainous heap. Our leaders, both in government and the financial community have failed the US population, and badly.

It is long past time for change. Unfortunately, those in power will not go away quietly.

NYSE Volume 5,344,189,500
NASDAQ Volume 2,574,493,500

Laugh (or lie) of the Day: End in Sight for Subprime Writedowns

Today's word from Standard & Poors that the "end is in sight" for the massive subprime writedowns taken by major financial institutions, is as ludicrous and bittersweet as news can become.

The ratings agency issued word that the subprime losses had reached the "halfway point" amidst yet another spate of bad news that had markets reeling early in the trading session.

Prior to the opening bell, the Commerce Department reported that retail sales fell by 0.6 percent in February, while analysts had been expecting a gain of 0.1%.

Chiming in, the Labor Department noted that first time applications for unemployment benefits was unchanged, at 353,000. Import prices also registered a gain of 0.2% in February.

With that news in hand, investors quickly sold off stocks, sending the averages to intraday lows, with the Dow down more than 200 points in the first hour of trading.

With the manufacture of positive news the latest weapon in the arsenal of attacks against falling equity prices, the S&P ploy was just what the spin doctors ordered. Stocks eventually turned positive, with the Dow registering a 100-point gain just after 2:00 pm.

Dow 12,145.74 +35.50; NASDAQ 2,263.61 +19.74; S&P 500 1,315.48 +6.71; NYSE Composite 8,827.16 +45.93

Of course, the hot air eventually was mostly blown out, and the session ended with stocks holding onto marginal gains.

Advancing issues managed to beat back decliners, 3706-2535, though new lows stayed ahead of new highs, 497-84.

Over in the commodities pits, the morning's dismal economic news brought out the best, with gold, silver and oil all reaching all-time highs. Oil gained 41 cents to close at $110.33. Gold soared, briefly trading at over $1000 per ounce, before backing down to finish at $993.80, up $13.30. Likewise, silver added 43 cents to end up at $20.42.

What's interesting, sad and funny all at once about the markets is that any small sliver of good news is magnified far beyond its importance, while bad news is simply taken in stride. While the markets continue to wriggle and writhe their way toward some kind of bottom (probably 12-18 months away), the merchants of happiness on CNBC and at the brokerages have consistently under-appreciated the depth of the downturn.

It's not only too bad for them, but for small investors who have neither the expertise nor keen market understanding to make rational decisions regarding their holdings.

Simply put, anybody who hasn't already taken their 10% penalty and the associated tax bite by at least partially emptying their retirement account has missed the boat. The sad news is that most accounts such as these are already down 15-25% from their summer 2007 highs. The even sadder news is that many baby boomer types are still holding on for dear life (and many happy years in their 60s and 70s), though the chances of regaining their former valuations are slim and nil.

Too bad for them too. The age of 70 is still 15 years away for more than 2/3rds of the boomer generation.

NYSE Volume 5,001,790,500
Nasdaq Volume 2,471,754,250

Rally Over, Stocks Resume Slide

Following yesterday's massive Fed-induced, short-seller rally, Wall Streeters tried in vain to make it two in a row... and failed.

With healthy gains on the board by 11:00 am (the Dow was up nearly 150 points), stocks sent the remainder of the session losing value. There was no specific news of import to move stocks, simply the general feeling that the economy as a whole is less likely to improve before it deteriorates further.

Dow 12,110.24 -46.57; NASDAQ 2,243.87 -11.89; S&P 500 1,308.77 -11.88; NYSE Composite 8,781.23 -61.45

It's relatively simple to understand where investors are getting the majority of their negative sentiment of late. Oil and gas prices are exploding, as are food prices, while home sales and prices are down and the credit crunch seems far from resolved. Add a falling dollar to the mix, stir gently and viola you have less disposable income for consumers who are tightening their belts, which usually translates into lower corporate profits.

What may be driving Wall Street's declines more than anything, however, is the absolute dearth of leadership from Washington. Investors are concerned about their futures and all they see from D.C. is stagnation and a lack of solutions. America, over the past 7 years of the Bush administration and a strangled congress, has been reduced to a nation of haves and have-nots. The trouble is that the haves cannot survive well without the have-nots having something. The middle class is being shoved down to a survival class with no means of upward mobility. Such a system cannot and will not work in the longer term.

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There's also a feeling that the Fed has become impotent to a large degree and since announcing yet another option to salvage battered banking interests, another rate cut next week may not be forthcoming. The Fed meets on Tuesday, March 18, to discuss the federal funds rate. Analysts had been looking for a 50 to 75 basis point reduction, but since yesterday many have trimmed that outlook to 25 to 50 basis points.

While today's trading range was not great, the breadth of the losses were significant. Declining issues retook the lead over gainers, 3747-2536, and new lows beat new highs, 327-82.

Oil continued to reach new heights, adding $1.17 to close at $109.92. Gold gained $4.70 to $980.70, while silver was up 23 cents to close at an even $20.00.

Naturally, everybody wants to know what's next. Some answers may come as early as tomorrow as February retail sales figures and the most recent unemployment claims hit the street prior to the opening bell.

The news on the retail front is not likely to be cheery, though only a small decline - 0.1% - is expected.

NYSE Volume 4,314,355,000
Nasdaq Volume 2,158,134,250

Bleakness, Misery and Despair

When will it end? When will investors find enough confidence and selected bargains to forge back into the market and begin buying stocks?

From the looks of things, it's going to be a while.

The Dow is off 17.12% from its high of 14164.53 close on October 9, 2007. According to widely-accepted guidelines, we're not even in a bear market. That, supposedly, occurs when an index is down 20%. Seems that the Dow is close enough and the charts ugly enough to call a bear a bear.

Dow 11,740.15 -153.54; NASDAQ 2,169.34 -43.15; S&P 500 1,273.37 -20.00; NYSE Composite 8,534.37 -141.90

Only four of thirty Dow stocks delivered gains on the day: Intel (INTC), IBM (IBM), Microsoft (MSFT) and McDonald's (MCD). Financial stocks took the biggest hits. Citigroup (C) fell nearly 6%, losing another 1.22 to close at 19.69. On a split-adjusted basis, Citigroup has not closed below 20 since 1998.

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The impetus for today's decline was once again the financial sector. Fitch Ratings took negative ratings action on eight US-based banks on mortgage loan exposure. Washington Mutual, Citigroup, Wachovia and Bank of America were among those put under ratings watch or downgraded.

There were also various unfounded rumors concerning financial firms Lehman Brothers (impending layoffs) and Bear Stearns (liquidity problems).

What's becoming more and more apparent every day is that the economy is in severe crisis due largely to the collapse of the banking industry, which underpines the entire system. The largest and most influential banks in America are stressed to the breaking point due to mismanagement and a near-total lack of regulation. As a nation, we are about to be plunged into total economic darkness.

While some economists are worried about the country heading into a recession, more serious heads are wondering how we escape the complete destruction of our financial system.

Wall Street types are guessing whether the Fed will cut rates 50 or 75 basis points at the next FOMC meeting, March 18. It should be pointed out to those who still have faith in the Fed (a number, that, like the stock indices, has taken quite a recent fall), that the 2.25% reduction (from 5 1/4 to 3%) in the federal funds rate since September has done roughly nothing to ease the pressure on stocks, banks, the economy or improve the general condition.

The Fed can ease all the way down to zero if they like, but the inescapable conclusion is not about avoiding recession, it's about survival of the fittest in the face of mounting, inevitable bank failures. Once the banking system completely implodes, the misery will be widespread, bankruptcies will explode and today's 2% foreclosure rate will expand to something more like 10%, if not higher.

The future is very unpretty and I am loathe to be one of the few reporting the truth, but all evidence continues to indicate nothing but bleakness, misery and despair.

Declining issues overwhelmed advancers again, 5104-1228. New lows expanded to 839, while new highs contracted to a mere 52 stocks.

Oil rose $2.70 to an all-time closing high of $107.85 per barrel. Even precious metals investors were taking money off the table. Gold fell $2.40 to $971.80. Silver lost 47 points to $19.79.

NYSE Volume 4,196,839,500
NASDAQ Volume 2,137,205,750

Labor News Gloomy; Stocks Lose Value

The word best fit to describe the current US labor situation is "grim."

Nonfarm payrolls fell by 63,000 in February, the worst monthly decline since March 2003 and well below the expected creation of 25-35,000 jobs. Further, January's payroll decline of 17,000 was revised lower to 22,000.

Meanwhile, the geniuses at the Federal Reserve, those brainy masters of all things economic, have no clue how to stem the rising tide of foreclosures, credit strangulation and runaway inflation. Instead, they're content to "milk" their way out of a serious liquidity and confidence crisis that has only worsened since August of last year. The Fed is increasing the amount of securities it will acquire from banks – via its Term Auction Facility (TAF) – to $100 billion this month vs. the previously announced $60 billion.

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Since December, the Fed has loaned $160 billion to banks via the TAF and the results thus far have been nil, excepting, of course, the fact that certain financial institutions have been precluded from sheer liquidation by borrowing more money.

The Fed's actions can be viewed as somewhat futile considering the depth and scope of the overall economic condition in the US. Americans have saved nothing for 20+ years, the banks went on borrowing and lending - often to individuals and corporate entities that hadn't a shred of good credit standing - and now the defaults are piling upward and onward.

All the Fed is doing is extending the time the banks have until they themselves admit their wrongdoings, take their losses and - for some - close up shop. The short list of major banks on the brink of failure include Wells Fargo, Citibank, Bank of America, JP Morgan Chase, Wachovia and Merrill Lynch. Smaller, regional banks may begin failing sooner as their access to credit markets continues to be impaired. Within 3-6 months, bank failures will be making daily headlines.

Here's a handy list of the 150 largest US banks which will serve as a scorecard later this year.

The early reaction by investors to the labor report ensconced in a shroud of other bad economic news, was, in a word, implausible.

After the expected opening dive, the indices all turned positive by 10:00 am and less than an hour later were sporting healthy gains. The NASDAQ was up a full percentage point and the Dow had tacked on more than 50 points.

Naturally, the artificial euphoria couldn't and didn't last, and by 11:00 am nearly everything was heading lower, the averages continuing their journey of the down slope.

Dow 11,893.69 -146.70; NASDAQ 2,212.49 -8.01; S&P 500 1,293.37 -10.97; NYSE Composite 8,676.24 -89.17

Considering the depth of the labor report, the losses were somewhat contained by the usual late-day upticks, which boosted the Dow more than 100 points off the intraday low. Still, the Dow recorded its lowest close of the year, and the worst since October 12, 2006.

These kinds of comparisons to the past are useful for a little bit of perspective, since life in the USA was a little bit better in 2006. At least gasoline and food prices were lower, the economy was creating new jobs (albeit not good ones, but jobs nonetheless) and home prices were still rising.

Of course, that last caveat is what caused most of the disaster we face today, so the perspective is useful for market trackers, but the conditions are vastly different. Stocks were rising in 2006, as they generally did since the Spring of 2003.

The next support area to be tested on the Dow is a range between 11,635 and 11,670, the near-term intraday low and a top from May 11, 2006, respectively. After that, there's an area of congestion between 10,250 and 10,750, which will likely be where the Dow settles in for the summer of '08.

During that period, we will surely hear plenty of calls for a bottom, though it's unlikely that the bear market will be played out in just 10-12 months. Expect a short term respite during the middle of the year with a resumption along a major decline line following the release of third quarter earnings in October. By that point, comparisons will be easier to make, a change in the presidency and in Congress may offer some relief, and by the end of '08 there may be some reasonably encouraging news. It's unlikely that we'll be out of the woods as a nation and in the stock markets before the first or second quarter of '09 - and that prediction may be overly optimistic.

How soon the economy is righted depends largely on a wide swath of factors, but the most important are the Fed, the fall elections and how quickly America purges both the corrupt practices in the government and on Wall Street and the gargantuan losses incurred by the decrepit banking system.

On the day, declining issues trounced gainers, 3959-2307. New lows widened their edge over new highs, 844-62. Since the number of advancing issues was still somewhat respectable, the obvious direction is lower still. Not until stocks are completely hammered down, when advancing issues only account for 10% of all shares traded will we begin to comprehend how severe the recession (the one we're either already in or about to enter) will be. Until then, investors, economists and analysts remain largely in denial.

Oil backed off 32 cents to close at 105.15. Gold finished down $2.90 at $974.20. Silver gained 3 cents to $20.25. Pre-1965 quarters (90% silver) are now worth roughly $18.00. The smaller, lighter quarters jangling around in your pocket are still worth 25¢, but that value is dropping fast.

It wasn't a good week to own stocks. The Dow, for instance, lost 372 points, but investors can take heart in the knowledge that some weeks ahead will probably be worse.

Peace. Out.

NYSE Volume 4,216,124,500
NASDAQ Volume 2,332,342,000