Commodity Dive Continues; Stocks Join the Party

The price-slashing in commodities continued unabated on Tuesday, but with an added twist. Stocks spent the entire session losing value as well.

What contributed to the overall gloom on Wall Street were a number of items from financial firms that reminded investors that the US economy is far from what would be considered stable.

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Morgan Stanley (MS) had its credit rating cut by Moody's, JP Morgan Chase reported another $1.5 billion in writedowns just in July, Wachovia (WB) and UBS (UBS) reported quarterly losses, and even the venerable Goldman Sachs (GSC) was downgraded by Oppenheimer.

Overall, it was a pretty ugly day to be a banker, broker, trader, investor or financier. Most skid row bums had better days than the suits on Wall Street. At least they didn't lose a bundle of money.

Dow 11,642.47 -139.88; NASDAQ 2,430.61 -9.34; S&P 500 1,289.59 -15.72; NYSE Composite 8,398.71 -94.23

Declining issues took back the advantage over advancers, 3911-2341. New lows also regained their edge over new highs after a one-day respite from that long term drubbing, 200-117.

As mentioned, crude oil fell again, down $1.53, to $113.13. Gold gave back $13.70 in value, dropping to an 8-month low of $814.60. Silver lost just 14 cents, closing at $14.49 the ounce.

This kind of continuing price depression does not bode well for companies or individuals. While price relief is welcome in energy-related issues and staples like food and rent, they are being caused by a severe cutback in demand. People and companies are strapped for cash, and banks are loathe to lend to anyone or any company with less than a pristine credit history.

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As I've been attempting to drive home lately, the point is not to contain inflation, but to slow down price depression. It's simple supply and demand economics in the flesh: too many goods are now chasing too few dollars. Inventories are rising and the solution is to lower prices to an acceptable level.

The real kicker is that consumers, which comprise 70 to 75% of GDP, are distressed over high fuel and food prices, actively seeking lower cost alternatives and finding them. It's the magic of the marketplace at work. If prices become overinflated without justice, the market adjusts and the pricing mechanism is tamped down.

What's fueled the spiral to the bottom thus far has been overpricing, especially in oil, gasoline and other essential commodities. Add in the credit malaise and massive gold and silver positions get unwound as companies, governments and institutions need to raise cash.

The winner in all of this is a strengthening of the US dollar and increased exports, reflected in today's Trade Balance figure for June, which came in at -$56.8 billion. Analysts were expecting something along the lines of -$61 billion, so the lower imbalance came as a pleasant surprise.

On the other side of the coin, it meant that US consumers were spending less on imported goods, which is probably not a very welcome signal to the rest of the world. Either that, or the rest of the world is catching the disease we've already got and realizing that the US isn't so bad off after all.

Economics can get pretty confusing, and these days are confounding even to people who are supposed to know their way around all these numbers and conflicting trends. Eventually, some clarity will emerge, but it's probably not going to be very encouraging.

NYSE Volume 1,126,747,000
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Stocks Gain on Oil Slowdown, but Metals Drop is Troubling

The price of crude is just about the only element pushing the stock market at this juncture. Having fallen more than $30 per barrel since early July, oil, the energy fuel that drives the world economy, is better when it is cheaper, both for businesses and consumers.

So, banks may fail and consumer spending may sink into the deep blue, but every time crude drops a buck on the futures market, everyone gets a spate of relief and the feeling that all is well.

Dow 11,782.35 +48.03; NASDAQ 2,439.95 +25.85; S&P 500 1,305.31 +9.00; NYSE Composite 8,492.94 +32.62

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As I've been reporting of late, this is not necessarily good news, as other commodities are falling in price along with Texas tea, notably, gold and silver. The precious metals, as they are known, have been in total liquidation mode, as positions are being unwound with head-spinning rapidity.

Monday was no exception. Oil fell 75 cents to $114.45, but gold was off by a huge $36.50, to $828.30, while silver lost an impressive 71 cents, dropping to $14.62. Both gold and silver crashed through support levels established earlier this year.

Note: closing prices are based on NY spot prices at 2:30 pm Eastern time. As of this writing, at 9:00 pm Eastern, Gold has fallen even further, down to $803 in Sydney and Hong Kong.

Crashing prices in any market is not a good sign for economies in general terms. Ideally, prices should exhibit some degree of stability - it is what all economists strive to achieve. When the metals prices erode as quickly as they have been, it is a sign of serious liquidity problems on a global basis. In a market absent of credit - as our global economy has become - often precious metal caches are liquidated in order to raise cash.

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The sharp recent declines in gold and silver can only be seen in the most distressing light. We are on the verge of a global economic meltdown as the commodity bubble is now bursting.

To illustrate, gold soared past the $700 mark in September of 2007. Within 6 months, it had hit $1000. On July 15, after a decline down to around $850, gold sparked back to $980 on July 15. Noting tomorrow's early price, in less than a month, gold has lost nearly $150, or 15% of its value.

For stocks, it was a bullish session. Advancing issues outperformed decliners, 4114-2158. At last, new highs exceeded new lows, 204-191.

Where the unwinding in the commodity markets is going to land stocks is, for now, unknown. Presently, it's seen as a good sign - easing of prices. However, if allowed to continue unabated, these are the same conditions that led to Japan's lost decade of the 1990s, and, of course, the worldwide Great Depression of the 1930s.

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And Away We Go...

So used to say the "Great One", Jackie Gleason, at the start of his weekly variety show in the heyday of television. It's almost as though the ghost of Gleason has brought back the June Taylor dancers and the kaleidoscope dance routines to Wall Street, such is the gaiety at the brokerages these days.

With the wild gyrations - up one day, down the next, and so on - the brokers are booking commissions like mad. Even though volume has been a little off, there are still plenty of players, so the guys who get paid by the trade - even the electronic ones - have got to be rolling in some pretty deep grass right now.

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Volatility being one of the things serious old school investors seek to avoid, a lot of stodgy fund money is sitting around doing nothing while the whiz kids in the startups and hedge funds are wheeling and dealing like mad. The velocity of trading is fueling much of the high and low swings these days, as much as the decline in oil, the mortgage mess and general economic uncertainty.

So, the major indices went ballistic on Friday, even though Fannie Mae came through with a monstrous loss ($2.3 billion), productivity of US workers was not what was expected in the second quarter, coming in at an anemic 2.2%.

The outsize gains were tied largely to improvement of the US dollar against major currencies and an associated drop in the price of oil.

Dow 11,734.32 +302.89; NASDAQ 2,414.10 +58.37; S&P 500 1,296.31 +30.25; NYSE Composite 8,460.32 +121.92

Advancing issues far outweighed decliners, 4574-1711. New lows, however, continued their year-long domination of new highs, 226-131.

In commodity trading, crude oil took another major tumble, losing $4.82, to close at $115.20, a price almost everyone can appreciate. The metals continued to freefall, with gold losing another $13.10, to $864.80. Silver lost a massive 93 cents, dropping to $15.33 the ounce.

While all eyes are fixated on the price of oil, the real story may still be in the metals. Gold's close today is just about $12 ahead of the early May lows, and could be putting in a double bottom, but my hunch is that speculators and institutions in need of cash are tossing in their chips and taking whatever profits are available - and they're probably sizable, with gold nearly quadrupling since 2002.

Silver, meanwhile, has been harder hit, dropping to a point just pennies above where it began the year. The metals are presaging a coming economic slump and general price malaise which will probably decimate retailers in December.

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On the other hand, with politics so prominent in everything these days, could we not have predicted that oil and gas prices would fall into a more palatable range prior to the election? Probably. Big oil is tied to Republican candidates, and they're in trouble because of the high prices, so oil is gratuitously rolling back a bit, at least until November 4.

As for gas, the general rule of thumb is that gas prices drop about 2 1/2 cents for every $1 fall in the price of crude. Well, when oil hit $147, gas jumped to $4.14. Today, oil is at $115, but gas is still $3.85 according to the Daily Fuel Gauge Report. Our mathematical formula tells us, however, that the price of a gallon of petrol should be down 80 cents, not a mere 29. The national average should be right down around $3.24. It's about 60 cents too high. What's up with that?

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OUCH! Where's That Bottom?

Remember that 330 point gain on Tuesday? Ancient history. The Dow stands just 50 points above where it closed last week after another drubbing on Thursday.

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In case you haven't gotten the memo yet, we're still in a bear market. And it's a nasty one that isn't anywhere near conclusion. That's at least 6 to 12 months away, if not more. The US economy is completely upside-down, but the massive mainstream media simply won't end its love affair with corporate slime.

Too bad. They're leading the American investing public down a particularly thorny garden path at the end of which is a wealth-devouring beast called debt. We're all in it, taking our cue from the absurd federal government, which just can't seem to get a handle on balancing its own books.

One great feature of this ridiculous market is the volatility. It offers in-and-out trading possibilities in both directions. However, it is not a good environment for those seeking solid investments. Nothing is solid anymore, because the foundation - the banks and financial firms - is built on quicksand.

Dow 11,431.43 -224.64; NASDAQ 2,355.73 -22.64; S&P 500 1,266.06 -23.13; NYSE Composite 8,338.40 -163.04

The cause for today's demise was likely more tied to overall market conditions than the ugly unemployment statistics that kicked off the session. Companies are trying to shed jobs and employees as quickly and quietly as possible, but there's no doubt that the recession that really began in the 4th quarter of 2007 is surely alive and well today.

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There is no truer sign of recession than job losses, and we've had month after month of those. So, hang on for another bottom, soon. Trading will take a seriously end-of-summer tone in the next few weeks as the earnings season just passed proved to be a huge flop and the horrors of an economy in deep decline will continue to dominate the headlines.

Thank goodness for preseason NFL games and the Olympics. At least there's something to divert our attention.

On the day, declining issues took out advancers by a 4454-1787 margin. New lows finished ahead of new highs, 216-75.

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Oil was up $1.44, to end at $120.02. The precious metals continued their descent unabated, however, with gold down $5.10, to $877.90 and silver off another 25 cents, to $16.26. Lest anyone believe this is a temporary condition for the metals and a buying situation, think again. Both will be lower 3 and 6 months out.

The conditions of the economy and market have deteriorated to very unsafe levels. A cataclysmic financial event is at hand, probably within the next two-three months, though it will be disguised as a "news" story. A bombing, scandal, war, etc.

Get ready for a plunge back below the 11,000 level on the Dow and 4-year lows on the NASDAQ, S&P and NYSE Composite.

NYSE Volume 1,283,215,000
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Despite Freddie's Failure, Some Follow-Through for Stocks

Wednesday paled by comparison to the Fed-induced euphoria yesterday. Stocks were battered early on by news that Freddie Mac, the beleaguered mega mortgage aggregator, had fallen on some very lean times in the second quarter of 2008.

Freddie (FRE) posted its fourth consecutive loss and set aside more money for bad loans while announcing that its dividend may be cut by up to 80%. Shares fell sharply, as did those of Fannie Mae (FNM) and most financial sector stocks.

Financials, along with transportation and services were the only three of twelve sectors to register a loss on the day.

The news from Freddie sent another shock wave across the trading spectrum, however. With the GSEs - Fannie and Freddie - in deep trouble and near default, investors are peeling away from the market in droves. Volume has been limited of late, moreso than usual during the normally slow summer months.

Dow 11,656.07 +40.30; NASDAQ 2,378.37 +28.54; S&P 500 1,289.18 +4.30; NYSE Composite 8,501.44 +29.59

Nevertheless, all major indices showed gains on the day, and, at this point, the Wall Street bankers, brokers, moguls and magicians will take what they can get.

Advancing issues outperformed decliners, 3548-2716. Those pesky new lows ranged ahead of new highs, for roughly the 200th time out of the last 210 trading days (the better part of the last full year), 186-109.

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Crude oil slipped another 59 cents, closing at 118.58. The metals continued their precipitous decline, with gold off $3.10, to $883.00, and silver down 7 cents to $16.51.

The non-stop drops in the precious metals continue to flash signs of a long, coming recession, along the lines of the Japanese lost decade of the 1990s. There has been significant pricing pressure on commodities and products of all kinds of late - a sideshow of globalization - from clothes, to rents, to silver and gold coins. This is a very troubling trend, and yesterday's Fed decision to leave rates unchanged, plays right into the scenario.

More than inflation, the Fed fears deflation even more, because there is no generally-accepted remedy except liquidation, stagnation and financial pain. Falling prices are rarely mentioned in the financial lexicon because they are anathema to Keynesian economic principles.

Well, maybe the Austrian school would argue along with me that deflation is a mechanism for cleaning the system. But our financial system is so overweighted with safeguards and interjected with government interference that Austrian school conjecture would barely register on the minds of even the brightest Harvard or Chicago school of financial dunces.

Life is getting cheaper by the day and that's not a good sign for macro-economics.

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