Truth Hurts: Financials Slammed Again

Sometimes the media actually gets it right.

Unfortunately for investors, Jonathan R. Laing's feature story in Barron's The Endgame Nears For Fannie and Freddie was a truth many did not want to hear, much less see published in one of America's premier business weeklies.

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Laing makes the case for the "inevitable" recapitalization of the two mortgage underwriting giants as they have continued to flounder during the ongoing US mortgage mess.

The article was enough to send financials and the rest of the stock market into a funk on Monday. The selling began early in the financials, but by afternoon had spread to the broader market, resulting in another bloody Monday on Wall Street, wiping out last week's tiny gain in the S&P and a more substantial one in the NASDAQ.

Dow 11,479.39 -180.51; NASDAQ 2,416.98 -35.54; S&P 500 1,278.60 -19.60; NYSE Composite 8,281.86 Down 101.81

With the markets already in a state of suspended animation, volume virtually dried up. Monday's losses would probably have been deeper had more traders not been on vacation or otherwise away from their desks.

If last week's volume data was to be considered anemic, today's was downright desolate and pallid.

Advancing issues were overwhelmed by the number of decliners, with losers ahead, 4375-1845. New lows were also boosted to a larger margin than in recent days, beating new highs 194-84.

If there was any good news, it was the rebound in the metals. Gold shot up $13.60, to $805.70. Silver gained 29 cents, closing at $13.22. Alternately, oil slipped $1.05, to $112.85, which is $35 below its all-time high, set just this past July.

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Any moves in commodities are likely to be short-term and reactionary for the time being. Until the general understanding becomes one in which a global slowdown is accepted, the metals should bounce around, though trend lower. Oil, and, by proxy, gas and petrol, should continue to weaken over the short term on slack demand.

And what about stocks? Well, if all assets classes are going to take a hit, another 15% decline on the indices is not out of the question. The Dow could easily break below 10,000 within the next six months as the presidential race takes center stage and the rhetoric from the left (Barack Obama) becomes more pronounced and understood as the honest reality.

The Republicans - but mostly the Bush administration - has made a shambles of the US economy and increasingly, it looks as though the next president is going to have to clean up the mess. Usually, that's a sure sign that a sea change in Washington politics is coming.

...and not a moment too soon.

NYSE Volume 985,302,000
NASDAQ Volume 1,665,853,000

The Numbers Say No

The Dow gained on Friday. So did the S&P 500. But, the Dow was down for the week and the venerable S&P index was up less than two points. The week's big winner was the NASDAQ, which added 38 points to the upside.

What does this all mean?

Probably not much, except that investors are tired of trading the same stocks and hoping for better results in a quarter, a year, five years. It's just not adding up.

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It was just about a year ago (July 19, actually) that the Dow closed above the 14,000 mark for the first time. In the 13 months since, the blue chip average has fallen by 17%, briefly falling into what is known as "bear territory", glibly described as a 20% loss.

Fools without a great deal of market understanding would say that we've touched a bottom and the markets are beginning to recover. Those more wizened and mature would point out that once stocks break below that 20% threshold, they usually spend more than a few days there, which is all this market has spent in the bear's lair.

Those few days were between July 9 and 15, so we've clearly encountered a bounce of sorts. The price of crude oil has moderated considerably since then, helping stocks, as has the value of the US dollar versus other currencies. These have been positive for stocks.

On the other side of the ledger are some undeniably negative economic readings, most of them being recorded this very week. The consumer price index (CPI) registered its largest gain in 17 years, leaping up 0.8% in July. even the core CPI - which excludes food and energy components - was up 0.3%. But all of this was prior to oil's descent, or just at the beginning of it, so the CPI is now a lagging indicator.

Thursday's initial unemployment claims came in at an astronomical 450,000. There are no good jobs out there. Along those lines, capacity utilization - a broad measure of manufacturing efficiency, fell slightly, to 79.8%, which is well below what would be considered healthy - above 93%.

People aren't working, or buying, much these days. Sooner or later, Wall Street will get a whiff of this and realize that there isn't much demand for the stocks they're pedaling either. Volume has been dead over the past two weeks.

Dow 11,659.90 +3.97; NASDAQ 2,452.52 -1.15; S&P 500 1,298.19 +5.26; NYSE Composite 8,383.67 -2.30

For the day, losers outdid gainers by a small margin, 3122-3092. New lows retained their long-standing edge over new highs, though by a very slight margin, 169-144. We are clearly witnessing a market void of momentum in either direction.

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Commodities, however, are pointing the way, and that way is lower. Oil continued to unwind, losing $1.09, to $113.94. Gold finally crumbled, dropping $22.40, to $792.10. Silver was absolutely crushed, dropping $1.43, to $12.93.

The rout in the metals has been absolutely stunning. Gold was in the high $980s a few weeks ago. Silver was above $18.00. The ramifications of such a rapid unraveling of these commodities is mind-boggling. It is portentous of nothing less than a massive global recession. There is an absolute need for cash if such large amounts of gold and silver are being liquidated.

Were the metals a bubble, and has it popped? Sure, they were overinflated to a degree, and now the froth has been blown away. It will be interesting to see where they bottom out and whether they recover. Best estimates are for gold to retest the $650 level and silver to settle around $11.25, though after today's grinding, nothing's really for sure.

It was an interesting week. Even with commodities unwinding in a big way, stocks failed to gain. That's not a good sign going forward, especially with that ridiculously low volume.

NYSE Volume 1,175,771,000
NASDAQ Volume 1,776,362,000

Why Stocks, and Why Now?

One often wonders what people are thinking when they make investments such as buying stocks. Simply put, when a trader buys shares of stocks, they are getting in on a piece of a company, in effect, becoming an owner of a sliver of that company, ostensibly without any of the day-to-day headaches that come with actually operating it.

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Nowadays, most people, including supposedly really, really smart people managing hundreds of millions - or even billions - of dollars, think that what they are buying will actually increase in value over time.

In theory, it's not a bad idea. In reality, it's often horrible.

What investors do is finance companies' operations. Usually, money invested in publicly-traded firms does nothing but change hands in the marketplace. For every buyer, there's a seller, and sellers have vastly different rationales than buyers.

Thursday's trading can be taken as an example of more people believing that their purchases will be worth more soon. Stocks were up.

Why? More buyers than sellers, for the most part, but where their money went is an important feature. Largely, money went into financial firms today, on the premise that these companies have gone through a rough period, but have put their problems behind them and those shares should continue to appreciate due to lessons learned.

Wow! If people are buying that whopper, I've got bridges and airplanes to sell you.

The financial firms have committed the most egregious kinds of money mismanagement imaginable over the past few years and are paying the price. Are people so gullible to believe that these very same people will handle other people's money better than they have in the past?

You bet they are.

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Fools. Giving these bankers, brokers and financiers more money is like giving a crack addict another snort, or an alcoholic a bottle of whiskey. One suspects that the money flowing into financials is from other financials - people who share the same addiction and can't - or won't - handle their own money themselves. It's a recipe for disaster and we've bought right into it.

Dow 11,615.93 +82.97; NASDAQ 2,453.67 +25.05; S&P 500 1,292.93 +7.10; NYSE Composite 8,385.97 +10.58

Well, maybe they're right. But, judging solely by the overall volume - the lowest in months - they seem to be out on an island in their perceptions. Foreclosures are up, as is unemployment, and inflation. Meanwhile, home prices are down and going lower. Wages continue to contract. The basic measure of wealth for the average American is going lower by the day. Economic conditions are generally horrible. But the banks... they'll make money. Sure.

Advancing issues on Thursday overwhelmed decliners, 3888-2356. New lows, however, continued to dominate new highs, 172-110.

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Oil lost 96 cents, to $115.03. Gold gave back all of yesterday's gains and then some, losing $17.00, to $814.50. Silver also traded lower, dropping 62 cents, to $14.36.

As much as I'd like to believe that the economic problems caused by, and now being handled by, Wall St. financial firms are abating, the massive day-to-day drops in gold and silver are telling me a decidedly different story. We've turned a corner, for sure, but the street we're headed down doesn't look so friendly.

And there's no going back...

NYSE Volume 1,008,494,000
NASDAQ Volume 1,867,483,000

Financials Lead Stocks Lower Again

There simply is no light at the end of the tunnel through which financial companies have been navigating.

Credit conditions have deteriorated to a point at which the entire global financial system is in a seizure while financial firms - banks, brokerages, combined entities - continue to reveal just how poorly managed their monies have been.

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They are now in desperate race to shed toxic assets as they begin to savage each other with downgrades amid lawsuits brought by states, municipalities, funds and investors of all stripes which invested in subprime, alt-a or other non-creditworthy tranches of securitized obligations.

It is an absolute mess, with no end and no solution other than to dispose of assets at fire sale prices and hope for the best outcome, which, in reality, is a severe global recession. Billions and billions of dollars worth of assets are being sold for pennies on the dollar as a result of loose lending standards, lax oversight and naked greed.

Dow 11,532.96 -109.51; NASDAQ 2,428.62 -1.99; S&P 500 1,285.83 -3.76; NYSE Composite 8,375.39 -23.32

Once the financial firms are finally tossed to the curb, the next phase will be an all-encompasing rout of stocks, especially those that are mismanaged, in need of capital or in any business outside of bare necessities. Most stocks will head lower over the next six to eight months. Those which avoid outright liquidation will be shells of their former selves.

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On the day, declining issues fared slightly better than advancers, beating them by a margin of 3253-2999. More stocks hit new lows than new highs, 199-117. Investors are seeking safe havens for their money, though the options in equities are highly risky. Every day seems to bring new horrors to a variety of companies suffering through tough economic conditions.

Oil stopped its slide for a day, gaining $2.86, to $115.99, still well below levels of just a month ago. The metals also gained, with gold higher by $16.90, to $831.50, and silver up 36 cents to $14.98.

The best way to make money in this environment is not to try to pick winners, but losers, and sell them as short as possible until November. Volume has been anemic this week, exemplifying the general lack of enthusiasm for equities in general.

NYSE Volume 1,210,340,000
NASDAQ Volume 2,029,940,000

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
NASDAQ Volume 2,086,532,000