Chicken Little and Henny Penny Save Wall Street

Fear.

It's what drove the Dow down 950 points over two days this week. Oddly enough, fear also was the motivating factor behind Wall Street's dramatic two-day turnaround in which the Dow gained back nearly 800 points.

On Monday and Wednesday, the fear was that major investment banks were about to cause a global financial meltdown. On Thursday and Friday, the days the market rebounded, that same fear fueled a rally as government agents intervened with various devices designed to cool traders down, eliminate short selling and wipe clean the balance sheets of some of the most over-leveraged companies in America.

Was the fear of global financial calamity real? Maybe, though it was probably not as bad as many thought or as those government interlopers made it appear.

Rushing around Washington, jawboning members of congress, Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson put on their best impressions of Chicken Little and Henny Penny, declaring to all who would listen, the sky is falling, the sky is falling!

Well, as we all know from the fable, the sky isn't really falling and sly Foxy Loxy eats most (or all, depending on the version you wish to read) of Chicken Little's friends.

So, the moral is the same on Wall Street as it is in stories we softly tell four-year-olds: Have courage, or don't believe everything you hear. This little nugget of wisdom should not be lost on investors, all of whom are in their adult years, though many act like four-year-old children.

If anyone was eaten, it was the American taxpayer, if the Paulson plan is actually adopted by congress. If it turns out that the pending disaster was more fiction than fact and congress either acts slowly or not at all, then we have all had our lunch eaten by the government and its various agents of deceit.

It's also worth noting that today was a quadruple witching day, on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire. Huge sums of money changed hands this week.

For now, the Foxy Loxies have the upper hand and are laughing, but another adage also applies, he who laughs last, laughs best. And that last laugh, my dear friends and readers, comes November 4, election day. Who will be laughing then?

It should also not be forgotten that we are still in the throes of a vicious bear market. This week saw no bottom being put in place. It's far too early in the cycle for that. Also, true bottoms are never overcome by such massive volume as was evident on Thursday and Friday. There is still a long way down before recovery begins. The wild activity of this week should be seen only in the overall context of disaster averted... for now.

Dow 11,388.44 +368.75; NASDAQ 2,273.90 +74.80; S&P 500 1,255.07 +48.56; NYSE Composite 8,186.47 +411.31

The mammoth moves over the past two days did move some key metrics. On Friday, advancing issues outpaced losers, 5345-1131, nearly 5-1. For the first time in a very long while, new highs exceeded new lows, 442-280. It will be interesting and useful to see just how long those numbers remain shifted toward stocks making new highs.

Oil finished up $6.67, at $104.55, but the metals were battered, as one would expect. Gold fell $32.30, to $864.70. Silver lost 23 cents, fending the day at $12.48. The general understanding is that commodities should continue to unwind, along with stocks. The deflationary spiral has begun, and the government can only intervene just so much, for just so long. Sooner or later, the real market dynamics return.

This week was fun and proof once again that the party never stops on Wall Street.

Volume was very high, but again, there was an abundance of self-dealing.

NYSE Volume 2,954,863,000
NASDAQ Volume 3,965,442,000

Say Good Bye to Free Market Economics

Government Taking Extreme Measures to Rescue Corporate America

Unbelievable.

The measures being undertaken by various branches of the government, including the congress, the SEC and Treasury in concert with the Federal Reserve are the most extraordinary that I have ever seen.

The US Treasury is opening a function that will guarantee money market funds. Treasury also recently announced plans to sell bonds to fund the Federal Reserve. The Fed and Treasury are planning, with congress, to create an entity for the liquidation of bad debt. The SEC has banned short selling on 799 financial stocks.

Adding to the steps already taken - bailouts of Bear Stearns and AIG, the takeover of Fannie Mae and Freddie Mac - the federal government is engaging in nothing short of naked fascism, the combination of government and corporations.

Being sold as various attempts to "unfreeze the liquidity crisis" the government is doing more to boost the fortunes of the same people and companies which precipitated the whole mess. They are making them whole. Banks, funds and other financial institutions are being made whole by allowing them to whisk away all of their underfunded obligations from the balance sheets.

Eventual cost to the taxpayer for the entirety of these measures will run into the trillions of dollars. If the figure reaches $2 trillion (and that's probably conservative) that would result in a debt of roughly $6,500 for every man, woman and child in America.

Guess what? With 6,500 free dollars I could pay off almost all of my debt. So could most other Americans. My sister and her family would get $32.500. They could buy a few more rental units. Certainly, every other individual and family would benefit from such a generous show of largess. But, that's not going to happen. No, the money is going to the banks.

If the government wants economic prosperity, it would probably be better the forget the greedy, cruel, uncaring, lascivious banks and financiers and give the money directly to the citizenry. The banks will be saved, with the American people getting nothing but the bill.

It's absurd. The federal government is completely off the rails and out of control. Largely, it is the fault of the American public, who were warned at least 40 years ago about apathy toward government. Eventually, however, responsibility must fall on the sitting and previously-elected officials who allowed this pitiful economic condition to occur and who are now employing desperate - and ultimately damaging - methods to "fix" the problems.

The entirety collapse of the financial underpinnings, the bailouts and special entities created to restore confidence in the markets are not the making of the president, the Fed, the Treasury, the SEC, the congress, the Wall Street bankers or unscrupulous lenders. It is all of them, working in concert, to undermine the capitalist system and democratic institutions.

The government is already nearly $10 trillion in debt. Another couple-three trillion isn't going to affect anyone, except for the value of the US dollar, which will plummet in value even more than it has over the last 8 years.

On the surface, everything in most places in America will feel and look the same as always, except in one place: the future. Once more, America's leaders have chosen to mortgage our future to save the banks and other poorly-run and grossly-negligent financial institutions from even an ounce of pain, spending money we don't have that creates a debt to be bourn by today's youth and the yet unborn.

America is rapidly morphing into a complete warfare/welfare state. The current rescue operations are only the more bold and significant devices to further that particular political and financial structure.

The US stock markets, which are due to open within minutes, should end the day with record gains. The govenment has cancelled most, if not all, bad corporate debts. Horray!

Say good-bye to free market economics.

US Stocks Gain on Treasury Plan Rumor and Innuendo

Briefly, how the Dow gained 400 points after losing 450 on Wednesday:

• Before the markets open, the Federal Reserve, along with the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank inject $180 billion into into financial markets in an effort to add liquidity.


• By 10:00 am, the plan seems to be working. The Dow Jones Industrials are up 200 points.


• Investors, still shaken from Monday and Wednesday's fallout, begin to sell. By noon, the Dow is unchanged. By 1:00 pm, it is down nearly 150 points.


• In a rocky afternoon session, the Dow regains its positive footing, but by 2:45 it is just above the unchanged mark.


• CNBC reports that Treasury Secretary Paulson is in talks with congress about creating a pool for bad debt, similar to the Resolution Trust Corp. which helped clean up the savings & loan mess in the late 1980s and early 1990s.


• By 3:00 pm, the Dow is back up 200 points and adds another 200 in the closing hour.

Naturally, the idea behind the Fed money-pumping and Paulson's late-day desperate jawboning are efforts in futility. Bad debt is bad debt, plain and simple. Wall St. wheelers and dealers made bonehead loans without proper regulatory supervision and now the federal government is supposed to bail them out.

Throwing money at the markets in overnight loans and swaps has proven - over the last 13 months of declining stock values - to be a purely stop-gap affair. Paulson's plan has little chance of finding sponsors in congress and even less opportunity to be acted upon anytime soon. Congress goes into recess at the end of the month, less than two weeks ahead.

But, that doesn't stop the CNBC equity pimps from applauding every single rumor or gesture by either Treasury Secretary Paulson or Fed head Bernanke. The two are have been anointed as infallible. And the gullibility of investors cannot be underestimated. Today's late surge was supposed to indicate that the crisis had passed... at least for now.

Elsewhere, Morgan Stanley (MS), one of only two remaining investment banks (the other is Goldman Sachs), is apparently in talks to be acquired by Wachovia Bank (WB). As odd as that combination sounds, Wachovia, itself under scrutiny be investors for a shaky balance sheet, rocketed up 59% on the day, from 9.12 to 14.50. Morgan Stanley gained over 3%.

Apparently, combining two failing companies into one will magically transform the remaining single entity into a financial powerhouse. Over the past 12 months, Wachovia has lost 75-80% of shareholder value. It traded as high as 53 per share last year. Morgan Stanley has dropped from nearly 70 to 22, a 68% decline.

Washington Mutual or WaMu, the nation's largest savings and loan bank, also got a boost, though hardly one of any significance, gaining 98 cents to close at 2.99. The stock is down more than 80% from a year ago. Goldman Sachs is attempting to find a buyer or additional funds for the troubled institution.

It's a real morass of bad money chasing more bad money. Wall Street's finances haven't been in such a state of chaos since the Great Depression and these mergers and fixes still fail to address the underlying cause - highly leveraged debt-to-equity and derivatives of staggering magnitude.

These repairs also don't offer any hope to the hosing market or the flagging economy. They are nothing more than chimeras, designed to keep the public unaware of the significance of the crisis. 98 out of 100 Americans actually don't have any idea of what is really occurring, but they do know that - in an overall sense of the game - today's gains canceled out yesterday's losses.

Dow 11,019.69 +410.03; NASDAQ 2,199.10 +100.25; S&P 500 1,206.51 +50.12; NYSE Composite 7,775.16 +334.77

The late-day rally lifted most boats but not all. Advancing issues had a huge edge over losers, 4811-1648. It was not enough to register one of the most unbalanced reading in new highs vs. new lows. 169 stocks made new highs, but 1438 reached new 52-week lows.

Gold was once again in the spotlight, rising $46.50, to close in New York at $897.00. Gold is up $118 in just two days. Silver gained $1.03 to $12.70. The move in the metals begs the question: If everything is all good now, why are investors flocking to safe havens like the metals and bonds?

Oil even managed a small gain of 58 cents, to close at $97.54, after briefly topping the $100 mark earlier in the day. Strangely enough, what was the topic of heated discussion just weeks ago - oil - has now faded to the back pages.

Volume was absolutely off the charts in one of the most volatile and high volume days of the year. Considering so much money was pumped into the markets by central bankers, that should not be a surprise. Nor should the dramatic climb of the indices. After all, most of the trading was nothing more than shady self-dealing.

NYSE Volume 2,430,078,000
NASDAQ Volume 3,914,326,000

Global Financial Carnage

When US stock markets opened on Wednesday, with fresh news that insurer AIG would receive an $85 billion loan from the Federal Reserve in exchange for an 80% equity stake in the company, there was hope that Wall Street could manage to display at least a modicum of confidence that a major economic calamity had been avoided.

What occurred was exactly the opposite.

Fear that more highly-leveraged companies would soon fall victim to the worsening global recession spread through the trading floors and brokerages around the world. All of the major US indices were off sharply at the open and continued to spend the rest of the session underwater. By noon, all had reached their lows of the day, with the Dow off a startling 390 points. By the end of the day the Dow was off 449 points and the other indices ending with even larger losses.

Not a single one of the 30 stocks on the Dow finished with gains. The biggest losers were AIG, JP Morgan Chase (JPM) and Citigroup (C).

Stocks remain in a worldwide tailspin. For the week, major indices are showing the following losses: Mexico's Bolsa (-7.4%), Brazil's Bovespa (-11.1%), London's FTSE 100 (-9.3%), Germany's DAX (-6.0%), France's CAC 40 (-7.7%), Russia's RTS (-21.1%), India's Sensex (-5.3%) China's CSI 300 (-7.2%), Hong Kong's Hang Seng (-8.9%).

Once again, financial stocks led the parade down into the bottomless pit of a financial system loose from its moorings. Investment houses Morgan Stanley and Goldman Sachs fell by 24 and 14% respectively, though both were considerably lower during the session. There's beginning to be a sense that the investment banking model is badly broken and that the remaining two should seek mergers with consumer banking interests.

A series of negative economic reports have been flowing into the markets as well, feeding into the swirling vortex.

Capacity Utilization for August fell to 78.7%, down from July's 79.7%. Industrial Production for August was down 1.1% after showing a meager 0.1 increase the prior month. Building Permits fell to 854K down sharply from the 925K in July. Housing Starts were also down, to 895K, form 954K in July.

Perhaps even more frightening to those who dread deflation more than inflation, the Consumer Price Index showed a -0.1% decline with Core CPI up 0.2%. Generally a good sign, continued price weakness should occur naturally as assets are wiped from the face of the earth, as is occurring. In that regard, the CPI is a lagging indicator, but signs of pricing pressure are appearing everywhere as money conditions tighten.

Dow 10,609.66 -449.36; NASDAQ 2,098.85 -109.05; S&P 500 1,156.39 -57.20; NYSE Composite 7,440.38 -352.75

Gold was a particularly bright spot, rising a phenomenal $70, to $850.50. as wealth preservationists imagined the worst-case scenario being carried out right before their eyes. Silver gained by an even-greater percentage, adding $1.16 to $11.68. Not to be outdone, crude oil rose $5.94 to $96.96.

The percentage gains for the metals were all-time, one-day records.

Market internals were horrific, to say the least. Declining issues subsumed gainers by a better-than 7-1 ratio, 5737-748. There were only 46 new highs, but an incredible 1530 new 52-week lows. More than 1 in 5 listed securities made new lows.

The Dow Jones Industrial Average is now down 25% from its October, 2007 all-time high (14,280.00); the NASDAQ, 27%. The S&P 500 has shed 26% while the NYSE Composite, the broadest index of stocks, with 3300 equities represented, is now down 28% from less than a year ago. All of these are multi-year lows, most coinciding with early 2005 levels.

Volume was substantial, noting that some major players have been and are still being sent to the sidelines. Trade volume is a relative consideration. With fewer and fewer participants, volume should decline. Today's volumes, though not historically high, may be at the high end of a new, lower regimen.

NYSE Volume 2,154,158,000
NASDAQ Volume 3,139,135,000

Fed Bails Out AIG; Leaves Rates Unchanged

After the markets closed, the Federal Reserve authorized an $85 billion emergency loan to insurance concern American International Group (AIG).

The nation's largest insurance company, AIG fell into the "too big to fail" category, which is a bunch of rubbish, but nevertheless qualifies it - in the minds of policy makers at the Federal Reserve - for assistance from US taxpayers.

Though the story on the government bailout was originally reported on Bloomberg around 2:30 pm, it was not confirmed and attribution was to unnamed sources. Still, the rumor was enough to keep markets from collapsing, which they had on the non-news of the Fed's rate announcement.

Following the FOMC's decision to leave the fed funds rate unchanged at 2.00% stocks sold off near their lows of the day. The Fed also left the discount rate at 2.25%. Moments later, the rumor that the Fed may consider authorizing a loan package for beleaguered insurance firm AIG began to circulate. Stocks began a sudden ascent.

Later, in the evening, well after markets had closed, the government announced a deal to save the battered insurance company.

AIG traded as low as 1.25 per share during the session, briefly showed a small gain, but finished in the red, down 1.01 at 3.75.

That the Federal Reserve has to bail out yet another company - this time a monstrous insurance concern - should not be cause for celebration, yet the market mavens managed to find a way to turn gloom into glory with a late-session rally, even if it turns out to be a very short-term upswing.

Following Monday's meltdown, Tuesday began with more panicky investors seeking relief by selling. All of the major indices were down heavily early on, but quickly regained their footing and toed the flatline through much of the session.

While today's action is hardly an endorsement for stocks or the general economy, it was at least not a disaster. That will likely come later, preferably, in the opinion of many, after John McCain is elected president. It should come as no surprise that Wall Street insiders prefer McCain over Obama. Despite his reformist rhetoric, McCain is a proven ally to Wall Street. Tough on workers, light on immigration law and lenient when it comes to standards and regulation, McCain will give the crooks and liars whatever they need to continue to savage the US economy and taxpayers.

Dow 11,059.02 +141.51; NASDAQ 2,207.90 +27.99; S&P 500 1,213.59 +20.89; NYSE Composite 7,793.13 +112.98

Interestingly, NYU professor Nouriel Roubini was making the rounds on all the talking heads after Monday's calamitous session. I seldom toot my own horn, but I have to say that Roubini is probably the only analyst I can find who holds a more pessimistic position than my own and who has been more prescient. Further, he's got the credentials to back up his words and he's been right almost as often as yours truly. I enjoy being in the company of people who share my keen perceptions.

On the day, the PPT and their proxies at the various brokerages, including Goldman Sachs and the recently-acquired Merrill Lynch, managed to control enough of the jawboning and trading to keep the indices above water.

Internal numbers were another story altogether.

Advancers and declining issues were in a virtual dead heat, with the winners ahead, 3269-3153. The real story was in the number of new highs (71), as compared to new lows (1629). The massive number of stocks hitting new 52-week lows represented nearly 1 in 3 listed securities on the NYSE reaching new bottoms on the day.

If financial armageddon isn't here already, it sure must feel like it to many investors, large and small. Incidentally, the indices in Japan and China were knocked down substantially on Tuesday as well. The Bank of Japan issued $18 billion in emergency funds to shore up stocks.

Taking their queue from the general market commotion, commodities took another hit. Oil lost $4.67, settling at $91.02, the lowest price in more than 7 months. Gold fell $6.50, to $780.50. Silver lost 62 cents, finishing the day in New York at $10.52.

NYSE Volume 2,163,764,000
NASDAQ Volume 3,247,308,000