Wall Street: DEAD AS A DOORNAIL

Economic reports dominated the headlines on Tuesday, where weakness in manufacturing, an all-time low in pending home sales and a release of the Fed's December meeting minutes were offset by a better-than-expected ISM Services reading for December of 40.6, up from 37.3 a month ago.

Preliminary figures provided by the US Census Bureau on manufacturers' shipments, inventories and orders was unsurprising but sobering. Following a 6% decline in October, new orders fell 4.6% in November, the 4th consecutive month of declines. Further, the inventories-to-shipments ratio rose again, from 1.33 to 1.41. Inventories are piling up on producers' shelves and in stores as the holiday season failed to produce a break in the negative trend in spending.

The Fed minutes (linked above) from the December meeting were released at 2:00 in the afternoon, just in time to rally the markets, though one would be hard-pressed to produce any positive spin, save that the Fed was prepared to expand its own balance sheet and make hefty open-market purchases of a wide range of mortgage and agency debt. While those purchases might alleviate some strain on stressed-out bankers, it only prolongs the drag on the economy until such a time that it becomes impossible to contain the downward price pressures of outright deflation.

Those minutes are an interesting read, if only to characterize the FOMC and the entire Federal Reserve as a roomful of fat, impotent old men in suits who think the economy can be maneuvered in whichever way they like through monetary policy. It's also useful in realizing that the Fed is essentially hell-bent on inflation as a major tool for their stated dual goals of full employment and price stability. The unfortunate reality for the fools of the Fed is that Keynesian economics never advocated outright inflation (or money creation out of thin air) as a tool for price stability. Proponents of the Austrian school of economics, in which no intervention is the preferred model, is probably going to have the last laugh when this episode of economic and moral turpitude has run its fatal course.

With the uneven news came an unsteady market, which opened higher, collapsed just after 10:00 am and staged a late-session recovery, with the major indices finishing moderately higher.

Dow 9,015.10, +62.21 (0.69%)
NASDAQ 1,652.38, +24.35 (1.50%)
S&P 500 934.70, +7.25 (0.78%)
NYSE Composite 5,968.84, +60.41 (1.02%)

The good news is that better volume has finally returned as volatility continues to decline. The entire day's range for the Dow was a mere 148 points. More good news came from the internal data showing advancers far ahead of declining issues, 5010-1661. New lows remained stubbornly ahead of new highs, 94-40.

NYSE Volume 1,334,630,000
NASDAQ Volume 2,179,892,000

As for direction, there are dithering indicators. The new high-new low metric refuses to break and stocks seem to be stuck at resistance in the 9000-9100 level on the Dow. There will need to be a significant catalyst to break through said resistance, and the December Non-farm Payroll report, due on Friday prior to the opening bell, isn't likely to produce anything approaching good news. Therefore, the emphasis must be on safety and risk aversion, as the market now seems poised for either a rally continuation or a sharp reversal. Something is going to give, and soon.

There seems to be a little more of an appetite for stocks, now that the average investor has lost a bundle and now sees equities as just about the only way out. It's a natural occurrence, as the old saying, time heals all wounds works equally well for investments as for romances. With stocks staging a slow recovery, investors may well be licking their chops over what seem to be enticing valuations.

Surely, stocks are cheap, but they are that way for a variety of reasons. As mentioned in previous posts, the rationale to steer clear of stocks at this juncture consists of interlinking parts: 4th quarter numbers are likely to be poor and will be reported - for the majority of companies - within weeks; the US and global economy are in the midst of the worst setback since WWII and recovery will be slow; government attempts to reinvigorate the economy have failed and have been costly; nothing has been done to affect the hundreds of thousands of people losing their homes and/or jobs, and whatever will be done will likely not be enough to offset the prevailing headwinds of slack demand and price deflation.

So, go ahead and jump in at your pleasure, but don't tell anyone you heard that advice here. I have been completely out of buy side positions since September, 2007, and continue to advise against stocks. Cash is the very best friend you've ever had right now. Real bargains have not yet begun to appear and won't until the housing market bottoms out and then stabilizes. That pair of events is still a good 12-18 months away.

I am so negative on stocks that I'm considering not even reporting on them any more as we move further toward a cash-based - as opposed to credit-based - economy. Distortions, disruptions and price permutations are going to be all over the map for the next two years in everything from car prices to used comic books. Value investors will have a field day buying distressed assets at rock-bottom prices.

Wall Street committed suicide by holding their own toxic blend of mortgage-backed securities (MBS) and structured investment vehicles (SIV) and is thus DEAD AS A DOORNAIL. The major banks are insolvent (as is the US government), lending is still occurring at a snail's pace and capital formation has been nearly entirely wiped out. 2009 will be remembered as the year in which globalization failed completely and all of the excesses of the past 20 years began to unwind in recognizable ways. Real job growth will not take place until at least October of this year, though probably later than that. There's nothing the government can do to prevent the unwinding, which is necessary and real, though they will spend $$$ trillions trying to stem the inevitable tide of foreclosures, liquidations, defaults and bankruptcies which must occur in order to restore function to both the financial and societal structure.

On the day, commodity prices see-sawed to a mixed close. Oil ended down slightly, by 23 cents, to $48.58. Precious metals reversed earlier selling to finish the day with gains. Gold was up $8.20, to $866.00, while silver added 18 cents, to $11.45.

At 5:00 pm, an hour after the close, Alcoa (AA) announced plans to slash 13,500 jobs and 1700 contractors in a cost savings measure.

Stocks Sag in Sluggish Session

It was back to business as usual for the first trading day of the first full week of 2009, meaning that investors went about the business of shedding losers and making incremental bets on safety stocks. Speculation has just about been wrung out of the market along with the wicked volatility that marked trading in the 4th quarter of 2008. In fact, the Dow Jones Industrials, in which 300-500 point daily swings had become commonplace, has only had one day, has only had one 300-point swing - from the low to the high of the day - in its last eight sessions.

Traders have grown weary of the relentless selling pressure, while many are surely sitting out until close to Inauguration Day (Jan. 20) which neatly coincides with the kickoff of 4th quarter earnings season. The duopoly of events should make for some interesting developments nearing the end of the month. For now, however, the major indices are holding onto pretty good gains for '09, garnered on Friday's New Year rally.

Dow 8,952.89, -81.80 (0.91%)
NASDAQ 1,628.03, -4.18 (0.26%)
S&P 500 927.45, -4.35 (0.47%)
NYSE Composite 5,908.43, -7.30 (0.12%)

Monday's losses finished off a three-day winning streak for the major indices, though advancing issues outdid decliners by a wide margin, 4016-2655. New lows continued their domineering streak over new highs, though the margin narrowed once more, to 68-40, in favor of the lows.

Volume was again modest, if not downright depressing. There is a notable lack of enthusiasm, due, no doubt to the vicious beating investors took in 2008. There needs to be more clarity from Washington as well as Wall Street for investors to regain a modicum of confidence that stocks are still good investments. The Dow spent all day underwater, while the other averages only briefly posted positive numbers.

NYSE Volume 1,322,749,000
NASDAQ Volume 1,800,739,000

Commodities were all over the place. Oil gained $2.47, to close at $48.81. Gold slipped $21.70, to $857.80, while silver fell 22 cents, to $11.27. Natural gas futures for March remain stubbornly above their seasonal norm, today gaining 9 cents to close at $6.09. Potential disruptions in Eastern Europe and an unusually cold December have contributed to higher prices for the commodity by which nearly 2/3rds of American homes are heated.

As the world awaits the official taking of power by President-elect Barack Obama, there is a palpably tense mood overwhelming the nation, if not the world. It is as though we are holding our collective breaths - especially with the ongoing violence in Gaza - until we can exhale when we officially appoint a new leader. Until then, the market should only take baby steps, unless there is some remarkable news or event to disrupt the anxiety.

Optimistic Investors Push Dow Past 9000

It's a new year, so let's all buy the stocks we sold for losses in 2008.

That seemed to be the prevailing mentality as Wall Street staged its third consecutive rally in a row, starting 2009 off with a veritable bang.

Of course, this kind of optimism is exactly what bears like, even more than bulls. The January Effect seems to be in full flower, with investors jumping in with abandon. Apparently, there's still far too many plungers out there willing to take risks on stocks - even following the worst year on Wall Street since the 1930s - for a realistic bottom to form.

That a real, enduring bottom will form at some later date is almost assured, unless President Obama turns out to be a miracle worker instead of a politician. His administration begins in just 18 days, and investors are encouraged that a change of parties and policies will produce prosperity.

While stocks scrambled up the charts on Friday, economic news was less-than-reassuring. The Institute for Supply Management (ISM) Manufacturing Index, a key measure of manufacturing strength or weakness, tumbled to 32.4% in December, following a reading of 36.2% in November. It was the lowest reading for this particular report since June 1980. The report included some nuggets of just how weak the manufacturing sector really is, including this:

"New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948. Order backlogs have fallen to the lowest level since ISM began tracking the Backlog of Orders Index in January 1993. Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity."

Despite that sobering bit of news, investors were undeterred from staking out positions.

Dow 9,034.69, +258.30 (2.94%)
NASDAQ 1,632.21, +55.18 (3.50%)
S&P 500 931.80, +28.55 (3.16%)
NYSE Composite 5,915.73, +158.68 (2.76%)

Another indication that the recent rally is unsustainable is the relatively low volume, which, for the past three sessions, including today's, were more in line with mid-Summer doldrums rather than an expanding market condition.

NYSE Volume 4,075,754,500
NASDAQ Volume 1,464,044,875

Advancing issues leaped ahead of decliners, 5084-1415. New lows outnumbered new highs, but by a very slim margin, 54-20. This indicates that the market is either headed for a long reversal rally or that this 3-day event is just about over. New highs have only surpassed new lows 4 or 5 times (on a day-to-day basis) in the last 14 months.

Commodities were mixed. Oil gained $1.74 per barrel, to $46.34. Gold lost $4.80, to $879.50. Silver gained 20 cents to $11.49.

It was a welcome relief rally for investors, who want to at least believe that the market cannot go down any more.

Did somebody say, "sucker rally?" We'll see in days and weeks ahead. Earnings for the 4th quarter will begin to flow to the street in three weeks and they're predicted to be short of expectations in a variety of industries, not the least of which will be retail.

It will be interesting to note the January Barometer, which is a highly accurate predictive tool based on the premise that whatever direction the S&P 500 ends the month is the direction for stocks the rest of the year.

The January Barometer was a highly useful predictor last year, when the S&P lost 90 points in January, presaging a 2008 total loss of 465 points.

Economic Predictions for 2009

Making predictions for an entire year is usually an effort in futility or, when the year comes to an end, a message of humility. Nobody has the crystal ball of the ancient prophets. Nowhere is there a font of knowledge from which one can plumb what people will do tomorrow, next week, or next month. Thus, predictions are nothing more than educated guesses, or just plain guesses, without the benefit of analysis.

Fortunately, we have projections and predictions all around us. For the most part, they offer glimpses of what people hope for, not what they fear. But it is only by facing the fear, realizing the worst, that we can proceed onto greater things.

The Roman philosopher Lucretius intoned, many years ago, "Fear was the first thing on earth to make gods."

How right he was. In the earliest days of recorded history, people feared their environment. It was harsh and brutal; there were wild beasts and floods and storms and fires and rain. The people turned these elements into gods to be not only feared, but revered and honored. Sacrifices were offered to them in hopes that their wrath upon the race would not be severe, that we would be spared.

It worked. Humanity survived all the pain that the earth and the skies could produce. Better yet, humanity prospered and grew.

Facing the fear was fine in ancient times, but today, we longer offer sacrificial lambs to the sun or the moon or the seas. They have been tamed (what a fine conceit that is), or at least we've devised ways in which we survive the occasional natural extreme, better. Houses are stronger. Oil and natural gas heat us in winter. We have even harnessed some of nature - in many marvelous ways - to our benefit.

We no longer fear nature. Men and money are the more obvious threats today. The global financial system is creaking under the weight of mountains of bad debt and fiat money, even more produced during the 2008 crash, that has to find a way into the system, even though everyone - from the banks down to the individual piggy bank - is hoarding it. The government is giving it away, and that's essentially inflationary. As the money trickles into the system, inflation will eventually emerge, though that seems a far-off event as we enter the new year.

The first thing one needs to understand about 2009 is that it's likely to be worse than 2008, and that's the fear up to which we must now face. Most people only saw their "nest eggs" decline by 50%. Some people lost their jobs - about 2 million, roughly. More sizable layoffs are coming, beginning with retailers in January. But, I'm getting ahead of myself.

Here's the most elemental of predictions: Will a very small basic basket of food - say a chicken, five pounds of potatoes, a couple cans of vegetables, a loaf of bread and four sticks or a tub of of margarine (it's better than butter) - cost more today or on January 2, 2010?

It just so happens that, as a human, I have to eat in order to survive, so I know these prices pretty well. Here's what I recently spent on the above-noted items:

7 Pound Chicken: $5.53 (79¢ a pound)
5 pound bag of potatoes: $1.99
Canned corn or peas: $0.39
Loaf of bread: $0.99
Four sticks of margarine: $0.99

Grand total: $9.89.

I'll check back in a year to see what it costs then. Of course, prices vary by locale, where you shop and use of coupons, but these are, in my estimation, pretty low. It doesn't seem likely that many are going to go hungry or starve when a family of four can basically have one solid meal for a mere $10. I predict food prices to go even lower during the year and probably remain slightly depressed throughout the year. Demand being the big driver in foodstuffs, the prospects for anything more than a 10% dip would assume that more people stop eating or that people eat more of their own produce. Either of those are not probably going to occur in any great way.

Next, the big question, will oil and gas stay low, or will they skyrocket again?

Right now, oil is ranging around $38-45 per barrel and gas is generally $1.50-$1.80 per gallon in the US. These prices are going to fluctuate up and down with the seasons, though they won't be anywhere as volatile as the past few years. Gas should not top $2.00 a gallon in most locales outside the big cities, and it could go under a buck in some Southern states. Oil's ceiling is probably $50, and slack demand could drop it into the high $20s, though it should spend most of the year right round $35, a very sustainable price level.

Gold and silver will still be safe-havens. Gold should top out just below $1000 an ounce and not dip below $650. It won't be a great year for the gold bugs, but they'll still be better off than most. Silver could very easily be a big winner, up 30-50%. The Gold-Silver ratio is far out of whack. It used to be 15:1. Now it's closer to 80:1. Look for mean reversion, with gold going lower and silver going higher, relatively.

As for currencies, they are a mixed bag, but everyone is going to feel the pain. The US dollar might continue to gain against other currencies, since they now are all feeling our pain. Americans need to change their habits for that trend to continue, however, and they will, as people hoard cash.

Speaking of cash, it will be KING. Anybody with disposable income or money on hand may find incredible deals on everything from automobiles to real estate. Collectors of anything will be able to add or fill in missing pieces at very reasonable prices. Art, jewelry, baseball cards and everything else collectible will fall in price as demand withers.

Stocks will stink. Even from the depressed levels of today, there will be further declines of 15-25%. Naturally, there will be some gains, with most of them occurring in the first half of the year. But, when the GDP figures and economic indicators begin to reveal just how long and deep this recession has become, investors will bail out of stocks once more. Here are the ranges for the major indices:

Dow: 6500-9700
NASDAQ: 1165-1840
S&P 500: 720-1175
NYSE Comp.: 4500-6750

I'm not about to speculate in those markets because they're going to remain somewhat volatile, but the long-term primary trend is still down, the bear market has not been broken; nor has the bottom been plumbed. Stocks have to be seen as absolutely horrible investments before they begin to act like good ones. So far, sentiment is still not completely negative on equities, so there's still room to fall, plenty of it.

Besides the economic distress that will continue to spread across the nation and into nearly every industry, comparables are going to be tough in the first three quarters. Many companies turned solid profits in the first three quarters of 2008, but those will be tough - if not impossible - to replicate. The big losers will be retailers, followed by banks, insurance companies, and anything financial, manufacturers, health care providers, consumer discretionary and recreation and entertainment. The few winners will emerge from the internet sector, high tech, energy (especially those offering clean or green tech solutions) and agriculture.

Some regional banks may post profits, especially if they are outside the Federal Reserve system and are invested locally, though there aren't many locales which will be spared from the economic consequences stemming from global confidence collapse.

Real estate will continue its slump as Alt-A and ARM mortgages begin resetting, taking the place of subprime. More people with standard mortgages will default as job losses grow, and the commercial real estate market is going to break apart. 250,000 retail stores could close between 2008 and 2009. More than half of that number has already occurred or been announced. The glut of commercial space will be monumental and not worked out for at least 7-10 years. Even though the commercial sector is only 1/10th the size of residential, its demise will be so complete as to add to the misery and lengthen the economic correction.

Of course, much of this favors the consumer, for a change. Prices will go down, and those with jobs and money will be able to afford a decent lifestyle. There will be more people on unemployment or some kind of government assistance than ever before, further straining the already bloated federal budget and busting some state and local bodies.

Government authorities will have to walk a fine line between cutting services and jobs. Government revenues will be hard hit across the nation, and job cuts are sure to embolden unions who will fight for every position. Service cuts are easier, and will be the likely choice for narrow-minded politicians who populate state and local offices. Eventually, the public outcry for tax relief will be the loudest, starting with reassessment of overvalued real estate by distressed property owners and ending with income tax revolts against states. In between, there will be more cheating and outright refusal to remit taxes on every level.

Protests and even riots could occur as government begins to be seen more as the problem than the solution.

Some caveats and wild cards:

President Barack Obama: Obama could be anything from a tremendous, creative leader to an outright bust, depending on his policy initiatives. Beginning with what we already know, that an infrastructure stimulus plan is going to be on his desk - and signed by him - on January 21, the prospects aren't that hopeful. while Obama preached "change" during the campaign, many of his appointees seem to have been recycled from the Clinton years, so a minor departure from the "status quo" is expected. He needs to make bold moves, but may opt for safety in closely calculated small changes. In the end, even very aggressive fiscal policy won't undo the monetary blunders already in the works.

War and Pestilence: The threat of widening wars are still with us, though it seems certain that we will be out of Iraq - for all intents and purposes - by the end of 2009. Afghanistan is another powderkeg altogether, especially with disruptions in Pakistan and India. There are other areas of concern, such as the former Soviet satellite states of Georgia and the Ukraine, and much of Africa. The chances are good, however, that we'll stay out of serious conflicts, at least for a while. While nobody can predict the next outbreak of the Bubonic Plague or similar scourges, disease seems to be the least of anyone's worries right now. That probably won't change, though one never knows.

More bank failures and systemic collapse: We can almost count on more banks falling into insolvency, but a big one, like Citigroup or JP Morgan Chase defaulting remains a particular threat to the global environment and could trigger a worldwide crisis which would make today's environment look like a summer picnic.

In the final analysis, 2009 should not be bad for people at the lower income levels, at least those already receiving assistance or with full time jobs. An phalanx of middle class people will fall into poverty due to job losses, and investors will continue to seek profits in stocks without finding them. The rich will get poorer, if that's any consolation, but their money will go further. The huge disparities in incomes has not yet begun to be wrung from the system, and that will take years, not months.

If anything is for certain, GDP will shrink by as much as 5% and maybe more. Recovery is still a long way off, as this recession begins to look more like a depression. Money and credit will remain unusually tight, though interest rates will stay low. Government efforts to reflate will continue to fail. Unemployment will reach 9%, according to government numbers, though the real unemployment rate will be closer to 20%. Home prices will fall another 10-15% and the number of foreclosures will not subside. Delinquencies, bankruptcies and business liquidations will spur a new age of entrepreneurism based on a cash model which excludes most traditional forms of financing.

Cash will be king. Silver will be a knight in shining armor. It doesn't have to be a rough year if one understands that the fear we must face is that of an economy and monetary system which has failed. It's time to readjust and realign.

Good luck. You'll need some of that, too.

Markets Finish Dismal Year on Positive Note

Hope springs eternal.

It was that kind of sentiment that typified trading in the final session of 2008. Stocks put a day of solid gains for the second straight day, though they finish the year with massive losses and an investment community dazed by insecurity and a failed economy. Stocks approached key resistance late in the day and retreated, with most participants happy to say goodbye to a truly horrible year.

The pain was equally shared amongst the indices.

The Dow ended 2008 with a loss of 4488.43, closing at 8776.39 from the Dec. 31, 2007 close of 13264.82, a 33.83% drop in overall value.
The NASDAQ fell 1075.25, from 2652.28 to 1577.03, a 41% loss.
The S&P 500 lost 565.11, from 1468.36 903.25, off 38%.
The NYSE Composite skidded 3983.27, from 9740.32 to 5757.05, a 39% decline.

On the day:
Dow 8,776.39, +108.00 (1.25%)
NASDAQ 1,577.03, +26.33 (1.70%)
S&P 500 903.25. +12.61 (1.42%)
NYSE Composite 5,757.05, +87.05 (1.54%)

Advancers 5476, Decliners 1345. New lows out finished new highs once more, 155-46. a trend that has now exceeded 14 months with only intermittent breaks. Volume was subdued.

NYSE Volume 1,308,103,000
NASDAQ Volume 1,557,348,000

Commodities soared at year end. Oil priced $5.57 higher, closing at $44.60. Gold gained $14.30, to $884.30. Silver added 32 cents at $11.30 per ounce.

Overall, the buying of the past two sessions shouldn't be considered any kind of a trend, as much of the purchases were tax or allocation induced. The real action begins with great levels of doubt, fear and faith on Friday.

Happy New Year!

Check this page tomorrow for annual predictions.