Who Flipped the Switch? and, Is the Fed Busted?

The action today on the markets was extraordinary, to say the least. When General Electric fessed up to a major revenue miss and 46% drop in profit, the market futures signaled a steep decline at the opening, which is exactly what happened. The Dow lost 200 points in the first few minutes of trading.

From there on, however, it was all hands on deck for the PPT and the foes of free markets. All but the Dow finished the day with small gains as the interventionists kept stocks from doing what they were supposed to do, drop like stones thrown off a cliff.

Dow 8,077.56, -45.24 (0.56%)
NASDAQ 1,477.29, +11.80 (0.81%)
S&P 500 827.68, +0.18 (0.02%)
NYSE Composite 5,195.55, +23.87 (0.46%)

I may sound pessimistic to many, and I'll admit that I don't see much but doom and gloom ahead, but that's for stocks, mostly. If you like shiny objects made of gold and silver, the future looks better. But, the backdrop of millions of jobs lost, families being put out on the street and people just plain afraid to spend money, does have a sobering effect. Stocks should head lower, below the levels of November 20. The p-e ratios of most of the S&P (sans financials) are still high, not indicative of stocks in a recession. But, despite my desire for a quick, painful revaluation, the Fed and the federal government will continue to unwind matters slowly. Stocks have fallen, and they will continue to fall, just not quite as quickly as some (me) would like.

So, right around 9:15, somebody over at the secret PPT bunker kicked the switch-flipper awake and things got going. Ben Bernanke's grubby little fingers were all over this particular episode.

On the day, advancers and decliners were virtually even, with the winners ahead slightly, 3223-3211. New lows maintained their edge over new highs, 315-13, actually expanding their advantage, yet another indication that a lows retest is upon us. Volume was eerily the same as it's been all week.

NYSE Volume 1,410,774,000
NASDAQ Volume 2,182,405,000

Whoever flipped that switch this morning, must have tripped the inflation lever as well, as commodities, mired in a deep recession, suddenly emerged as the big winners of the day. Oil gained $2.80, to finish the week at $46.47. Gold was up $37.00, to $895.80, briefly trading above $900. Silver rose 58 cents, hitting $11.94 an ounce at the close of NY trading. The big loser of the day was natural gas, down 17 cents to $4.49. While this may seem like a boon to householders heating with natural gas, the reality is that most utilities locked in higher prices months ago, so Mr. and Mrs. Average Joe and Jane won't see any reduction in this month's utility bill. Maybe next month, maybe not.

Yesterday, I promised something called a "blockbuster" report on the Fed and I've managed to piece together most of the salient facts and articles which lead me to believe that the Federal Reserve Bank, which has provided nothing less than massive inflation and destruction of the dollar over it's 95 years of existence, is, in fact, one big Ponzi scheme, making Bernie Madoff look like a piker by comparison. We begin with a tame somewhat mainstream video clip and proceed to the meat of the story of the Fed

The following video features Christopher Whalen of Institutional Risk Analytics, proposing that the bailouts of banks end and the government allow Sheila Bair of FDIC to do her job, which is, take the Citigroups and Bank of Americas of the world into receivership, liquidate the assets and move on with new, stronger entities. Naturally, this sensible approach will be completely ignored by our financial masters at the Fed and in the higher reaches of "our" federal government.



This concept actually dovetails nicely into the creation of a "bad bank" as a repository for all the toxic debt weighing down the balance sheets of financial firms. The concept is neatly outlined, defined and debated in Bad Bank Regains Favor As Solution for Toxic Debt.

A "bad bank" is exactly what the world's money masters need. It is likely to be the biggest bank in the world, as companies, governments and central banks deposit all of their crookedness into one big cesspool. Naturally, the assets and liabilities will never be made public, nobody will have to come clean, and all the world will be better off, especially the rich, greedy manipulators of finance.

Moving on, the details of how the Fed creates money out of thin air are boring in their detail, but suffice it to say that they have many means available to them to create wealth for themselves at the expense of the American public, and they use all of them in gross excess almost all of the time.

The most interesting articles, were this one, The Federal Reserve’s Blueprint for Market Intervention, by James Turk, in which he follows the sleuthing of researcher Elaine Supkis, who uncovered a 1961 TOP SECRET FED RESERVE GOLD EXCHANGE REPORT.

The details of these two articles compelled me to make them more widely available before somebody from NSA comes along and scrubs them from the web. They partially describe how the Fed is an unruly, corrupt organization, with black holes in their books and secrecy and deceit all around. Both are exceptional reads.

Finally, here's John Maudlin, suggesting that we "muddle through" for another decade or so, but he does offer a couple of other, more interesting scenarios.

From John Maudlin, in an article entitled, The Endgame:

The US (and indeed soon the whole world) is in a deep recession. The US is going to try and combat that recession with stimulus on a scale never before tried. It is a grand experiment. On the one hand is the theory that you can allocate stimulus and keep the velocity of money from falling. On the other hand is the theory that once the deleveraging process starts, there is not much you can do about it: it is going to work its way through the economy. We are about to find out which theory is correct.

While the Fed and Central Banks around the world are simply dissatisfied with stealing most of people's wealth and labor (They want it all!), they'll be betting on the side of the argument that keeps liquidity and money flowing at a high velocity. The US population, scared to death by Wall Street, trillion dollar deficits and the Fed running the printing presses around the clock, are going to be a serious counterbalance to any reflation effort. So, choose your poison: deflation or inflation. I'll bet dollars to doughnuts that it will be deflation first and inflation later: my few dollars will buy lots of doughnuts today and later, I'll sell the stale ones for 10 times what i paid.

We've already seen what $350 billion did to re-inflate and stimulate the banking sector. It cratered like a punctured beach ball. More money thrown at it will have a similar effect because the banks and the Fed and central banks around the world are so deep in debt and sunk by credit default swaps, debt reconstituted into securities, resold and defaulted again, that they will find no way out short of armed conflict, devaluation of currencies (starting with the US dollar).

So, that's it for the week. It's Friday; go have a beer or seven. I am on my way out for a couple gulps of Steel Reserve, a high gravity lager, which, considering the height of the "gravity" we face, only seems appropriate.

Cheers!

Geithner Passes Committee; Housing, Unemployment Reach Records

Tim Geithner was approved by the Senate Finance Committee (guess we all can cheat on our taxes without worry now!) earlier today, as the process of confirmation as Treasury Secretary now passes to the full Senate. The AP wire lit up with the story at 12:37 pm EST, just about the same time the Dow crossed back above 8000 and started a mini-rally (by 2:15 pm, the Dow snuck past 8200).

Coincidence? I think not. Wall Street's fate is now tied to Geithner and how he and Ben Bernanke, over at the Fed, interact and respond to the ongoing obliteration of the nation's largest financial firms.

The euphoria over having one of their own (Geithner's resume is full of Wall Street, World Bank and NY Fed connections) with his hands nearly on the US Treasury quickly faded as those in the know remembered that the US government is carrying a debt load of close to $11 Trillion, so maybe Geithner won't be able to help in the long run. Shortly after 3:00 pm, the Dow was down 150 points again, and matters didn't improve much heading into the closing bell.

Dow 8,122.80, -105.30 (1.28%)
NASDAQ 1,465.49, -41.58 (2.76%)
S&P 500 827.50, -12.74 (1.52%)
NYSE Composite 5,171.74, -102.25 (1.94%)

On top of this is a growing concern over how stable the Federal Reserve is. Bearing in mind that the Fed is a private bank, albeit with deep tethers to the government, the Fed has been buying up more than its fair share of rotten assets and throwing around money like Bernie Madoff on an investor hunt.

With more and more economists and commentators openly saying that the large banking institutions are insolvent (something I and others have known and written about since 2007), reality is taking a heavy toll on investor sentiment. (I'll have much more about the Fed, the banks, the bailouts and our future in a blockbuster report tomorrow)

While the marketeers were making the most of their man being appointed to Treasury, an earnings miss and announced layoffs by Microsoft and more dismal data from the housing and employment sectors overhung the entire session, acting as the metaphorical ton of bricks weighing down all sectors.

New unemployment claims hit a level not reached since 1982, with 589,000 new applications for the week ended January 16.

New home construction and permits fell to record low levels in December, the Commerce Dept. reported.

Taken together, the news could not have been much worse, though investors are getting used to the endless stream of bad news coming out of government and private analyses. The poor earnings reports for the 4th quarter are a relatively recent add to the mix, but earnings season is getting into full swing. Google reports after the bell today. (Update: Google beat analyst expectations ($4.98), posting Non-GAAP EPS for the fourth quarter of 2008 of $5.10.)

Declining issues outweighed advancers by a wide margin, 4867-1560. New lows: 230. New highs: 12. Volume was consistent with the past few days, generally on the high side.

NYSE Volume 1,554,123,000
NASDAQ Volume 2,347,116,000

Oil finished with a 12 cent gain, closing at $43.67, though US inventories were reported 14% above last year's levels. Oil traded lower for much of the session before recovering into the close. Natural gas fell 9 cents, to $4.65. Gold gained $8.70, to $858.80; silver finished the day 4 cents to the good, at $11.37 the ounce.

A catalyst to propel the bulls has yet to emerge, though at this juncture, small bits, like Google's good report, may be enough to keep what little is left of investor confidence. Today's close on the Dow, however, was the second this week below 8149, the interim low (Dec. 1) following the November 20 collapse and bottom (7552).

The markets have traded sideways for two months running, so a betting man might be inclined to look for a change in dynamics. I make the prospects of closing below the Nov. 20 lows within a month at 70%, and a gain to 8750 in the same time frame almost nil.

Hedge Fund Oxymoron?

In a report released on Wednesday, tracking firm Hedge Fund Research said investors pulled $155 billion from the secretive portfolios.

What separates hedge funds from other, better regulated funds and investment vehicles is that hedge funds are chartered to engage in short selling, buying and selling options and other devices designed to "minimize risk." The whole idea behind the concept of hedge funds is that they can weather any kind of market and make money in any environment.

So why did they take - on average - a 19% beat-down in 2008? It seems that the hedges were trimmed when they should have been sprouting new branches. While mutual funds lost an average of 38% last year, the hedge funds should have been in a position to identify the enormous risks in the market and "hedge" accordingly.

But maybe the term is oxymoronic. Maybe the average hedge fund manager isn't any smarter than the guy with glasses who handles your pension plan, and maybe, despite the tools available to them, the hedge fund managers were not any more aware of what the banks were going through in 2007 and 2008, and failed in their charge to ameliorate risk by shorting, buying puts or exiting losing positions in timely manners.

When this ugly chapter of economics is finally unwound by financial historians, it's likely to be revealed that the clandestine hedge fund community was one of the major contributors to the extreme volatility in markets during the final three months of 2008, fleeing financials just like the rest of the duped investors who thought the subprime crisis was "contained" - a la Ben Bernanke - as markets and profits disappeared like the vapid promises of "higher returns."

Greed, an emotion which knows no bounds, is what attracted the rich and not-so-famous to hedge funds in the first place, and it is the same greed (masked as fear of losing their cash hoard) that is fueling the exodus today. Had the hedge funds really been on the ball, they would have profited from the relative ignorance of the rest of the market. Unfortunately, hedge fund managers turned out to be not the "smartest guys in the room," but merely a little smarter than the average broker.

Investing is largely about managing risk, and while the hedgies purported to managed risk better than the average, their losses - and subsequent redemptions - proved their fallibility and the underlying investment risk dictum, "nobody is immune."

Obama Bounce? No, It's a Geithner Gallop; eBay Disappoints

Stocks reversed nearly all of yesterday's losses after the New York Times posted an article with the glaring headline. Hearing Over, Geithner’s Confirmation Is Expected minutes before noon.

Stocks started out full of steam, but had surrendered most of their gains before that bastion of journalistic integrity asserted that Timothy Geithner's problems with not paying taxes on time would be sufficiently swept under the rug and he would be confirmed as the new Treasury Secretary. Such an appointment virtually assures more bad behavior on both Wall Street and in Washington, DC. The banks will continue to receive hefty sums of taxpayer dough from the Treasury without recourse nor accountability.

Tra, la, la, life as a bankrupt banker must be good with a capital G.

Dow 8,228.10, +279.01 (3.51%)
NASDAQ 1,507.07, +66.21 (4.60%)
S&P 500 840.24, +35.02 (4.35%)
NYSE Composite 5,273.9902, +215.93 (4.27%)

The advance was broad-based with gainers beating losers, 5011-1567. New lows retained their 14+ month edge over new highs, 278-10, notable in the minuscule number of new highs on such a large point gain. Volume was solid, a very optimistic indicator.

NYSE Volume 1,737,111,000
NASDAQ Volume 2,109,177,000

IBM's strong 4th quarter results also contributed to the sanguine tenor of the day. The computing giant returned impressive results after the close on Tuesday.

Commodities also got in on the rising price action, though oil's gain of $2.71 resulted in a closing price of $43.55, quite tame by recent standards. Gold continued to trade under pressure, losing $5.10, to $850.10. Silver gained 15 cents, to $11.33. Natural gas was also higher, gaining 12 cents, to $4.75 mmbtu.

After the close, eBay released 4th quarter and full year results. The company's 4th quarter returned lower revenue and earnings, and the stock sold off after-hours. Here [PDF] is a link to a graphical presentation.

Ebay-related revenue took a large hit. The largest revenue production came from PayPal, as the company struggles through a troubling transition in their core auction and fixed-price business. Essentially, the company has largely neglected the individual seller in favor of catering to larger enterprises. This has caused nothing short of a seller exodus over the past few months. Ebay executives put most of the blame on poor global economic conditions rather than taking the heat for their failed turnaround of a business that didn't need changing.

At this writing, ebay was trading at 12.52, down 0.76 in after-hours trading.

Roubini: "systemic banking crisis"; Obama: "the time has come"

As Washington, DC became a grand celebration with the inauguration of Barack Obama, the 44th President of the United States of America, a far different mood was spilling out of the stock exchanges and broker/dealer offices of Wall Street.

The juxtaposition of moods and emotions could not be more stark between the Capitol and the Big Apple. While Obama was reminding us of the nation's greatness, Wall Street was dealing with the current reality of a systemic banking failure. Speaking in Dubai, New York University Professor Nouriel Roubini, who has been one of the leading voices predicting the global financial crisis, said that US banks are "effectively insolvent," adding that total financial losses could reach the staggering sum of $3.6 Trillion.

There is no doubt that the economy will be the stiffest challenge presented to the newly-minted President. Obama, in close contact with the congress, is already working on a financial rescue package which will total over $800 billion in tax breaks and incentives over the next two years. Whether the medicine spooned out by Washington will cure the sick patients of Wall Street is still suspect. The wheels, however, will turn, for better or for worse, and business will continue, in whatever form it takes.

As President Obama made his way to the Capitol to take his oath of office, markets around the world were reeling. The Dow Jones Industrials quickly sank below 8100, the fourth consecutive session in which it has declined beyond that mark. The catalysts for the decline were the same as they have been throughout: the banks and financial institutions that continue to write down massive, unpayable debt, begging for help from stunned legislators while destroying investor confidence and trust in markets.

So it was that the new president was greeted with a massive loss on US equity markets, which ended the session with the worst losses of the new year.

Dow 7,949.09, -332.13 (4.01%)
NASDAQ 1,440.86, -88.47 (5.78%)
S&P 500 805.22. -44.90 (5.28%)
NYSE Composite 5,058.0601, -329.44 (6.11%)

Advancing issues were overwhelmed by decliners, 5655-833, one of the most lopsided showings in months, even though the past few months have been nothing but an endless string of declines in the broad markets. New lows arched ahead of new highs, as expected, 328-18, expanding both the number of new lows and the margin of lows to highs. Volume was once more light, considering the loose selling all around, but, as mentioned in earlier posts, smaller volume figures are more or less going to be a fixture for some time to come. Small investors have been spooked, hedge funds are largely out, and big brokerages (are there any left?) have trimmed their positions significantly.

NYSE Volume 1,718,511,000
NASDAQ Volume 2,014,633,000

On the commodities side, oil, which began a new futures contract today (March), gained from the closing February contract, up $2.23, to $38.74. Gold rebounded sharply, adding $15.30, to $855.20, while silver slipped on profit-taking, down 4 cents, at $11.18.

Up this week are tech heavyweights - Apple, eBay, Google, AMD, and others - reporting 4Q earnings. Of particular focus is eBay, which seems to have lost a lot of momentum lately, due to CEO John Donahoe's commitment to "disruptive thinking," the idea that eBay must change to grow, or, in his own words, "create a vision of the future so people could let go of a very successful past." Apparently, Mr. Donahoe never heard of IIABDFI (If it Ain't Broke, Don't Fix It) before embarking on changes (like tripling fees in some categories) that have resulted in vociferous complaints and a mass exodus of mid-to-small sellers.

The movement of sellers has been so abrupt that one site, Bonanzle, has gone from zero to just under 1 million listings in about six months time. Other niche and general sites have experienced enormous growth during Donahoe's tenure. Ebay reports after the close on Wednesday. Look for the first of many disappointing quarters. The stock should sink to under $10/per share (currently hovering around $13-14) in short order (no pun, nor hint, intended).

If today's action was any indication, President Obama's task is not going to be an easy nor a pleasing one. Rescuing an economy that has been buffeted by years of abuse and neglect will take time to repair. This is not a condition which will be cured overnight. And, as the President has been reminding us, it's likely to get worse before it gets better. How much worse only time will tell.