The Dangers of Fraudulent Behavior

Throughout most of the Thursday session, markets were substantially lower for no good reason other than that stocks are still overvalued and too risky right now for the majority of investors.

Right at 3:00 pm, however, it was as though Moses had parted the Red Sea and the enslaved people were freed. The Dow had just broken below 7700 for the first time since November 21, but it would not stay down long. (see image at right)

Like Rocky rising from the canvas, the Dow Jones Industrials staged somewhat of a "miracle" recovery, finishing at 7932.76, easily the best level of the day and a solid 240 points higher in just the last hour of trading.

Hallelujah! Reuters is giving credit to the Obama administration for the rally, citing his sketchy plans to help homeowners.

The real headline - instead of Reuters' tag: S&P and NASDAQ rise after mortgage plan news - should have been "stocks higher as day-trading Wall Street wheedlers cover their shorts."

My headline is probably closer to the truth. Hilary Kramer (left), a frequent guest on PBS "Nightly Business Report" said, during her appearance on the February 11 show, that her most profitable trades of late were short term buys, which she would be out of in less than "48 hours." If Wall Street professionals are day-trading (which is trading, not investing) then what does that say of US equity markets?

It says quite a bit, but clearly expresses an understanding that they are no place for actual long-term investments. Today points up what many people suspect. That Wall Street is becoming even more of an inside game than ever before. The bankers who testified to congress yesterday didn't reveal anything about what or how they were doing internally. Traders won't normally tell either, though one must respect Ms. Kramer's candid behavior on a national financial show.

In any case, we should all be used to substantial bear market rallies appearing out of nowhere for no reason. Today was such a case. In days ahead, expect the losses to resume because hitting 7700 and bouncing off it is not a retest of the November 20 lows - not even close.

It may take six months or six days, but those bottoms must be tested, and they will. No significant bottom has occurred in this market and for good reason: we haven't seen the worst of this recession yet.

Dow 7,932.76, -6.77 (0.09%)
NASDAQ 1,541.71, +11.21 (0.73%)
S&P 500 835.19, +1.45 (0.17%)
NYSE Composite 5,256.45, +3.77 (0.07%)

Faced with a market such as this, individual traders must use their own judgment. The smartest among us are out completely, having moved into the safety of money markets and, in my case, heavily into silver (Since silver broke through 13.50 yesterday, I am temporarily out, awaiting the next buying dip.).

If you must be in play, Kramer's advice is a gem of unusual clarity. In and out is the only way to play.

On the day, there were some interesting economic numbers released, including initial estimates of retail sales for January, which tallied a 1% increase over December, which, in itself, is somewhat of a shocker. In other words, people bought more after the holidays (January) than before or during them (December). Of course, the US Census Bureau's numbers are "adjusted for seasonal variation and holiday and trading-day differences, but not for price changes..."

Well, that's a mouthful upon which I won't bite. Never mind that "Total sales for the November 2008 through January 2009 period were down 9.5 percent (±0.5%) from the same period a year ago."

New unemployment claims were significantly higher, at 623,000, which alone could have accounted for the 200+ point drop on the Dow, that is, until manic buying took hold.

Our trusty internal indicators told a vastly different story. There were more declining issues than advancing, 3319-3050. New lows were 321, compared to just 19 new highs. Volume was quite high, especially on the NASDAQ, not unusual considering the overall volatility.

NYSE Volume 1,480,256,000
NASDAQ Volume 2,470,079,000

Commodities, less prone to manipulation and political head fakes acted more rationally. Oil fell $1.96, to $33.98, its lowest level since mid-December.

Gold's rapid rally stalled slightly, gaining $4.70, to $949.20, a gain much smaller than those of the past few days. Silver dipped a penny, to $3.51.

Congress was still diddling around with the banking fix and the stimulus package, though those two major pieces of legislation/regulation are quickly becoming back burner issues. Stocks are supposed to rise and fall on fundamentals, earnings, profit, not politics, though that is what currently seems to be moving markets. It's a condition which cannot last long before becoming a very unhealthy environment.

Wall Street Still Waiting on Washington

Markets were mildly optimistic on Wednesday, awaiting word from Washington on the proposed $800 billion stimulus bill in Senate-House negotiations, which appeared close to a deal.

Having investors focus on anything other than issues regarding US banking interests was likely preferable, following yesterday's massive sell-off on the heels of Treasury Secretary Timothy Geithner's sketchy bank plan announcement.

Following the initial shock, players in the financial field are beginning to flesh out possible scenarios, each of them fraught with peril as economists delve into the unknown. Preeminent are the individual balance sheets and books of the banks in question, primarily bank of America and Citigroup, the two which seem to be most at risk, though the books of Wells Fargo, JP Morgan Chase and others will surely require the close scrutiny of government fixers before any steps toward a working solution are attempted.

Like an alcoholic with serious addiction issues the major money center banks have not yet taken the serious step of actually disclosing the size of their losses and may never do so, publicly, as the sheer size of the numbers would panic most ordinary people. It's essential to any kind of recovery that the banks confess their shortfalls to the government, so that an appropriate solution can be delivered.

As for the bank plan being devised at Treasury and the Fed, there is some agreement, that, considering the broad outlines, banks will be merged and/or downsized in coming months.

Trading in very narrow ranges, all of the major indices finished on the upside, though only marginally. Much of the trade was tied to hope for quick passage of the stimulus bill or recovery from yesterday's drama. As for a dead cat bounce, today's action barely merited notice, though most traders seemed relieved that the markets didn't devolve into indiscriminate selling.

Dow 7,939.53, +50.65 (0.64%)
NASDAQ 1,530.50, +5.77 (0.38%)
S&P 500 833.74, +6.58 (0.80%)
NYSE Composite 5,252.65, +37.94 (0.73%)

Much of the bounce-back on the Dow was due to the financials, as Citigroup (C) and Bank of America (BAC) each rose by more than 7%, and JP Morgan, another Dow component, lifted to a 4% higher close.

Internally, the market sent a mixed message, one to which traders have become accustomed over the past 18 months. Advancing issues outnumbered decliners, 3669-2769, though new lows sailed past new lows, 232-14, increasing by both raw number and the overall divergence.

NYSE Volume 5,977,889,500
NASDAQ Volume 2,206,760,750

Crude futures took a severe hit after US inventories were reported to be close to 16-year highs. Oil for March delivery fell $1.61, to $35.94.

Gold finished with strong gains for the second straight day, as the flight to safety continues. Gold was up $30.50, to $944.50, with the magic $1000 mark clearly in sight. Silver also showed strong gains, picking up 39 cents to finish at $13.52 in New York.

In yet more good news for consumers, natural gas lost a penny and all food stock futures were lower. After Citigroup analysts downgraded supermarket chain operators Safeway (SWY) and Kroger (KR) on Tuesday, warning of a protracted "price war," shoppers should expect stable to lower prices on grocers' shelves over the near term.

Considering the dark cloud over the stock markets and the number of layoffs occurring in the past few months, cheaper food and fuel are providing the silver lining.

Geithner's Wall Street Cram-Down

It was pretty evident that Wall Street didn't like what Treasury Secretary Timothy Geithner was telling them when he began outlining the details of TARP II, the $350 billion Obama administration's side of the original $700 billion plan approved in October of 2008.

Stocks were already trading lower when Geithner stepped to the mic, but they really tanked as he drilled out scant details of the government's plan. The Dow was down about 45 points when he started speaking at 11:00 am. By the time he was finished, just a half hour later, the blue chip index was off nearly 300. Matters proceeded to become materially worse from there. The Dow was down more than 400 points before a last-gasp rally trimmed the losses by about 40 points in the final 15 minutes.

Dow 7,888.88, -381.99 (4.62%)
NASDAQ 1,524.73, -66.83 (4.20%)
S&P 500 827.17, -42.72 (4.91%)
NYSE Composite 5,214.34, -265.54 (4.85%)

Some of the more vocal Wall Street banking crowd are complaining that Geithner's plan - which reportedly has provisions for the assumption of some of the banks' toxic assets by private investors - is short on specifics.

The truth of the matter is that it likely opens the banks in question to too much public scrutiny, as evidenced by the government's new web site, financialstability.gov.

For a glimpse of what's ahead for the Bailout Bunch, the site currently links to Treasury's own Emergency Economic Stabilization Act web site. drilling down just a page reveals, under "Systemically Significantly Failing Institutions" we find reams of info on Bank of America, Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase, Wells Fargo & Co., Bank of New York Mellon, State Street, Merrill Lynch, AIG, plus Chrysler, General Motors and GMAC.

How appropriate and sweetly ironic that these banks and businesses are grouped under such a heading. Most, if not all, are already insolvent. Bloggers and economists should have a field day with all the fresh light shining on these cheaters, liars and scoundrels. There's a wealth of information there, much of it which will almost surely facilitate the demise of these failed firms.

Could the government actually be forcing the banks to confess to their excess and the extent of their failures? It sure looks that way, and, if so, it's a great step forward. Wall Street fails to see it that way, but, clue to the clueless, Wall Street isn't America and the fate of 300 million Americans is not inexorably tied to the ups and downs of the Dow Jones Industrials.

Main Street may finally be catching a break as the banks are forced to come clean, which means that a good number of them will be forced into bankruptcy and/or liquidation, the key step in ridding the market of malinvestments and failed institutions.

Could it be that Secretary Geithner, under the thumb of President Obama, has finally gotten religion and intends to actually correct the mess that he was already a party to? Could be. Obama's sincerity and forthrightness was on display just last night at his first press conference when he left the door a bit ajar in his response to a reporter's question about investigating former administration officials.

His response to a question about Senator Patrick Leahy's calling for a "truth commission" was decidedly grey-area, as the President said much to the affect that while he preferred to "look forward" he would not block investigative efforts. Between those comments and the Geithner cram-down on Wall Street, maybe real healing in America can begin.

This writer honestly hasn't felt this good about a serious market tumble since the dot-com bust, the key being Geithner's fairly obvious signal that the rules have changed and the hand-outs and free rides are now relics of the past.

Advancing issues were absolutely overwhelmed by decliners in the broadest selling since November. Losers led gainers, 5405-1145, a nearly 5-1 edge. New lows continued to strengthen ahead of new highs, 203-19. A major part of the story was volume, which was very strong, indicating that this bust was the real deal.

NYSE Volume 1,757,078,000
NASDAQ Volume 2,473,252,000

Financial stocks took a beating, especially the most egregious offenders. Bank of America (BAC) lost 1.33 to close at 5.56 (-19.30%). There was false hope recently as BofA rallied from below $4 to above $6, a level at which major funds could still participate. It now looks to fall below $5 again, signaling a continuance of the classic death spiral.

Ironically, this stock looks very much like Countrywide did in January of 2008, after Bank of America had assumed most of the company's assets. Countrywide eventually was fully assumed by Bank of America. Much of the same bad debt which killed that company are now crushing CEO Ken Lewis' company. Bank of America has been insolvent for quite some time and it will be interesting to watch the continuing saga of what was once America's largest banking interest.

Citigroup (C), another of the walking dead, was hammered 0.60, to 3.35 (-15.19). This company's future may be numbered in weeks rather than months.

Goldman Sachs (GS) was hard hit, dropping 7.49, to 90.40 (-7.65%). Morgan Stanley (MS)lost 2.82, to 20.79 (-11.95). JP Morgan Chase fell 2.66, to 24.62 (-9.75).

Commodities were mostly mixed with oil down substantially, losing 2.01, closing at $37.55, a three-week low. The metals were moving in the opposite directed, hurriedly. Gold shot up 21.40, to $914.20. Silver gained 30 cents, to 13.13.

The precious metals prices are signaling another flight to safety. Clearly, equities are not the place to be now, as they haven't been for the past 18 months, and they still won't be for some time even though today's decline could be interpreted as the beginning of the recovery. The dollar was up sharply against other currencies.

While our own corrupt bankers and wheedlers express themselves with outcries of fear and panic, smart money is on the greenback and gold, a combination that may not seem plausible at first, though it's better understood when seen in the light of a basic turnover of power. It's clear that the Obama administration is not going to tolerate much less than complete transparency. THAT is a very positive development.

Silver remains my #1 investment. On the other hand, opportunities may begin to emerge in black market tobacco and stinging race and sports fixers, the ultimate revenge play.

Today's losses were surely not the last, as the Dow closed at its lowest level since November 20 of last year and is also the first close since then below 7900. Wall Street is in serious jeopardy of breaking apart at the seams. Another precipitous move lower could be in the cards as the market must retest 7550 on the Dow, though that move actually seems a foregone conclusion after today.

It was a poor day for Wall Street, but a darned good one for the United States of America.

Markets Flatline Awaiting Stimulus

Stocks traded in narrow ranges on the major indices Monday as investors awaited congressional delegations to reconcile differences in the Senate and House versions of the massive $800 billion government stimulus bill.

While Washington fiddles, Wall Street diddles, indeed. The Dow barely surpassed a 100-point full-session range. The S&P 500 never moved more than 7-points off of no change, finishing with a minimal gain of 1.29, joining the NYSE on the upside, while the Dow and NASDAQ ended lower.

Dow 8,270.95, -9.64 (0.12%)
NASDAQ 1,591.56, -0.15 (0.01%)
S&P 500 869.89, +1.29 (0.15%)
NYSE Composite 5,479.86, +4.58 (0.08%)

The imperfect storm included a lack of corporate reports, scarce economic news and a delay in the highly-anticipated "TARP II" bailout plan for major financial firms.

Lethargic conditions resulted in a severe lack of volume and volatility. Maybe everybody just needed a break from the steady salvo of bad news, inquisition and recrimination. Word is out that the global economy is quitting, the question is over haw bad it will become and whether any government plan can stem the tide of defaults, layoffs and deflation.

On the day, advancing and declining issues were virtually split, with advancers ahead, 3279-3221. New lows continued to outnumber new highs, 115-19. The volume figures, as mentioned, were rather anemic.

NYSE Volume 1,257,726,000
NASDAQ Volume 1,912,234,000

The major tracking commodities deflated as crude oil closed near its session lows at $39.56 per barrel, down 61 cents. Gold fell $21.50, to $892.80, with silver slipping 23 cents, ending at $12.83 the ounce in New York.

There was so little to report on today, even I am at a loss for words.

Bear Market Rally Like Crack Cocaine

2:35 pm : The stock market sports strong gains near session highs. Beaten down industry groups top the leader board -- homebuilding (+16%), diversified financial services (+14%), regional banks (+14%), diversified banks (+12%), auto parts and equipment makers (+12%).

The above quote is from briefing.com, noted as the markets approached the highs of the day on Friday. As I noted earlier today, the market has absolutely rejected the obvious, continuing stream of bad news, including January's horrific jobs numbers (-598,000), released prior to the market's opening bell by the Bureau of Labor Statistics (BLS).

So, is this "irrational exuberance?" A little of that. The mainstream-obviated financial press is attributing the rise in equities to anticipation of congress passing a stimulus bill, presumably by tonight. There's probably a little of that, too, but the truth probably lies somewhere between the PPT and the fact that Bank of America stock had fallen below $5.00 per share on Wednesday, and our great and glorious financial leaders could not stomach the thought that investment and pension funds would not - by charter - be able to throw more cash down that rat hole of a "bad bank." Throw in a teaspoon of short-covering and viola! Bear market rally.

Rallies like this, in the midst of a serious recession, are like crack cocaine: a great rush, but it doesn't last and the crash is difficult. We've all seen them before and, judging by past experience, this one is just a lot of noise, indicative of nothing in particular except for the assertion that investors can be herded more readily than cats.

Bank of America was the among the biggest winners of the day, gaining 31% at one point of the activities. The stock finished the session with a nifty 1.29 point gain, closing at 6.13, up 26.65%.

But take a gander at those industry groups leading the rally. Banks? Homebuilders? Auto Parts? Aren't these the same companies needing bailouts and TARPs? This was another in a series of well-orchestrated pumping by the "invisible hand" of government and financial firms afraid of losing their grip on the American psyche. Naturally, jacking the stock markets is only a temporary solution.

Another irony of our day is the news that many of the banks and institutions receiving TARP funds - now that severe restrictions have been placed upon them, like limits on executive compensation - banks are turning away from government largess and Bank of America's CEO, Ken Lewis (left), says his firm won't need any more.

Is Lewis to be believed? Probably not. Bank of America is technically insolvent. Besides, his bank has already received $45 billion in direct funding, plus another $118 billion in government loan guarantees. Let's hope BofA doesn't need any more money.

Here's some more proof of the extent of insider meddling in today's (and every day's) trading. Look at how closely the indices tracked by percentage gain. Absolute lock-step. Unusually aligned.

Dow 8,280.59, +217.52 (2.70%)
NASDAQ 1,591.71, +45.47 (2.94%)
S&P 500 868.60, +22.75 (2.69%)
NYSE Composite 5,475.28, +149.27 (2.80%)

To say that today's gains are illusory or fantastical might be putting too fine a point on it, so I'll patiently wait until stocks on the Dow (of which every single one was higher today) revert to the norm at 8149, pulled down by the absolute weight and unshakable might of pure market dynamics. The Dow can only go so far for so long before retesting the lows set last November. How far and how long you ask? A few hundred points (maybe a top at 8600, though that's doubtful) and about another month at the outside. Sooner or later reality rears it's pretty head and investors head elsewhere, profits in hand.

On the day, advancing issues hammered decliners, by a heavy margin, 5137-1446. New lows remained atop new highs, 144-22. Volume, as it was yesterday, was strong, not surprising, considering how much money went into bidding up stocks that should have been going down.

NYSE Volume 1,611,600,000
NASDAQ Volume 2,429,589,000

Commodities continued under some pressure, which is normal. Oil futures finished a volatile session down $1.00, at $40.17. Gold barely budged, picking up 10 cents to $914.30. Silver's advance was the sharpest of all, up 41 cents, to a multi-month high of $13.16.

The stock indices all registered gains for the week, snapping four-week losing streaks and posting the first weekly gain of 2009. Direction is still down, though point-and-figure chartists will note a reversal here. Considering the depth of economic despair the country and globe is encountering, this doesn't seem to be much of a sustainable trend.