Nice Bounce, But the Dow Is Headed to 5237

Tuesday was get even day for the bulls, wiping out most of Monday's losses, almost as though they never happened. But they did, as we know, with the Dow, S&P and NYSE Composite all breaking below support and hitting new lows.

So, while Tuesday will likely go down in the books as a simple snap-back rally, Monday was the more portentous of the two days, and we are now sure as shootin' going back to the 7100 level, though just when that happens is an open question.

Dow 7,350.94, +236.16 (3.32%)
NASDAQ 1,441.83, +54.11 (3.90%)
S&P 500 773.14, +29.81 (4.01%)
NYSE Composite 4,821.73, +187.95 (4.06%)

The likelihood of a rally is very good here, as the market was technically oversold. There are still speculators with cash in hand, dying to jump in and today was one such day. Their hopes of quick, easy money will be soon dashed. It took three months to retrace back to the November 20 lows, so surely a 2-4 month time span is surely appropriate for a revisit to 7114.78, yesterday's close.

For the rest of this week, though, and into next - prior to the Friday, March 6 BLS Non-farm Labor report - prospects are reasonably good for gains.

We've entered a period of the recession and bear market that may prove difficult to track and predict. Major indices have taken half off their 2007 peaks, so further deterioration should be slower and more agonizing. We could witness a period of sideways action for some months, but an eventual, final purge is needed and we haven't gotten to such capitulation yet. That could come in 6 weeks or 9 months. It's up to the markets and highly dependent on how well the government handles the crisis, which, up to this point, hasn't been very promising.

Fed Chairman, Ben Bernanke, testifying before congress today, said, "it is reasonable to expect the recession to end this year." Should we believe him? Maybe, maybe not. Recall, this is the same man who said that the subprime problem was "contained" back in the first quarter of 2008, so we know that his powers of prediction and grasp of the situation are less than accurate. Furthermore, he's presided over the worst economic catastrophe since the 30s, and as of yet his solutions haven't produced any positive developments. Still, even a broken clock is right twice a day, so, by calling for an end of the recession in 10 month's time, the erstwhile chairman has provided himself plenty of room for error.

Yesterday, I postulated that this recession, being larger and far different than anything other than the Great Depression, is going to last longer and plunge the US economy deeper than the others, which generally last 16-24 months. I am still looking at a horizon of 27-30 months duration, which puts recovery off until January 2010 at the earliest and June 2010 at the latest, using September through December 2007 as the actual start of the recession.

So, where's the bottom? I ran some calculations, using a fairly simplistic - but I believe sound - formula: comparing the price of the Dow Jones Industrials to the annual growth rate of US GDP.

I found an excellent site for tracking GDP growth rates by region and country back to 1961, here.

Using 1992 as a baseline, annual GDP growth over 17 years (1992-2008) came to 2.94%. Then, using the same baseline for the Dow, I calculated that 2.94% growth on top of the Dow at 3200 (an average closing price from January-March 1992, a very stable period). The result was 5237. Mark that number down, because that's where the Dow is headed.

To get an idea of just how overinflated the Dow (and stocks in general) had become from 2005-2008, consider that starting at 3200 in 1992, the Dow grew by more than 9% per year over that 17-year span. It's simply not believable, rational or normal for stocks to advance at such an exceptional rate. 2-5% is more like it, and that's why - back in the good old days before 1980 - investors sought out stocks more for their dividend yields than their growth potential.

Obviously, the internet and the coming of age of baby boomers brought in a gaggle of rubes who knew little about investing, and the market now has rewarded them justly by eviscerating most of their money. The market is probably going to take a little more before it's done.

One can argue that my analysis is too cursory, arbitrary and that it doesn't account for inflation or dividends, and to that I say, well, do your own analysis, please! I encourage all investors to analyze, slice and dice and dissect the markets for price discovery. There are many methods, and I believe mine will prove as sound as any. I'll state right here and now that I'll be within 400 points of the eventual, true bottom, and I'll accurately predict the market bottom to occur between August and November of this year. (Hey, it's only my reputation at risk here.)

Getting back to Tuesday's issues, besides Bernanke blathering at the insipid senators and lethargic legislators, the S&P/Case-Shiller Home Price Index dropped 18.55% in the 4th quarter of 2008 from the same period in 2007. Nationally, home prices are down 23% since their mid-2006 peak, suggesting that the decline is far from over.

Between the stimulus plan, bank bailout and foreclosure plan forwarded by the president and congress over the past few weeks, the housing market should bottom out by this time next year, with a total national decline of 34-38%, though many homes in what were once the hottest markets could fall by 50% or more.

Consumer confidence checked in today with a record low reading of 25.0, The Conference Board reported.

On the day, advancers finally held the edge over declining issues, 5271-1401. New lows continued ahead of new highs, 736-9. Volume was very strong, a function both of pent-up demand and furious short-covering.

NYSE Volume 1,841,785,000
NASDAQ Volume 2,371,004,000

Commodities were once again mixed. Crude oil futures finished $1.52 higher, at $39.96. Precious metals continued to be hit by a profit-taking wave, as gold pushed lower by $25.50, to $969.50. Silver presented investors with a buying opportunity, down 46 cents, to 14.00.

As mentioned before, gold and silver still look attractive at current levels and they will present buying opportunity over the next few weeks and months. Stocks are still risky, though if you are day-trading, good gains are possible for quick-turn artists.

The Sinking, Stinking S&P 500

The drumbeat of bad news and frightened investors continued unabated on Monday, after the government and Citigroup discussed plans to increase the level of US government ownership in the once-giant financial firm to as much as 40%.

Oddly enough, Citi was one of just two stocks on the Dow 30 to finish the day with gains. Odd, because on Friday, the White House issued a statement expressing that "banks in private hands" was their preference, which stabilized rapidly falling stocks, especially those of Citi and Bank of America (BAC), the other Dow issue which finished the day on the upside.

27 other Dow issues finished in the red on Monday; General Motors (GM) was unchanged at 1.77. The gains on the two banking stocks were minimal. Citigroup (C) ended the day up 0.19, to 2.14, while Bank of America gained 0.12, closing at 3.91.

While two of the largest US banks grappled with insolvency issues, the real story was witnessing the S&P 500 fall below the November 20 support level at 752.44. The NYSE Composite also broke through that same November 20 support (4651.21) during the session. Since the Dow broke down last week - and continued in free fall today - that leaves only the lonely NASDAQ as the one major index still above its 2008 bottom (1316.12).

Dow 7,114.78, -250.89 (3.41%)
NASDAQ 1,387.72, -53.51 (3.71%)
S&P 500 743.33, -26.72 (3.47%)
NYSE Composite 4,633.78, -170.73 (3.55%)

The headline numbers were more than sufficiently validated by internals. Losers beat gainers by a massive number, 5471-1183, nearly a 5-1 margin. New lows dominated new highs, 940-12. Regarding the highs-lows, it should be noted that new lows have held sway - on a day-to-day basis - every day for nearly 16 months, except for 5 or 6 instances, according to our own figures.

Volume moderated a bit, as expected, since options expiration was Friday.

NYSE Volume 1,612,611,000
NASDAQ Volume 2,040,330,000

With a dearth of either economic reports of corporate filings, investors had to fly somewhat blind, but even a bat could tell that sentiment was clearly negative, as the economy works through one of the worst recessions of all time.

The NASDAQ, S&P and NYSE Comp. are already off more than 50% from their October, 2007 highs, and the Dow is within 36 points of being exactly half of its all-time closing high of October 9, 2007 (14164.53).

Commodities continued lower as well. Crude oil for April delivery was off $1.59, to $38.44. Gold slipped $7.20, to $995.00. Silver fell 4 cents, to $14.45. The metals were hit by some profit-taking, as they have been on a tear of late, though this pause may not last long before the next leg up occurs.

The shiny stuff may be about the only true safe haven available right now as stocks are simply too risky, though some traders are moving into high-grade (BBB and above) corporate bond issues and munis, on the back of the government's recently-approved stimulus bill.

As far as a bottom in stocks is concerned, there is none in sight, though some idea of the length of the recession may provide a clue. Typically, recessions last 16-24 months, but since this one is anything but typical, it almost certainly run past the long end of that span. Since the downturn began roughly in December, 2007, we may be only 14 months in, meaning that 2009 should pretty much be written off. If the recession lasts 27 months (long by any measure except that of the Great Depression), recovery could begin March 2010.

If the markets begin to move roughly six months prior to the actual economic recovery, then October of this year may be a rough mark for a bottom and a potential time frame to begin nibbling at stocks.

With prices beaten down severely in many sectors, it would not be imprudent to take some calculated risks - especially if you have a long time horizon and ample discretionary funds - sooner. stocks have been hammered so badly, many are beginning to appear downright cheap. Nobody will be blamed for jumping the gun at this level, though only with small caliber bullets.

Finding and Reviewing Business in Australia

I know there are a good number of globe-trotting and Aussie readers of this blog, so from time to time, I like to point out sites I think are useful, entertaining or informative. Then there are the days when certain sites are brought to my attention that satisfy all three criteria.

That's what I call a red-letter site, though you may just want to bookmark it. Today's site in question is known as Rave About It, and its functionality comes in a variety of forms.

One can browse or search for businesses, and one can also write reviews of businesses once signing in for an account. The search function is particularly strong, as it allows for searching for specifics in addition to by locale.

For instance, a search for party hire Sydney returns a wealth of results - everything from Funeral Caterers to Turquoise Turkish Cuisine, and, well, everything in between and beyond.

The site is extremely functional in that you can find a business, read other users' reviews and decide for yourself if it is worth your hard-earned money or whether you should keep on looking. The additional ability to review and rate (with 1-5 check marks) any business you might frequent or happen upon is a great benefit, not only for you, but for anyone who might be searching for a similar business, store, service or experience.

So, when traveling Down Under, don't forget to Rave About It.

Stocks Hammered Again, But It Should Have Been Worse

After falling below key support on Tuesday, the Dow Jones Industrials, and US equities in general, were pounded down as fears of bank nationalization and unease over the future of the economy and even the welfare of the nation itself scared investors out of many positions.

While the technical damage on the Dow was serious, it should have been even worse, if not for subversive afternoon intervention by the usual corrupt cast of characters - the PPT, Goldman Sachs, Morgan Stanley, et. al. - which brought the Dow all the way back from a 215 point loss at 1:15 pm to a small gain at 10 minutes until 3:00.

At the heart of the matter was the fates of Bank of America and Citigroup, which suffered another day of crippling losses. At the low point of the day, Bank of America (BAC) was down 1.40, to 2.53, while Citigroup (C) fell 90 cents, to 1.51. On a basis unadjusted for splits, both were at all-time lows. Bank of America closed the day down a mere 14 cents, at 3.79, though Citigroup was not so fortunate, finishing 22% lower, down 56 cents at 1.95.

BofA CEO Ken Lewis was also subpoenaed by NY Attorney General Andrew Cuomo over the bonuses paid to Merrill Lynch executives in 2008. BofA took over Merrill under government supervision during the meltdown last fall.

It was only a hastily-prepared White House statement pledging a commitment to keeping banks in private hands that kept the markets from an all-out rout.

There's little doubt that the some kind of solution must be found for the ailing banking session, and soon. The public, however, has seen enough of bailouts and handouts, so the newly-installed Obama administration and Democratically-led congress must tread lightly.

Truth of the matter is that two of the nation's largest banks (and probably more) will have to be managed by the government, or somebody sober, for some time, in order to restore even a hint of credibility in the markets. There is also a distinct possibility that the government may not have sufficient power to prevent a complete collapse of an over-leveraged banking sector. In some ways, it is nothing more than the market hurrying the bankers' self-inflicted collapse.

Yesterday's rant by Rick Santelli at the Chicago Board of Trade (Feb. 19, 2009) on CNBC created no small sensation across the blogosphere. One of his more poignant remarks was his this gem:

You know, they’re pretty much of the notion that you can’t buy your way into prosperity, and if the multiplier that all of these Washington economists are selling us is over… that we never have to worry about the economy again. The government should spend a trillion dollars an hour because we’ll get 1.5 trillion back.

Santelli was even called on the carpet by NBC's Brian Williams and Matt Lauer (NBC owns CNBC) on this morning's Today Show and put across the screen from his network nemesis, Steve Leisman, a puppy lapdog for the industrial-military-communications junta which rules the government and the nation. Santelli certainly has never backed down from a fight, and his performance on the Today Show was remarkably well-reasoned and honest with obvious middle-class populist overtones.

And now the censorship begins. While attempting to retrieve the code, I was initially met with a mention that the above-referenced video was no longer available on Youtube.com, a not-very-subtle attempt by the media elite to silence the truth and keep the public under wraps.. Don't be surprised if Santelli isn't quietly relieved of his duties soon or, more likely, continually marginalized. Nevertheless, as mentioned yesterday, the genie is well out of the bottle and the public outrage at just about anything and everything concerning government and big business will not be contained much longer.

Dow 7,365.67, -100.28 (1.34%)
NASDAQ 1,441.23, -1.59 (0.11%)
S&P 500 770.05, -8.89 (1.14%)
NYSE Compos 4,804.51, -76.65 (1.57%)

Internals were as expected, favoring declining issues over advancing ones, 4906-1775. New lows dominated new highs, expanding to new levels with 1119 new lows and a mere 25 new highs. The massive number of stocks hitting 52-week lows (1 in 6) have only been seen on days of extreme market turmoil, and today surely fit that bill. Volume was the highest in weeks, owing to options expirations, market intervention, usual trading and high levels of outright open executions on the sell side.

NYSE Volume 2,117,367,000
NASDAQ Volume 2,560,465,000

Commodities remained on their own track. Oil for March delivery closed down 54 cents, at $38.94 on the final day of that contract. Gold topped the $1000 mark, gaining $25.70, to $1,002.20. In concert, silver gained 56 cents, to $14.49. All food-related commodity futures were markedly lower.

The CPI figures released this morning demonstrated an increase of 0.4%, the first gain since July, 2008, though it is more than likely only an aberration in the continuing deflationary spiral.

Stocks should have finished much lower than they did today, which only means that they will fall further at some future date. Considering the level of angst in the market, in the public, and the ineptitude of government and corporate business to constrain the wealth destruction leads one to believe that the market is well into the third and most crucial phase of the bear market, total, utter, final capitulation.

All of the major indices finished the week with substantial losses. The Dow registered its lowest close since October 27, 1997.

For the week, the Dow was down a whopping 485 points, and closing in on a 50% decline from the October 2007 all-time high. The NASDAQ lost 93 points; the S&P surrendered 57; the NYSE Composite was down 402 points.

It's not a pretty picture and not likely to improve soon.

Panic Selling Crashes Stocks Through False Bottom

Yesterday's manipulated close above the false bottom at Dow 7552 could not hold, not even for a day, in the wake of unprecedented government handouts and institutional selling that nearly brought the major stock indices to their knees in the final hours of Thursday's session. The Dow Jones Industrials finished the day at their lowest level since October 9, 2002, prior, even to the start of the Iraq War.

The best the government interlopers (through their proxies at Goldman Sachs, Morgan Stanley, et. al.) could muster today was putting a good face on an unmitigated disaster. The game is over for Wall Street. A massive systemic collapse of global finance is palpable and seemingly inevitable.

With an opening pop, investors bought the Dow up about 60 points, but the market could not sustain the gains. By 10:30 the index was back into the red. After a brief, heartless rally, stocks cascaded lower with the Dow eventually falling below 7450. From 11:30 to the close, the the major indices were all under water. Selling was relentless, with the occasional covering of options positions, which close tomorrow. A line could be drawn diagonally across the tops. The slope of the bottoms was more severe.

Dow 7,465.95, -89.68 (1.19%)
NASDAQ 1,442.82, -25.15 (1.71%)
S&P 500 778.94, -9.48 (1.20%)
NYSE Compos 4,881.16, -43.38 (0.88%)

It was not the size of the losses that mattered much in this session, but the overall tenor and tone of trading. The level of desperation as a standard emotion continues to deepen, even daily. People are angry. The press, economists, and the public are all up in arms over the rapid-fire moves of the federal government. Most of the abuse is being heaped upon newly-elected President Obama, though much of the focus is rightfully on the US congress.

Unsurprisingly, the Dow components were a shambles, 20 down and 10 up, with most of the largest losses sustained by financials and tech, though the damage was truly broad-based. Paradoxically, the largest percentage gainer on the Dow was Home Depot, which gained 1.82%, up 0.36 to 20.16.

If you're seeking a good proxy for the Dow, look no further than JP Morgan Chase (JPM), which turned negative today just as the Dow was rolling over. The pride of Wall Street banking, JPM is probably overvalued by a factor of 5-10, since it is in largely the same boat as brethren Bank of America and Citigroup, all of whom are in the government's notorious gang of Systemically Significantly Failing Institutions under the Capital Purchase Program.

JP Morgan Chase dipped 0.91 to 20.60, a mere 4.23% loss, but it is joined at the hip to Bank of America (-0.64, 3.93, -14%) and Citigroup (-40, 2.51, -13.75).

The January Producer Price Index (PPI) registered its first gain in six months, edging up 0.8% over December. This shouldn't have come as much of a surprise, since retailers discounted heavily in December during one of the worst holiday shopping seasons in memory.

Inflation alarmists should also take a cold shower on this news, as much of the increase was due to slightly higher energy prices, and, of course, the figures are seasonally adjusted. Deflation continues to rule.

But the real story of the day was the final breakdown through the November 20 bottom on the Dow. The process will no doubt continue as the other indices approach and retest their lows. The markets are again in uncharted territory.

Friday's action most certainly will be among the most volatile of recent vintage. Thursday was only a prelude to the real wealth-cleansing that will occur over the coming days, weeks and months.

Internals did little to mask the carnage. Decliners swept by advancers, 4384-2129. New lows outnumbered new highs, 617-11. Volume was strong enough to suggest more selling as more participants become engaged in a race to the bottom.

NYSE Volume 1,485,501,000
NASDAQ Volume 2,036,313,000

Commodities exhibited perhaps the most random and directionless trade in decades. Oil priced $4.86 higher, to $39.48. Gold fell $1.70, to $976.50, while silver lost 36 cents, to $13.94. The metals cooled off what was, until today, a torrid rally. Beef and corn were up, pork and soybeans were down. Natural gas fell to a new seasonal low as at $4.11, as milder weather and conservation measures are keeping demand tamped down.

The level of unrest, not only on Wall Street but on Main Street and across the nation and around the world, cannot be underestimated. Cheats and scoundrels in government and business have opened the gates of hell with their wrong-headed policies over many years. Another of America's dates with destiny is fast approaching.

Brace yourself.