Stocks managed another day slightly to the upside on Tuesday, the mood tempered somewhat as there wasn't another world-record bankruptcy to celebrate as on Monday. Without a General Motors going bust, the fat cats must have little to do, trying to keep the mood cheery and uplifting.
Despite the paucity of news - though pending home sales in April were up a reported 6.7% - investors still haven't gotten the idea to lock in profits, expecting the rebound and recovery to continue seemingly forever.
Dow 8,740.87, +19.43 (0.22%)
NASDAQ 1,836.80, +8.12 (0.44%)
S&P 500 944.74, +1.87 (0.20%)
NYSE Composite 6,182.87, +13.80 (0.22%)
Despite the smallish gains on the indices, the positive tone was notable, with advancing issues defeating decliners, 3764-2648. New highs recorded their second straight victory over new lows, 99-81, though it will take more than just a few instances for this to become a trend, and the betting - in this quarter at least - is against it. Volume was solid, roughly in Monday's range, and thus, unimportant.
NYSE Volume 6,945,081,000
NASDAQ Volume 2,406,962,750
Crude oil took a bit of a breather - or, rather, the pumping speculators did - losing 3 cents to $68.55. Gold gained, adding $4.40, to $984.40, in its inexorable push back above $1000. Silver continues to post impressive gains, adding another 22 cents per ounce, to $15.96. The silver rally is real, has legs and should continue unabated beyond $17 in short order.
As for stocks, well, they keep going up, too, but there are many reasons not to like them, the main one being that everyone has grown so complacent in recent weeks, setting up the potential for a swift and violent decline.
Tuesday, June 2, 2009
Monday, June 1, 2009
The Strangest Rally of All Time
It would be difficult, if not impossible, to describe the absurdity of the current rally in equities in terms that would do it justice. Mere mortals stand in awe of the magnificence, the enormity, and the one-sidedness of the US stock markets since March 9, 2009, until today... and probably beyond.
To try to offer some perspective, the S&P 500 closed today at 94xx, from the March 9 low of 676.53. That is a gain of 39.6% over a span of 57 sessions - 33 up, 24 down. Obviously, the days in which the index recorded gains, those were far superior in size than the days with losses. How well this has been orchestrated would make celebrated composer Leonard Bernstein blush.
Today's gains marked the 12th time during this span that the S&P has been up more than 20 points. By contrast, the index declined by that amount or more only 4 times through the same period. There has been no pullback or correction, as is almost always the case in rallies, no matter what the conditions or the degree of positive sentiment. This rally, unlike all others, has been nearly straight up, without any hint of a respite.
The kicker is that the S&P 500 index, should one like to apply Dow theory to it, should now be considered a PRIMARY BULL market, having successfully reversed the primary trend by topping the previous interim high of 934.70, posted at the close on January 6 of this year. That was off the low of November 20, 2008, of 752.44, and prior to the subsequent low of 676.53 (March 9, 2009). If one follows only the S&P 500, chartists would have to agree that we are now - without a doubt - in a bull market.
As an offset to that queer finding, the actual Dow Jones Industrial Index, upon which Dow Theory is based, still has room to run before breaking the primary - bearish - trend. The Dow would have to reach 9034.69, which it did on January 2, 2009, before declaring a new primary Bull market. The transportation index would also have to confirm, and, since those two events have yet to occur, one can safely assume that the current rally is indeed of the bear market variety, albeit quickly closing ground on fully debunking that data set.
All of this has occurred in an environment of growing, near-record unemployment, continuing declines in the median price of housing, a handful of Fed and Treasury initiatives to stimulate the economy, and the bankruptcies of Chrysler and General Motors, the latter occurring today and being the largest bankruptcy in the history of the United States.
While the Fed floods the world with newly-printed currency, commodities have also gained - not unexpected - as the dollar has declined against other currencies. All of this adds up to a great deal of uncertainty, a condition usually associated with market declines, not rapid, non-stop gains.
I, among others, have called the "top" incorrectly more times than we'd like to admit. There seems to be no stopping the engine of Wall Street, despite stocks on the S&P 500 having cut dividend returns to record lows while price-earning ratios have soared to levels normally associated with the end of long bull markets. The only way this rally continues is if the market is being manipulated, and that is the only conclusion which I can make at this point. There simply is not enough evidence that the economy has returned to a growth posture, nor any indication that stocks are actually being valued correctly, that is, discounting future growth. Most of the large gainers are actually showing a negative trend of declining earnings, which, in more normal times, would spark selling, not buying.
Dow 8,721.44, +221.11 (2.60%)
NASDAQ 1,828.68, +54.35 (3.06%)
S&P 500 942.87, +23.73 (2.58%)
NYSE Composite 6,169.0698, +165.00 (2.75%)
Advancing issues crushed decliners, 5159-1405. The biggest story of the day has to be the rollover of new highs finally surpassing new lows, 130-105. This is a reversal of a trend that has held in place every day except five or six since September, 2007. This is either the starting point of another bull run, which could dwarf even the current run-up, or a signal to sell everything as quickly as possible. The rally has pulled even the worst companies up by the bootstraps.
Volume on the day was higher than levels experienced last week, for no known reason, though not significantly.
NYSE Volume 1,500,474,000
NASDAQ Volume 2,647,576,000
Commodities in the energy area went ballistic. Crude oil gained $2.27, to $68.58, the highest point since November 4, 2008, seven months ago. Unfortunately, for those of us who still have to use gasoline to power our personal transportation devices, back in November of last year, prices were declining. They are now galloping ahead. Natural gas gained a whopping 41 cents, to $4.25, odd, because natural gas is primarily used for heating homes, and we are heading into warm summer months. The rise in natural gas was more than 11% in just one day.
Just as oddly, the metals responded in less-than-enthusiastic fashion. Gold actually fell 30 cents, to settle at $980.00. Silver gained 13 cents to finish at $15.74 per ounce in New York.
There were more "green shoots" of economic data, such as a 0.5% rise in personal income, a smaller-than-expected decline in personal spending and an 0.8% increase in April construction spending. Of course, those minor positives should have been more than offset by the largest bankruptcy in US history, the coming shutdown of 12-15 plants, job losses between autoworkers and dealers of more than 100,000, and a general malaise in manufacturing.
It just doesn't seem right that on the death of General Motors, Wall Street would throw a party.
To try to offer some perspective, the S&P 500 closed today at 94xx, from the March 9 low of 676.53. That is a gain of 39.6% over a span of 57 sessions - 33 up, 24 down. Obviously, the days in which the index recorded gains, those were far superior in size than the days with losses. How well this has been orchestrated would make celebrated composer Leonard Bernstein blush.
Today's gains marked the 12th time during this span that the S&P has been up more than 20 points. By contrast, the index declined by that amount or more only 4 times through the same period. There has been no pullback or correction, as is almost always the case in rallies, no matter what the conditions or the degree of positive sentiment. This rally, unlike all others, has been nearly straight up, without any hint of a respite.
The kicker is that the S&P 500 index, should one like to apply Dow theory to it, should now be considered a PRIMARY BULL market, having successfully reversed the primary trend by topping the previous interim high of 934.70, posted at the close on January 6 of this year. That was off the low of November 20, 2008, of 752.44, and prior to the subsequent low of 676.53 (March 9, 2009). If one follows only the S&P 500, chartists would have to agree that we are now - without a doubt - in a bull market.
As an offset to that queer finding, the actual Dow Jones Industrial Index, upon which Dow Theory is based, still has room to run before breaking the primary - bearish - trend. The Dow would have to reach 9034.69, which it did on January 2, 2009, before declaring a new primary Bull market. The transportation index would also have to confirm, and, since those two events have yet to occur, one can safely assume that the current rally is indeed of the bear market variety, albeit quickly closing ground on fully debunking that data set.
All of this has occurred in an environment of growing, near-record unemployment, continuing declines in the median price of housing, a handful of Fed and Treasury initiatives to stimulate the economy, and the bankruptcies of Chrysler and General Motors, the latter occurring today and being the largest bankruptcy in the history of the United States.
While the Fed floods the world with newly-printed currency, commodities have also gained - not unexpected - as the dollar has declined against other currencies. All of this adds up to a great deal of uncertainty, a condition usually associated with market declines, not rapid, non-stop gains.
I, among others, have called the "top" incorrectly more times than we'd like to admit. There seems to be no stopping the engine of Wall Street, despite stocks on the S&P 500 having cut dividend returns to record lows while price-earning ratios have soared to levels normally associated with the end of long bull markets. The only way this rally continues is if the market is being manipulated, and that is the only conclusion which I can make at this point. There simply is not enough evidence that the economy has returned to a growth posture, nor any indication that stocks are actually being valued correctly, that is, discounting future growth. Most of the large gainers are actually showing a negative trend of declining earnings, which, in more normal times, would spark selling, not buying.
Dow 8,721.44, +221.11 (2.60%)
NASDAQ 1,828.68, +54.35 (3.06%)
S&P 500 942.87, +23.73 (2.58%)
NYSE Composite 6,169.0698, +165.00 (2.75%)
Advancing issues crushed decliners, 5159-1405. The biggest story of the day has to be the rollover of new highs finally surpassing new lows, 130-105. This is a reversal of a trend that has held in place every day except five or six since September, 2007. This is either the starting point of another bull run, which could dwarf even the current run-up, or a signal to sell everything as quickly as possible. The rally has pulled even the worst companies up by the bootstraps.
Volume on the day was higher than levels experienced last week, for no known reason, though not significantly.
NYSE Volume 1,500,474,000
NASDAQ Volume 2,647,576,000
Commodities in the energy area went ballistic. Crude oil gained $2.27, to $68.58, the highest point since November 4, 2008, seven months ago. Unfortunately, for those of us who still have to use gasoline to power our personal transportation devices, back in November of last year, prices were declining. They are now galloping ahead. Natural gas gained a whopping 41 cents, to $4.25, odd, because natural gas is primarily used for heating homes, and we are heading into warm summer months. The rise in natural gas was more than 11% in just one day.
Just as oddly, the metals responded in less-than-enthusiastic fashion. Gold actually fell 30 cents, to settle at $980.00. Silver gained 13 cents to finish at $15.74 per ounce in New York.
There were more "green shoots" of economic data, such as a 0.5% rise in personal income, a smaller-than-expected decline in personal spending and an 0.8% increase in April construction spending. Of course, those minor positives should have been more than offset by the largest bankruptcy in US history, the coming shutdown of 12-15 plants, job losses between autoworkers and dealers of more than 100,000, and a general malaise in manufacturing.
It just doesn't seem right that on the death of General Motors, Wall Street would throw a party.
Friday, May 29, 2009
Bad Is Good, Less is More, Failure is Success
My Orwellian title for today's post stems from a belief that our national economy has gone fully bust, bankrupted by policies which favored financial manipulation and "wealth creation" over actual financial profit in a more traditional sense: by labor, production and industry.
The US economy is on its death bed. Actually, it has been lying there on life support for nearly two years now, since the initial failure of two obscure Bear Stearns hedge funds sent shock waves through the world financial system. (I should note, without any pleasure, that the US financial system is locked into the larger, global system to some degree, though far less than 100%, so that when the US fails, other countries will also take a hit, some more than others.)
Since that time in July of 2007, when Bears' High-Grade Structured Credit Strategies Enhanced Leverage Fund and High-Grade Structured Credit Strategies Fund imploded, leaving investors with nothing and freezing credit markets worldwide, the US economy has suffered its worst decline since the Great Depression of the 1930s.
Rescue efforts by former Treasury Secretary Hank Paulson, current Secretary Tim Geithner and Fed Chairman Ben Bernanke have succeeded only in stopping the bleeding temporarily. These doctors of finance have yet to address the real cause of the malady: the toxic assets in collateralized debt obligations (CDOs), credit default swaps (CDS) without sufficient capital to underwrite them and various frauds in commercial banking from the "miracle" fractional reserves" to interest rate manipulation.
Worse yet, these government pretenders have been completely bought off by the criminal syndicate at the root of the financial crisis: the largest banks and brokerages populating the canyons of Wall Street, headed by Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and, of course, AIG.
These companies are essentially insolvent and bankrupt, brought down by the very derivative trading by which they enriched themselves for many years. The same securitization markets which underpinned - and eventually undercut - the US financial system remains in place, and, in an odd bit of alchemy, the surgeons are attempting to revive the patient by administering an unhealthy dose of the same medicine while felled it: more debt, more credit, more exotic, intractable, indiscernible financial instruments. With this kind of financial witchcraft at hand, the actual death of the US financial system will come in due course, most likely within the next two to three years, if not by the end of this one.
It was reported yesterday that 12% of all mortgages nationally were in some stage of trouble in the first quarter, either in foreclosure or past due by at least one payment, a record high. Unemployment is largely cited at 9%, though the real figure is likely closer to 12 or 15% when people who have exhausted their unemployment insurance are included in the calculations.
These numbers point out that the economy - despite mainstream media's contentions - is continuing to contract, decline, or, to put it into realistically stark terms: fail. Look up and down your street and there's probably one or more homes in which the occupants either have recently lost their job or have fallen behind on mortgage payments. And those numbers are more likely going to increase over the next 6, 12, 18 months. At some point - and remember, these people are also not going to be paying income and property taxes any time soon - you have to face reality. Am I going to be the only person on this block paying my mortgage and taxes? And why should I when the government is bailing out those who cannot meet their obligations with borrowed tax dollars?
Which brings us to the Orwellian part of this discussion: the sooner everybody defaults on either mortgage or tax obligations, the sooner the corrupt bankers and politicians can be uprooted, disposed of, dethroned, defrocked and demolished and a new economy can supplant the bad one. We are getting closer to that reality daily. When unemployment reaches beyond 20% and foreclosures are running at a rate similar, we'll be on our way to destruction, resolution and resurrection.
Regular people outnumber politicians and bankers in this country by a level of probably 1000-1. Surely we can muster the will to put an end to their borrow-tax-spend-lend tyranny? Or can we? Bad, defaulting on your mortgage, is good. Less, as in debt, is more, as in freedom. Failure of the financial system as currently structured will result in Success of the American experience.
The stock market today did what the economy has been doing for the past year: nothing... at least until 3:30, that is. Now, the fraud and deceit of such blatant manipulation can be seen first-hand. Stocks vacillated along the unchanged mark all day long until the final half hour of trading. Did everyone suddenly find reason to buy stocks with both hands shortly before the weekend commenced? Or did insiders decide it would be practical to end the week on a high note, knowing that the insipid media would carry only the final numbers and ignore the fact that ALL OF THE GAINS WERE IN THE FINAL HALF HOUR OF TRADING? The major dealers who did all this buying will no doubt be unloading the very same shares early next week to unsuspecting, sheep-like, retail investors.
You be the judge. Our economy is dying, if not already dead. Wall Street is an absolute Ponzi scheme on steroids, boosted by the bankers and winked at by government regulators and politicians. Until these scoundrels are unearthed, tried and imprisoned, we are their slaves.
Dow 8,500.33, +96.53 (1.15%)
NASDAQ 1,774.33, +22.54 (1.29%)
S&P 500 919.14, +12.31 (1.36%)
NYSE Composite 6,004.07, +87.01 (1.47%)
On the day, advancers beat decliners by an obvious margin, 3652-1837, though new lows maintained their advantage over new highs, 84-77. As close as that margin has gotten this week, it has yet to roll over, and, unless there is some kind of miracle cure for the economy - as GM heads to bankruptcy - it won't. Volume was slightly higher than the depressed levels which predominated the week, though that alone is without meaning.
NYSE Volume 1,854,219,000
NASDAQ Volume 2,524,330,000
The commodity rally continued apace, with oil shooting up another $1.23, to $66.31; gold rising $17.10, to $980.30, and silver gaining 45 cents, to $15.61.
Everything's going up, which really shouldn't happen in a balanced economy, but it is. George Orwell, wherever he is finally resting, is having a good laugh at our expense.
The US economy is on its death bed. Actually, it has been lying there on life support for nearly two years now, since the initial failure of two obscure Bear Stearns hedge funds sent shock waves through the world financial system. (I should note, without any pleasure, that the US financial system is locked into the larger, global system to some degree, though far less than 100%, so that when the US fails, other countries will also take a hit, some more than others.)
Since that time in July of 2007, when Bears' High-Grade Structured Credit Strategies Enhanced Leverage Fund and High-Grade Structured Credit Strategies Fund imploded, leaving investors with nothing and freezing credit markets worldwide, the US economy has suffered its worst decline since the Great Depression of the 1930s.
Rescue efforts by former Treasury Secretary Hank Paulson, current Secretary Tim Geithner and Fed Chairman Ben Bernanke have succeeded only in stopping the bleeding temporarily. These doctors of finance have yet to address the real cause of the malady: the toxic assets in collateralized debt obligations (CDOs), credit default swaps (CDS) without sufficient capital to underwrite them and various frauds in commercial banking from the "miracle" fractional reserves" to interest rate manipulation.
Worse yet, these government pretenders have been completely bought off by the criminal syndicate at the root of the financial crisis: the largest banks and brokerages populating the canyons of Wall Street, headed by Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and, of course, AIG.
These companies are essentially insolvent and bankrupt, brought down by the very derivative trading by which they enriched themselves for many years. The same securitization markets which underpinned - and eventually undercut - the US financial system remains in place, and, in an odd bit of alchemy, the surgeons are attempting to revive the patient by administering an unhealthy dose of the same medicine while felled it: more debt, more credit, more exotic, intractable, indiscernible financial instruments. With this kind of financial witchcraft at hand, the actual death of the US financial system will come in due course, most likely within the next two to three years, if not by the end of this one.
It was reported yesterday that 12% of all mortgages nationally were in some stage of trouble in the first quarter, either in foreclosure or past due by at least one payment, a record high. Unemployment is largely cited at 9%, though the real figure is likely closer to 12 or 15% when people who have exhausted their unemployment insurance are included in the calculations.
These numbers point out that the economy - despite mainstream media's contentions - is continuing to contract, decline, or, to put it into realistically stark terms: fail. Look up and down your street and there's probably one or more homes in which the occupants either have recently lost their job or have fallen behind on mortgage payments. And those numbers are more likely going to increase over the next 6, 12, 18 months. At some point - and remember, these people are also not going to be paying income and property taxes any time soon - you have to face reality. Am I going to be the only person on this block paying my mortgage and taxes? And why should I when the government is bailing out those who cannot meet their obligations with borrowed tax dollars?
Which brings us to the Orwellian part of this discussion: the sooner everybody defaults on either mortgage or tax obligations, the sooner the corrupt bankers and politicians can be uprooted, disposed of, dethroned, defrocked and demolished and a new economy can supplant the bad one. We are getting closer to that reality daily. When unemployment reaches beyond 20% and foreclosures are running at a rate similar, we'll be on our way to destruction, resolution and resurrection.
Regular people outnumber politicians and bankers in this country by a level of probably 1000-1. Surely we can muster the will to put an end to their borrow-tax-spend-lend tyranny? Or can we? Bad, defaulting on your mortgage, is good. Less, as in debt, is more, as in freedom. Failure of the financial system as currently structured will result in Success of the American experience.
The stock market today did what the economy has been doing for the past year: nothing... at least until 3:30, that is. Now, the fraud and deceit of such blatant manipulation can be seen first-hand. Stocks vacillated along the unchanged mark all day long until the final half hour of trading. Did everyone suddenly find reason to buy stocks with both hands shortly before the weekend commenced? Or did insiders decide it would be practical to end the week on a high note, knowing that the insipid media would carry only the final numbers and ignore the fact that ALL OF THE GAINS WERE IN THE FINAL HALF HOUR OF TRADING? The major dealers who did all this buying will no doubt be unloading the very same shares early next week to unsuspecting, sheep-like, retail investors.
You be the judge. Our economy is dying, if not already dead. Wall Street is an absolute Ponzi scheme on steroids, boosted by the bankers and winked at by government regulators and politicians. Until these scoundrels are unearthed, tried and imprisoned, we are their slaves.
Dow 8,500.33, +96.53 (1.15%)
NASDAQ 1,774.33, +22.54 (1.29%)
S&P 500 919.14, +12.31 (1.36%)
NYSE Composite 6,004.07, +87.01 (1.47%)
On the day, advancers beat decliners by an obvious margin, 3652-1837, though new lows maintained their advantage over new highs, 84-77. As close as that margin has gotten this week, it has yet to roll over, and, unless there is some kind of miracle cure for the economy - as GM heads to bankruptcy - it won't. Volume was slightly higher than the depressed levels which predominated the week, though that alone is without meaning.
NYSE Volume 1,854,219,000
NASDAQ Volume 2,524,330,000
The commodity rally continued apace, with oil shooting up another $1.23, to $66.31; gold rising $17.10, to $980.30, and silver gaining 45 cents, to $15.61.
Everything's going up, which really shouldn't happen in a balanced economy, but it is. George Orwell, wherever he is finally resting, is having a good laugh at our expense.
Thursday, May 28, 2009
Stocks Gain, but Clouds Are Forming for Rally's End
In another lackluster session, stocks gained widely on Thursday amid mixed economic news. Prior to the market opening, newly-released unemployment figures showed new claims at 623,000, slightly below last week's revised 636,000, though continuing claims reached another record - 6.788 million - for the 17th straight week.
Data on new home sales for April from the Commerce Department offered little in the way of excitement in either direction, rising 0.3%, an annual pace of 352,000, still well below historical norms.
What really captured investor attention was the $26 billion auction of 7-year Treasury notes, which was better-received than anticipated. After bond prices had fallen precipitously over the past few weeks due to concern of oversupply of government debt, the 10-year note actually rose, dropping yields to more palatable levels... for now. There is still worry that the enormous amount of borrowing the US government will be engaged in over the coming 12-16 months will cause yields to rise, crowding out private investment and making bonds an attractive alternative to stocks.
As explained in yesterday's post, the result of higher interest rates would not only stunt any recovery efforts, but would also be largely inflationary. It's nearly a foregone conclusion that interest rates will rise and inflation will follow, the only unanswered questions are how high and when these events will occur and how severely they will affect the economy. For today, at least, the answers remain mysteries, though the sentiment appears positive. Expect more of this kind of choppy day-to-day activity in the markets for the time being.
Eventually, however, stocks are doomed in the near term, as p/e ratios on the S&P 500 have reached extreme highs and dividends have reached extreme low rates of return. It will take some time for the Wall St. sharpies to unload their recent purchases onto the unsuspecting public, but another round of market shock is surely in store for the average 401k investor.
Dow 8,403.80, +103.78 (1.25%)
NASDAQ 1,751.79, +20.71 (1.20%)
S&P 500 906.83, +13.77 (1.54%)
NYSE Composite 5,917.06, +93.50 (1.61%)
Advancing issues decisively took back control from decliners, 3988-2463, though new lows continued their domination over new highs, 66-47. Volume was only slightly better than the first two sessions of this shortened trading week, an insignificant reading for now.
NYSE Volume 1,368,613,000
NASDAQ Volume 2,237,013,000
In the commodities markets, oil continued its seemingly unstoppable ascent, gaining another $1.63, to a multi-month high of $65.08. with the price of oil rising as dramatically as it has over the past four-five months (more than $25 per barrel) the question of just how much strain it puts on the general economy has to be asked. Every additional dollar spent on gas for regular transportation is another dollar taken out of circulation in the consumer-led economy. Eventually, high gas prices will do more damage to any recovery - if one ever does occur - than high interest rates or bad tax policy. It's absurd to think that Americans can survive 9%-and-growing unemployment and high gas prices. Oddly enough, gas (and in a more general sense, all energy) prices are the sacred cow neither the administration nor the congress will address properly. Tighter control on energy prices would be a major step toward getting the economy out of recession and the lack of oversight is proof that the federal government is not really serious about future growth, only about their future electability.
As the government diddles along without any general direction, the precious metals have been staging another powerful rally since late March. Gold gained again, up $8.00, to $963.20, as was silver, up 30 cents, to $15.16. The rally in metals and higher bond yields are screaming that the equities rally has stalled and is about to roll over. Stocks cannot remain at these unrealistic levels much longer, especially with slower summer months dead ahead.
Data on new home sales for April from the Commerce Department offered little in the way of excitement in either direction, rising 0.3%, an annual pace of 352,000, still well below historical norms.
What really captured investor attention was the $26 billion auction of 7-year Treasury notes, which was better-received than anticipated. After bond prices had fallen precipitously over the past few weeks due to concern of oversupply of government debt, the 10-year note actually rose, dropping yields to more palatable levels... for now. There is still worry that the enormous amount of borrowing the US government will be engaged in over the coming 12-16 months will cause yields to rise, crowding out private investment and making bonds an attractive alternative to stocks.
As explained in yesterday's post, the result of higher interest rates would not only stunt any recovery efforts, but would also be largely inflationary. It's nearly a foregone conclusion that interest rates will rise and inflation will follow, the only unanswered questions are how high and when these events will occur and how severely they will affect the economy. For today, at least, the answers remain mysteries, though the sentiment appears positive. Expect more of this kind of choppy day-to-day activity in the markets for the time being.
Eventually, however, stocks are doomed in the near term, as p/e ratios on the S&P 500 have reached extreme highs and dividends have reached extreme low rates of return. It will take some time for the Wall St. sharpies to unload their recent purchases onto the unsuspecting public, but another round of market shock is surely in store for the average 401k investor.
Dow 8,403.80, +103.78 (1.25%)
NASDAQ 1,751.79, +20.71 (1.20%)
S&P 500 906.83, +13.77 (1.54%)
NYSE Composite 5,917.06, +93.50 (1.61%)
Advancing issues decisively took back control from decliners, 3988-2463, though new lows continued their domination over new highs, 66-47. Volume was only slightly better than the first two sessions of this shortened trading week, an insignificant reading for now.
NYSE Volume 1,368,613,000
NASDAQ Volume 2,237,013,000
In the commodities markets, oil continued its seemingly unstoppable ascent, gaining another $1.63, to a multi-month high of $65.08. with the price of oil rising as dramatically as it has over the past four-five months (more than $25 per barrel) the question of just how much strain it puts on the general economy has to be asked. Every additional dollar spent on gas for regular transportation is another dollar taken out of circulation in the consumer-led economy. Eventually, high gas prices will do more damage to any recovery - if one ever does occur - than high interest rates or bad tax policy. It's absurd to think that Americans can survive 9%-and-growing unemployment and high gas prices. Oddly enough, gas (and in a more general sense, all energy) prices are the sacred cow neither the administration nor the congress will address properly. Tighter control on energy prices would be a major step toward getting the economy out of recession and the lack of oversight is proof that the federal government is not really serious about future growth, only about their future electability.
As the government diddles along without any general direction, the precious metals have been staging another powerful rally since late March. Gold gained again, up $8.00, to $963.20, as was silver, up 30 cents, to $15.16. The rally in metals and higher bond yields are screaming that the equities rally has stalled and is about to roll over. Stocks cannot remain at these unrealistic levels much longer, especially with slower summer months dead ahead.
Wednesday, May 27, 2009
Bottom Falls Out As Bond Yields Surge, GM Bankruptcy Looms
There's a problem with the government borrowing trillions of dollars to finance its various bailouts, stimuli, military and domestic operations. All that money has to come from somewhere and somebody, and the buyers will undeniably demand higher yields.
That became evident today as the government auctioned off $35 billion worth of 5-year notes. Stocks traded in a narrow range, with the Dow consistently below the unchanged mark and the NASDAQ trading marginally in the green, up anywhere from 5 to 12 points in the morning and early afternoon. At 1:30 pm, however, the bid fell off on all exchanges as the Treasury auction wrapped up. While the Wednesday auction was well-received, speculation was widespread that an oversupply of US government debt would have deleterious effects on any kind of recovery. Treasury is selling $26 billion of 7-year notes on Thursday.
The Dow dropped more than 150 points from 1:30 pm to the close of the session.
Dow 8,300.02, -173.47 (2.05%)
NASDAQ 1,731.08, -19.35 (1.11%)
S&P 500 893.06, -17.27 (1.90%)
NYSE Composite 5,823.56, -113.02 (1.90%)
As bond prices fall, yields rise, making bonds a more attractive alternative than stocks. The other effect of rising yields is that of making loans more expensive, especially for mortgages and autos. Higher interest rates threaten any recovery, whether one is in the cards for later this year or not. They are also by nature inflationary, adding cost at the producer of the supply chain.
In the short run, higher interest rates and inflation is exactly what the Federal Reserve and Treasury are after. Deathly afraid of the long-run effects of deflation, all of the various deficit-spending plans and aid to business and state governments have been designed to keep the bubble from bursting, to reflate the economy with massive infusions of currency and debt.
The problem for the best and brightest in Washington is that they can't have it both ways. The natural process of business failure, austerity and reallocation of assets - though inherently deflationary in the short turn - would have been painful, but swift and healthy long-term. The actions taken by the Fed and Treasury, designed to rescue failing institutions and keep government spending at current growth levels, have proven to only prolong the recession and threaten any incipient recovery with now-evident, profoundly inflationary aspects.
Another specter of massive government borrowing is the crowding out of private investment. Monied interests are likely to trend toward the safety of Treasuries rather than taking riskier positions on corporate issues. That also is an impediment to private sector growth, from which any recovery must spring.
Clearly, it is time to re-examine the efforts of the Fed and the Obama Administration. It's been four months since the inauguration, and, despite widely-reported "green shoots" and "positive signs" of the recession slowing, there is still no hard evidence that the economy will be in a recovery position later this year. All along, the American public has been told that the recession would be over by the third or fourth quarter of 2009, but, with those dates fast approaching there has been no job creation, no meaningful middle class tax break, and no stopping the continuing decline in home prices nor stemming the wave of foreclosures that has now become mainstream.
Government intervention in the economy has produced nothing except a temporary reprieve for insolvent banks and for the banking system as a whole, while adding mountains of debt to the already unserviceable load in place before the crisis. The federal government will eventually end up owning most of the largest banks, the auto companies and various other "too big to fail" industries. All of this is predicated on the notion of keeping the economy on a firm footing, meaning keeping hundreds of thousands of overpaid autoworkers at make-work jobs while nobody is buying autos, and bankers counting their billions without lending any to suffering small businesses.
The Federal Reserve has already bought up more than $160 billion of Treasury issuance. They've committed to buying a total of $300 billion, but there's no doubt that they'll have to pony up much more than that in order to keep the economy adrift. At some point, the wisdom of piling up even more massive debt has to be brought into question. That point may come sooner than anyone expects. Bond auctions in the UK and Germany have already failed, with a paucity of buyers for government debt instruments. The same could have already occurred in the US, had the Fed not engaged in its policy of quantitative easing. that is, buying up the debt with money created out of thin air.
It's a policy doomed to failure, as has been the case forever and ever, so be prepared for massive disconnects in the market, an absence of valuation rigor, inflation and deflation at the same time in different areas, and an overall failed economy which will finally bottom out sometime in 2011 or 2012, and not a moment sooner.
NYSE Volume 1,335,881,000
NASDAQ Volume 2,166,732,000
On the day, declining issues overwhelmed advancers, 4246-2227, wiping out most of Tuesday's illusory gains, and new lows maintained their long-standing edge over new highs, 68-62. Volume was only slightly better than yesterday's subdued level.
Oil gained $1.00, to $63.45. Gold gained a dime, to close at $955.20, while silver recorded the best showing of the metals, up 27 cents, to $14.87, an eight-month high.
General Motors executives announced that the offer to bondholders - to swap debt for common stock - met with an undue amount of resistance. This should have come as no surprise, since the company was offering bond-holders a mere 10% stake in the company, when the financiers were seeking an equity ownership position of between 50 and 60%. Instead, GM is likely to head down the same road as Chrysler, into bankruptcy, with the government ending up owning 60-70% of the company and the union picking up 15-17% of ownership. The government of Canada is expected to pick up less than 5% ownership.
in the end, the deal for GM is poorly designed, the goal only to keep from sending more than 200,000 UAW workers into the unemployment roles. There is no genuine plan to produce better autos, shave costs or limit benefits in an effort to become more competitive. General Motors will go down in history as the nation's largest bankruptcy, and the legacy will be that the US taxpayer will subsidize the jobs of hundreds of thousands of workers, in addition to paying lifetime health and pension benefits to millions more.
Existing home sales showed an increase for April, but the price of homes purchased was lower, affected by the thousands of foreclosed homes on the market. The stock of available housing continued to increase as well, another drag on home prices, which have fallen every month for the past two years running.
New home sales figures for April will be released on Thursday, along with continuing and new unemployment claims. The result of the $26 billion Treasury auction of 7-year notes will be closely monitored as well.
Today's sharp sell-off is the best evidence yet that the rally is over and stocks are set to fall and eventually retest March lows. The entire process could take as long as 6-9 months - or sooner - but the stage has been clearly set.
That became evident today as the government auctioned off $35 billion worth of 5-year notes. Stocks traded in a narrow range, with the Dow consistently below the unchanged mark and the NASDAQ trading marginally in the green, up anywhere from 5 to 12 points in the morning and early afternoon. At 1:30 pm, however, the bid fell off on all exchanges as the Treasury auction wrapped up. While the Wednesday auction was well-received, speculation was widespread that an oversupply of US government debt would have deleterious effects on any kind of recovery. Treasury is selling $26 billion of 7-year notes on Thursday.
The Dow dropped more than 150 points from 1:30 pm to the close of the session.
Dow 8,300.02, -173.47 (2.05%)
NASDAQ 1,731.08, -19.35 (1.11%)
S&P 500 893.06, -17.27 (1.90%)
NYSE Composite 5,823.56, -113.02 (1.90%)
As bond prices fall, yields rise, making bonds a more attractive alternative than stocks. The other effect of rising yields is that of making loans more expensive, especially for mortgages and autos. Higher interest rates threaten any recovery, whether one is in the cards for later this year or not. They are also by nature inflationary, adding cost at the producer of the supply chain.
In the short run, higher interest rates and inflation is exactly what the Federal Reserve and Treasury are after. Deathly afraid of the long-run effects of deflation, all of the various deficit-spending plans and aid to business and state governments have been designed to keep the bubble from bursting, to reflate the economy with massive infusions of currency and debt.
The problem for the best and brightest in Washington is that they can't have it both ways. The natural process of business failure, austerity and reallocation of assets - though inherently deflationary in the short turn - would have been painful, but swift and healthy long-term. The actions taken by the Fed and Treasury, designed to rescue failing institutions and keep government spending at current growth levels, have proven to only prolong the recession and threaten any incipient recovery with now-evident, profoundly inflationary aspects.
Another specter of massive government borrowing is the crowding out of private investment. Monied interests are likely to trend toward the safety of Treasuries rather than taking riskier positions on corporate issues. That also is an impediment to private sector growth, from which any recovery must spring.
Clearly, it is time to re-examine the efforts of the Fed and the Obama Administration. It's been four months since the inauguration, and, despite widely-reported "green shoots" and "positive signs" of the recession slowing, there is still no hard evidence that the economy will be in a recovery position later this year. All along, the American public has been told that the recession would be over by the third or fourth quarter of 2009, but, with those dates fast approaching there has been no job creation, no meaningful middle class tax break, and no stopping the continuing decline in home prices nor stemming the wave of foreclosures that has now become mainstream.
Government intervention in the economy has produced nothing except a temporary reprieve for insolvent banks and for the banking system as a whole, while adding mountains of debt to the already unserviceable load in place before the crisis. The federal government will eventually end up owning most of the largest banks, the auto companies and various other "too big to fail" industries. All of this is predicated on the notion of keeping the economy on a firm footing, meaning keeping hundreds of thousands of overpaid autoworkers at make-work jobs while nobody is buying autos, and bankers counting their billions without lending any to suffering small businesses.
The Federal Reserve has already bought up more than $160 billion of Treasury issuance. They've committed to buying a total of $300 billion, but there's no doubt that they'll have to pony up much more than that in order to keep the economy adrift. At some point, the wisdom of piling up even more massive debt has to be brought into question. That point may come sooner than anyone expects. Bond auctions in the UK and Germany have already failed, with a paucity of buyers for government debt instruments. The same could have already occurred in the US, had the Fed not engaged in its policy of quantitative easing. that is, buying up the debt with money created out of thin air.
It's a policy doomed to failure, as has been the case forever and ever, so be prepared for massive disconnects in the market, an absence of valuation rigor, inflation and deflation at the same time in different areas, and an overall failed economy which will finally bottom out sometime in 2011 or 2012, and not a moment sooner.
NYSE Volume 1,335,881,000
NASDAQ Volume 2,166,732,000
On the day, declining issues overwhelmed advancers, 4246-2227, wiping out most of Tuesday's illusory gains, and new lows maintained their long-standing edge over new highs, 68-62. Volume was only slightly better than yesterday's subdued level.
Oil gained $1.00, to $63.45. Gold gained a dime, to close at $955.20, while silver recorded the best showing of the metals, up 27 cents, to $14.87, an eight-month high.
General Motors executives announced that the offer to bondholders - to swap debt for common stock - met with an undue amount of resistance. This should have come as no surprise, since the company was offering bond-holders a mere 10% stake in the company, when the financiers were seeking an equity ownership position of between 50 and 60%. Instead, GM is likely to head down the same road as Chrysler, into bankruptcy, with the government ending up owning 60-70% of the company and the union picking up 15-17% of ownership. The government of Canada is expected to pick up less than 5% ownership.
in the end, the deal for GM is poorly designed, the goal only to keep from sending more than 200,000 UAW workers into the unemployment roles. There is no genuine plan to produce better autos, shave costs or limit benefits in an effort to become more competitive. General Motors will go down in history as the nation's largest bankruptcy, and the legacy will be that the US taxpayer will subsidize the jobs of hundreds of thousands of workers, in addition to paying lifetime health and pension benefits to millions more.
Existing home sales showed an increase for April, but the price of homes purchased was lower, affected by the thousands of foreclosed homes on the market. The stock of available housing continued to increase as well, another drag on home prices, which have fallen every month for the past two years running.
New home sales figures for April will be released on Thursday, along with continuing and new unemployment claims. The result of the $26 billion Treasury auction of 7-year notes will be closely monitored as well.
Today's sharp sell-off is the best evidence yet that the rally is over and stocks are set to fall and eventually retest March lows. The entire process could take as long as 6-9 months - or sooner - but the stage has been clearly set.
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