Bernanke's Remarks Quite Revealing of Future Fed Policy

Federal Reserve Chairman Ben Bernanke reiterated previous comments and provided even more clues to future policy for the nation's central bank. Throughout his prepared remarks to the Economic Club of Washington, Bernanke hinted at a tightening of policy in the future, though he was resolute in never using qualifies such as "near" or "short", keeping any anticipated federal funds rate hike at arm's length, at least. He also mentioned, at various times, that the Fed had other means for reigning in inflation, not limited to rate adjustments, such as repurchasing agreements and liquidation of some assets on the Fed balance sheet.

The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recovery in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market. The Federal Reserve has been aggressive in its efforts to stabilize our financial system and to support economic activity. At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future. I am confident we have both the tools and the commitment to make that adjustment when it is needed and in a manner consistent with our mandate to foster employment and price stability.

-- Federal Reserve Chairman Ben Bernanke addressing the Economic Club of Washington

The mopping up of excess liquidity has likely already begun, sufficiently demonstrated by recent moves in currency and commodity markets. On the first day of trading for the week, gold was hard hit early in the day while stocks held onto fractional gains all morning. Following Bernanke's remarks, the markets began to unwind, falling off their highs (up more than 50 on the Dow) to register in the negative as the day ensued.

Gold and silver managed to pare losses, and while the US Dollar was lower against most currencies, it was not by very much as the Euro continued a strong run against the greenback. Stocks continued to struggle along, as they have over the past three sessions. The indices put in hard triple tops on December 2, 3 and 4, and those intra-day high levels have been, and will continue to be, difficult levels to overcome.

Contributing to the weakness is a fairly obvious short-term overbought condition of stocks and the coming end of the calendar year. Many professionals have already locked in substantial gains prior to the month (indeed, many fund managers were through at the end of October) and trading volumes have been thin. Profit taking seems more the order of the day than actual search for value or the staking out of new positions.

Dow 10,390.11, +1.21 (0.01%)
NASDAQ 2,189.61, -4.74 (0.22%)
S&P 500 1,103.25, -2.73 (0.25%)
NYSE Composite 7,155.73, -26.98 (0.38%)

Simple indicators were slightly skewed to a positive bias, with advancing issues outperforming decliners, 3380-3103. New highs finished ahead of new lows, 352-49. Volume was at the low end of the recent range, and, in fact, among the lowest trading volume of the past two months, another sign that overall market participation is on the wane. Similar conditions are being reported on options exchanges.

NYSE Volume 4,780,842,500
NASDAQ Volume 1,894,192,500

Commodities continue to slide, with oil down to 2 1/2 month lows, down $1.54, to $73.93. Gold, which was down as much as $29 during the day, fell $5.50, to $1,164.00. Silver was down 14 cents to $18.38, though, like gold, losses were far greater earlier in the session.

Most of the indications currently in play are calling for nothing greater than sideways trade, which, by itself, puts pressure on the downside. With the general consensus that the markets are tired and trading slow, the potential for some spillage is evident. If the current short-term climb in the dollar continues, spurred along either by better US economic news or a flight to currency safety, the bet for stocks is presently neutral to lower. Chasing performance at these elevated levels goes against the most fundamental tenet of investing: buy low, sell high.

It's obvious that the professional traders are, or already have been, selling.

Grand Jobs Number Rally Spoiled by Risk Trade

When the November Non-farm Payrolls were announced at 8:30 am, coming in far better than even the most wide-eyed optimist could have anticipated (a loss of only 11,000 jobs, when the expectations were for a loss of 125-150,000), the various futures markets exploded to the upside signaling a higher open and the beginning of what should have been an outstanding rally in stocks.

While stocks initially responded, with the Dow up more than 150 points at its zenith, the US Dollar was also busy rallying against foreign currencies on the positive news. Just before 11:00 am, stocks had begun to slip, and before noon, they were in negative territory. In all, the Dow swung a full 200 points, registering the lows of the day at a 50-point loss.

Not only were the November jobs numbers staggeringly positive, but October's figures were revised as well, reflecting an improving unemployment picture in the United States. The official unemployment rate also dropped, from 10.2 to 10%, not an enormous movement, but one which offered a glimmer of hope as the year and the decade draws to a close.

However, the risk trade was being unwound by the good news, which is just one of the evil elements to dealing in free cash. Once the money begins to cost more, the game must end quickly, and, as is the usual case, with a good deal of messiness along the way. Thus, we are now encountering a condition in which the more good news is announced concerning the US economy, the worst it will affect stocks, if the dollar is a beneficiary of the news. In more mundane times, stocks improved in price as the dollar gained value. In the risk trade, the opposite is true. Stocks purchased with free, or declining money, go higher. The net result is a zero sum, though the feeling along the way is euphoric. Obviously, such a condition cannot maintain indefinitely, and today was just another part of the great unwinding.

While stocks managed gains, they were paltry compared to what the would have been under normal circumstances.

Dow 10,388.90, +22.75 (0.22%)
NASDAQ 2,194.35, +21.21 (0.98%)
S&P 500 1,105.98, +6.06 (0.55%)
NYSE Composite 7,182.71, +25.66 (0.36%)

Simple indicators reinforced the overall trade. Stocks were, at the high, more than 5-1 in favor of advancers, but managed to finish the day with just better than a 2-1 edge. Advancers were better than decliners by a score of 4508-1991.

NYSE Volume 6,935,438,000
NASDAQ Volume 2,237,404,500

Taking the most significant hit was gold, losing $49.30, to $1,169.00, and even another $12 lower after the official 1:30 pm close. Such was the case with silver as well, which dropped 61 cents, to $18.52. Oil fell 99 cents, to close at $75.47 per barrel.

The perversity of the risk trade is such that it will do damage to assets of all kinds as it is unwound, despite the true value of those underlying assets. It's a simple proposition. As the dollar rises, speculators must cover their positions, and do so by selling assets, causing them to fall. Just as they rose artificially as the dollar weakened, they will fall without any regard to fundamental value as the dollar rises. Eventually, an equilibrium will be reached when the trade is fully unwound, which could be a matter of months, depending on hedges and various other financial games, and there will more than likely be a few hedge funds which blow up in the process, though they will likely be small (we hope).

In the end, there will be more bargains for the patient, who wait out the end of liquidity and invest in appropriately undervalued assets. It's not going to be very pretty. Good news will turn stocks South, sometimes, and bad news may send them soaring. It's a very difficult trading regimen for the average investor to fathom. Surely, more than a few home traders will be scratching their head on today's abrupt turn-around, but that's what we have currently and we must live with it.

Maybe the best advice of all is to take profits and wait it out. There should be more rational investing periods in the future.

This one is not.

Fear Overwhelms Market in Final 1/2 Hour

After hugging the flat line for almost the entire session, investors took to the sidelines in the final 1/2 hour of trading on Thursday in advance of Friday's pre-market November Non-farms Payroll report. Stocks had held up well through most of the session, even in light of a poor reading from ISM Services, which slipped back from expansion to decline in the course of one month, dropping from 50.6 in October to 48.7 in November.

That initially caused some slippage at 10:00 am when the report went public, but stocks quickly regained their footing and vacillated along the break even mark for most of the day afterwards. Prior to the opening, investors received good news on employment, as the Labor Dept. reported another decrease in initial unemployment claims, dropping to 457,000 for the most recent week.

Other news was mixed, though mostly negative. Productivity was revised downward for the third quarter from 9.5% (which was a bit unbelievable) to a more tepid 8.1%. Retail sales from a wide swath of national retailers was horrible, however, with many of the top mall stores reporting November sales down anywhere from 2-20% from a year ago. The combined figures showed a decline of 0.3% from last November, a horrible showing, considering last year's sales were down 7.7% from 2007. The only area showing any strength were discounters, though not all of them were posting positives.

These numbers reflect a growing concern that the entire recovery has been built on liquidity, the main beneficiaries of such largesse being the banks and Wall Street. As such, it's no surprise that while Main Street's interests wither and die, stock race higher and banks - like Bank of America - are able to find the means to pay back all $35 billion in TARP funds doled out by the feds last year.

Consumers are not spending as though times are good. Clearly they are not and this is being reflected in poor showings at the mall and department stores during the holidays. Even though Black Friday and Cyber Monday offered some hope, beyond those high promotion days, the US consumer seems already hunkered down for the holidays, intent on not splurging and running up more debt. The simple fact of life is that many consumers have no more credit with which to spend, either having reached their limits, already defaulted or had their lines reduced by the ever-popular banks and credit card companies.

Cracks are beginning to appear in the media's recovery story everywhere, though the most notable statement on the financial condition of the world can be found in the price of gold, which continues to reach new highs as a put against all fiat currencies.

Today's setback for equities should not be taken lightly. There are many indications that the US recovery is not as robust as many would like to believe, and, as goes the US, so goes much of the rest of the world. The hardest hit areas will be in developed nations such as Europe and Japan. The dislocations caused last week by the cries for help from Dubai may have been the canary in the coal mine, with more horrific debt stories still to come.

Time will tell, but today's market response in advance of November jobs data is not encouraging.

Dow 10,366.15, -86.53 (0.83%)
NASDAQ 2,173.14, -11.89 (0.54%)
S&P 500 1,099.92, -9.32 (0.84%)
NYSE Composite 7,157.05, -65.37 (0.91%)

Simple indicators, which reverse course in the final hour of trading, underlined the sell-off in graphic detail. Declining issues outpaced advancers, 4235-2215, a nearly 2-1 margin. New highs exceeded new lows, 448-90, though those figures are highly suspect due to the level of late-day selling. Most of the highs were reached early in the day and erased in the late portion of the session. Volume was not dramatic, holding at the usual levels. The one caveat is that the last time sellers beat down the averages in advance of a jobs number - on October 1 - the report came in as expected and the indices quickly recovered to their previous highs.

This time around, the market is looking for a loss of just 125-150,000 jobs during November, though whispers have circulated suggesting only 100,000 jobs lost for the month. Any number under 100,000 would surely repudiate today's late-day selling and spark a rally on renewed confidence, though it appears that the gloom and doom crowd has thus far had their way. Tomorrow's Non-farm Payroll Report and the official unemployment rate will be released at 8:30 am.

NYSE Volume 5,517,375,500
NASDAQ Volume 2,011,226,125

Oil once again finished lower, losing 14 cents, to $76.46. To the surprise of nobody, gold gained again, up $5.20, to $1,218.20. Silver did not respond in kind, losing 22 cents, to $19.11. Copper and platinum were likewise priced lower. Gold has truly set its own course.

Almost unnoticed was the US dollar trade, which was stronger against the Yen and Pound, but weaker against the Euro, resulting in a small gain on the Dollar Index. That also helped the bears beat down stocks by limiting the risk (or risk-free, as it should be identified) trade off a weaker dollar. should the dollar resume its decline, stocks would once again become the investment of choice, consequently trading higher.

Not all, but much will be revealed before tomorrow's opening bell.

ADP Employment Number Trumped by Stronger Dollar

The market loves liquidity, lately, the kind that gushes forth from the font of a weaker US dollar. And since the market did not get what it wanted today, stocks pouted, putting on their most forlorn looks and stubbornly refusing to come out of their basement room.

After a relatively strong start, boosted by the private ADP Employment Report for November (-169.000 jobs), stocks took note of the dollar's strength against both the Yen and the Euro and headed South for the day. Coming one day after a major uptick, it probably wasn't such a bad move, and consequently a light one, though many were more hopeful for some follow-through on the back of Tuesday's semi-sweet rally. When all was said and done, of the major markets, only the Dow Jones Industrials finished in the red. Other indices posted marginal gains.

The Forex wouldn't allow stocks to advance much at all, however, as the perverse risk trade trumped all bets, good, bad or indifferent.

Dow 10,452.68, -18.90 (0.18%)
NASDAQ 2,185.03, +9.22 (0.42%)
S&P 500 1,109.24, +0.38 (0.03%)
NYSE Composite 7,222.42, +10.34 (0.14%)

Internals belied the headline numbers. Advancing issued finished the day well ahead of decliners, 4091-2396, and new highs beat new lows, 467-86. Volume was surprisingly strong for such a light news day, once again slightly better than usual. These indications bode well for the remainder of the week and month. It should be reiterated that stocks have patterned in the same manner over the past three months, with the best gains in the first 10-12 days of the month.

NYSE Volume 4,568,939,000
NASDAQ Volume 2,076,633,000

Strength in the US Dollar didn't stop gold from continuing its dramatic climb, posting another record close at $1,213.00, after gaining $12.80 on the day. Silver improved, though only by 12 cents, to $19.33. Crude oil lost $1.77, to $76.60, though that decline was keyed mostly to improvement in existing supply than anything else. In general, the energy and food complexes were all lower, with precious metals the only sector showing gains.

After the close came news - from CNBC's Charlie Gasparino - that Bank of America would exit the government's TARP program, with plans to raise capital to repay the entire $45 billion to get out from under the government's thumb. Some of the reasoning behind such a move would surely include the search for a new CEO to replace Ken Lewis, who has stated that he would step down from the position at the end of 2009. Government strictures on pay levels for executives whose firms have received TARP funds have limited BofA's search for a new CEO. Lifting the government pressure from the firm would pave the way for a new Chief Executive free to earn a competitive salary.

The surprising announcement also revives the conspiracy theory that the entire "financial armageddon" scenario of 2008 was smoke and mirrors orchestrated by the banks in the largest swindle ever perpetrated on the public. If Bank of America - like many of its colleagues - can suddenly find the means to repay an emergency loan all in one fell swoop, the veracity of the entire financial industry should be scrutinized with a more curious eye.

No matter the case, Bank of America's departure from the TARP is welcome news at a time the market needs a bit of a catalyst to move ahead. Whether this is really the kind of event which will propel stocks will have to wait until tomorrow.

New Highs for Gold, Silver Bucks Higher

Now that fears of another financial meltdown - a la Dubai - have subsided, world markets have bounced back nicely. Taking a look at the charts from the past three days of trading, we see the Dow, S&P and NASDAQ have all just about recovered from the swift down-kick from Friday. The Dow, in fact, made a new 52-week high today.

Most of the experts who have been covering the situation considered the Dubai dilemma to be nothing more than a hangover from last year's malaise. Certainly, the sultans and magnates in charge of one of the world's most robust commercial real estate build-outs had to know there were risks - overbuilding, high prices - but were blinded, like most of us, by the glorious profits which emanated from the global peace-time asset expansion.

While some of the projects in Dubai have been halted or scaled back, there are issues remaining to be worked out, such as rental prices, debt restructuring and all manner of price upheaval, but most of the companies and people who made investments there are well-heeled and not likely to bat much more than an upturned eyelash at the situation.

So, it's back to the risk trade, with the dollar down against the Euro mainly, and most other currencies, driving more and more money into stocks. As long as the dollar remains weakened - due to our high deficits, low interest rates and an implacable central bank (the Fed) intent on keeping things that way, stocks should have little impediment to move forward through the end of the year. What happens after that, in 2010 and beyond is another matter, though nobody seems particularly concerned about untidy matters such as inflation and the new bubble in government bonds, so long as there's money to be made in stocks, everybody's favorite game.

And while stocks have done exceedingly well, gold has outperformed everything in sight and continues to do so, today making its 25th all-time high in price. What people do not understand about the move in gold, as it usually responds to inflation - not deflation - as we are currently experiencing, is that it is a bet against all paper currencies. As long as they are floated and priced against each other, gold provides its investors with a surging supply of wealth in a hard asset. Unlike the fiat currencies, gold is tangible and its supply cannot be expanded easily. It costs more than $400 to extract one ounce of gold, so the miners, currently digging as furiously as they can, cannot produce enough supply to meet the growing demand.

The same is true, to a degree, for silver, though it is more abundant than its yellow cousin and used in more industrial situations. It has not eclipsed the highs of 2008, though today's move above $19/ounce puts it on track to shatter the $20 mark by year's end - maybe even the end of this week. Investors in the precious metals are enjoying the best price appreciation of all time.

With stocks up well from the March lows (nearly a 60% gain), all asset classes seem to be in good condition, though there's still some searching for value. Having some gold and/or silver mixed in with your paper assets has been a much better idea than just a hedge. The hard assets have actually returned quite handsomely.

Dow 10,471.58, +126.74 (1.23%)
NASDAQ 2,175.81, +31.21 (1.46%)
S&P 500 1,108.86, +13.23 (1.21%)
NYSE Composite 7,212.08, +119.72 (1.69%

On the day, the simple indicators were right in line with the headline numbers. Advancers trampled all over declining issues, 4916-1650. There were 406 new highs, to just 79 new lows. Volume was the best it's been in the past two weeks; all indications are for another leg up in the markets. Besides the A-D and high-low lines, volume and the unusual pattern of the markets - in which rallies have burst forth at the beginning of each of the last four months - are screaming to investors to buy now, despite recent highs. The pattern has been for stocks to pull back 3-5% after each of the subsequent runs, but this time the Dubai incident managed to sting only about 2%. Stocks are poised for another move higher, with the Dow heading to 10,750-10,850 or higher, by year's end.

Valuations may get a little on the pricey side, but that is a normal feature of raging bull markets, of which this undoubtedly is.

NYSE Volume 5,002,317,500
NASDAQ Volume 2,199,957,750

Commodities took the dollar down trade in stride. Oil popped another $1.75, to $78.75. Gold surged $17.90, to $1,200.20 and silver vaulted 68 cents, to $19.20. As well as gold has been going, silver should outdo it over the next few months if today's outsize gain is any indication.

Investors aren't waiting for retail figures or any other metrics at this point. They are snatching up investments in a chase of performance, led by the nay-sayers who haven't had enough faith in this market. The current condition is the perfect set-up for a true blow-off topping rally, especially once the S&P clears 1115. Stocks could gain another 5% before we close out 2009.