Stocks Climb to Fresh Highs; Housing Still Slumping

I'll begin where I left off yesterday. My final words were:

"Wall Street will continue to trade in what it knows best: equities. And until there comes an alternative, they will continue to rise."

I have now no doubt attained the status of a genius, but I cannot explain the explosiveness of today's venture into equity-land, but I'll attempt to make some sense of it.

Stocks, without alternatives, will no doubt provide positive returns. Since there are few alternatives in today's environment - real estate is a mess, bond returns are paltry, art is illiquid, over-priced and risky - all the money is going into stocks.

Partially to blame for Wall Street's current bubbly stock markets is the near-complete meltdown in the mortgage securitization market. It's a two-pronged attack that has virtually frozen the market for what just 5 years ago was the whitest-hot money machine in the world.

First, Fannie Mae and Freddie Mac have already announced that they would be prepaying a large number of soured loans. In other words, investors will be paid a lump sum - the remaining principal - on loans delinquent by more than 120 days, decimating their long-term value and consistent cash flow. Once these and other quasi-federal agencies own the loans, they're combing through them, looking for discrepancies and hammering the banks that issued them. One such instance is a recently-filed lawsuit by the Federal Home Loan Bank of San Francisco, seeking $5.4 billion from the usual suspects including Deutsche Bank; Bear Stearns; Countrywide Securities, a division of Countrywide Financial (now Bank of America); Credit Suisse Securities; and Merrill Lynch (also Bank of America).

So, where's the money? And, where's it going? Simply put, there must be a lot of mortgage investors out there sitting on large chunks of cash, because Fannie and Freddie have no doubt begun the process of prepayment. Stuck in the middle are the large banks which originated the mortgage melee in the first place, having first to pay back investors and then, sweat out the heat from the G-men scouring the bad loans for errors, omissions or outright fraud.

It doesn't require a huge leap of faith to believe that both the investors who have been made whole (Here's a dirty little secret, though: those investors, including the banks servicing the loans, don't get hurt from day 1 when a mortgagor defaults if it's a Fannie or Freddie loan. The agencies make the payments) and the banks, each looking for places to make money might dip a toe into equities. The banks would no doubt be the more aggressive and the parties with more money to move, which makes the recent rally all that more suspect.

Loads of liquidity are thus fueling the stock market rally, and, as usual, the Fed is sitting on its hands, watching the bubble inflate. With the NASDAQ already back to the level before the economic collapse of 2008 and the Dow and S&P fast approaching theirs, shouldn't the Fed be raising interest rates to slow down the rampant speculation?

You'd think so, but the Fed is in a box. Any rate hike - even a tiny 25 basis points - would kill the stock rally. Worse, it would likely touch off discussions of the broader economy and the unseemly truth that jobs aren't being created, banks aren't lending and most consumers are still stretched pretty thin. Even worse, all of the recently-issued government debt would begin to cost more to service. The Fed is quite literally dammed if they do and dammed if they don't, but the Wall Street money-grabbers are having a field day.

The sorriest part of the story is going to be the ending, other than the idea that most small investors haven't fully participated in the most recent money party. They are still too scared of the markets after the horrifying events of 2008.

Major banks and brokerages are now in nearly-complete control of the stock markets, so they're not trustworthy. Most of the current financial commentary resides somewhere below the ethereal, along the lines of, "this or that stock is up; it must be a good buy."

The oldest adage on the Street is to buy low and sell high. Since the Dow was languishing around 6600 a year ago and today its closing in on 11,000, even a third-grader would know that now is not the optimum time to buy stocks.

During the housing boom, the attitude filling the balloon was that housing prices would always go up. We know how wrong that was. Now, it appears that stocks will continue to rise. I remain on the bearish side of that statement, awaiting the eventual collapse. We have gone too far, too fast.

Dow 10,888.83, +102.94 (0.95%)
NASDAQ 2,415.24, +19.84 (0.83%)
S&P 500 1,174.17, +8.36 (0.72%)
NYSE Composite 7,478.76, +59.74 (0.81%

Advancers pounded decliners, 4550-1942. New highs exploded to 757, to just 73 new lows. Volume was actually good, especially on the NASDAQ.

NYSE Volume 4,955,676,500
NASDAQ Volume 2,305,962,750

Oil drifted 31 cents higher, to $81.91. Gold also was up $4.20, to $1,103.50. Silver gained 9 cents, to $17.01. All three commodities remain stuck in a range they've maintained for close to 9 months.

The National Association of Realtors (NAR) announced that existing home sales slipped 0.6% nationally for the month of February, but that inventory of unsold homes rose 9.5%, the largest jump in 20 years. The increase is due to banks finally releasing some of their foreclosure inventory onto the market and the overall lack of qualified buyers.

The sales rate improved in the Northeast and Midwest, but fell in the South and West, which has generally been the story for the past two years.

Better? That's a no.

Health Care Passed, Stocks Gain?

As odd as this may seem, the world did not come to an end as of last night when the US House of Representatives voted to move forward on historic health care legislation. While the bill still must be returned to the Senate if it is to include changes made by the House, President Obama is prepared to sign the existing legislation into law on Tuesday, March 23.

For the 14 months that health care has been a debating point on Capitol Hill, Wall Street has watched and observed closely, amid pithy warnings of damage to health-related stocks and other dire consequences of the sweeping reform.

However, after a brief dip at the open, stocks rallied, led by some of the very insurance companies which were supposed to be hurt the most by the legislation. Tenet Healthcare (THC), Universal Health Services (UHS) and Aetna (AET) - all health insurance providers - were among the best gainers on the day, rather than being sold down the river by speculators who see evil intent in the reform bill.

There are any number of possible reasons for gains in health-related stocks, though the most obvious are that the reforms don't fully take effect until 2013 in most cases, and the taxes levied on providers was substantially scaled back in the final bill. In the short-run - which, overwhelmingly is Wall Street's primary interest - health insurance providers will not be negatively affected. They remain at the heart of the system, and they still have various loopholes with which to exploit the more onerous - for them - provisions in the bill. Further, congress has mandated that all American citizens MUST have some form of health insurance coverage by 2013, a boon to the providers, since they are the primary dealers in such products.

So, health care reform should more accurately be described as mandated taxpayer expense, as this legislation marks the first time American citizens will be forced to purchase something or else face fines. It's a national mandate, and one that surely will not go down easy. A handful of state attorneys general are already busy crafting lawsuits challenging the constitutionality of the bill about to be passed into law. The debate will rage on for months - if not years - more.

Dow 10,785.89, +43.91 (0.41%)
NASDAQ 2,395.40, +20.99 (0.88%)
S&P 500 1,165.81, +5.91 (0.51%)
NYSE Composite 7,419.02, +32.17 (0.44%)

The markets were of their own minds today. Advancing issues outflanked decliners, 4224-2291, while new highs soared past new lows, 486-42. All of this occurred while the dollar was gaining against other currencies, a sign of strength for the markets and somewhat of an aberration, though not entirely outside the bounds of imagination and reality. A strong dollar and a rising stock market are certainly not mutually exclusive. Volume was again not particularly strong, bringing back arguments that the rally is based more on hope and insider dealings than actual economic worthiness.

NYSE Volume 4,868,379,500
NASDAQ Volume 2,325,247,000

After posting large early losses, oil bounded into the positive for the day, closing higher by 57 cents, to $81.25. Gold fell $8.10, to $1,099.30, though losses were steeper earlier in the day. The same was true for silver, off by a dime, to $16.92.

The trade today was highly suspect, owing to the sharp decline (Dow down 50 points) and quick reversal. Apparently, there's more to health care, stocks and markets than Wall Street veterans are allowing us to know. Either that, or cheap money is still being employed to boost share prices. Until something better comes along, Wall Street will continue to trade in what it knows best: equities. And until there comes an alternative, they will continue to rise.

Dow Ends 8-day Win Streak

The headline pretty much says it all. Investors have absolutely priced in expected improved earnings for just about all of 2010.

During the 8-day run-up, Dow stocks added 227 points, but gave back 37 today. Off the most recent bottom on February 8 (9908.39), the Dow added 871 points, a pretty emphatic rally. Further gains should prove more difficult, though the continuation of easy money policies had made stock picking relatively easy of late.

Though there are still any number of headwinds, the Wall Street money machine seems to be humming along just fine.

Dow 10,741.98, -37.19 (0.35%)
NASDAQ 2,374.41, -16.87 (0.71%)
S&P 500 1,159.90, -5.92 (0.51%)
NYSE Composite 7,386.80, -56.77 (0.76%)

Losing issues surpassed gainers for the second straight day, 4383-2149. New highs were elevated again, at 499. There were 41 new lows. Quadruple-witching produced excess volume, as widely expected.

NYSE Volume 6,126,701,000
NASDAQ Volume 2,786,147,500

Commodities all took a nosedive on the day, with oil down $1.52 per barrel, to $80.68. Gold was not shining, off $20.00, to $1,107.40. Silver fell 39 cents, to $17.02.

The trade on options expiration seems to suggest that there are plenty of speculators in the market, many with similar mindsets. Future direction will depend largely on keeping the consensus positive, which has not proved very difficult of late. Most market participants are discounting a double-dip, further easy money policies from the Fed and a lengthy debate over health care moving forward.

In Washington, Democratic lawmakers continued to attempt to find the votes necessary to pass pending health care reform, as it has come to be known, but stripped out some of the taxes on medical device manufacturers and have watered-down the bill, to the delight of the Republicans. A vote on the house measure is expected by Sunday, though any resolution would be referred back to the Senate for further reconciliation.

The process has become entirely tiresome and tangled. Something is likely to come of it, though few regular Americans will notice any changes for at least six months.

Strange, Uneven Day on Wall Street

With much of the nation's attention diverted from Wall Street toward the opening round of the NCAA Tournament or Washington's desperate dance to pass health care legislation, major stock indices made some odd directional moves.

The Dow vastly outperformed the other indices, with the NYSE Composite, the broadest measure, taking the largest loss of the day. Traders were busy closing positions on options trades, with quadruple-witching expiration tomorrow. Most adroit traders have already shut down for the week, with not much wiggle room remaining on options strike dates.

Dow 10,779.17,+45.50 (0.42%)
NASDAQ 2,391.28, +2.19 (0.09%)
S&P 500 1,165.82, -0.39 (0.03%)
NYSE Composite 7,443.57, -30.56 (0.41%)

Internals revealed the true nature of the market, which was hurriedly exiting positions. Losers led gainers, 3774-2685. There were 602 new highs and 42 new lows. Volume backed off from better activity earlier in the week.

NYSE Volume 4,785,140,500
NASDAQ Volume 2,091,388,625

Oil backed off a bit, losing 73 cents, to $82.20. Gold gained $3.40, to $1,127.40. Silver slipped 10 cents to $17.41.

The CPI, released prior to the market open, may have encouraged some selling as fears of deflation persist. The index was flat for the month of February, with many of the components showing losses. Initial unemployment claims came in at 457K, another cause for concern.

There are no economic released slated for Friday, and expectations are for a dull session, though traders should be alert to any abrupt move to the downside, which could turn into an avalanche under the proper conditions. There is little to trade on over the next 3-5 weeks, as 1st quarter earnings season approaches.

Extending Gains, Stocks at 18-month Highs

Oh, Happy Day! If you haven't bothered to pay much attention to this space, you should be well off following the seventh straight advance for the Dow Jones Industrials, which broke and closed above the January highs and now sit at their best levels since October, 2008, when the bear market took its most prominent downside path.

What this would infer is that the financial crisis is fully behind us, recovered from and prosperity is now priced into the market to a substantial degree. Never mind that high unemployment persists and that housing remains in the throes of its worst extended period since the 1930s, money - as measured by the Fed funds rate of ZERO - is dirt cheap and stocks are flying.

Instead of looking this gift horse squarely in the mouth and playing this leg of the rally for all its worth, some of us have serious doubts going forward, though naysayers during spectacular bull trends (this is a bear market rally) are usually shuffled onto the last trains to loserville. No difference this time around, as sentiment has grown overwhelmingly positive. Stocks are the only investment with little risk and high reward, and that's what on everyone's plate.

While those viewing the macro-economic condition as less-than-healthy and still riddled with structural time-bombs, short-term, stocks have provided a great deal of upside action and quality trading plays. Note that the word "trading" was substituted for "investment," as the latter is no longer viewed with much respect. The money is there for the taking today, and take it is what most traders will do.

One tiny detail many may have missed here is that Friday marks a quad-witching day in which stock index options and futures and individual stock options and futures all expire. Being that the betting (note "betting" rather than "investment") has uniformly been to the high side, insider market participants will conclude their self-fulfilling prophecy with healthy gains, just as they have nearly every month and on every such quadruple-witching event of the past four quarters.

Also of note is that the Dow Industrials have now confirmed the breakout by the Transports, keeping Dow Theorists firmly in the back of the bus until such time as another aberration is recognized and then swiftly reconciled. If you expected stocks to rise, then you've hit the bulls-eye, though the reasons for gains may matter more than the actual finished product.

In other words, with easy money, bullish sentiment and no headwinds blowing against them, stocks had little to do but wait until people bid them higher. It's all so neat and simple when a plan comes so sweetly to fruition, no matter the underlying fundamentals.

Dow 10,733.67, +47.69 (0.45%)
NASDAQ 2,389.09, +11.08 (0.47%)
S&P 500 1,166.21, +6.75 (0.58%)
NYSE Composite 7,474.02, +47.32 (0.64%)

The internals were possibly even better than the headline numbers, with 4328 advancing stocks to 2196 losing value. New highs exploded to 1073, versus 77 new lows. That's the largest margin of difference - in either direction - in 16 months, and the best showing for new highs since prior to the bear market which began in late Summer of 2007.

Volume was very strong, owing again to the quad-witching condition.

NYSE Volume 5,549,815,500
NASDAQ Volume 2,166,110,750

Crude oil traders must be thinking there's a boom coming soon, because their pricing is out of this world. Crude closed up another $1.23, to $82.93, close to 18 month-highs itself. Gold was not so lustrous, but still up $1.80, to $1,124.00. Silver closed higher by 17 cents, to $17.50.

A few of the less-noticed economic data sets from the past few days may shed light upon why not everyone is sold on the recovery story. Capacity utilization ticked up a fraction in February, to 72.7%, still horrible. In a robust economy, that number would be over 90%. Consequently, industrial production saw a gain of only 0.1% in February, barely moving the needle.

Housing starts fell to 575,000 in January, again, a feeble number, and PPI, released this morning, showed a decline of 0.6%, or, in other words, outright deflation. However, instead of considering this a portent of a weak, stumbling, or at best, stagnant economy, the take was to call it "tame inflation" as though inflation would magically re-appear in time to rescue the pricing power of businesses.

This bear-market rally has now gone on for 13 months with only two near-corrections of 9% - in June, 2009 and February of this year - hardly the kind of performance one would expect from economic conditions such as exist today. But, Wall Street does as it pleases, and what pleases it most is stuffing more money into it's already lavishly-lined pockets.

Party on, Garth.