Our Curious Stock Markets: Bernanke Speaks, Markets Tank

So, what did Federal Reserve Chairman, Ben Bernanke, say that markets, bond traders and equity traders didn't already know?

Hardly a thing, except for this statement slipped neatly into the fourth paragraph of his prepared remarks:

Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years.

In other words, deflation, not inflation, has been the overwhelming economic force since just before the market malaise of 2008.

Now, that may come to news to some, though not to regular readers of this blog, as I've been reporting and indicating - for probably than anybody wishes to recall - that deflation has been the dominant trend since markets began their decline in August, 2007. That's three years ago, so maybe Mr. Bernanke and the minions of stock traders, analysts and "economists" (what a bunch of bozos these types have proven to be!), are just catching on, and maybe they're still behind the curve.

There are good reasons to enjoy and promote deflation, especially if you are not either wealthy, a banker or otherwise dependent on rising asset values. Those reasons include, but are by no means limited to, potential for significant capital appreciation (hard money) by correctly pricing and purchasing assets through forced liquidations, general lower prices for all manner of daily use goods and services, significant arbitrage situations, lower costs for everything from business startup to attorney fees, and the list goes on and on.

As asset values fall, as they have the past two years, and as there seems to be no end in sight for the continuance of deflation as the dominant trend, it is wise to be always in a strong cash position, with as little debt as possible, and on the look out for price dislocation.

The stock market and individual stocks have been ripe ground for wide variances (volatility) in pricing value, though stocks are not generally for individuals (until the past twenty years or so) and should only be employed for income or capital growth as a small portion of one's overall portfolio. I continue to recommend raw land, preferably arable, cash, cash equivalents, tools of trade and transportation devices, with the bulk of one's allocations in cash (anywhere from 40-80%).

If you own a home, you should be doing everything in your power to own it free and clear. Despite the headlines detailing the horror of the housing market, there have been few times better than the past six months to invest in one's own home. It is an asset, in addition to providing a secure environment for oneself and one's family, that can enhance one's overall financial position and provide leverage for any manner of transaction. All it takes is a little ingenuity, some papers supporting your strong position and a little persuasion to counter-parties of any given transaction.

But the tiny sentence in Bernanke's testimony before the US Senate Committee on Banking, Housing, and Urban Affairs apparently came as somewhat of a shock to astute followers of Fed-speak. The stock market dived and bonds improved on that phrase, and the move extended through and beyond the extent of his statement and for the rest of the trading day.

The move from the start of his testimony, at 2:00 pm ET, through its conclusion and well into his question and answer period at about 3:00 pm, took the Dow from 10,250 all the way down to 10,065, a 185-point drop, erasing Tuesday's gains and putting the Dow up just 22 points from where it ended the previous week.

Dow 10,120.53 109.43 (1.07%)
NASDAQ 2,187.33 35.16 (1.58%)
S&P 500 1,069.59 13.89 (1.28%)
NYSE Compos 6,731.16 88.88 (1.30%)

As expected, decliners overwhelmed advancers, 4497-1970, though new highs remained well above new lows, 239-106, but, for the third day in a row, NASDAQ stocks showed more new lows (56) to new highs (31), a troubling trend underscoring tight credit conditions for smaller, younger, more speculative firms. Volume was at its best level of the week, another disconcerting data point for bulls to ponder, as the previous two days of gains were on lower volume. Obviously, there is a great deal of risk intolerance in the markets.

NASDAQ Volume 2,245,542,250
NYSE Volume 5,465,722,000

Commodities felt the pinch of deflation as well, with crude, after hitting a one-month high on the expiration of the August contract yesterday, slipped $1.02, to $76.56 on the first day of the September contract. It doesn't take a genius to understand what that means, though in futures trading parlance, it's known as "backwardation," a condition wherein the cash price is higher than the futures price. It's been seen in gold and silver recently, and, though not a textbook case here, one contract ending on a high and the next day's new contract selling immediately lower, constitutes the same dynamic.

Gold was up just 10 cents, to $1,191.60, with silver higher by 11 cents, at $17.80, though both traded lower following the New York print around 1:30 pm.

Earnings reports from a wide variety of companies were mostly in line, with few surprises to either the upside or down, though Morgan Stanley (MS) was particularly outstanding, especially in comparison to their chief rival, Goldman Sachs (GS). bank of America, the nation's #1 zombie bank, fell again, losing 41 cents, to $13.36 (3%). The stock has fallen 31.4% since its high of 19.47 on April 14, 2010. Not only does BofA suffer from enormous loan losses and continuing deterioration in their loan portfolio, they are not making new loans of any substantial size and will be under pressure from the newly-passed financial reform legislation - along with most other large banking institutions - for a considerable period of time, which, were I Ben Bernanke, might easily be interpreted as meaning three to four years.

Clueless? You're Not Alone on Turnaround Tuesday

From the most grizzled veterans to the baby-faced nubians, nobody was able to put any kind of story or spin on the dramatic turnaround stocks made Tuesday.

After IBM and Texas Instruments both reported revenue misses for the second quarter Monday after the close, Goldman Sachs continued the trend with an earnings report that had traders scrambling for the exits before the market had even opened. When stocks did begin trading, they fell off a cliff, with the Dow down by more than 145 points within the first 15 minutes.

Stabilizing in the red, all indices were trading lower, but gained strength throughout the morning and accelerated into the afternoon session. As 2:00 pm approached, stocks had staged a stunning reversal on nothing but momentum. By the close, all of the major indices sported solid gains, keeping hopes alive that this earnings season would offer some value and momentum for the second half of the year.

Even though IBM ended lower for the day (-3.24, 126.55, -2.50%), it had pared losses substantially, after it had opened with a loss of more than 5%. Goldman Sachs, on the other hand, possibly the true catalyst behind the entire market rally, ended the day higher (+3.23, 148.91, +2.22%) after initially trading down by more than 3 1/2 points from its previous close.

Dow 10,229.96, +75.53 (0.74%)
NASDAQ 2,222.49, +24.26 (1.10%)
S&P 500 1,083.48, +12.23 (1.14%)
NYSE Composite 6,820.04, +80.40 (1.19%)

Headline numbers were supported by strong internals, with advancing issues beating back decliners, 4846-1552. New highs remained atop new lows, 214-136, though once again the disturbing trend in the NASDAQ - more new lows than highs, 67-26 - appeared for the second straight day. Volume was light, but much better than Monday's dismal showing.

NASDAQ Volume 1,944,221,875
NYSE Volume 5,323,317,000

Crude oil closed out the August futures contract up 90 cents, at $77.44, the highest price in a month. Gold rallied for a gain of $9.80, to $1,191.50. Silver added 15 cents, to $17.68.

After the bell, Yahoo! and Apple reported, with Yahoo missing on revenue though beating consensus bottom line EPS by a penny at 15 cents per share. Apple beat on almost all metrics, including gross revenue and earnings per share, setting up a potentially powerful open for tech shares on Wednesday.

Everybody Up for Fund Manager Monday

Dow 10,154.43. +56.53 (0.56%)
NASDAQ 2,198.23, +19.18 (0.88%)
S&P 500 1,071.25, +6.37 (0.60%)
NYSE Composite 6,739.64. +30.13 (0.45%)

Volume was absurdly low. Advancer beat decliners, 3971-2424. New highs surpassed new lows by a count of 163-133, which, due to the skewed NASDAQ readings (78 new lows, 16 new highs) bears more consideration. In wide, absurd, general terms, NASDAQ companies are younger, more intuitive and more likely to be managed by entrepreneurial types with less business knowledge and experience than their peers in, say, the Fortune 500.

If the case is that these companies are unable to meet obligations because of the horrid and deplorable banking situation in the US, thus scaring off investors and fomenting failure, then it should come as no surprise that the banking, credit and financing system in the United States of America is a miserable failure, and that the only companies receiving funding of any kind are the largest and most-deeply-entrenched in the hopelessly-corrupted and dysfunctional political system.

It is an untenable condition that cannot continue without severe repercussions, to business and polity alike. Innovation and enterprise cannot be constrained by either governmental will not banking constriction. As necessary as mother's milk to newborn creatures, capital remains essential, and without it, no enterprise can prosper, much less survive.

The ridiculous situation into which the Federal Reserve Bank has painted itself - free money and no lending - can, and actually has, maintained itself for much longer than most financially-minded individuals would have thought possible. How much further the Fed and its other friendly central banks can sustain the pantomime performance is a matter of pure conjecture. It could end tomorrow as easily as sometime in the next year, but it will end, as do all performances, good, bad or otherwise unremarkable. And when it does, there will be chaos, and all assets will lose value, some more than others.

US stock markets, and by inference, global markets, are headed for a spectacular crash within the next two days to six months, almost with 100% certainty. The imbalances in the global economic diaspora are too great for anyone rational to come to any other conclusion. By November, equities should be flattened to levels heretofore unthinkable. If there's any need for proof, simply follow the travails of Bank of America (BAC), a company too big to fail, which has failed.

There is no amount of money (it being all of the fiat variety and based upon nothing other than the good word of a given government, almost all of which have been proven to be utterly craven, corrupt and transitory throughout history) that can save Bank of America. The company owns enormous amounts of non-performing loans and continues to operate with a balance sheet in which most of the "bad" assets are not accounted for, those being on off-balance instruments and subject to laughable "mark-to-market" accounting rules.

Bank of America should have been liquidated last year or the year before, surely as soon as it acquired Countywide, the absolute root of the financial collapse, but, by government fiat, it was allowed to continue along with a good number of its large banking brethren, "for the good of the country" or some other brackish backwash as that.

It is a dead entity, a zombie, and of no further use to the general welfare of either its investors or its creditors. It should be broken up, dismantled and sold for parts. I believe Dr. Nouriel Roubini stated this very same argument, possibly as long ago as early 2009, maybe even sooner.

Wipe Bank of America and Citigroup off the landscape of corporations and the rebuilding of the global economy can begin... after a few thousand other banks go down in a heap with them.

Oh, and by the way, if our weenie Attorney General Holder doesn't put the screws to BP for the life of their company, then the American people should simply stop paying taxes. The damages to our sovereign lands and waters done by this company are already in excess of $100 billion, to say nothing of the harm to commerce. If AG Holder isn't up to the task of holding this rogue company responsible, then he has no place in his position.

NASDAQ Volume 1,759,521,250
NYSE Volume 4,697,778,000

Oil was higher by 53 cents, to $76.54. Gold lost $6,30, to $1,181.70. Silver fell 24 cents, to $17.53. Check with me later, but by October, oil should be below $65 a barrel, gold should be around $1045 or lower and silver should be hovering around the $14 level.

That's all I've got for now. See you tomorrow.

SMASHING! Stock Hammered as Banks, Google Disappoint

The first week of second quarter earnings season actually came to an abrupt end on Tuesday, when all the major indices topped out after a six day rally. Wednesday and Thursday were flat-lined, as nervous investors jockeyed in and out of equities. With options expiring on Friday, the stage was set for a near-panic sell-off, and it was a doozy.

When Bank of America (BAC) and Citigroup (C) followed JP Morgan Chase's lead with unsettling results prior to Friday's open, the trade was set and sellers pounded stocks in the opening minutes. Just before 10:00 am, the university of Michigan's Consumer Sentiment Index delivered another in a series of economic blows, as the gauge fell from 76.0 in June, to 66.5 for the current month. The rout was on, as the Dow soon dipped down 200 points from the previous close.

There was no relief for stockholders in a relentless grind lower which lasted through the end of the session.

For the week, all f the major indices ended with losses, as the Dow finished 100 points lower, the NASDAQ shed 17 points, the S&P 500 surrendered 13 points and the NYSE Composite dropped 99 points.

Dow 10,097.90, -261.41 (2.52%)
NASDAQ 2,179.05, -70.03 (3.11%)
S&P 500 1,064.88, -31.60 (2.88%)
NYSE Composite 6,709.51, -207.30 (3.00%)

As expected, internals told the same stark story. Decliners pounded advancers, 5321-1154, with losers beating winners by a 7:1 margin on the NASDAQ. New highs managed to stay ahead of new lows, 150-124, though that trend is weakening and about to roll over again. Volume was not spectacular, though it was far better then the previous three sessions.

NASDAQ Volume 2,183,108,750
NYSE Volume 6,016,648,500

Stock investors were not alone in their desperation. Commodities were also pummeled in concert with the CPI reading (0.2). Crude for August delivery fell another 61 cents, to $76.01. Gold continued its recent shaky form, losing $20.10, to $1,188.00. Silver followed that lead, dropping 57 cents, to $17.77.

Gold hit its lowest level since May, though it is still well above its 200-day moving average. Silver continues to flirt with its 200-day MA, touching it again today. Any further deterioration in precious metals prices might just spread the panic through the commodity space in a deflationary sell-off.

Bank of America was the Dow's worst performer, losing 1.41, to 13.98, a decline of 9%. Citigroup fell 26 cents, to 3.90, a 6.25% loss. Google, after announcing a slight miss on earnings per share Thursday after the close, was punished with a 7$ decline, off 34.41, to 459.61.

All of this in the middle of earnings season does not bode well for bulls. The next two weeks will be interesting, to say the least, and challenging to see where any support might appear.

Yes, That Was the End of the Rally

As queried yesterday, the split decision by the major indices, resulting in paltry gains and losses across the board, appears to have signaled at least a pause of optimism for the markets.

News flows were both good and bad (depending on one's perspective) prior to the open, highlighted by JP Morgan Chase (JPM) trying to get away with reporting second quarter results which included unusual one-time gains. The usual protocol is for one-time charges or gains to be stripped out, as the vast majority of analysts predict on such a basis.

The Financial Times reports that JPM's earnings "Signal end of Wall St. rebound" and even Wall Street darling CEO Jamie Dimon couldn't get away with reporting $1.09 per share, when analysts were seeking 70 cents, excluding one-time charges. JPM decided to pad earnings by lowering their loan-loss reserves by $1.5 billion. Stripping those out, the venerable House of Morgan made 75 cents per share in the quarter, though there were likely other crafty accounting tricks employed.

For their efforts, investors sold off the nation's second-largest bank to the tune of a little more than a point at the lows of the day. When all was said and done, however, and the Wall Street connivers couldn't stand a little decline, all stocks were boosted in a furious final half-hour, which saw the Dow gain about 70 points and JP Morgan close 11 cents higher on the day, closing at 40.46.

The final push was attributed to passage of the long-overdue Financial Regulation bill by the Senate, but stocks finished mixed again. As the Dow and NASDAQ finished higher on Wednesday, today's two winners were the S&P 500 and NYSE Composite, a complete reversal. So, for the past two days, all the markets did was vaporize a lot of money.

Also prior to the open Initial jobless claims for the week reportedly totaled 429,000, down 29,000 from the previous week. Following last week's precipitous drop, continuing claims climbed by almost 250,000 to 4.68 million. Separately, the Producer Price Index (PPI) for June fell 0.5% month-over-month, another sure sign that deflation is well-entrenched.

The NY Fed Empire Manufacturing Index fell to 5.08 in July, from 19.57 in June, a seven-month low.

Industrial production gained 0.1% in June, while Capacity Utilization stalled out at 74.1% over the same span. All of these indicators cause stocks to sell off at the open, but career further and deeper into the red after 10:00 am when the Philadelphia Fed announced that their manufacturing index fell from 8.0 in June to 5.0 in July.

If there isn't a double-dip or recession headed our way, you sure can't tell it from the spate of negative statistics sprouting from every corner of the economy.

Dow 10,359.31, -7.41 (0.07%)
NASDAQ 2,249.08, -0.76 (0.03%)
S&P 500 1,096.48, +1.31 (0.12%)
NYSE Composite 6,916.81, +13.45 (0.19%)

Decliners again led advancing issues, 3601-2789, and new highs remained ahead of new lows, 172-71. Volume was weak, owing to the uncertainty of the marketplace.

NASDAQ Volume 1,980,588,625
NYSE Volume 5,214,455,500

Crude oil sold off, losing 66 cents, to $76.62, but gold was higher once more, up $1.30, to $1,208.10. Silver gained 7 cents, to $18.35. All traders in commodities are due for a rude awakening at some point, when deflationary forces can no longer be contained and demand eventually falls off a table. Those not in cash (unlike myself and ardent followers of this blog) should begin shedding all semi-liquid assets, including futures contracts, as all signs point to a resumption of the bear market, though this time bottoms could be severe - far lower than expected.

After the final bell, Google (GOOG) was ravaged as it missed analyst expectations of $6.52, by seven cents, or $6.45 per share. To understand the absurdity of Wall Street, one must realize that Google is among the most profitable companies in the world. GAAP operating income (revenues after expenses) was $2.37 billion, which is a pretty good sum of money for any three-month period. Nonetheless, some traders saw fit to wallop the stock down more than 20 points in after hours trading, or, by more than 4%.

Maybe it was a touch overvalued at $494 a share, or, 22 times earnings. Live and learn.

This earnings season can't be over with already, can it? We've just gotten started. There are sure to be wild gyrations tomorrow on options expiration and over the next two weeks, which will only be fun if you're winning.