Stocks lower as Europe Weighs Heavily on Risk Assets

Stocks simply stalled out today as the euphoria over a new year continued to wear thin and the realities of Europe took center place in the minds of investors, traders, cheaters, liars and assorted money moguls.

Ancillary to the dilemma on the Continent, US companies are weighing the potentialities of a pan-European recession, which the IMF clearly defined today in cutting their global growth estimate from 4% to 3.25% for 2012. In case anyone's interested, that 0.75% cut in growth amounts to a drop off of 18.75% in their estimate. Whether the IMF economists just throw darts at a wall in search of a politically correct "number" or actually have ferreted out the world's economy to the penny, the sense of this announcement is pretty clear. Europe is big enough to plunge the rest of the world into a prolonged recession or, at best, a slow growth regime for the next four to five years, which, on top of the past three years of uncertainty, confusion and doubt, doesn't bode well for the rest of 2012 and beyond.

The IMF also lowered their forecast for the 17 nations comprising the Eurozone, from 1.1% growth in September to -0.5% today. In ordinary terms, the IMF is calling for a mild recession in Europe, though anyone who's been following this tableau of financial terror, knows that a mere 0.5% falloff would be a rather welcome outcome.

The Peterson Institute for International Economics (PIIE) has released their January 2012 Policy Brief[PDF]. The 13-page report, authored by Peter Boone and Simon Johnson details most of the pressing issues facing Europe and the viability of the EU itself.

The authors cite five key measures towards the survivability of the Eurozone:

Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations hypercompetitive” in the near future, (3) supportive monetary policy from the ECB, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.

Let's dissect these five measures one by one.

1) an immediate program to deal with excessive sovereign debt. Like what, actually paying down debt rather than continually issuing more bonds to avoid reality?

2) far more aggressive plans to reduce budget deficits and make peripheral nations hypercompetitive” in the near future. What would Greece and Italy do to become "hypercompetitive?" Eat faster? Dance more wildly? This is ludicrous.

3) supportive monetary policy from the ECB. Somehow, that just doesn't exactly jibe with "excessive sovereign debt" outlined in #1.

4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability. Can you say "gold standard" and "kill the Euro" in the same sentence?

5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector. Banks, governments acting rationally? The authors have clearly headed into an alternate dimension.

The off-the-cuff remarks notwithstanding, Johnson and Boone come to the startling conclusion that Europe's problems are not going to be fixed either easily nor soon, saying, in their conclusion, "Europe’s economy remains, therefore, in a dangerous state."

Well, somebody tell the stock jocks that their portfolios are about to shrink.

Elsewhere, Greece talks to get private investors on board for a voluntary "haircut" have stalled out once again, as there continues to be no deal on restructuring Greece's largely unpayable debt, while on Wall Street volume dried up completely in advance of tomorrow's FOMC non-eventful rate policy announcement and subsequent (ZZZZZZZZZZZZ) press conference.

Yes, it was another bang-up session for US equities. Now might be a good time to escape, like the hordes of other individual investors already have, having absolutely no confidence in markets, the government, or the sustainability of our glorious "recovery."

After the bell, the legacy of Steve Jobs lived on just a little longer as Apple (AAPL) delivered bang-up 4th quarter results, while Yahoo (YHOO) missed revenue and earnings estimates for the umpteenth consecutive time. It's very telling that Yahoo hasn't been acquired by now. Apparently, any interested buyers are content to wait until it simply disappears from the internet.

Dow 12,675.75, -33.07 (0.26%)
NASDAQ 2,786.64, +2.47 (0.09%)
S&P 500 1,314.65, -1.35 (0.10%)
NYSE Composite 7,840.65, -14.87 (0.19%)
NASDAQ Volume 1,659,757,875
NYSE Volume 3,671,223,750
Combined NYSE & NASDAQ Advance - Decline: 3138-2409 (lots of UNCH today)
Combined NYSE & NASDAQ New highs - New lows: 141-24
WTI crude oil: 98.95, -0.63
Gold: 1,664.50, -13.80
Silver: 31.98, -0.30

Markets Take Pause, But, If Everything Is so Swell, Why are Gold and Silver Soaring?

While it was somewhat expected for stocks to take Monday off after the successful ramp-up of the past four weeks leading directly into options expiry on Friday, what is more befuddling to anyone with at least half a brain (and all of our readers have fully-engaged complete brains, we are quite sure) is the stratospheric rise in the precious metals, gold and silver, since the end of last year.

In the case of gold, which plummeted to its lowest level since July 7, 2011, precisely on the last trading day of the year, December 29, at 1531.00, the close today at 1,678.30 in New York represents a move of 8.8% to the upside in 2012, easily outpacing the much-ballyhooed gains in the stock market over the same span.

Silver's move from 26.16 on December 29 to its close today of 32.27 is an even bigger move of 18.9% if one was able - or willing - to catch the falling knife precisely at its bottom.

Conventional thinking on precious metals and their relationship to stocks and currencies is rather straightforward. If risk assets, such as stocks are rising, gold and silver, the safe havens, should be lower or, at best, flat, and a strengthening currency would also serve to flatten the price of the metals.

However, the dollar was particularly strong over the first part of the new year, rising, according to the Dollar Index (^DXY) from 79.61 to 81.52 on January 13 before taking a dive back to its close today at 79.70, coming up relatively flat itself in the new year.

A theory on the price and manipulation of gold may be useful in understanding why gold has been so strong. First, the price collapse in the latter half of 2011 may have been a coordinated attempt by the fiat-crazed central banks to make gold look more like a risk asset than a safe haven, as it's gain for the year was a paltry 9.35% (from 1400 to 1531). The same scenario could be applied to the less-liquid silver market.

Understandably, not everyone ascribes to the manipulation theories, so the moves lower at the end of 2011 could have just been year-end selling or profit-taking. Whatever the case, the sellers in late December are now kicking themselves in January.

This does not explain why stocks and precious metals are rising at the same time, though it might be a bit of front-running in the metals as opposed to a pure hope and hype new year rally which Wall Street seems to find irresistible (as in, they do it almost every year). With January options expiration behind us, it will be interesting to keep track of these various price levels (dollar index, S&P, Dow, NASDAQ) going forward.

With Wall Street off to a flying start of the new year, even in the face of sub-par GDP growth worldwide in 2012, one may be suspect of this most recent slow-motion rally in stocks, yet hopeful that the precious metals would continue their decade-long bull run. Just today, Christine Lagarde, head of the IMF, politicked for a larger European bailout fund of up to $1 trillion, and mentioned that the IMF would be lowering its global GDP forecast, due out tomorrow, though she would not be specific on the size or scope of the reduction.

In New York, stocks vacillated across the flat line, ending with a split decision and overall flat close. The FOMC of the Fed begins a two-day rate policy meeting tomorrow, with the usually-suspect Wall Street crowd hoping for some signal on a renewal of QE, as a means by which to boost their bottom lines, risk free, though an outright commitment by the Fed at this time is unlikely. There would need to be more signs of sluggishness in the economy, which, after the past four weeks of stocks rallying and fairly benign economic data, have yet to surface.

Dow 12,708.82, -11.66 (0.09%)
NASDAQ 2,784.17, -2.53 (0.09%)
S&P 500 1,316.00, +0.62 (0.05%)
NYSE Composite 7,855.52, +26.19 (0.33%)
NASDAQ Volume 1,689,429,500
NYSE Volume 3,744,960,500
Combined NYSE & NASDAQ Advance - Decline: 2898-2637
Combined NYSE & NASDAQ New highs - New lows: 203-11 (yes, this is extreme)
WTI crude oil: 99.58, +1.25
Gold: 1,678.30, + 14.30
Silver: 32.27, +0.60

Nice Day for Dow Industrials, Thanks to IBM; Housing Fix Not In

Stocks continued their happy saunter through the cold of January, with the Dow Jones Industrials posting another nearly-100-point gain, thanks in large part to IBM (up 7.98 to 188.50 (+4.42%) on solid 4th quarter earnings reported after the bell Thursday), which accounted for half of the Dow's gain all by itself.

The other indices lagged far behind the Blue Chips, courtesy of Google's (GOOG) worst earnings miss in six years, reporting a profit of $2.7 billion on revenue of $10.6 billion, well below Wall Street non-GAAP estimates of $9.50 per share versus an estimate of $10.46. Whoops! Shares of the internet behemoth were down 53.58 points, a loss of better-than eight percent.

Two other tech titans - Microsoft (MSFT) and Intel (INTC) - reported excellent quarters, helping to keep the montl-long rally going. The Dow, S&P and NYSE Composite were up each of the four trading days this week; the NASDAQ fell just short, losing 1.63, despite a valiant, last-half-hour rally.

Despite the outstanding gains from the last half of December through today, there are signs of trouble, and the fact that today marked options expiry, may lead to declines next week as more companies report. With just about 20% of the S&P 500 having reported, only 55% have beaten expectations, a ten year low. The average for the past ten years has been that 62% of companies beat street estimates. Considering that the big banks have all reported already - and all of them matched or beat - this does not bode well for the bulk of reporting companies which are set to report over the next two weeks.

Meanwhile, the Dow is back at levels last seen in mid-July, today's close just missing (four points) making a six-month high. It will be interesting to see if the Dow can crack through next week and continue onward toward exceeding the 2011 high of 12810.54 made on April 29. Yes, it's getting a bit frothy. The word for next week is likely to be "overbought," as in "we're market pumping day-traders who don't give a hoot about fundamentals, just making a profit."

So far, the advance-decline and new highs-new lows indicators are showing no sign of an impending correction, but, with the Dow up nearly 1000 points in just the past four weeks, a short correction would be something a healthy market would fully appreciate.

One other item that may be a canary in the coal mine is the nice rise in gold over the past few weeks, including a healthy advance today, and, finally, silver caught a bid over the past few sessions, finally breaking and holding over the artificial resistance at $30/ounce.

On CNBC today, the network featured a series of reports on housing, calling it, somewhat inappropriately, "The Big Fix." Hottest among the topics was the government plan to sell off Fannie Mae and Freddie Mac's inventory of foreclosed homes (REO) to investor groups which will turn these single-family homes scattered across the country into rental units.

As is usual with government's half-baked plans, there are a rash of questions and arguments against, primarily centered around the whole fairness issue of kicking families out and then reselling - at what should be huge discounts - to well-heeled investors more concerned with turning profits than restoring blighted neighborhoods. The plan is still in the formative stages, but there are indications that the government will allow the investors to rent to whomsoever they please, which would include welfare and other social program recipients, meaning that homeowners ought to be on guard for the ghetto-ization and balkanization of their McMansion neighborhoods, such as is the case in other socialized nations, notably France, where the ghettos are in the suburbs, far from the uber-rich in the well-maintained cites.

One other problem is that the banks - if they actually do the right thing and write down these loans - will be facing far larger write-downs on bulk sales than anticipated. Since the US economy has been predicated for the past six years on keeping the banks free from losses, the government plan looks like a classic election-year crash and burn before it even gets going.

Dow 12,720.48, +96.50 (0.76%)
NASDAQ 2,786.70, -1.63 (0.06%)
S&P 500 1,315.38, +0.88 (0.07%)
NYSE Compos 7,829.34, +9.97 (0.13%)
NASDAQ Volume 1,979,837,250
NYSE Volume 3,911,913,250
Combined NYSE & NASDAQ Advance - Decline: 3289-2274
Combined NYSE & NASDAQ New highs - New lows: 182-26
WTI crude oil: 98.46, -1.93
Gold: 1,664.00, +9.50
Silver: 31.68, +1.17

Amazing Stock Market Rally Rolls Along

One of the oldest adages of stock market investing is the time-honored, "the markets can remain irrational longer than you can remain solvent," or something to that effect.

This is particularly poignant in the midst of the current Wall Street "melt-up" which has been ongoing since the middle of December and shows little sign of letting up.

While corporate earnings continue to flow, the latest being from two big banks, Morgan Stanley (MS) and Bank of America (BAC), both of which met or exceeded expectations, though the accounting tricks and tactics employed by the mega-banks leave much to the imagination.

As far as Bank of America is concerned, their beat of expectations of 13 cents per share with a reported 15 cents included a bunch of one-time items and useful reserve and loan loss calculations, embedded deep within their monstrous 110-page quarterly report. Despite the discrepancies in the quarterly, Bank of America bounced higher again today, closing at 6.95, a 15 cent gain, after popping above $7 per share for the first time since Warren Buffett invested $5 billion in the bank in early 2011.

Morgan Stanley actually lost money for the quarter, but lost quite a bit less than expected. The firm’s net loss was $250 million, or 15 cents a share, compared with profit of $836 million, or 41 cents, a year earlier. The consensus expectation was for a loss of 57 cents per share. Traders took the data in stride, boosting the stock to its highest level since October. In this case, even P.T. Barnum would be proud, noting that "there's a sucker born every minute." All the better for momentum chasers in this beat-up financial.

There was a dose of economic data that surprised some and annoyed others, notably bearish investors. Initial unemployment claims came in at a sparkling 352,000 - the lowest number in months - after last week's upwardly revised 402,000. The unemployment figures continue to be a topic of some debate, in that the "seasonally-adjusted" model used by the BLS seems to have forgotten that December was holiday season, chock full of part time and temporary hires. Whatever the case, traders seemed less-than-satisfied with the numbers, as the markets began slowly but ground slowly higher through the session.

December CPI came in flat, after yesterday's -0.1% drop in the PPI, sparking fears of "disinflation" (a Federal reserve governor term) or deflation, the bogey man that haunts Fed chairman Ben Benanke.

Housing starts and building permits were flat to lower, though new home builders have been leading this rally, up more than 10% as a group since the first of the year.

How much longer can the rally last? Tomorrow being options expiration, one would think a major sell-off is in the cards for either Friday afternoon or Monday, though, as stated at the top of this piece, rationality is generally not a hallmark of recent rallies.

If you've not already taken part in this wild market ride, it may be a little late. Stocks are getting extremely overbought, as the advance-decline and new highs vs. new lows figures have been telegraphing lately.

Adding to the upside has been the unusually quiet tones coming out of Europe, as opposed to the rather hysterical daily dispatches that typified the latter half of 2011. Nothing's really changed over there, except perception, perhaps. Europe is mostly headed for a recession, which will hit the middle classes, though Greece, in particular, in already in the throes of a fiscal straightjacket which some might say is emulating a full-blown depression. To the Greeks, most of europe is saying "pay up," to which the Greeks respond with "shut up" or some other suitable and more demonstrable phraseology.

The long and short of it, if one is of the camp that believes a strong stock market is a proxy for a strong general economy, 2012 is shaping up to be a banner year or at least a good effort at kicking the can of economic woes down the road until after the elections in November.

Throwing a bit of cold water on the rally parade, as expected, Eastman Kodak (EK) filed for bankruptcy protection today, and Republican presidential nominee hopeful Mitt Romney has been found to have a number of accounts and holdings in off-shore banks, notably in the Cayman Islands, setting the stage - if he's the nominee - for a battle of ideologies between him as the ultimate one percenter and President Obama as the champion of the 99%.

While that may make for great TV, it's hardly honest, as President O'banker is about as 1% elitist as one can get without actually admitting to it.

Dow 12,625.19, +46.24 (0.37%)
NASDAQ 2,788.33, +18.62 (0.67%)
S&P 500 1,314.50, +6.46 (0.49%)
NYSE Composite 7,819.36, +52.41 (0.67%)
NASDAQ Volume 1,974,862,250
NYSE Volume 4,442,754,500
Combined NYSE & NASDAQ Advance - Decline: 3454-2119
Combined NYSE & NASDAQ New highs - New lows: 261-26 (yes, 10-1 is a bit extreme)
WTI crude oil: 100.39, -0.20
Gold: 1,654.50, -5.40
Silver: 30.51, -0.03

Non-stop Rally Continues As Financials Lead

Editor's Note: Apologies for the brevity and lateness of today's missive. Technical issues required a call to the hated internet service provider, Time Warner, whose tech specialists could not solve the problem, though after an hour on the phone with said tech specialists, intrepid publisher, Fearless Rick, solved the problems all by himself, proving there's something to be said for resourcefulness and self-sufficiency.

Either there's something in the drinking water at the lower end of Manhattan or, from what the stock markets are telling us, there's no reason not to be fully invested in US stocks, as they continue to rise virtually every day since the last weeks of December.

Putting aside the issues of Greece and the rest of Europe, the fact that most of the largest US banks were insolvent just a few years ago and probably still are today, the huge number of unemployed persons in the US, the 84% disapproval rating of the US congress and various other issues, US stocks apparently look like the buys of the century to the people buying them.

Consider that beginning with December 19, 2011, the Dow Jones Industrials, in the span of 19 trading sessions, has risen an incredible 812 points, or, an average of nearly 43 points per session. In the same period, the S&P has added 102 points while the NASDAQ popped for 246 points, a gain of about 9%, which would be a great return for an ordinary year, but an absolutely insane rise in the span of just one month.

What strikes one as odd is that these outsize gains began on the Monday following options expiration in December, just as we approach January options expiration. While it might be simply serendipitous, the flow of money into options has been outstanding over the past few months, and that fact alone might help explain at least a portion of the insane gains of the past four weeks.

It could also be that Wall Street traders aren't overly concerned about the issues outlined above, or are at least somewhat oblivious to them. Then again, most of ordinary Americans hold stocks in mutual funds or retirement plans, so, to them, the stock market is more spectator sport than participant-guided.

Could it be that fears of the imminent demise of the Euro are overblown, or is Wall Street purposely blowing smoke up the collective behinds of the American public?

Whatever the case, some small fortunes - and perhaps a couple of big ones - have been made in just the past month. Carry on, because the next thing you'll know is that the unemployment rate will drop like a rock off a bridge, Iran will suddenly give up on its plans to develop a nuclear arsenal and unicorns will spit gold nuggets.

Dow 12,578.95, +96.88 (0.78%)
NASDAQ 2,769.71, +41.63 (1.53%)
S&P 500 1,308.04, +14.37 (1.11%)
NYSE Composite 7,766.95, +96.48 (1.26%)
NASDAQ Volume 2,035,416,625
NYSE Volume 4,096,162,500
Combined NYSE & NASDAQ Advance - Decline: 4400-1251
Combined NYSE & NASDAQ New highs - New lows: 207-31
WTI crude oil: 100.59, -0.12
Gold: 1,659.90, +4.30
Silver: 30.54, +0.41