Running on Empty
Following Asia’s lead last Monday, sentiment before the New York stock market open measured negative in reaction to European political uncertainty. As the day wore on, the Dow oscillated around the key 13000 level while stocks in general traded flat. The real story related to the U.S. Treasury bond which declined to a 1.88% interest rate, buoyed by concern over the euro.
Throughout the day, both the German and French markets climbed steadily to erase their initial losses. French stocks traded almost euphorically—rising over 1.5% by the close. Apparently, the plan to spend other people’s money still has traction in Eiffel Tower land. By the end of the day, the Dow held above 13000 with bloated IBM aiding its fall. The other indices traded flat, VXO dropped to about 18, and volume was light moderate.
Tuesday, stocks started lower with continuing concerns over Europe weighing on sentiment. The Dow blew through the 13000 mark down below 12900 before recovering. Both gold and silver suffered sharp declines in the morning with silver crashing through the $30/oz level and gold flirting with dropping below $1600/oz. As mentioned here many times before, on a fundamental basis both of these metals have much farther to fall before they approach production cost so this decline comes as no surprise.
High securities prices reflect the larger phenomenon set in place by the Federal Reserve’s scheme to grossly overvalue assets by grossly undervaluing interest rates. The U.S. Treasury bond rate dipped to 1.84%. It looked to me like a “flight-to-quality” or “risk-off” move as precious metals and the stock market dropped together. Perhaps over-leveraged stock speculators, already starting to feel the pain of the current very mild stock market decline, have already resorted to selling precious metals to generate cash to cover losses or meet margin requirements.
While European stock markets fell strongly, through the afternoon and particularly after 2 PM, U.S. stocks recovered somewhat—for no particular reason. The Dow still closed well below 13000 on moderate, but higher than normal volume. The VXO moved above 20 before settling back to close at 18.65.
Wednesday began with stocks again lower on continuing concern over Europe and especially with Greece. The Dow early dropped below 12800 but recovered somewhat to close above that level by the close. Notably, the VXO closed above the significant 20 level—indicating fear has returned to the stock market. Spanish 10-year bond rates shot up to over 6% again as European fears deepened. With silver down below 30 yesterday, gold broke below its 1600 level.
Last summer I mentioned the PRPFX indicator. Again we can see it has crossed its 200-day moving average. If the central bankers restrain themselves this time, perhaps this indicator will confirm the trend.
Stocks went nowhere Thursday on moderate volume. The VXO dropped a point to move it back beneath the critical 20 level, but AAII investor sentiment moved to strongly bearish. Four Federal Reserve bank heads spoke—keeping their public relations fires burning brightly.
In the silver lining department, one pathetic headline announced that the Dow closed up for the first time in six days. That big up move in the Dow was a whopping 19 points or 0.16%—not much to write home about. IBM, which benefits greatly from its presence in major indices, hung on to close just barely above the 200 level.
After the close, JP Morgan reported more billions lost to bad trades. That hammered the stock itself as well as associated stock market indices. In Asia Friday the Nikkei (once nearly 40,000) closed below 9000 while the Hang Seng closed below 20,000. China reported more figures indicating the continuing slowdown there.
I wonder if Mr. Bernanke understands the carnage that the perpetual low rates policy has wreaked on Japan? I suppose he believes that in his case, we have a “new paradigm.” Here’s a pretty good article laying out the sugar-high effects of central bank monetary easing operations on the stock market.
China reported more figures indicating the continuing slowdown there. Spanish 10-year bond rates continued to hover right at the critical 6% mark. With 200K+ dropping off of the U.S. extended unemployment gravy train this week, we can expect further pressure on stocks in the coming days. Oil also dropped sharply while silver and gold continued their declines.
A positive preliminary consumer sentiment reading for May cheered investors. Demand rotated back to technology a bit while fleeing from banks and ditching commodities. This allowed the NASDAQ to close nearly unchanged during a slightly down day for the Dow and S&P on light to moderate volume.
For the week, silver and gold free-fell (5%), while stocks retreated further (1%) and fear grew with VXO closing at 20.56. The upcoming IPO of Farcebook, a company with a few billion dollars in annual revenue, will provide further insight into the valuation madness rampant on Wall Street. It should be an interesting week.
Filed under: Investment
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