by Sam Collins 09/25/08
Investors again focused on the hearings in Washington on Wednesday. As the lawmakers delved more deeply into the workings of the Bush administration's proposal to buy up to $700 billion in illiquid assets, the less the public seemed willing to back the plan.
Fed Chairman Ben Bernanke explicitly warned that the crisis was a grave threat. But he seemed to rule out a quick interest-rate cut as part of the package and said that the magnitude of the downside risks would jump through the roof if Congress failed to act.
When asked for specific reasons to give to constituents, the chairman said that if the deal failed to get congressional support, every American would feel "direct" negative effects if the credit crunch was allowed to continue or worsen. Also, that it would be difficult to get loans for autos and other necessities, and that it would be hard for small businesses to expand.
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When pressed further, Bernanke went on to say, "It will affect the unemployment rate. It will affect job creation. It will affect real incomes. It will affect everyone's standard of living. It is much more than car loans. It is really about the overall performance of the U.S. economy, perhaps over a period of years."
Although the market sagged at the end of the day, it had a strong opening after Warren Buffett said that his Berkshire Hathaway (BRKB) would be buying $5 billion of 10% perpetual preferred stock in Goldman Sachs (GS).
Berkshire also received warrants to buy an additional $5 billion in common stock at a price of $115 that can be exercised anytime over the next five years. His enthusiasm for a bargain brought buyers to Goldman's common stock, which rose 6.36%.
In other news, existing home sales were down 2.2% in August and the median price fell 9.5% in the past year to $203,100. The inventory of unsold homes fell to 4.26 million, a decline of 7% -- the biggest drop since December 2006.
At the close, the Dow Jones Industrial Average (DJI) was down 29 points to 10,825. The S&P 500 (SPX) fell just over two points to 1,186 and the Nasdaq (NASD) was up two points, closing at 2,156.
The New York Stock Exchange traded just under 1.1 billion shares, with decliners ahead of advancers by 4-to-3. On the Nasdaq, 727 million shares traded with decliners ahead by 2-to-1.
Crude oil fell, with the November contract down 88 cents, closing at $105.73 a barrel. The Amex Energy SPDR (XLE) gained 20 cents to close at $67.89.
The December gold contract closed up $3.80 to $895 per troy ounce, and the PHLX Gold/Silver Index (XAU) gained 58 cents, closing at $145.63. A 50% retracement of the fall from mid-July to mid-September would result in a rally for the XAU to $158. Yesterday at the close its intraday high of $149.20 was almost exactly at the 50-day moving average, which could serve as resistance before making a drive to $158.
What the Markets Are Saying
Last Thursday's reversal from Dow (DJI) 1,133.50 may prove to be a bear-market low. If so, future technicians will no doubt use it as an example of a fully sold-out market with a combination of high-volume reversals, extremely bearish sentiment indicators, and internal indicators that are well below normal correction levels.
The CBOE Volatility Index (VIX) and CBOE Nasdaq Volatility Index (VXN) numbers, which have held for most of the year at very low levels, vaulted to highs normally associated with major bottoms, and volume set a new NYSE record on the reversal.
So why doesn't it feel like a low?
Mainly because of the dire predictions of politicians and key officials who warn daily of gloom and doom if the current rescue package isn't passed and now has the market pinched into a narrow trading range.
But that may be the best that we can expect for now. When the pressure is finally off, perhaps we'll see a rush to buy. At least one big investor, The Oracle of Omaha, put his money up and Mr. Buffett is seldom wrong.
With all of the turmoil and even fear surrounding the government testimony yesterday, it was curious to see the homebuilders jump on the news that inventories were down. Here's a sample of the stocks: Centex (CTX) was up 8.8%, DR Horton (DHI) up 6.1 %, Lennar (LEN) up 16.2%, and Toll Bros. (TOL) up 4.46%.
For those with the spirit to buy when stocks are cheap, like "The Oracle," this group may offer some value. Many successful investors have followed the "buy straw hats in winter" theme but patience and high levels of courage are required to make it work.
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Today's Trading Landscape
Earnings to be reported include: Accenture (ACN), Aehr Test Systems (AEHR), Amarin (AMRN), Analogic Corp (ALOG), Authentidate Holding Corp (ADAT), Bonso Electronics Int'l (BNSO), Chattem (CHTT), Christopher & Banks (CBK), CRA Int'l (CRAI), Diamond Foods (DMND), Discover Financial Services (DFS) and Finish Line (FINL).
McCormick & Co (MKC), Media Sciences Int'l (MSII), Pioneer Behavioral Health (PHC), Research in Motion Ltd (RIMM), Rite Aid Corp (RAD), Scholastic (SCHL), Smart Modular Technologies (SMOD), Spectrum Control (SPEC), Texas Industries (TXI), Tibco Software (TIBX), and Vail Resorts (MTN).
The following economic reports are due today: initial jobless claims for the week of Sept. 20 (the consensus expects negative 10,000), August durable goods orders (the consensus expects negative 1.4%), August new home sales (the consensus expects negative1.4%), and the DJ-BTMU Business Barometer for Sept. 13.
HSBC (HBC) said it is not interested in buying UBS (UBS). General Electric (GE) cut its Q3 earnings outlook to 43-48 cents from 50-54 cents but will maintain its dividend of $1.24 through 2009.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
