Friday morning Quarterbacking of the week on Wall Street August 8-12. by Bill Gee
Friday, August 12, 2011
For those of us who have a personal or professional interest in observing the markets for the past week, the week of August 8 through 12 is going to be one to remember. Already this week has been compared to similar weeks in 2008 just before some of the world’s largest financial institutions fell into the history books and left us with mountains of additional debt and a looming Depression that is likely to consume us for the next decade.
Friday, August 5th
Following the historic embarrassment of the Debt Ceiling Debate, investors breathed a collective sigh of relief knowing that the government was not going to shut down anytime soon. Unfortunately, the debate itself with its walkouts, filibusters and angry rhetoric, caused Standard & Poors to follow through with their threat of downgrading the nation’s credit rating from AAA to AA+. On Thursday the markets saw a major drop due mostly due to Europe, so S&P waited until after the close of trading on Friday to make their announcement.
Monday, August 8th
Despite numerous excuses and recriminations of S&P, the markets reacted badly on Monday. All of the major indexes lost over 5% of its value throughout the entire world. Adding insult to injury, S&P downgraded Fannie Mae & Freddie Mac to AA+, which they should have done on Friday because the reasons for the downgrade were the same as for Treasuries. Ironically, rather than going up, bond yields on 10-year Treasury notes went down as investors divested their stocks and went to the relative safety of US Treasuries despite the downgrade.
Tuesday, August 9th
Investors licked their wounds on Tuesday and recovered some of the losses they endured on Monday. The big news was that the Federal Open Market Committee (FOMC) was scheduled to make an announcement at 2:15 EST. In that announcement, the Fed announced that they will keep interest rates at historic lows through at least mid-2013, and that they are considering other options to keep bond rates down. Translation: The Fed will probably start buying Treasuries in the Fall as part of QE3. Investors first thought that was bad news, then they thought it was good news, and ended the day up just under 4%.
Wednesday, August 10th
Reality struck home at mid-week when investors realized that the Fed really didn’t say anything useful at all on Tuesday. Also on Wednesday, bank stocks took a major tumble when investors finally came to the realization that most of the value on the balance sheets of companies like Bank of America are made up of subprime mortgage loans that are probably not worth anything. In the end, most major indexes were down over 5%.
Thursday, August 11th
By Thursday investors were looking for any excuse to inject some optimism into the markets. They got it by the Department of Labor’s unemployment report, which showed that the number of people applying for and receiving unemployment insurance went down in July. Good news, right? The markets certainly thought so. They recovered most of their losses from Wednesday. Unfortunately, that unemployment figure is VERY misleading. We already know that very few new jobs were created in July, to why the sudden drop in unemployment insurance. The answer is that thousands of people who collected unemployment expired their benefits. What it also tells us is that employers aren’t laying off too many new workers because they have already cut as much as they can and still stay in business. Other bad news on Thursday was a widening trade gap, which signals that domestic production in the US is going down.
Another interesting development on Thursday was the bond yield rates for US Treasuries. They reached all-time lows on Wednesday, which signals that despite the ratings downgrade, investors cannot seem to get enough of them, but then surged up on Thursday, which may signal a slowdown in bond purchases. The continued popularity of US Bonds runs counter to any logic that I can think of and I can only speculate that investors are dumping their European Sovereign Debt in favor of the US because they know that at least until December, there is no risk of any default, which is what you cannot say about any bond outside of Germany in the Euro Zone.
As of this writing, stock futures are up, but we are already seeing signs that Friday is going to finish up with a bang. First, several European countries have banned Short Selling of bank stocks. This was counterproductive in 2008 and it will probably be counterproductive today. Gold continues is upward climb into record territory, which indicates that many investors are anticipating a currency crisis in the near future. (Not a good sign) My guess is that this wild ride to the bottom is far from over as good news continues to be blown out of proportion and bad news continues to be ignored until it becomes too big to ignore any more.
My advice to those who own stock or 401K’s is this. It’s already too late to sell, so just hold on tight and hope for a "dead duck bounce" where you can sell and still recover some of what you lost over the past two weeks.
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