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Turnaround Tuesday a Downer for Stocks - Money Matters for 10/04/05 Don Bravo | 10/04/05
US Equity markets staged a stunning turnabout today as concerns over corporate profits and inflation due to higher energy costs sent sellers high anxiety. The Dow Jones Industrials suffered their worst loss in two weeks on very high volume, signaling that investors may have had enough worrying and are now taking action with wholesale selling.
While the economic picture for US companies is surely in poor form, there is growing concern over the continuing ineptitude, cronyism, corruption and looming criminal investigations at the highest levels of the federal government, to say nothing of continuing deceitful scare tactics regarding the presupposed onset of the pandemic avian flu.
Stocks will no doubt react to earnings news, but entire markets are prone to political fiasco and folly. Now nearly through five years of the Bush administration, the American people have been hit by the worst attack on our homeland by foreign enemies ever, an unjustified war, the complete mishandling of the hurricane Katrina disaster, soaring energy prices, lower real wages, massive budget deficits, the largest ever foreign trade deficit, the disintegration of the airline industry, a stagnant economy and now the possibility of a severe recession.
How long American investors and corporate leaders will go along with the status quo and accept administration policies unquestionably is now coming into focus. The movement to unseat the Bush administration has reached epic proportions, though many in the opposition feel betrayed by Democratic party leaders. There is a palpable feeling that things are coming apart at the seams on political, social and economic fronts.
If that is the case, one of the first places it will be noted will be in the equity markets, where policy comes straight from the pocket and mistakes are swiftly corrected. The mood of the market continues to deteriorate and that only causes more pain down the pike. This market, which has been mostly flat for 18 months, is just about ready to spiral downward as problems swirl about mostly unresolved.
What's odd about today in particular is that the natural trend of the market rising as oil falls did not hold true. Oil prices would have to come down quite a bit more - say to the $45/barrel level - before Wall Street would breathe a sigh of relief. There are market forces at work, but it remains to be seen whether or not they will kick in before the economy comes to a screeching halt under the weight of fear and government fiat.
The bond markets continue to lean closer to actual realization of recession. An inverted yield curve has a 100% correlation to recession and the 2 and 3-year bond yields reached equilibrium again today. This is the fifth or sixth time the 2 and 3-year yields have achieved this state. Trouble occurs when the yield on the 2 year surpasses that of the 3-year, or when any shorter-maturity yield exceeds any longer-maturity yield.
The bond market is extremely sophisticated and sensitive to economic realities and a powerful forecaster. When short term debt becomes riskier than longer terms, inversion occurs in rare circumstances. Things like hurricanes, flu epidemics, political upheavals and/or assassinations and other near term disruptions cause higher short term rates and that's what we're seeing today. It is apparent that the tipping point is upon us.
BY THE NUMBERS
Dow Jones: -94.37; 10,441.11 close
NYSE Advancers: 1111
Nasdaq Advancers: 1192
NYSE New Highs: 223
Nasdaq New Highs: 147
Gold: 0.00; 469.30 close
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