Dow plunges again, this time 514

Another brutal day in the stock market is becoming routine as the Dow looks like it wants to test recent lows. Not sure how many times I said that before, only the numbers were different (i.e. higher):


Dow Jones Industrials --- 2 weeks





Dow sank 514, decliners over advancers 5-1 & NAZ dropped another 81. The markets sold off badly in the last couple hours, maybe the hedge funds guys are back selling again! However, this time there was buying in the last 20 mins which limited the severity of the loss for the Dow to "only" 500. The S&P 500 FINANCIALS INDEX dropped 15 to 196 approaching the 184 low reached just a couple of weeks ago. The Alerian MLP Index was down 5 to 213, giving back some of its big gains in the last couple of weeks. Junk bond funds (with yields well over 15%) sold off, but they sell off on any excuse.

The Dow Jones REIT dropped 13, that's 8%, into 5 year low territory. Many REIT yields are well into double digits in an environment where all dividends are under suspicious. This brings buying opportunities for those who think locking up high yields for the long term will make for great investments as they did at the start of this decade. Simon Property (SPG), one of the largest & best run REITs, has fallen in half from its peak last year, bringing its relatively "modest" yield to over 6%:


Dow Jones REIT Index --- 5 years






And oil continues to sink to new lows. If there is a prime mover, it's about being in a global slowdown & a long recession. In Asian trading, they keep bringing up the concept of demand destruction (high prices destroying demand). I guess they feel this is sort of payback time for those high prices in the summer:

CLZ08.NYM

Crude Oil Dec 08

....66.82

.... 5.36 .... (7.4%)

As an aside, gold plunged 45 to 721, a 14 month low. The world economy has big problems & bank fixes are nice but not solving fundamental problems.

In this atmosphere of confusion & fright, there is strong demand for T-bills where the annualized rate of interest for the 90 day T-bill is only 1%. This represents another use for proceeds from stock sales. Earnings continue to be center stage & the messages are not encouraging. Markets are bleeding & today's actions show with these dreary earnings reports there be more bleeding.

Financial worries continue to drag down markets

Dow is down 83, decliners over advancers a big 5-1 & NAX is down a more mild 9. Financials are leading the way down on more worries about Lehman (LEH), now at $4, & its ability to survive. The vultures keep circling:

•Lehman Plummets as Goldman, Merrill, Citigroup Analysts Cite Credit Risks

S&P 500 FINANCIALS INDEX

Value...273.00___Change.. (8.39)___ %Change ... (3.0%)

Washington Mutual (WM), the largest S&L in the country is down to 1.90, fearing they may need to raise a lot more capital to help cover $19B in losses from mortgage writedowns.

•WaMu Plunges on Concern It May Have to Raise Capital; Short Positions Rise

Do you want more headaches? American International Group (AIG), a Dow stock & until recently the largest insurer in the world, is down over 3 to 14 (a 15 year low). The stock's decline has been reviewed here & it looks like their financial condition is going from bad to worse. They get credit for knowing the insurance business, but wandered far afield which has brought them billions in losses. Now there are increasing doubts about their ability to recovery.

American International Group



The US is not alone in stock market suffering. Markets are falling around the world. Asian markets are taking big beatings. They worry about weaker demand from customers, with the US being their biggest customer. Strength in the dollar is making matters worse bringing up more talk about demand destruction.

Back to routine economic news, while jobless claims fell slightly to 445K last week, the number on jobless rolls climbed to 3½MM, highest number in 5 years. Times remain tough.

•Jobless Benefit Rolls in U.S. Reach 3.52 Million, Highest Level Since 2003

A back-burner news story is oil, down pennies to the 102s as the hurricane approaches Texas. Once again, demand destruction is reducing demand for oil & related fuel products limiting worries about potential storm damage.

S&P 500 declines are becoming very serious. Earlier this year, many were talking about 1270 being a key support level. It's been living under that for a few months. Now they are watching the Jul 15 low, 1200. We're just inches away at 1223 (as with Dow retesting the 10,962 closing low). Markets are all playing defense & it looks like dreary results will continue.

Meager energy, not Lehman, rally

Dow finally rallied, but not on Lehman announcements, instead on a technical rally for energy group. Financials did not lead or even participate in the gains. Dow rose 37 (earlier gains of 100+ points were lost in the last hour), advancers were about 20% ahead of decliners & NAZ was up 19. NYSE volume was basically medium, almost 1.6B. Financials were lower as Lehman news (or confusion) was not taken well:

S&P 500 FINANCIALS INDEX

Value ... 281.39 __Change ..(2.02) % __Change...(0.7%)

Lehman (LEH) was down 59¢ to 7.20 on confusion about their complicated restructuring plans. This confusion overhanging the markets (especially financials) will keep away buyers for some time:

• Lehman Tries to Soothe Wall Street With Asset Sale- AP

Not helping the financial index, the cost of protecting against bank credit default has risen after all the recent, very ugly news. Washington Mutual (WM), the largest S&L, is now a $2 stock:

•Washington Mutual, Lehman Lead Increase in Bank Bond Risk to 6-Month High

On the plus side, gains were led by energy despite lower oil prices. Chevron (CVX) & Exxon-Mobil (XOM), Dow stocks, were each up 3% in a technical or overdo rally (from being oversold). As shown in the Yahoo financial badge on the right, The Alerian MLP index was down pennies at its roughly 3 year low. Oil was down pennies in the 102s. Oil, as with all commodities, is clearly on defense, trying to hold off the wave of recent selling. The concept of Demand Destruction, talked about by foreign analysts, is taking control of these markets. Also the stronger dollar is making matters worse for commodity bulls. The Euro has fallen to $1.40, down about 20¢, in the last few weeks.

In my focus on MLPs, I have been ignoring REITs & junk bond funds which I also like. REITs had a minor rally in recent days, but very little & off very depressed levels. Junk bonds continue in the dumps with yields over 12%, more than triple those available on Treasury bonds. Historically, this is one of the widest spreads ever seen. While REITs have mortgage exposure, they're the borrowers not lenders. Their yields are 4-6% for some leaders & higher (even into double digits) for other quality companies. Both groups deserve more respect as these high yields will make taking the sideways (if not lower) markets easier to take.

Markets waffle

After a 150+ drop by the Dow in early hours, markets recovered & settled down. Dow was up 32, S&P 500 gained 5, advancers equaled decliners & NAZ dropped 3. NYSE volume continues to drift along at 1.2B. Financials had a very good day. The S&P 500 FINANCIALS INDEX rose 9 (3%) to 290, still range-bound in recent weeks. Lehman (LEH) rose 1+ on rumors about selling assets. REITs recorded good gains, but junk bond funds continue to drift along at depressed levels offering 12+% yields. In the oils, Exxon Mobil (XOM) & Chevron (CVX), Dow stocks, dropped about 1% each. Exxon is at an 18 month low, the pullback in oil prices is hurting prospects.

Oil was down but closed above 105 & change, a previous close considered very important by day traders:

CLV08.NYM

.. Crude Oil Oct 08

...106.52

.... 1.37 .. (1.3%)

Alerian MLP index --- 2 years





The Alerian MLP index dropped 3 to 261. At midday it was at the 2 year low of 258 recorded a few weeks ago, then rallied in the PM to cut its losses. The graph illustrates the importance of sub 260 levels. Two years ago, it came off a flat period in the prior year for a sustained rise only to max out at 342. In the last year it lost all rally gains.

Demand destruction was talked about again last night by Asian analysts. They say this is what is dragging markets down, both here & foreign markets. Higher inflation is forcing customers to cut back purchases causing slowdowns in many economies.

Changes in foreign currencies will also impact the US economy, particularly exports which has been the strong sector of the US economy. The Euro has fallen to under $1.43 or 10% in the last couple of months while the ¥ rose from under 100 to 110 before settling back to 107s. The stronger dollar will make US exports more expensive to foreigners.

Let me close with another brief mention about junk (high yield) bonds. They continue to get no respect, even in today's rally for financials. They offer 12+% yields with no mortgage exposure and much better fundamentals than during the 2 previous major downturns (1990 & 2000 periods). Their traditional spread over Treasuries has been around 400-450 basis points. Today that spread has doubled. The very brave may want to check out high yield bond funds.

One ugly day

Dow tumbled 344, decliners over advancers 5-1 and NAZ was down 74, making for the kind of day that has become routine this year. NYSE volume continues modest at 1.3B. The S&P 500 FINANCIALS INDEX got slapped hard today, down 14 to 281, just above 277 reached 2 days after the 232 low set on Jul 15. Financials dropped 5% after bond's biggest investor, Bill Gross, warned of a "financial tsunami" (mentioned in my AM post & linked on his name here).

Crude oil for October fell to settle under $108. This was oil's 5th straight decline & the lowest settlement price since April 4. The Alerian MLP index dropped 3 to 264s approaching its 2 year low, 258, reached last month.

CLV08.NYM

.. Crude Oil Oct 08

... 107.99

... 1.36 (1.2%)

Demand destruction is a phrase used a lot by analysts in Asia, thanks to night time visits with them on Asia-CNBC. It is what it sounds like, high prices for commodities destroys demand. This is most visible with oil, but affects all commodities after their recent fall from their price peaks. They say this could be the fundamental cause for the fall in oil prices & the rest of the commodity group.

Earlier this year, analysts were talking about 1270 on the S&P 500 being an important support line. The graph below shows that it has held fairly well, allowing for limited minor dips below in the last couple of months. Today at 1236 it's testing the soggy floor (1200+) again. But this time the S&P 500 has declined for 4 consecutive days, worst performance since Jan.

S&P 500 --- YTD

With all the attention paid to oil & weather recently, don't forget about the mortgage mess & other problems with the large financial institutions. Lehman (LEH) is trying to wriggle out of its mortgage portfolio so as to get a better price for selling itself to an outsider. With the low quality of these assets, this could drag on for days or even weeks (not a help to other financials).

•Lehman Mulls Plan to Shift $32 Billion of Mortgage Assets to a `Bad Bank'