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.

Stocks down on higher unemployment

Dow dropped 105 to 11082 getting close to the 10962 low close of Jul 15. This is testing time, I think the support will not hold. Decliners are over advancers 4-1 and NAZ is down 28. The S&P 500 FINANCIALS INDEX is down 2 to 279. After the 5 day relief rally following July 15 low, it had risen to 277. Oils are down 2% & the Alerian MLP index dropped 5 to 259. This selling is testing the 2 year low, 258, reached a few weeks ago.

There is plenty of gloomy news about the economy. The Labor Dept reported the jobless rate rose to 6.1% as 84K jobs were lost in Aug (vs forecasts of 75K).

•Payrolls in U.S. Fall More Than Forecast; Jobless Rate at Five-Year High

The foreclosure rate in Q2 rose to 1.19%, highest rate in 29 years. The mortgage mess will continue bringing additional significant mortgage writedowns in Q3 & Q4.

•Mortgage Foreclosures in U.S. Rise at Fastest Pace in Almost Three Decades

Merrill Lynch (MER), down 72¢, the largest brokerage firm, was downgraded to "sell" by Goldman Sachs. They were "battered by more than $40 billion of credit market writedowns" which summarizes thinking for the sell recommendation.

Merrill Lynch Cut to `Sell' at Goldman; Credit-Market Writedowns May Rise


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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'

Early market optimism fades by day's end

Dow fell, after rising 250 out of the gate, ended down 26, decliners were slightly ahead of advancers while NAZ was down 18. Exxon-Mobil (XOM), Chevron (CVX) & Alcoa (AA), all commodity related, led the Dow lower. The Alerian MLP index slipped 2 to 271, remaining in its trading range for the last couple of months. Oil settled at 109.71 (after recovering from early day lows in the 105s), down 5¾. That sell-off did not carry the day. NYSE volume, while ahead of last week's very low volume, remained weak under 1.2B. At its best, S&P 500 FINANCIALS INDEX was up 11, but ended up 5 at 290. Optimism in the AM gave way to realism in the PM. Lower oil prices sounded very good, but reality sunk in that lower oil prices are caused by lower worldwide demand for oil. Fears that an economic slowdown worldwide will bleed into the strong tech sector gave a big decline for NAZ.

The buyout of Lehman (LEH) by the Korean Development Bank is back on again after going on-off for a few days. The stock is not sure what do make of it, LEH remained little changed at 16.06 as stockholders realize they will not be getting top dollar in any buyout.

Lehman-Korea Deal May Be CEO Fuld's Last Hurrah- Tech

The US and now the worldwide economy are getting greater attention as the slowdown in the US is causing others to slow. The financial mess with massive mortgage writedowns drags on. More macro economic news is coming this week which will give a better understanding on the economic & banking problems.

Very good rally on very light volume

Dow was up 89, advancers over decliners 7-2 & NAZ rose 20. All this on very light NYSE volume of 0.8B. The last 5 days have been the lightest volume days in the year. All stocks I follow were in the green, very good, but light volume suggests no conviction. S&P 500 FINANCIALS INDEX rose 4½ to 275. Oil ended up 2 on threats from Gustav:

• Oil Ends Higher as Gustav Spins Toward Gulf- AP

CLV08.NYM -- Crude Oil Oct 08 -- 118.43 -- up 2.16 (1.86%)


Fannie Mae (FNM) & Freddie Mac (FRE) sold notes indicating they are healthy, to a degree. The premiums over Treasury rates keep climbing indicating investors see these as risky securities. Some think their ability for self financing means the Federal Reserve will have NOT have to come up with a rescue plan. I don't think so, watch for developments this weekend!

•Fannie, Freddie Sell $3 Billion of Debt, Suggesting Rescue Isn't Imminent


Ugly news on big mortgage mess continues. In Q2, S&L's had $14B in mortgage writedowns. They set aside 3.68% of their assets for writedowns vs just 0.38% last year. Washington Mutual, the largest in the country, is now a $3 stock.

• US Thrifts Lost $5.4B in 2Q, Second Most Ever- AP

Alerian MLP Index - 3 months

The Alerian MLP index chart for the last 3 months shows after being caught up in selling has been slugging it out, trying to climb from the recent low at 258. In the last couple of months, 275 has been a ceiling it hasn't been able to crack, now the index is making another attempt. For those interested, the 200 day moving average (at 285) is also shown. Over the last year, the index has had similar kind of short run moves but rally attempts have stalled out. The record high last year was 342. This year, it has been living under 300.