Oil is at $142.50.

As I said yesterday, what do you expect to happen when a tank of gas costs $70?  We were hoping for some relief but we are not getting it.  Every sell-off on the NYMEX, like the one yesterday that dropped oil back below $140 just 5 minutes before the close, is met by an after-hours pump that takes it back up.  Congress is on vacation and the speculators are going wild, driving the prices to new records.  Note the spikes in the price of oil, EVERY SINGLE DAY as we approach the close at 2:35.  Note that 75% of the week’s gains come in pre-market trading while only 1 day in the past 4 has had a close that was higher than the open - yet oil climbed $4 in 4 days!

I mentioned last night that Bush debased our currency further yesterday, taking advantage of Congress’ recess to authorize a $163Bn war spending program and to postpone a Democratic proposal to rein in Medicaid costs that had broad bipartisan support and was due to be implemented today.  All told, those two acts alone raised our 2009 (starts today) budget deficit by over $200Bn, giving us a whopping $600Bn shortfall for the year.  This is causing foreign investors to throw in the towel on America pre-market and our stocks are in free-fall this morning.

On the banking front, Lehman (LEH) adamantly denies the rumors that knocked their stock down 11% yesterday and 20% since they were floated last Wednesday, which also drove the whole financial sector down another leg.  LEH is, in fact, investing $3Bn in small hedge funds and is attempting to do business as usual even as the hyenas circle around them.  As with BSC, it doesn’t have to be true to kill the company and a crisis of confidence can force them to sell.

The Nikkei had another wild up and down day and, once again, ended up going nowhere at 13,463.  The Hang Seng was closed for a holiday but that didn’t stop the Shanghai from falling another 3%, down to 287 now while India had another nasty 500-point sell-off (3.7%) and finished below 13,000 for the first time since last April.  Banks in China were trading limit down on expectations that the PBOC will raise rates to fight inflation and the property market pulled back as DIS denied rumors which have been driving that segment that they will be building a theme park in Shanghai.  Japan’s manufacturers’ confidence is shot due to high oil prices.

It was Europe that tipped the morning markets as very poor manufacturing data combined with a 6% fall in UBS dragged the markets down to the 2.5% rule across the board.  UBS bowed to pressure and adopted new corporate-governance rules and changed their board but that isn’t stopping the US Justice department from attempting to force the bank to turn over the names of US clients who are involved in a tax shelter scandal run by UBS.

The U.K. manufacturing index slumped to 45.8 in June, its lowest level since December 2001.  "We cannot underline enough how appalling these survey findings are for activity in the manufacturing sector — a sector we had hoped would prove one of the more resilient sectors of the U.K. economy," said David Page, an economist at Investec Securities.

Way back at the beginning of the year, I predicted that American Equities would be the "least sucky" place to put our money in what we expected to be a very sucky year but what I should have said is "THE Americas" as this side of the globe has clearly kicked the collective asses of European and Asian markets by a wide margin.  In fact, on a dollar-adjusted basis, our markets only appear to be down 2% to a global investor in Q2.

Does that mean we are flattening out or that we have a long way to fall?  Is sucking less going to be good enough to bring investment dollars back to US equities?  Perhaps, it’s how we pick most of our leaders, so why not our investments…

While this morning is very disappointing already, the real question is "will we hold our levels"?  It doesn’t matter what the Dow does because it’s not the same Dow as we measured last year as Bank of America (BAC) and Chevron (CVX) have been substituted for Altria (MO) and Honeywell (HON).  MO used to be an anchor for the Dow and would typically outperform in a down market.  While CVX has posted an 8% gain for the year, BAC has dropped over 40%, exerting a tremendous drag on the index.

Other Dow zombies include General Motors (GM) - who are down 40% this quarter and off 54% for the year, AIG (AIG) - 38.8% for the Qtr and 55% for the year, General Electric (GE) - off 28% this Q and the same on the year, Citi (C) - off 22% this Q and 43% on the year, JP Morgan (JPM) - who took a 20% hit on the quarter, Pfizer (PFE) - off 16%, and Home Depot (HD) - down 16% for the quarter.  The only "good" stocks on the Dow this whole year are:  Walmart (WMT) - up 18%, IBM (IBM) - up 9%, Chevron (CVX) - up 6% and Caterpillar (CAT) - up 2%.  That’s it!  Boeing (BA) had an accident in South Carolina that will delay the Dreamliner and that should knock them to new lows today.  The Dow is off 100 points this morning as of 8:30.

This morning’s move is the move we wanted to have yesterday, a nice morning sell-off to close out the quarter, giving us a final flush to buy into.  We didn’t get it then and I have to say I’m undercovered today, especially after taking a chance on Apple (AAPL) into yesterday’s close.  We will get many retests this morning, including Apple at the $165 line, and it’s going to be very hard to get a good recovery with the market closed this Friday and Thursday being a 1/2 session so I suppose we’ll have to do a little capitulating if we can’t hold our 20% levels from Thursday’s Big Chart.

I will be most concerned with the Nasdaq holding 2,289, the Russell holding 684 and the AMEX holding 2,230 as they have been holding us up for the quarter.  The Dow finished yesterday just below the 11,354 20% line and the S&P has cushion to 1,261 before hitting that mark.  The NYSE has the most breathing room, with a 20% level at 8,310, but that can break too as we are being subjected to the same old noise about:  Recession, Iran, The Banks, Commodities, Inflation, The Auto Industry, Unemployment…  All the things that were bothering us since last year, when I ran this picture with the Dow at 14,000.

As we sit here at 11,200, with the media treating everything old like it’s new again, I have to say the only variable that has really changed is oil, which was "only" $80 at the time.  A 50% increase in the price of oil has sent the industrials tumbling 20% since then and if we are going to continue to have oil punched up $2.50 a barrel between one day’s close at the NYMEX to the next day’s open, then how can we ever expect to recover?

• Faith Doesn't Cut It - Cramer's Mad Money (8/29/08)  »
• Again With the Financials - Fast Money Recap (8/29/08)  »
• Real Disposable Income Up in Q2  »
• Percentages of Stocks Above 50-Day Moving Averages  »
• Don't Mistake Intrade for an Oracle  »

Philip Davis

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