As if preparing for a spectacular suicide, stocks once again rampaged higher, blithely ignoring yet one more glaring sign that the financial system is falling apart. The Dow settled up 179 points on the day, seemingly oblivious to a distress flare fired into the sky by Citigroup.  The beleaguered banking giant told the Associated Press that about $6 billion of mostly municipal debt auctions for which it had been the lead underwriter had failed the previous day. This came on top of a half-dozen other similar offerings in the auction-rate securities market that had failed prior to Tuesday.

Auction-rate securities (ARS), a $250 billion market, serve effectively as a money-market vehicles for corporations, pension funds and other institutional investors. The actual securities – long-term bonds and preferred stocks whose interest rates are reset at short intervals – have long been treated as cash equivalents. However, the resets are typically at 7, 28, 35 or 49 days, and a precipitous price decline between adjustments can create very significant losses for corporate investors. Bristol-Myers Squibb, for one, took a $250 million charge earlier this month on auction-rate securities in which it had invested $811 million.  Other ARS losers named in a recent Merrill Lynch report included 3M, Foundry Networks and Texas Instruments. However, thousands of companies use auction rate securities, so the problems that have shown up so far could be just the tip of the iceberg.

The Psychotic Three

If such developments were weighing heavily on the financial sector yesterday, they had little apparent impact on the broad averages. The psychotics in particular – Apple, Google and Research In Motion – all soared, with gains, respectively, of 3.5 percent, 3 percent, and 5.5 percent. Even the financial stocks managed to eke out small gains by day’s end. Citigroup, for one, closed up 8 cents, at 26.29,while Merrill, at 52.32, showed an 84-cent gain. The upward lurch of stocks in the face of a gathering financial disaster should come as no surprise to readers, since, as we have continually pointed out, the buying is being driven almost entirely by short-covering. Which is to imply that neither “bad” news nor rational concerns will end the current spree, only the complete capitulation of bears. For our part, we have been mostly watching from the sidelines, scalp-trading now and then in the Rick’s Picks chat room while remaining wary at all times of the stock market’s ability to stand logic on its head. We would suggest being especially careful going into President Day weekend, since the stock market will be able to strike with vicious opportunism when U.S. investors are on holiday.

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Kiss Your Guru Good-Bye

When the Hidden Pivot seminar that was held last weekend sold out, I added an additional session on March 8-9. If you’d like to attend, click here  for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.

Last Call, Australians!

I will also be offering a Hidden Pivot class next week that is tailored to the scheduling needs of students from Australia, New Zealand and Singapore. If you live in Sydney, this seminar will take place on February 21-22 (Thursday and Friday), from 3:30 p.m. to 7 p.m. These hours will also work for early risers in Western Europe.  For further details, click here.  You can also register directly by clicking here, then on the “Upcoming” tab.