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Consumer Confidence & Market Recovery

January 23, 2009 – 12:35 pm

This week was dominated by the new President taking the oath and grabbing the reins of power. The day of the inauguration the stock market had its worst day in history for that first day of a new administration. I don’t think that means much at this point but it is an interesting fact. More important is that the market tested support levels that day and the next day bounced up sharply from those lows. What will be important is the follow-through.

On the day the market fell it was because of bad news in the banking industry. That news was replaced with good strong earnings reports from IBM on Monday night and some very good news from different large banks that had earnings rather than losses. That was a surprise. After hours on Tuesday Apple reported numbers that were very good but before the opening on Thursday Microsoft reported poor earnings. That scared the market badly, so down it went to retest the lows it bounced off of the day before. The market is very nervous. It is looking for something from Obama. The banking sector is searching for something to help it. I think we need the same thing we needed in the dark days of the Savings and Loans bank crisis of 30 years ago and that is setting up a separate entity to take the troubled loans off the banks’ balance sheets. That is the solution. Also, that does not mean necessarily it will ultimately cost us much. Those assets have value if you wait long enough to realize a good price for them.

We are past the middle of earnings season with good and bad numbers being reported. On balance, at least so far, you have to be fairly pleased. I think there was wide expectation that earnings were going to be terrible. They were poor but overall they showed that there are companies growing their incomes even in the current poor economic conditions.

Now it’s up to confidence building by our new President and his team. Will the spending package be a net positive and when might that happen? What will they spend the second half of the TARP money on? Will any of this massive spending help? One thing is certain: there will be massive waste. Whenever the government spends money there is a lot of waste. Don’t buy in that there will be no pork spending. If there isn’t, as Obama promises despite his best intention, it will be the first time in history. Just like pet projects the Republicans spent on, the Democrats will do the same. Let’s just hope the net results will be good for our economy.

Frankly, I think our economy will recover on its own. We are in a normal deep recession. One in which we will see unemployment reach 8 to 10%, where the GDP will shrink for several quarters and where prices for all things go down. This will be a health restoring event- it’s just very painful to live through.

When can we expect the banking crisis to end? That is what the stock market is trying to determine. Once they know, or at least when they think they know, stock prices will begin a long recovery. For the near term we are looking at very choppy waters. There will be rallies and retests of lows. Every stock market bottom acts this way. So far the lows made in October and November are holding. This is the real test. As long as they hold and the longer they hold the more positive the prospects. If the lows do not hold then we are in for a down stroke in equity prices. If we go lower we are looking at history making events. 2008 was the second worst year in history and you have to go back to the Great Depression to make comparisons. The 1973 to 1974 market is a close third, both for the market and the economy. In fact that market is a very good comparison with this market. What happened in 1975? The market rallied strongly.

If you own stocks hold them unless the stock market breaks the low. If that happens exit and wait for another bottom to be put in. If you have cash slowly invest it. The bottom is close if not already in. Also, keep your stops close. Let them take you out of the market if need be. Caution is the word that should describe your approach but long term this market is going to go higher; it’s the short term that is the worry.

One final word. The U.S. economy ‘will’ recover. It always has and always will.

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