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Manic Market

November 15, 2008 – 9:02 am
Bulls and Bears

Bulls and Bears

There was very little economic data out this week until today. The market continued its manic depressant ways falling sharply for two days and then Thursday up 500 points. Then this morning with the one important economic stat out, retail sales for October, the market sold off early. Sales were down sharply but few people looked deeper to see that sales in gasoline and autos caused the bulk of the downdraft. Still the report was weak, with retailers guiding lower on the future, and previous months were revised downward so it was not a good report. Falling gas prices is a very good thing so that part of the retail sales report needs to be ignored. Also, I am thinking that auto sales have been so bad that they are likely to improve in the months ahead especially with gas on a nationwide basis breaking the $2.00 per gallon level. We are going to see some aggressive sales pitches for cars and likely some improvement will result.

Despite the extreme low valuations, worries continue to plague stocks that the recession may be deeper and longer than the stock prices reflect. It appears the massive selling by Hedge Funds that were heavily leveraged, meaning they borrowed huge amounts of money to invest in the stock market in one way or another, has unwound. Most of that reckless investing is reflected in the market. They were going long commodities and short the U.S. dollar for months and it appears that has come to a halt.

Interest rates, and in particular the LIBOR, are still coming down and are approaching normal levels though it is still elevated. Mortgage rates have fallen this week but are still high with a 30 year fixed mortgage loan at about 6% when the Fed Fund rate is 1%. That spread is much higher than normal and mortgage rates should fall. The problem is that the banks are afraid to loan. They are dealing with increasing default rates that continue to impact their liquidity. They are not sure how deep these defaults will cut into their cash position so they have increased their loan standards to such a degree that it discourages borrowing; this despite the government willing to provide them cheap money. Freddie Mac and Fannie Mae are doing their part, willing to buy the loans and TARP (Troubled Asset Relief Program) is starting to buy questionable loans from banks. Of course this program is just beginning as mentioned by Paulson this week.

Home sales are increasing in California and we will see the second month in a row with an increase in the numbers though prices are still falling. Next week we should see the nationwide numbers for October.

The government will be bailing out the auto industry as well, though their problem has nothing to do with the liquidity problem. Their biggest problem is old union contracts that require them to pay huge pension and medical benefits. Also, they were caught with a lineup of big gas guzzler cars at a time when gas prices skyrocketed while we entered a recession, a confluence of circumstances that may mean the U.S. auto industry won’t survive without government help. Obama will bail them out with a lot of strings that are likely to keep union jobs but is probably not the wisest idea. The important issue is will our U.S. companies change their ways planning for cars that have a better future as drivers demand more fuel efficient vehicles. Despite much lower oil prices I think car buyers have changed their buying habits and will be looking for more hybrid and fuel efficient vehicles.

The stock market has retested the October lows. Will it hold? If it does this will be a triple bottom and history tells us that the market should rally. However, if it does not and breaks down below that triple bottom then we will have another strong down leg to the market. Cash is king but you need to start buying, concentrating on high growth and high dividend type stocks. If we break below the recent lows then your cash cushion will help greatly and it will not hurt to use the inverse ETFs that go up when the market goes down. It is too early yet for the inverse funds because the lows are holding. On Thursday, the big up day, we sold a number of stocks and mutual funds. We are being very careful at this time.

  1. 2 Responses to “Manic Market”

  2. Great post. I will read your posts frequently. Added you to the RSS reader.

    By Susan Kishner on Nov 15, 2008

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  2. Nov 15, 2008: Interest Rates » Manic Market | InvestTalk Podcast & Blog

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