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Seeking Clarity

January 17, 2009 – 11:35 am

This week was the start of earnings season as Alcoa posted over a billion dollars in losses on Tuesday. On Monday, anticipating that the report might be worse, the market sold off. It came in at about what was expected, so on Tuesday the market tried to hold up. Selling pressure intensified on Wednesday with 90% of the volume for 90% of the stocks on the down side. That was a very strong sell off as the market appeared to want to retest the lows. A retest is normal though tough to handle if you are the one who is experiencing the fall in your asset value. Still, it is normal and a successful retest is very positive. On Thursday the low was not broken and the market turned around in mid day ending on the up side after an intraday slide of almost 300 points on the DOW, a positive sign that maybe we have seen the low in this mini cycle.

The market this week was dealing with some tough economic reports. Though most of the news was expected, the retail sales report for December showed a fall of 2.7% which was more than expected. However, I think it was the news about the banks this week that pushed the market down. Citigroup is selling assets to try and improve its balance sheet and Bank of America announced that they are in negotiations with the Fed for more money and then got it early this morning. This uncertainty is not what the stock market wants to hear.

Economic news not so well reported as the retail sales this week, was inflation which has fallen off a cliff. On the producer level for December it came in at a -1.9%. No one is talking about ‘deflation’ which is what we have at this time. The reason no one is talking about deflation is because almost every expert expects inflation to come back at some point. That will depend on the FED and when it starts to raise rates again. That is not going to happen for a long time.

Foreclosures are up strongly, especially in California. This recent spike is nothing more than a result of government interference. The government forced banks to postpone notices of foreclosures to try and work out loan defaults and all that did was push back the time line. The good news is not in the foreclosure rate. That is going to continue to be a problem long after the housing market settles down. Any good news will be in mortgage applications which were up last week another 25%. That was on top of the 25% increase the week before. Annually, applications are up 50%. Of course 85% of those applications were for refinancing, but with 30 year fixed rates falling to below 5% this bodes well for future sales of properties. As I have said before, look for a recovery to start in refinancing and sales of homes. Don’t expect prices to rise or foreclosures to fall for a while but sales are the important aspect at this time. Without an increase in sales a recovery is not going to happen.

Import prices fell in December by 4.2% and that is on top of a 7% drop in November. I wonder what this means when you consider the retail sales report? Net of auto and gas, retail sales fell 1.5% not 2.7%, but what have lower prices on everything done to the sales report? Maybe it is not as bad as we all think. Still it is not good.

It appears the market is marking time. It has established a range and is testing the low of that range. There is no great urgency to buy stocks at these very low levels as fear makes investors worry about going lower while at the same time everyone is waiting for the new president to take office and see what his stimulus package is going to look like. A huge amount of money is sitting on the sidelines paying zero to 1% interest rates. Traders are waiting for something. They just don’t know what that something is.

Maybe they are waiting for more clarity in the economy. We shall have to wait and see. Meanwhile, stock prices are at historic low prices. The market will rally but maybe it’s one to sell not buy as we struggle in this trading range.

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