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The Economic Line

November 21, 2008 – 7:19 pm

The economic news this week was actually positive; not great and certainly reflecting a weak economy, but inflation fell sharply as expected and industrial production rose sharply, though only because the month before was so bad. Still, production was up. Core inflation fell for the first time since 1982 and of course that fall was lead by significantly lower gas prices. Lower gas prices are good for the consumer as it puts money in their pocket on a consistent basis instead of a one time shot in the arm that the tax rebate achieved.

Housing starts fell by 4.5% in October from September as the builders keep trying to slow construction so that inventory can be absorbed. In California, with much lower prices, we saw a spike in sales up over 60% in October from depressed levels. Inventory is starting to shrink but it is not certain how much of that is due to the various programs to keep homeowners in their houses that might be causing a short term delay in foreclosures. The various schemes to keep homeowners in their houses may have unintended consequences. I fear that if you give some homeowners a reduced mortgage or better terms those homeowners who are making their payments but struggling will stop making payments just to get the better deal their neighbor is getting. This is a dangerous move.

The stock market failed to hold the October lows for the stock indexes. We are at the same mark as we were in 2001 when the bubble burst and collapsed the market. That is what the traders are all looking at as support, the 2001 lows. Of course they did that for the October lows as well and it didn’t work.

At some point the market will hold and begin to recover. America is not going to disappear and we will claw our way out of this economic slump. The economic news is poor and will look worse before it gets better but stock prices are reflecting an extreme recession or depression. Stock prices will recover at the depths of a recession. Are we there or will it be deeper? The market is trying to figure that out.

It is not helping that we have a lame duck President and the President elect is being very silent on his plans. The market is assuming the worst and is not happy.

In our portfolios we are very heavy in cash, a little short and very defensive long in all programs. The market is almost down 50% for the year. We too have lost money this year just not as much as the overall market or most of our competitors. It’s unpleasant to say the least. We will recover and the market will recover. The turn, when it comes, will be dramatic. It’s a matter of when, not if; we just have to hold the line until it does.

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