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Where DID I put that Crystal Ball?

February 13, 2009 – 7:33 pm

There was not a lot of economic news out this week other than the nebulous plans put forth by our government. There was great disappointment with our new Treasury Secretary’s ‘outline’ of a plan to help the financial industry, when the expectation was for a ‘plan’. There were no details and everyone wanted to see those details. The market was led to believe that there was going to be a ‘plan’ and that means details. The market crashed on Tuesday because of it. The only economic news of note was retail sales for January which were up 1% when the expectation was for it to be down. That is not much to cheer about but it is a nice surprise and better than a fall.

As the week progressed the market tried to find its footing. On Thursday an intraday collapse of over 200 points on the DOW was erased in the last hour of trading. That was a very large recovery in a short period of time. The support levels are trying to hold. They are 8,000 on the DOW and 800 on the S&P 500. This is the third test of that support. Will it hold or give up this level? That is the question on everyone’s mind.

The world economy is suffering. The recession is deep and will be long. It is already long and there are many who think it will last through the first two quarters of this year and that sometime in late 2009 GDP will start to show improvement. That assumption is based on a continued improvement in the financial system world wide. There has been improvement, but it has been very incremental. The new efforts by governments may or may not work as the first efforts have shown us that it is not just as simple as pouring money into the system. That money is important but that is not the cure-all for what ails our economy.

There are major issues in our economy but it all started with bubbles. The dot.com bubble with cheap money burst in 2000, the housing bubble burst in 2006 and its cause was cheap money. Cheap easy money will always cause a bubble in some asset category. Today we have cheap money, maybe not easy to get but low in price, so there will be another bubble produced somewhere. The key to preventing another bubble will be when that cheap money is withdrawn and dealing with the result. We need the cheap money to get us out of our current economic malaise. The most likely result of this cheap money this time is inflation. A rise in commodity prices worldwide is a likely result. A rise in interest rates is going to happen.

The speed and timing of removing this excess liquidity is going to be very important. Geithner said this week that his fear is that the government will withdraw liquidity too soon. I think it is just the opposite. They are likely to error in leaving the tap of cash wide open too long.

There will be a recovery in both our economy and the stock market and the market will be first. The stock market is a leading indicator and has always rallied long before any sign of an economic rally. The time frame is anywhere from 1 month to 1 year. On average the rally will happen 4 or 5 months before the economy shows signs of recovery.

So ‘when’ is the most important question. Some think we are in a spiral that will take us to the Great Depression levels. Anything is possible but that is unlikely. We have not seen a deep recession like the one we are in since 1973 and 1974. The current problem is tracking that recession very closely. If that is so, we are close to a bottom and those economists that have been calling for a recovery to start later this year will be vindicated. If that is true stocks can rally at any time.

Where is that crystal ball? No one knows anything for certain but you have to act on the probabilities not the possibilities. Meanwhile we are keeping our tight stops in and ready to exit if support does not hold.

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