Saturday, October 20, 2007

New Disney Thrill Ride Called The Stock Market

If you look back at other postings on this Blog you will see my warnings on the markets and the real estate problem that have been by and large ignored or minimized. Why is it that when the brokerage firms reported their problems and announced their write downs on sup-prime mortgages they and the markets went up--while when the banks reported their problem they and the markets tanked?

How bad was it today?

The S&P 500 fell 3.9 percent this week and the Dow average lost 4.1 percent. The Nasdaq declined 2.9 percent.

All 10 industry groups in the S&P 500 decreased today, with 481 of the index's 500 members posting declines. Energy shares posted the steepest decline after crude oil retreated from a record. More than 17 stocks dropped for every one that gained on the New York Stock Exchange. A gauge of stock-market volatility rose the most since March 13.

On the surface the decline would look ugly the problem for me is that I don’t think we are yet halfway thought this correction. By the end of the month we could test the August low and there is a chance that it might go lower.

People remember the August meltdown and the quick run up in the market in less than two month to new highs. I think the decline of Friday will feed on itself next week. You will see more selling as people who have profits will want to sell to protect their profits.

As the economy showed signs that it may be stronger than it was originally thought and therefore the Fed might not cut interest rtes on their Halloween meeting as of the close of the markets on Friday the futures we suggesting a 92% chance of a 25 basis points cut. Give the decline in interest rates across the entire curve on both Thursday and Friday the bond markets are pricing in much more than the 25 basis points already expected.

Gas at $4 a gallon or higher

With the move to almost $90 dollars a barrel in crude oil you have to start wondering when we will see a spike up in gas prices. We have oil at record prices yet gas is considerably lower than it was when oil was $65 after the hurricanes a few years ago. If crude were to hold in the $85 to $90 a barrel we could see $4.00 gasoline or more. With energy prices moving up at some point in time the cost of energy will impact the ability of the majority of Americans to spend. Those people at the higher income levels will not change their spending habits because gas goes to $4 a gallon or more. The question is, “How much can the high income people carry the rest of the economy?”

Inflection Point

The problems of the housing market are not just a United States problem. In the past people have been saying that the problems are contained and will not affect the rest of the economy. Clearly the housing problem is more that just the sub-prime issue. On Tuesday S&P downgrade over $23 billion dollars of mortgage bonds issues in 2007 including some that were AAA rated previously by S&P. The real estate problem is growing and people are now beginning to understand two things about this problem. First, it is far from over and second we still don’t know the total magnitude.

I would like to hope that this correction will be as quick as the one in August and it may turn out that we hit bottom by the end of October. If in fact we do hit the bottom by the end of the month the psysocilogy of the market will not at that point in time allow a quick rebound to a new high. It is entirely possible that we may have seen the high in the markets for this year. The Fed action and the policy statement by the Fed after the meeting will give us a good idea how concerned the Fed is about the economy. Strap in for a very serious volatility in this thrill ride called the market.

Dan Perkins

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