Friday, January 4, 2008

Perhaps the Third Time is not a Charm

On Friday, the markets had two shocks, first the employment data that showed a low number of jobs created and some downward revisions from the previous month. The most disturbing news to me, was the unemployment rate jumping to 5%. For the first 4-trading day in the New Year, the Dow Jones is off 486 points. The Dow Jones, S&P 500 closed the week near the August lows.

In the last 5 months there have been three corrections of at least 10%.The question for Monday morning is will the third assault result in a oversold rally or are we headed much lower? I was watching an interview with Wayne Angle the former Federal Reserve Governor. He said and I quote, ”At the January meeting the open market committee needs to cut the Fed Fund interest rate by 100 basis points”.

I understand his point that the Fed has to shake the markets and tell the markets the Fed knows what it is doing. While Mr. Angel is an important person I think a move of 100, basis point would shock the market to lower lows. I do think the Fed is behind the curve, but 100 basis points may be the right amount for the first 6 months, but not in one shot.

The Fed Funds Futures are pointing to a better than 50% chance of a 50 basis points cut on January 30. I think we are not in the same position we were in August. The credit markets are in much better shape than they were in August. I do not want to lead you to believe that we have solved all of the problems with the banks and investment banks we have not. In fact, we will get a better idea how bad things are when the banks and the investment banks report earnings later this month.

For those of you who read this Blog that are my clients you understand my investment approach is to be paid while we wait. The power of earning interest and or dividends came home to roost this week. Those companies that paid a high level of dividends fared much better in the decline of this week.

If the Fed does reduce, interest rates by 100, basis points during the first half of the year those investments that pay a high yield will out perform those that do not. Therefore, not only will you get paid while you wait but also you could see some nice appreciation.

Depending on what you watched or listened to today the results of the Iowa primary captured more time than the decline in the market. How was it possible for Hillary to come in third? I did see one of the money show hosts asked the question “Was the sell off because of the results out of results in Iowa?” The answer was no, but lets see what happens next Tuesday.

I said in a posting earlier this week that I felt we may not yet know the party candidates yet. Clearly, the initial results in Iowa showed that the traditional Democrats and Republican parties were rejected in Iowa.

Dan Perkins

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