Wednesday, October 15, 2008

And You Thought All the Problems Were Solved.

So, you thought that the market goes up 1,000 points and the worst is over and it is onward and up from here. We Americans want everything solved over night and we get very impatient when we do not get what we want when we want it. I warned you on Monday night that we had a 20% gain form the low on Friday and that it was possible to add another 5% or about 450 points, but then I felt we had to correct. We started Tuesday with a 450 point gain only to close down for the day. Here we are two days later and we have already given back over 450 points of the 1,450 point gain.

I suggested that we might have to prove that the bottom of last Friday was the true bottom in this cycle. I am not convinced that we will test the bottom this time around. I think as I pointed out that I would expect to see selling pressure by people who did not sell on the recent decline, but would take advantage of any rallies to sell and raise cash.

This selling will, at some point in time, exhaust itself and then I think the market will move sharply higher after all the selling is done. Once we have another sharp advance that will be the time to build additional cash. It is after the next sharp rally that I expect the market test the previous low around 7,800 on the Dow.

Let me make one thing clear, these are guesstimates on my part and may or may not happen. I am trying to give my readers some guidelines as to what I think could happen and what action you should be taking if what I think will happen does happen.

On Monday, I suggested that you follow both the one and three month LIBOR interest rates to get a feeling for what is happening in the credit markets. A falling LIBOR interest rate would indicate that money is beginning to flow. As of this morning, the one and three LIBOR interest rates were 4.36% and 4.55% respectively. These LIBOR interest rates are more than 25 basis points lower than they were on Monday. I will post the LIBOR interest rates at the Blog site so you can see what is happening.

I do want to point out something that is important that is going on in the credit markets. All of the trouble we have had revolves around the problems in the mortgage market. As the government issues more debt to deal with the liquidity problems 10 and 30-year interest rates on Treasuries are rising rapidly. It will be difficult to refi mortgages with even higher interest rates. If people cannot afford their current mortgage interest rate, they clearly will not be able to refi at a higher interest rate. This divergence in interest rates tells me that the Federal Reserve Open Market Committee will either cut rates at their meeting at the end of the month or change their bias to cutting rates in the future.

Make sure you are strapped in because it will be a bumpy ride for a while.

Dan Perkins


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