When we wrote early Monday that the “morning trading could be the high we have been looking for in this rally” we didn’t think it would last a half a minute. The Dow opened up about 25 points and decided to set that as the high mark of the day. This Monday morning top has the potential to be the end of the top that has been forming over the past few days of trading. Monday the bond market picked up some strength and took in some of the money that was leaving the stock market. However you choose to look at the action on Monday, you really can’t be that bullish, many are.
In the news today, Merck said it would be laying off 11% of its workforce or about 7,000 people. The news was not good for investors as they apparently were looking for “fresh ideas” not just mere layoffs. The stock decided to drop nearly 5% on the news. The price is well off its lows of the year but this stock has not had good results especially since the news of VIOXX hit the wires. Back in late 2000, the stock traded around 90 and today closed just under 30. No, there wasn’t a three for one split, the stock value dropped by 2/3’s in the past five years, another poster child for taking profits in this current market.
The biggest news today, as we see it, was the existing home sales which showed a decline which was more than expected. More importantly, the inventory of homes for sale rose to a very high 4.8 months giving buyers a little less motivation to buy at the list price. This is what is known as a buyers’ market. So, while median prices have risen 16.6% over the past year, sales have dwindled a bit with more weakness expected. Housing slowing down is the event that we think will be the driving force in the next big recession and market decline. We have seen various signs of the housing juggernaut slowing.
Erick raised some questions out in the comments section and I will try to answer them more fully Tuesday evening but wanted to leave one thought before a close this post: The consumer here will have trouble sustaining the current level of demand for foreign goods, other than oil, and this alone could cause a global recession. As you mentioned, the US is the bully in the lunchroom. More tomorrow…
Dow Industrials: 10,890.72 -40.90 (so far, missed the closing high by 9 points)
RYVNX: 18.75
TLT: 90.96
BGEIX: 14.15
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