Sunday, January 06, 2008

2008 Part One

Top Line: After last week's poor performance, more analysts are talking about a decline in the market due to a recession. This is definitely new on the horizon. They are also hoping for a rate cut of 50 bps at this month's FOMC so that they can confidently declare the second half recovery. Haven't we seen that movie already? Since we are getting close to 12,500, we will need to be paying very close attention to what the market is saying.

The stock market had a very poor week with the Dow posting some strong down days and the NASDAQ actually breaking some support. Even the FSI is back near 100 and that level on the verge of giving way to lower prices. The steady hum of negative news has provided plenty of bearish press over the weekend.

The jobs' report was bad with only 18K new jobs created compared to 115K for November. The unemployment rate rose from 4.7% to 5.0%. The expected numbers were for 70K jobs and a little increase to 4.8% unemployment. And, we read that the birth/death addition to the number was 66K, meaning without it, the jobs number would have been a loss of 38K [mis-typed, s/b 48K]. Barron's was the source of that figure along with a report that for the year 2007, 89% of the new jobs reported in 2007 were from the birth/death model.

2008 Preview Part One:

In the short term we have been looking at a move to 12,500 and with the Dow sitting on 12,800 we think the Dow is ready for a break in 2008. It's been struggling to go up for several years now and it must be tired. Plus, the economy is showing signs of fatigue as well.

Housing: Our mainstay has been the housing situation. 2007 was the year that the public started to feel the pinch of lower prices and tougher credit. The ATM they live in decided to take a break. The 2007 holiday buying season may have been funded by credit cards but that routine is about to stop. The ability for people to borrow money from their houses to pay off miscellaneous debt has been challenged both in terms of the willingness of the lenders and the ability to service the debt by the borrowers. In 2008, this is going to be a big problem.

Deflation: With so much emphasis being placed on the falling dollar and rising oil, we thought it was time to discuss the inflation situation. As everyone knows, the Fed chairman has been focused on providing liquidity to the bond market and he has done this in several ways in late 2007 and is continuing in early 2008. The problem is that the flight to safety in the Treasury bonds is continuing with some possible pauses on occasion. What is really going on is that the world has turned and the credit expansion is now going to turn to credit contraction giving way to deflation. During 2008 there will be some realization of this and the Fed will be powerless to prevent it despite the strong opinions to the contrary from Helicopter Ben. Our premise continues to be that the housing contraction will lead this credit contraction into deflation...We think that deflation will be a big topic for the Update in 2008 so we'll move on to the commodities.

Gold: At the moment, gold is trading at or near all time highs along with oil. Some grains are trading magnificently higher. So, the central bankers have added liquidity and where has the money gone? First, it went into stocks then into real estate and now into commodities. We continue to see the central bankers, especially the Fed, trying to maintain bubbles to put off what has become an inevitable recession.

Recession: We are confident about a recession being announced in 2008, one that may have already started. December did not show us very good numbers at all so far and we expect more bad news. The mood of the people is one of hesitation now rather than confidence. We see this as a strong signal that the shift in sentiment is occuring. Confidence means people will buy things on credit (increasing their debt) but hesitation will cause people to consider what they are buying. The cost of gas and food and paying for that expensive house they live in will put a crimp in their expense budget for other items. We must clarify that the expensive house may be getting cheaper but in the mean time the mortgage has not changed. Living on the margin of this kind is a dangerous place to be.

More during the rest of the week...

FSI: 99.94

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