Top Line: We have been in a bear market since early 2000. What we have been seeing in the last four years is a long countertrend rally in the bear. Since October, we have started to see the real teeth of the bear showing again. Looking at recent trading, the market Looks oversold but this is a rather complicated condition. In bull markets the market can remain in an overbought position for a long time, this is normal. Now that we have moved to a bear market, the market can now be oversold for longer periods of time. After all there are more sellers generally.
Last week saw a wide variety of confusion by a great number of people. The Fed in its infinite wisdom has chosen the path of lower interest rates to try to prevent a stock market collapse. We see Jim Grant has written a great op-ed piece for the New York Times which we encourage you to read. The government has announced the large rebate program to spur spending and keep the economy going. Monday evening we will get the SOTU (State of the Union) address from the long time president who is in his last year.
The central theme of the powers that be seems to be that they don't think we're going into a recession but we need to take some steps to insure we don't. Why is it that they think the country is so ignorant? Maybe the people truly do think that what these people say is true and they will continue to spend. The problem has been that credit has been driving the economy and more credit will not solve the problem. That's what the Fed seems to think.
Well, we keep thinking that the Fed is primarily concerned with the banking system which drives their decisions. The credit crunch of the past year has been difficult for the banks but now that the problem has spilled over to the stock market, the Fed has to do something more visible to the public. For those who have saved some money, the rate cuts are going to push returns down. The whole idea is to get people to spend the money they saved.
The government is now trying to promise they will do all they can to help the economy. The presidential debates are now focusing on the economy with the Iraq war fading from view. The more we write about this situation the worse it seems. We said a long time ago that the economy's destiny has been set and very little can stop it. Government and the Fed have now joined forces to get the people spending.
We read an article in the Minneapolis Star Tribune that we felt we needed to share. It portrays what is going on in the country, people trying to tighten their belts, so to speak.
The stock market decided to drop on Friday in a very bearish way. The market opened up very strong getting a boost from the earnings news from MSFT. MSFT itself opened up nearly 2 full points. The open was probably the high for the day as the market leaked all day long with only short periods of time when flat trading occurred to stop the bleeding.
The Dow opened up 200 points and ended down 171 for over a 350 point reversal. This happened going into the weekend following the Fed's great mid-meeting 75 bps rate cut and preceeding the Fed's almost certain 50 bps more on Tuesday.
As we write, there is a selloff going on in Asia with the US futures taking their lead from Asia. The US futures are down about 1% with Asia down 3-5% right now. Of course, all of this could change by morning but a bad Friday can bring a poor Monday morning, especially in a bear market.