Thursday, January 24, 2008

The Government's Plan to Save the Economy

Top Line: Continuing in the line of reasoning that the market has found a short term bottom, we think the bulls are now breathing a sigh of relief. How long will it last? Not very long, so hopefully they will enjoy it.

We, here at the Update, have enjoyed the down draft in stocks and now we need patience to wait out another rally. Any rally should be short lived but still could result in a pretty powerful move. Such is the nature of bear market rallies, sharp and confusing.

Thursday's news was the Big Rebate program sponsored by the government. This package is supposed to stimulate the economy by putting some extra money in the hands of the lower income households. And, there is an increase in the so called conforming mortgage loan.

Fannie Mae and Freddie Mac have been telling us that they could help the mortgage crisis by providing funds to "jumbo" type loans, so called Non-conforming loans. They say that this will put more liquidity back in the market for these types of loans. Why? Because the investors could then buy pools of mortgages with a pretty solid Fannie or Freddie guarantee on it. At least this part of the plan has the possibility of actually stimulating the economy but we don't think this part is enough.

As you know, the Update's position on the economy is that it will go into a recession Because of the housing market and all things related to it. Thursday's report on the existing home sales was pretty dismal with that number dropping 2.2% from November to December. The full drop from 2006 to 2007 was about 13% while the price drop December 2006 to December 2007 was 6%. Still no signs of recovery.

Two interesting items were in the news on Thursday. The first was an article by Greg Ip of the WSJ discussing the credibility of the Fed and how some are criticizing the Fed for being too easily swayed by the stock market. Greg Ip is known as a well informed Fed reporter and most articles in the WSJ about the Fed directly are written by him.

The second item is something you may have read about, that being the Société Générale trader who supposedly lost $7 billion in trading their account. The consideration is that the company was trading in the European Markets on Monday, a US stock market holiday so there would have been light trading around the world. The trading they were doing was to sell some assets to cover some of their losses. We don't like to speculate on these things but the story is interesting. Part of the news item mentioned that the Fed may have triggered a huge rate reduction on Tuesday morning After the price damage had been done by these trades.

We'll see if more info comes out over the next few days. Something for you to watch but just the fact that the article is out there tells you that the world is starting to discredit the Fed which is something we see happening this year in a big way. Their rate cuts will have no effect on the economy because the people have changed the way they do things, paying off debt or defaulting on it, and concentrating on setting up a new life without falling into debt troubles.

In our last post, we mentioned that we would take a stab at predicting a high in the market. We have a range based on normal retracement levels and that range is between 12,400 and 12,750. You see that the Dow is near 12,400 and that is why it had a little trouble on Thursday to push much higher. There is room to move up to 12,750 and we think that number is very close to where this rally will end.

After the close this evening, MSFT reported their earnings and the market interpreted them as good so we see the US futures markets are higher along with a big move in Asia again tonight.

FSI: 85.72 (down 19.4% on the year)

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