Top Line: The market has now given its first signal that it still wants to go down. Most would say that a pullback was in order on Wednesday after the big runup on Tuesday, but they wouldn't necessarily agree to a 75% retracement being in order. We are firmly in bearish territory especially since the Fed must be exhausted after its crazy week of actions.
What will you tell your descendants about this week's news? We are writing it and we still can't believe what we write. Our title describes our sentiments almost perfectly, with a stunned look on our face as we say it. We draw a distinction, if you can indulge us, between pure stupidity and genuine ignorance. To us, stupid is that you know better but you do it anyway. Ignorance just means you didn't know so how could you have done any different.
Let's make sure you all know what we are talking about when we say "V". Wednesday was the day that VISA came to market in the largest IPO ever. We want to review the points we have been making in this blog for a Long time now. The first is that the housing market would deteriorate enough to put the economy into a recession. The second is this ATM has now pretty much closed for new withdrawals which should intensify the recession. We are now in a credit contraction that should last a long time. Need we say any more???
So here we are two days after the demise of Bear Stearns due to credit market issues and V comes to market with an overbid IPO. V had anticipated that the price would go off at $42 or lower but lo and behold bids came in to push up the offer to $44 during the last few days--What? Now, the opening trade this morning was 65 nearly 50% higher. We are pretty sure that this price won't hold and that the price of V for Ignorance will trade 50% lower, around 32, sometime very soon.
While we are in disbelief at the events of the past ten days or so, we don't think the desired consequences were realized. Certainly, V was sort of a Bell ringing for all of us to know there is still plenty of bullish optimism in the stock market--meaning the lows have not been seen. We think the move down will break the January lows in the Dow and then keep going. Our targets should be based on the NASDAQ 100 which is our favorite index. You'll have to come back next week to find out what they are--since we don't know tonight. We are waiting for Triple/Quadruple Witching on Thursday to settle out before we try any figuring.
Two items left, one the Fed and the other the precious metals and other commodities. We read and agree with a commentator that the Fed has unleashed a lot of its ammo this past week. No, we're not talking about the rate cuts, we are talking about their assets which stand at around $900 billion. Just recently they have traded in a lot of those dollars, estimated at nearly $400 billion, to loan money/Treasuries to all kinds of entities, in hopes of restoring the credit markets.
Did there efforts pay off? Well, we will never really know what would have happened if Bear would actually have been allowed to fail over the weekend. But, there still may be an opportunity for more bombs going off. You don't have to go too far to find continuing problems in the credit market. What we have been mentioning to you is the difference between the three month T-bills rate and the fed funds rate. It's still at a very high 175 bps meaning it would allow the Fed to lower another 175 bps Thursday and they would just then get to where they need/want to be. What they have wanted is for the T-bill rate to go up meaning that the other short term funds were being purchased rather than the safety of T-bills.
Last, the last couple of days may have given us the first indication that the precious metals have now changed directions. This week has seen gold (basis the April futures contract) drop from a high of 1035 to about 915 tonight, over a ten percent move. Silver has been crushed even more from 21.40 down to 18 tonight, about a 15% move. These are moves This week. We should now see prices move down dramatically over the next several months. This move should involve many commodities including oil and Gas.