Thursday, October 09, 2008

A Difficult Week for the Update

We are breaking with our normal post this evening. We are changing We to I but just for tonight.

The Dow dropped 500 points in the final hour of Thursday's trading, falling strongly through the 9000 level and showing just how weak the market truly is.

My estimate for the market as published here for several months has been 9000. Since I thought that the Dow was going to go to 8000, I wanted to be conservative in my estimate so 9000 seemed like a good place.

Unfortunately, I abandoned that position about a week ago and have paid the price in my own portfolio. That is something that I can live with and have lived with in the past. What I don't like is advising you incorrectly this week, with confidence. I have been given the title the perpetual bear and now that the market has a week like this we are bullish...I just can't believe how far off I could be.

The only consolation I have is that I hope you took my advice about investing a little at a time like I have done. I think it's important to be confident when moving my money from one position to another. It's difficult to be confident when you are buying good values because it is Tough to buy in this time of panic selling. One positive is that I tried to talk you into buying the GDX and that has performed much better than other stocks.

I started buying on Monday and have bought every day this week and plan to be buying some more tomorrow (Friday). That was the plan. I really did think that the true Low would be on Monday, October 13th and that date is coming into clear focus especially during the last hour of trading on Thursday. What I didn't envision was such a flush in prices this week, particularly today. I thought there would be a volatile week giving us good buying opportunities.

Since the Dow dropped 500 points in an hour, I must conclude there is more to come on Friday and the futures are indicating that this evening. Japan is down about 10% as we write this and our futures are down about 3%. The European markets are anticipating a huge selloff as they open.

For those of you who were short with me for the past several months, you enjoyed some profits and put yourselves in a good position to be buying at these lows and it may work out very well indeed due to the extreme nature of this decline.

Since we want to focus on the future, we need to examine where we are and where we have come from. This event is a crash and has been a global phenomenon. Fear has gripped the public and they are so afraid that they are selling. So many advisors continue to recommend that people hold onto their portfolios but they don't care. They see the market dropping 600+ points in one day and they think that there is another one like it tomorrow and the next day. The problem is that they don't know what to do.

I want to remind all of us that the Dow peaked a year ago (today actually) and has dropped over 5000 points this year. People have been watching their portfolios and have hoped that the market would come back but to no avail. Now they are throwing their portfolios to the wind just to get Stable Cash...cash is king.

Banks and other financial institutions are trying to gather more cash because they are shoring up their capital positions to stay out of bankruptcy. It's not so much that the banks aren't lending to each other, even though that is happening. It's more that they are trying to take care of their own house. In order to do that, they are selling whatever they can. They were selling to the Fed until the Fed really couldn't buy anything more from them.

Why has the market dropped so much? I think that the facts have been coming out for the past two years with regard to the housing market. The news hasn't been getting any better on that front but the Fed has tried to inject funds into the banking system for months in order to prevent deflation. They don't have enough funds to make that happen so they went to the US Treasury for help. Ultimately, that effort has to fail because there isn't enough money to go around.

Tonight, a Japanese life insurance company has declared bankruptcy partly causing a 10% drop in the Japanese market. Here in the US we have seen our share of large long term institutions End. AIG announced that the $85 billion wasn't really enough so could we please have another $35 billion please. And, the US Treasury wants to invest in banks now similar to what England did this past week.

There is the possibility that the US market fell hard in the last hour because of redemptions and mutual funds anticipating the need to get cash for their fund holders. That could be the way we can find an end to this drop. Significant selling has already occurred but we have been waiting for that huge volume day with a reversal in it. That has not happened.

What has happened is the volatility indexes showing strong fear and a buying opportunity, or at least what looked like a buying opportunity. I still think the buying opportunity is at hand at least for an intermediate term.

There is one looming problem with my theory. The US Treasury department thinks that there is a constant supply of money that they can use to "fix" the problem. When does the world say, we don't have any more money to give you. Remember, no official has declared a recession to date. With the Fed pumping money over the past year, we can't help but wonder what they will be able to do if a real recession shows up...

Here's my example. Let's say that there are two countries in the world, the US and one other. Let's say that the US economy is running at $1000 a year and the other one is running at $10. Without going into the details, the US trades with the other country and causes about $1 for the other country's economy. So, the other country takes that $1 and loans it back to the US and this continues for a few years. Then the US starts to have a problem and wants to add some liquidity to their markets so it goes to the other country to borrow some money. How much can the other country lend? There is definitely a limit and it can be reached.

Ok, I could continue this all night but there must be an end to this conversation. Please stay calm and enjoy the prices that you are being able to buy at. We have been watching the pharmaceuticals and they got knocked hard on Thursday. Why is that? Well, they can sell them to get cash. ETF is PPH but we have been looking at PFE for a long time and tonight the price is at a not seen since about 1997. 8% dividend while you wait... There are so many bargains out there right now.

I'll try to post once over the weekend and a reversal on Friday would prompt another special post. I will be buying on Friday in any event...assuming a low coming on Monday next week.

I know you are all adults and can make your own decisions. My job is to provide you with a little different perspective than what you hear on the main stream media.

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