Wednesday, November 19, 2008

Dow Below 8000

Top Line: If you were looking for better prices, here you go. The Dow closed under 8000 for the first time since 2003 and close to the 2002 lows as well. The financials took a large hit today with Citigroup down over 20%, yes, today. All of this selling leaves the market extremely oversold...still waiting for a solid rally.

Wednesday the Big 3 were in Washington pleading for money from Congress. Apparently, they flew in on their private jets which seemed to anger the public. The public thinks all the employees at these auto companies make $75 a hour, which also distresses them. Barney Frank thinks that the employees at AIG make well over $75 an hour and no one was complaining about the government bailing them out, why should we bail out the Big 3.

We're not sure that the failure of these talks in Washington had a negative effect on Wall Street with the Dow dropping over 400 points. We're not exactly sure if Wall Street wants a bail out of the Big 3 or what. Maybe they want a government orchestrated Chapter XI bankruptcy. But, wait...

What we want is for someone to say, enough is enough. The world is waiting for something to Work, for all the money that is being thrown at the problems. And, we think our President elect has virtually disappeared from the stage. All of his voters are probably wondering what he's going to say. We have expected that the New President, whoever it would be, would inspire the nation and all of that inspiration would lift some fear out of the market. Looking back to the day of the election, the Dow closed over 9600 and today it closed right at 8000. What makes sense?

We don't expect that the President elect will be able to do much about the economy long term due to the massive tax liability that is coming due in the name of Social Security, but we still think the public thinks he can do something. That's the key but he needs to show himself in order for people to fell confident that he can still do something. The period between now and January 20th is supposed to be a very positive stock environment due to a New president. Where is he?

The market wants to go up but it needs something. The government has given so much money out that there doesn't seem to be any more pockets to put it in. There are not enough credit worthy entities, at least in the minds of the financial institutions, to give the excess money to but they are still too scared to actually invest it.

This is typically what happens when powerful stimulus packages are used...the banks buy bonds and stocks because they are less than willing to loan it until there are good credit risks. When stocks go up people generally feel better and more willing to spend money. While it doesn't seem like that could even be possible now, that is exactly what we think will happen. A year or so from now there should be some major denial about what is happening right now.

Think about what was happening a year ago. The mortgage problems were known then but there was significant denial that it would mean anything for stock prices. Guess what, they did.
When things seem irrational, they usually are, but the world looks around and says, well, this must be real because...the media says so or something just as flimsy.

There is always room for more analysis so let's continue. We have not fared well with our long positions since that high on November 4th. We have been long a couple of stock index ETFs and we are starting to think there are so many good stock values out there that will preform better than these index ETFs. We have considered switching from the ETFs to some of these cheap stocks due to the possible return available. We wouldn't expect that the ETFs would triple in value but some stocks will. There seems to be more risk with individual stocks but that's one of those statements that begs us to say, more risk more reward...yeah, it's a bad comeback in this market. It's still ugly out there but we do think there is a lot of opportunity for gains.

One more item...CPI. The CPI was down 1% last month and now the whole world is worried about deflation. The CPI is such a tortured number anyway but the food and energy component has been isolated as something that is volatile and should not be included in Real analysis. We haven't even mentioned this silly number because we think it is so meaningless. The problem is that with deflation being squeezed out of the news, that doesn't help our precious metals position. Yes, it's time to stop...see you tomorrow.

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