Wednesday, December 03, 2008

Another Wild (and Up) Day for the Dow

Top Line: We think the stock market has been trying to rally since the October 10th lows and then we watched the Dow drop to a modest new low a couple of weeks ago. The market wants to go up so bad and we think the future point of reference is the inauguration on January 20th. Since that's a date we think will be a short term peak, the market doesn't have much time to get get going.

Stocks had another wild day with a range of about 400 points. The market opened with a thud as the Dow started with a loss of 150 points and then rallied 300 points followed by a 250 point loss before closing with another 300 point gain (all numbers approximate). Wild indeed.

The market has given people incredible volatility over the past couple of months. This volatility has kept most from entering the pool. Traders are having trouble in this market because it moves so far so fast. We have taken the position to buy at what we think are good prices and now are trying to be patient for the market to move higher.

We don't want to over analyze this market but we do want to understand why we are in the positions that we have or positions that could be good for the next few months. At the moment, the riskiest asset class is the Treasury bond, particularly the 30 year variety. We would steer clear of that class at least until rates go back up again.

The problem here is that the T-bonds are at incredible highs and so is the dollar. These two asset classes are closely tied and will fall together. Why? The government and the Fed have been pushing dollars through the printer and into the system to stave off deflation...we think it will work, at least for now, and inflation will return. Inflation is not a friend of T-bonds or the dollar. Who does have a friendship with inflation? Yes, commodities and in particular, gold.

Stocks don't really like inflation but they won't find out about it until they have gone up quite a bit. When they do find out about inflation, they will not be happy but until then we want to be invested.

Housing really doesn't like inflation either because of higher interest rates. Right now, though, interest rates have collapsed and mortgage applications have surged in the past week or so. This action is expected (not by us) to put a floor under housing. That confidence should put a floor under the stock market as well but that's not why we bring up housing. We are negative long term on housing because rates will go up and up into next year...but we do not see these same negatives in Asia.

In Asia, particularly Japan, where people didn't get crazy on housing. Prices of houses there never went up very much. Housing will Not have a drag on their economy like it has here in the US. The stock market will be able to go up in Japan with no burden of falling or fallen house prices.

Generally we are bullish on stocks for the near term and the reason is because of all the money being added to the system. We would have been bullish on stocks without that but this added liquidity just juices our thought process even more. Companies are awash in liquidity and banks don't want to lend it out so we think the best place for them to keep their money is in the stock market.

What should you do? If you are interested in refinancing your mortgage at lower rates, now is the time if you can qualify. In fact the latest news is that the government is trying to get new home buyers, probably not refi's, rates at around 4.5%. There is no clear plan but the WSJ broke the story Wednesday and you'll probably hear more about it on Thursday morning. Here is CNN Money's take on the subject.

The other thing you should do is buy stocks because at some time in 2009 we should see the Dow at a minimum of 10,500.

Don't forget, we've got the old jobs' report on Friday morning.

See you tomorrow.


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