Monday, December 01, 2008

December Starts Down Big

Top Line: The stock market dropped back quite a bit on Monday, something that should get the bears talking again.

Today the NBER, National Bureau of Economic Research, announced that the US economy is in a recession. Oh, and by the way, it started in December of 2007. The NBER is the organization assigned the task of determining whether the economy is in a recession and when it comes out. Popular opinion says that a recession is when the GDP declines for two quarters in a row. That's a pretty good way to think about it but it's not the Official determination. Now that we know for sure that we're in a recession, do people think it's time to sell stocks???

There were several bad news items today. The biggest one is the one in the last paragraph on the recession. Then there was the ISM index that fell to a 26 year low. (Notice that we have changed from the 1991 lows and are now looking back at the 1982 lows.) The Chinese manufacturing dropped the most on record. The California governor, Arnie, declared a fiscal emergency and called the legislature into session to deal with a multi-billion dollar deficit. And, let's not forget that Bernanke and Paulson were making statements as they seem to do every day.

Do any of these things seem bullish to you? No, they don't. But, that's the whole idea. These things are not New, they have been known for months. Why should we be thinking about an investment strategy based on this Old news. The bears were smiling today because of the news but we don't think the news matches with what is really going on...which is, the market is going up. The lows have most likely been put in and a day like today just makes the bulls nervous. You may not have noticed that there were only 98 new 52 week lows on the NYSE.

What is happening in this fear driven market is that Treasury's are being sought, even by the Fed. The 30 year T-bond was up 5 points today...unbelievable. The yield on the 30 year is now at 3. 20%. Now, the Fed wants to start buying more Treasury securities to provide liquidity to the market. Can you say bubble in the Treasury market?

We think the Treasury's are now extremely overbought. The easiest decision to make these days is to buy Treasury's. How can that be?!? We mentioned that the short Treasury's are at basically 0 yield and the 30 year is barely over 3%. To the Update, these are some of the worst investment you can make at the moment. We would say that the rate on the 30 year Treasury bond has the chance to be 5% plus next year which would be a 15% loss from these price levels.

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