I predicted the DOW would bottom-out at around 12,800 and made that prediction around a month ago. It actually went below that but the Fed shook the bears out of the market by lowering the discount rate. That created a bounce up from all the short-covering and put the market back to the near 13,000 level.
Now everything I am writing here is strictly my opinion but I personally feel the market is in adjustment for the former Feds goof of lowering interest rates too much under Greenspan. Instead of stimulating the economy through growth in business, those moves triggered an investor’s paradise in real estate and home equity loans became a source of spending money instead of income.
The liquidity of the lending institutions with no money down, balloon loans, sub-prime for the first few years deals, etc., added to the real estate bubble. Prices went up in what is known as a hyperbolic curve and history usually shows that these types of moves are followed by the same steep reversals, at least for stocks and commodities.
Real estate is not immune to changes in the market but real estate is historically more stubborn to move to the downside. First, the 'House Flippers" get shaken out of the market and then those who cannot afford to pay the mortgages are next. Further declines would occur but the simple fact is that those who don't have to sell just won't sell, help to stabilize the market. This is because unlike stocks that you want out of, a home is a place you need to live in. So, the homes coming off the market bring up the demand curve until some point of stabilization is reached.
The biggest problem I see is that the U.S. is over-built in homes and I wonder what the Baby Boomers are going to do in terms of moving. The usual scenario is to sell the home and go shopping for a condo. That could shift the market in the next ten to fifteen years. It certainly hit the skids in the Japanese market ten or so years ago when their Boomer generation started to retire. Japan is just now crawling out of that hole and is finally looking at Fed rates for Japan that will no longer be zero percent.
So, long story longer. First we have to see where the bottom is for these companies that made bad loans. Until that bad news is over, the market will still see triple digit loses in a trading day. The Fed will infuse money by buying up 'bad' paper (mortgage backed loans.) Usually, the Fed buys up better securities when it increases the money supply. Also, if they infuse too much, it could backfire on them and give the country what the Fed does not want at all, increased inflation. They need to be careful and draw a line, in my opinion.
The good news is that business profits are very strong. This has to be tempered by the fact that a lot of US businesses are multi-national companies like GE and can show better profits because of the falling dollar. This means that when such companies collect British pounds, Euros, etc., which all trade so much higher than U.S. currency, they must exchange them into U.S. Dollars. At the Pounds almost 2-1 value ratio, that makes for a lot of extra U.S. dollars that show up in these ‘profitability’ balance sheets.
Hey, if by any chance you are wondering why good stocks like Apple fell so far it isn’t because there is a problem with the company. It is just a fact that when liquidity is under pressure, investors get cash by selling equities to get cash and they sell the winners because that is where money is in their portfolios.
So there is some balance in the present market equation and I think the determining factor will be the consumer in the next three years. Will credit continue to tighten and if so, will that cause spending to dry up? My philosophy is to let this market settle out on its own without a lot of interference. When an acceptable bottom has been reached, the U.S. needs to work on firming up the dollar and increasing trade. That’s what Greenspan should have done a better job at. We need this country to get back to work and lead again. That's how you lead a Global economy instead of riding up on a Global economy, like the DOW 14,000+ bubble of July.
There's a lot more I could rattle on about but now that you are all comfortable asleep at your desktops, I'll say my good-byes.
The Universe
