At the Edge of the Abyss
We have seen the first crack and recovery. The rally has been poor and anemic, with the selloffs displaying much more power. This last week's drop in the first week after the traditional end of summer was pretty nasty, but the worst is probably yet to come. The odds of a "crash" are about as high as they have ever been. The commodities is a big negative for the stock market and the economy, in general. The Dow Jones-AIG Commodity Index has fallen sharply with the price of oil, recently breaking its 200-day moving average. It could easily fall another 20%. This would present a great buying opportunity, but it would also indicate that demand is dropping so precipitously that a severe recession is imminent. The decline in oil so far suggests that recession is an almost sure thing, it will just be a question of how bad. There is support at Dow 8800, with strong support at 7200, the level of the 2000-2002 bear market low. Odds are very high that the first level will be reached by year end, with better than even money that the lower number will be seen. This could set the stage for a HUGE rally back to as high as current levels (the level of the breakdown below support becomes resistance and a return to the lows in 2009. Whatever happens, my guess is that we will see extreme volatility in the next few months, so best not to be short volatility (no option writing).
I am skeptical of the FNM-FRE bailout. The mortgage problem is $1 trillion and growing. A "conservatorship" which costs the Treasury $25 billion is ridiculously inadequate. It is only deferring the pain and ultimately making it greater. This "crisis" is playing out in "slow motion". It is curious that no one ever complains that the boom is playing out in slow motion. But a slow motion decline is simply another way of describing a bear market. Since they have been relatively few in the last few decades, most people don't really know what one is like. But when everything you buy drops and most purchases blow up in your face, it is probably a bear market. When stocks rally on weak volume and unimpressive breadth, it is probably a bear market. When the opposite occurs on the declines, it could be a bear market. When reversals occur after sharp rallies, instead of shard declines, it is probably a bear market. When Wall Streeters start complaining about their bonuses (or lack thereof), it is probably a bear market. Nothing unusual about that, nothing abnormal about that and there is nothing bad about it either. This is the way markets are supposed to work. Henry Paulson and Ben Bernanke don't really want the markets to work, they simply want to prop up the rotten institutions and financial infastructure which has been built up over the last few decades. They could have chosen to take some medicine in a controlled manner over the last few years. Instead they have to chosen to put out fires and paper over the problems to buy a little more time. This is what the latest maneuver is all about. Playing for time. Hoping that things don't fall apart before enough of the bad loans and rot in the system are purged and then they can pump things up again with cheap money. But the imbalances in the system may be too great and it may be unavoidable. Also, they have unleashed so much cheap money already that they have further damaged the stability of the financial system with the fostering of on oil "bubble" which may be deflating and will create unnecessary damage and unfortunately, unlike the stock market, have significant negative impacts on the lives of ordinary people across the globe. Iraq and Georgia are two examples, but there are many more.
I am skeptical of the FNM-FRE bailout. The mortgage problem is $1 trillion and growing. A "conservatorship" which costs the Treasury $25 billion is ridiculously inadequate. It is only deferring the pain and ultimately making it greater. This "crisis" is playing out in "slow motion". It is curious that no one ever complains that the boom is playing out in slow motion. But a slow motion decline is simply another way of describing a bear market. Since they have been relatively few in the last few decades, most people don't really know what one is like. But when everything you buy drops and most purchases blow up in your face, it is probably a bear market. When stocks rally on weak volume and unimpressive breadth, it is probably a bear market. When the opposite occurs on the declines, it could be a bear market. When reversals occur after sharp rallies, instead of shard declines, it is probably a bear market. When Wall Streeters start complaining about their bonuses (or lack thereof), it is probably a bear market. Nothing unusual about that, nothing abnormal about that and there is nothing bad about it either. This is the way markets are supposed to work. Henry Paulson and Ben Bernanke don't really want the markets to work, they simply want to prop up the rotten institutions and financial infastructure which has been built up over the last few decades. They could have chosen to take some medicine in a controlled manner over the last few years. Instead they have to chosen to put out fires and paper over the problems to buy a little more time. This is what the latest maneuver is all about. Playing for time. Hoping that things don't fall apart before enough of the bad loans and rot in the system are purged and then they can pump things up again with cheap money. But the imbalances in the system may be too great and it may be unavoidable. Also, they have unleashed so much cheap money already that they have further damaged the stability of the financial system with the fostering of on oil "bubble" which may be deflating and will create unnecessary damage and unfortunately, unlike the stock market, have significant negative impacts on the lives of ordinary people across the globe. Iraq and Georgia are two examples, but there are many more.
posted by Matt Butler at 6:58 PM
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