“Hey, the market didn’t do too badly this week…maybe the worst is over…”

You keep telling yourself that if it makes you feel better.

The market moves in fits and starts.

During a bull market, as prices go up, there are periodic sell-offs as some people take profits. Then, the market resumes its upward path.

The same is true during bear markets. As prices go down, there are periodic run-ups as bargain hunters buy and short sellers cover their shorts. When the bargain hunters–who are a small minority–and short sellers are done, the market resumes its downward path.

In my opinion, that’s all that happened this week. The Fed’s reaction (more accurately: people’s reaction to the Fed), bargain hunters (all 12 of us) and short covering led the market to remain roughly flat this week.

But, that’s just a temporary reprieve. The fundamentals behind the market haven’t changed. The housing market is still going downhill fast, with no end in sight. Credit markets are still tight. Banks are still struggling to rebuild their balance sheets. Bond insurers are still in trouble. Employment still looks weak. Retail sales are still poor. Industrial activity is still slowing. The fundamentals haven’t changed one iota.

In my opinion, after this “clearing rally” is over, the market will resume its downward path. And, I think it will take years to hit bottom. In the meantime, there are a few great bargains to be had out there, and I’ve been selectively shopping and buying.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

“Are we there, yet, Dad?”

The stock market seems to be finally reflecting economic weakness. The bond market reflected it some time ago, but the stock market only now seems to be coming around.

The question now is: how much farther do we have to go?

I’ll be the first to admit, I don’t know. But, I do have an opinion on whether we’ve reached bottom, yet, or not.

It seems hard to imagine that the fallout from a steeply declining housing market and the seizure of credit markets will wash out in less than a year.

Remember the wash-out that resulted from the dot.com bubble? It took from 2000 until 2003 to really hit bottom and turn back up.

Does it seem reasonable to expect the stock market to hit bottom so soon and with so little damage when housing and credit markets are much bigger pieces of the economy than technology? I don’t think so.

No, I think we still have some way to go.

First, the subprime mess will continue to spread. A lot of floating interest rate mortgages will reset, and a lot more people will punt their homes to lenders. Credit card debt, auto loans, etc. will also fall apart as credit markets further reflect housing turmoil. That, by itself, will take another year or more to work out.

Next, credit markets will have to absorb all those losses and downwardly spiraling asset prices. That will take another year or so.

Then, a bunch of politicians and lawyers will ride to the rescue, further highlighting the misdeeds of the housing and credit markets. That will take another year or so, too.

In my opinion, we still have at least a couple of years to go on this.

That doesn’t mean stock prices won’t hit bottom beforehand. They usually do.

That also doesn’t mean there aren’t good investments to be found. I’m finding some outstanding bargains now and expect that list to grow over the next year or two.

My goal is to be greedy when others are fearful and fearful when others are greedy. The latter kept me out of the housing and credit down-spiral. The former is what I’m looking forward to, but I don’t think others are quite fearful enough, yet, to call the bottom.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Recession seems imminent

More troubling economic news this week.

First, the Institute for Supply Management reported that it’s manufacturing survey index showed a contracting industrial sector. Any reading below 50 means contraction. The reading was 47.7 last month. The last time it was this low was in April 2003, coming out of the last recession. Readings below 45 usually indicate a recession is occurring. We’re not there, yet, but we seem to be on the way.

Next, residential construction spending showed a 2.5% decline in November. The housing market is dropping, that’s no surprise. But, it’s impact on the economy as a whole still seems under-acknowledged.

Then, initial jobless claims fell 21,000, but the 4-week moving average, which better indicates labor market trends, was up to 343,750. This number is usually up around 400,000 in a recession, meaning we may not be there, yet. The last time the 4-week moving average was this high was in the summer of 2004, during the slow recovery from the previous recession.

Next, shipments of factory goods excluding petroleum and coal showed its fourth decline in 6 months. This indicates that, other than higher energy costs, shipments of factory goods is in a downward trend.

Today, payroll employment came out at +18,000 jobs. That may sound good, but a large part of that number is based on assumptions about jobs being created by small companies. Large revisions in this number are normal, especially at turning points in the economic cycle.

The payroll employment report was accompanied by a report of the civilian unemployment rate at 5.0%. Unemployment hit a cycle low of 4.4% just last March. When the civilian unemployment rate rises from its cycle low to 0.4% above that rate, a recession is usually imminent. 5.0% is 0.6% above 4.4%.

The stock market finally seems to be noticing with the S&P 500 down over 10% from the recent all-time high it hit last October. Although a 10% drop may not seem bad, recessions frequently cause 40% declines in the stock market.

It’s not all doom and gloom, though. Although the economy may be rolling over into a recession, this is a normal part of the business cycle. As long as our government doesn’t do stupid things to try to “solve” this “problem,” we will soon see an upswing in the market and economy.

Usually, the stock market drops long before the economy does. This time, it seems a little behind schedule. Despite this, the stock market also tends to lead the economy as we come out of a recession. Considering that most recessions don’t last more than a few quarters, this could very well mean the stock market could end up for the year.

That means this year could very well be an excellent year for bargain hunting!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.