Halloween Scare for the Markets

Well, if Halloween doesn’t spook you, maybe it is because you were already spooked out by the market action this past week, which culminated with Friday’s 250 point drop in the Dow.

Previous Octobers gave us grim news (think 1987 and 1989) from which we quickly recovered. But that rosy history is not likely to repeat this time. There are just too many negatives, foremost among them the global view that our exorbitant printing of dollars is undermining its value.

The U.S. is (was?) the economic engine for the world, and in spite of what our government gurus say, that engine is driven by consumer spending, not the spending in Washington, DC. U.S. consumers will continue to be tapped out by the increasing costs of just plain existing.

Federal officialdom may fool some citizens with “adjusted” numbers for the CPI, unemployment, jobs created and saved, the savings coming from the long-promised “health care for all plan”, and the ballyhooed “cap and trade” to reduce our energy costs and save the globe.

However, there are not many of us lining up to buy the bridge our federal government is trying to sell (or even the Penn. Turnpike, recently offered for sale). We have heard before that bromide: “a rising tide will lift all boats”. But we are intelligent enough to know that tides also recede on a regular basis.

We see local taxes rising, utilities like FPL requesting 30% rate increases, our States needing new revenues to balance their budgets, and the price at our neighborhood gas pumps increasing weekly. Discretionary income is shrinking.

And whether the GG’s (govt gurus) want to believe it or not, that is the fuel that drives the consumer engine.

Cautious investors, and their number is growing constantly, are increasing their respect for a market that can swing 3% or more in the course of one day. They are aware of other statistics which could shock the market to even greater extremes: $770 billion of commercial mortgages presently underwater; over 100 bank failures thus far this year with how many more to come; the CIT bankruptcy which will ultimately deep-six something like $2 billion tax-payer dollars; the dollar losing its status as the pricing medium for oil; etc, etc.

In previous messages we have used the analogy of a ping-pong ball bouncing down a stairwell to describe these 3 digit market swings. You can expect to see many more of them as the year draws to a close. But do not be fooled by the upward bounces, some of which come to you courtesy of the PPT. The ball has not yet reached the basement. The overall market trend is still down. And we expect it to stay down until, not just the US, but the world’s economies recover.

It is not too soon to add a contra like SDS to your portfolio.

Comments

[Mad Hedge F...:]

bdr The scariest costume I saw on Halloween worn by a kid dressed as the Dow Jones Industrial Average. Listening to all of the gnashing of teeth and hand wringing after the Friday close about broken trend lines, accelerating downside volume, and crisscrossing moving averages, you would think that a time machine had just magically transported us back to the dark days of March, 2009. The volatility index (VIX) has popped from 20% to 30% in a week. Impressive. A new CNBC poll says that two thirds of investors are now expecting a “W” shaped recession, and that the next big move in the market is down. Once all of the performance chasers finally got the equity weightings they should have had last March, the market could only go down. We cut through support in the S&P 500 at 1050 like a hot knife through butter. Next stop: 980. Then hold your breath.

Nov 01 08:20 AM