Is This the Beginning of the End for the Market?

Thursday's 300 plus point drop on the Dow made headlines in the media, and the feeling was that the sky is falling. But a little perspective is needed. For many, this drop in the market was somewhat expected. While major market indices have made new highs, the breadth of the market has been deteriorating for some time. Last week saw the market rise some on Wednesday led by Amazon’s 24% move, but in terms of the total market, decliners outpaced advancers by a 2-1 margin.

Investors need to keep an eye on the bigger picture. While the market is certainly jittery over the sub-prime mess, it still appears that this is an issue that is self-contained and won’t influence and spread to the rest of the economy. Corporate earnings have been stellar so far, with growth over 9%, which is much more than the pundits predicted. It’s also interesting to note that the recent market rally was lead by professional investors with most “Ma and Pa” investors on the sidelines. I think this will give the market support as we won’t have knee jerk selling and mutual fund redemptions by scared retail investors.

The market tends to overdo it in both directions, and we could easily fall another 5% on sub-prime concerns. But then rationality will take over, and people will realize that the global economic situation is good, corporate earnings are strong, and sub-prime is just an issue for sub-prime lenders and homebuilders. As a former teacher of mine, R’ Moskowitz used to say, “Don’t let emotions get in the way of your thinking process.”

Who knows what is going to happen in the next few days or weeks, but for all of you who want to sell-out, here is a prediction for you. I think we are either going to see the Fed actually cut rates, or at least rumors are going to hit that they are thinking about it, in order to help out the housing market, and the market is, in the words of Dave Neihaus (Seattle Mariners radio announcer), going to fly, fly, fly away.

Comments

[Ralph F:]

Any thoughts on what will happen to the dollar if the Fed cuts rates, and what the ramifications of that will be?

2007 Jul 29 10:40 AM

[James Cullen:]

Common sense says that a rate cut will result in the dollar going even lower, which will make inflation even worse given all the foreign goods we import... not that worsening inflation will be reflected in actual government data. This will lead to everyone asking questions like "why are my expenses up 12% when the Fed says inflation is 2%?"

2007 Jul 29 04:31 PM

[wixeywaxy:]

The economy is doing reasonably well as you indicate and the stock market will respond appropriately after we get past the summer and early Fall. I don't think we will get a cut in interest rates and don't think a cut would be good for the economy or the stock market. Rates are very reasonable and not at all high enough to jeopradize investment in new ventures that have a probability of being profitable. Interest rates need to be fair to both the borrower and the lender and this perspective that lower rates is always a positive is a mistaken one although it is almost universally accepted at least by market commentators. Ralph, the poster above, is correct, a stimulative interest rate cut would be negative for the dollar and produce speculative impulses which in the long run would be negative. Vic

2007 Jul 29 12:34 PM

[Johnny Bitc...:]

Looks like you've failed to internalize your teacher's lessons, because this statement of yours is probably based on the emotion called hope:

"I think we are either going to see the Fed actually cut rates, or at least...."

You've provided no cogent thinking process on this subject.

Go back to school.

John.

2007 Jul 29 12:35 PM

[Bright Inve...:]

John, I think you are right to say "You've provided no cogent thinking process on this subject." It is absurd that the author believes in what they wrote? Does the writer think that we as investors are not aware of what is at stake. "Your money!" I suggest to sell all you can before the big one hits harder. I am selling everything this Monday. I can always get back in to the game when the smoke clears. I think it is better to pull out now than placing stop orders due to a CRASH! Stop orders will not protect you if a crash is to occur due to the speed of the stocks being sold at a faster rate. All of the European firms have pulled out with other Nations. The sub prime is based on fear that is going to make the market crash. If I am wrong I will pay to send Aaron Katsman back to boarding school with the money I saved. Leo Surprenant

2007 Jul 29 09:56 PM

[Bright Inve...:]

John, I think you are right to say "You've provided no cogent thinking process on this subject." It is absurd that the author believes in what they wrote? Does the writer think that we as investors are not aware of what is at stake. "Your money!" I suggest to sell all you can before the big one hits harder. I am selling everything this Monday. I can always get back in to the game when the smoke clears. I think it is better to pull out now than placing stop orders due to a CRASH! Stop orders will not protect you if a crash is to occur due to the speed of the stocks being sold at a faster rate. All of the European firms have pulled out with other Nations. The sub prime is based on fear that is going to make the market crash. If I am wrong I will pay to send Aaron Katsman back to boarding school with the money I saved. Leo Surprenant

2007 Jul 29 09:56 PM

[Bright Inve...:]

DUPLICATE

2007 Jul 29 10:09 PM

[Bright Inve...:]

DUPLICATE

2007 Jul 29 10:09 PM

[Johnny Bitc...:]

More indications that you base your views on emotion:

It is quite clear that the so-called subprime problems are in fact spreading to other parts of the economy.

This subprime problem is really a broad problem with failed lending standards, fools buying houses without regard to economic value, and now the cycle has reversed. No doubt that homebuilders are not the only folks affected - see the retail sales slowdown at Home Depot, Lowes, etc.

As far as houses go, think of all the idiots that rely on this depth of analysis:

Uh, a house is worth what somebody will pay for, uh, uh, uh.......

Add free money from lenders to the above stupidity of most homebuyers and you have a recipe for big problems........

The economy is large and diverse which softens the blow, but most American's wealth is in their home and people are just starting to wake up to the true value of their biggest asset.

Guess what ? It's worth alot less than they think.

john.

2007 Jul 29 12:42 PM

[Bright Inve...:]

Question: Is This the Beginning of the End for the Market?

Answer: Yes

2007 Jul 29 03:10 PM

[Hankhawk:]

I think the Fed is extremely concerned with its image, and will do anything to protect itself -- it doesn't want to be blamed for making the housing/credit problem worse, so it will defiinitely make a rate cut shortly -- so people can't say it didn't
do enough and made things worse by letting the rate stay the same.

2007 Jul 29 09:20 PM

[olrick:]

Whoa! Your swipe at retail investors -- we won'have kneejerk selling and mutual fund redemptions by scared retail investors -- no longer has, if it ever did, any validity. It is now the go-go, mo-mo herd mentality professional traders with their hair trigger program selling and three minute long term horizons which cause market gyrations and these death spirals. Some of these guys have the risk tolerence of gazelles, and dump and run at the same speed.
Mom and Pop ain't responsible for 4 BILLION share volume on big down days!

2007 Aug 04 08:33 AM