Wednesday's Selloff Leaves Market On Weaker Ground

Some will probably say the market was hit by a perfect storm of negative events including: oil prices, continued dollar selling abetted by Chinese statements, a $39 [cough] billion loss at GM, financial sector disarray and lawsuits, and so forth.

This leads us to bring up the possibility that the August 16th lows for the DJIA [12,845.78] and DJT [47672.35] will be retested. A failure to hold those lows would trigger a Dow Theory sell signal if you're a follower.

All the numbers aren't in for breadth and volume but the WSJ numbers are probably close to being right by 4:30 PM. It looks like a very heavy "get me out" sell-off and perhaps a 90/10 negative day.

Let's look overseas and see how they fared Wednesday:

Wednesday definitely was a "no fun" day unless you were short.

It's hard to imagine the extent of incompetence that US senior corporate management has exhibited over the past ten years and beyond. We don't have crooks today like we had in 2002/3 although that remains to be seen.

GM was once the largest and best US company but today they're fighting for their survival. In the late 1960s GM senior management mocked the VW Beetle. They refused to even sit in a Mercedes Benz in the 1970s and laughed at Japanese imports. They were incredibly arrogant and much too comfortable. It's a disgrace!

Citigroup and Merrill Lynch CEOs have been shown the door over their incompetent oversight. And I haven't even mentioned Countrywide, AIG, FNM, MBI and so forth.

And over the last 30 years we have created a cabinet level Dept. of Energy loaded with political appointees and bureaucrats but no energy policy. Congress and presidents of both parties have not demonstrated any leadership in dealing with this mess other than to blame "big oil".

It's a terrible litany of failure.

Disclaimer: Among other issues the ETF Digest maintains positions in: USO, GLD, GDX, UDN, IEF, SPY, QQQQ, IGN, EWZ, RSX, INP, FXI and EFA.

Comments

[Jason Hamlin:]

excellent article and analyses. keep up the good work sir.

2007 Nov 08 04:08 AM

[J Kirkwood:]

Ok, let's look at this realistically...In the short-run, all is chaos, the sky is falling, etc...here are some interesting thoughts to consider:

1.) As I understand, China holds the majority of US gov't debt. With the dollar in a slide and the Yuan tied to it, it only makes sense to pick another currency to do business. Further, with all the countries we're picking fights with, aging population, gov't deficits, it doesn't look like the US$ will stabilize anytime soon...However, the Chinese cannot afford for the dollar to drop, as it lowers the value of our debt they carry as an asset. Also, the Euro is no safe haven in that the European economy will be crucified by US imports that come in at a fractional cost comparison, not to mention Chinese goods and services. In short, currency choices don't make a bit of difference. However,...

2.) As US multi-nationals begin re-importing their profits from overseas, we are going to see an enormous amount of exchange rate profits, the value of which should send US shares and the markets higher, significantly. Whether this is short-term or long-term depends upon how long foreign economies can weather both US imports and lack of US demand for foreign goods and services.

3.) Stores of Wealth: Similar to Matter in the Universe, there is a finite amount of Wealth in the Global Economy which can be diluted or transfered from one to another, but not destroyed. Therefore, Mr. Bernake's printing press only serves to piss off our neighbors to whom we owe money, therefore we're seeing investors look for alternative stores of wealth. Uranium, Steel, Gold, Copper, Silver, hell even Oranges and Pigs can serve as a store of wealth, however some work better than others for a variety of reasons. Uranium is not a readily tradeable form of currency and tends to kill you. Copper and Steel are dependent upon economic growth, ie building construction. Oranges and Pigs can work in the short-term, but it's difficult to keep a million dollars of orange juice or pork chops fresh for very long. Therefore leaving Gold and Silver as the best choice for long-term, liquid, stores of wealth. Although most stocks tend to follow the market, un-hedged mining companies provide the best income producing store of wealth due to their stock of the minerals they carry and trade.

4.) As for oil, I'm not sure if you've seen it lately but the price at the pumps ain't going higher with the price per barrel of oil. Although there maybe many reasons for this, speculation, supply exceeding demand, whatever, the point being at some point reality must set in, and it looks like there is zero rationale for $100 oil at this point in time. Should gasoline prices finally climb, this will force a decrease in demand for gas/oil as the average SUV driver can't afford $150 for a tank full, eventually reducing the price of gas/oil backdown. Granted, when the Texas Oilmen can persuade the US to bomb the hell out of Iran or cut off other sources of petroleum, this will provide sincere justification, but that is at least 9 to 12 months off. At the present, the markets can't forecast tomorrow or remember yesterday.

These are just thoughts to consider and do not represent the ideas, attitudes, or opinions of the author.

2007 Nov 08 11:56 AM

[J Kirkwood:]

Ok, let's look at this realistically...In the short-run, all is chaos, the sky is falling, etc...here are some interesting thoughts to consider:

1.) As I understand, China holds the majority of US gov't debt. With the dollar in a slide and the Yuan tied to it, it only makes sense to pick another currency to do business. Further, with all the countries we're picking fights with, aging population, gov't deficits, it doesn't look like the US$ will stabilize anytime soon...However, the Chinese cannot afford for the dollar to drop, as it lowers the value of our debt they carry as an asset. Also, the Euro is no safe haven in that the European economy will be crucified by US imports that come in at a fractional cost comparison, not to mention Chinese goods and services. In short, currency choices don't make a bit of difference. However,...

2.) As US multi-nationals begin re-importing their profits from overseas, we are going to see an enormous amount of exchange rate profits, the value of which should send US shares and the markets higher, significantly. Whether this is short-term or long-term depends upon how long foreign economies can weather both US imports and lack of US demand for foreign goods and services.

3.) Stores of Wealth: Similar to Matter in the Universe, there is a finite amount of Wealth in the Global Economy which can be diluted or transfered from one to another, but not destroyed. Therefore, Mr. Bernake's printing press only serves to piss off our neighbors to whom we owe money, therefore we're seeing investors look for alternative stores of wealth. Uranium, Steel, Gold, Copper, Silver, hell even Oranges and Pigs can serve as a store of wealth, however some work better than others for a variety of reasons. Uranium is not a readily tradeable form of currency and tends to kill you. Copper and Steel are dependent upon economic growth, ie building construction. Oranges and Pigs can work in the short-term, but it's difficult to keep a million dollars of orange juice or pork chops fresh for very long. Therefore leaving Gold and Silver as the best choice for long-term, liquid, stores of wealth. Although most stocks tend to follow the market, un-hedged mining companies provide the best income producing store of wealth due to their stock of the minerals they carry and trade.

4.) As for oil, I'm not sure if you've seen it lately but the price at the pumps ain't going higher with the price per barrel of oil. Although there maybe many reasons for this, speculation, supply exceeding demand, whatever, the point being at some point reality must set in, and it looks like there is zero rationale for $100 oil at this point in time. Should gasoline prices finally climb, this will force a decrease in demand for gas/oil as the average SUV driver can't afford $150 for a tank full, eventually reducing the price of gas/oil backdown. Granted, when the Texas Oilmen can persuade the US to bomb the hell out of Iran or cut off other sources of petroleum, this will provide sincere justification, but that is at least 9 to 12 months off. At the present, the markets can't forecast tomorrow or remember yesterday.

These are just thoughts to consider and do not represent the ideas, attitudes, or opinions of the author.

2007 Nov 08 11:57 AM