Will the Stock Market Continue Its Upward Trend?

The big news yesterday was, of course, the bailout plan for Freddie Mac (FRE) and Fannie Mae (FNM) over the weekend. The world stock markets celebrated the Freddie / Fannie bailout before the US stock market opened Monday morning. Except for the Chinese market, global stock markets were up significantly. The Dow was up more than 300 points at the open and then gradually faded away. The market had some momentum toward the closing and ended up close to a 300 point gain. The question is then: will the upward momentum continue?

Some say this is the catalyst the market needs: removing the uncertainty for both FRE and FNM. At the same time, we all know that the mortgage crisis and the financial sector cannot be cured in one day. The underlying problem may be deeper than everyone has thought.

Although this is good news for the stock market, I am not sure whether this is the bottom yet, because the economic fundamentals are still weak, including continuing high unemployment and lower prices in the housing market. People need to have a steady job before they canbuy a home, and people will not buy a house yet if they believe the price will continue to drop.

However, the good news is that the US government will do whatever it takes to support the housing market. So, the US government is taking a pro-active role to prevent further deterioration of the housing market. Now, the government starts to buy mortgage paper on the open market.

This action can ease some credit crunch. Hopefully, this will give the lenders more confidence to start lending again. As a result, we may see the mortgage rates begin to drop, and this may give home buyers an incentive.

But the bailout also has negative implications.

The US government is basically holding a lot of problematic mortgage papers. If the housing market continues to weaken, the mortgage paper value will continue to drop. This may cause the US dollar to go down. If global investors lose confidence in US dollar, then the Treasury bond price will suffer and rates will go up. If this is the case, the housing market will not be in better shape. Actually, we may end up with a lower US dollar and higher inflation with higher interest rates.

No one knows what the market will do. It really depends on how the market interprets the bailout. The bailout will no doubt have both positive and negative implications. The question is what investors will focus on – the good or the bad.

Bottom line: The main issue is whether the lenders start lending and home buyers start buying. If not, the US may be in deep financial trouble for a while.

Disclosure: none

Comments

[Steven Hansen:]

there is no data here, and very weak opinion. well today the US markets may go up and it may go down.

here in asia, this is tuesday and the rose colored glasses are broken. the markets in china are down for the second day in a row. this is the story - china is betting against any sort of quick recovery.

have a good day.

2008 Sep 09 05:35 AM

[little_guy:]

The patient is dying, now on life support... big Morphine injection last week-end. Going to kiss him good bye... and run !

2008 Sep 09 05:38 AM

[CrossProfit_:]

1) No mention of the $9.7T accumulated federal deficit?

2) "However, the good news is the US government will do whatever it takes to support the housing market." - why is this good news? It all depends how it is done; would you say otherwise?

3) "The main issue is whether the lenders start lending and home buyers start buying. If not, US may be in deep financial trouble for a while." - not true. The main issue is that the U.S. can NOT continue to rely on an economic model that is based on 66% consumption and 33% production.
***Production has to equal consumption***
The base of the imbalance is the importation (consumption) of energy. This is about half the trade deficit. Were energy produced at home as is consumed at home, this would go a long way at fixing the economy. Borrowing more in order to consume more (houses) will only make matters worse.

CrossProfit

2008 Sep 09 05:39 AM

[blondino:]

hey,
but look at the positive side of this nationalization: at least worrying china central bank got some reassurance from US gov't while common/preferred shareholders got screwed big time ;-))

2008 Sep 09 05:49 AM

[blondino:]

the US government will do whatever it takes to support the housing market - like what? give away free homes to defaulting loan takers perhaps, funded by the state (a.k.a. taxpayers)???
i mean its a serious mistake to think real estate prices will climb back as a result of this socialist take-over...

2008 Sep 09 05:51 AM

[bobtailnag:]

When the government owns your mortgage, one does what the government says - especially when the government is a GS-13 bureaucrat who thinks too many loans have been made in Denver so let's tighten up there and put out some cheap loans in Albany and get some more going in Valdosta. Yeah- plan it. That's what they call it in China.

2008 Sep 09 06:22 AM

[John Lounsbury:]

What upward trend?

We are in a primary bear market. We have not yet had a 10% correction (rise) from the 7/15/2008 low of 10,962.54 (DJIA), so you can not even be referring to a counter trend rally.

You article is well reasoned. The title is poorly worded.

2008 Sep 09 11:30 AM

[irondoor91:]

I assume you neglected to look at a chart that was longer than the last 3 hours of yesterday's data. Try starting with, say, October 11, 2007, when discussing trends.

Dittos to CrossProfit and jlounsbury59.

2008 Sep 09 11:41 AM

[Nidhi Kadalbal:]

title doesn't suit .. some substantial changes need to be worked out to see fundamental uptrend ..

creating-wealth.blogsp...

2008 Sep 09 03:25 PM

[Delojozafado:]

Are these typos in the text or is the writer's grammar really this bad? Get an editor please! The key to these issues is breaking the negative feedback loop. This will be increasingly more difficult for the government to accomplish. As federal deficits soar the cost shifting continues to increase. The States are saddled with more costs that they cost shift to cities and towns. This drives up state taxes and local property taxes dramatically. Some states like NJ and Calif choose to just borrow more money and let the next governors worry about paying for it. Their debt has decoupled from US treasury debt, a ten year tax free muni bond pays 1.25% more than a US 10 year taxable treasury. We are starting to see financial planners put these bonds in tax sheltered retirement accounts. The inflation inherent in the Government doubling the National debt over a 2 year period has already decoupled mortgage rates from the US bond market. This is called risk to principal due to risks of default, inflation and at the same time continuing deflation in housing prices. Inflation, global warming, and higher state and local taxes are driving the cost of home owner ship higher despite lower prices for homes. Heating and cooling costs go higher, homeowners insurance spirals as big hurricanes costing 10s of billions continue to occur. Areas like New England now see flooding and even tornados that used to be rare in that region. Wages continue to decline as Walmart now becomes the largest employer in more than 20 states. Those that had full time work with benefits are shifted into multiple part time jobs working 60 hours a week without time and a half and making far less than when they had full time employment. Taxes for these wage earners are not reduced so they do not have any extra to afford a house. These of course are not counted in the unemployment statistics so the economy is "fundamentally sound". As the foreign investors with draw their money from US treasury debt the ten year treasury bond will decouple from Fed interest rate policies. In the late Eighties we saw 17% 20 year mortgage rates. This of course can not happen again....We are told. Auto sales have fallen by 3 million a year. Home listings are at all time highs in some states while closings drop to all time lows. More revenues to local and state gov'ts lost in sales, registration and real estate transfer taxes. The solution? The next group of politicians falling all over each other promising more tax cuts and deficit spending economic stimulus. This is all the same result Newtons law: For every action there is an equal and opposite reaction. Negative feed back that worsens not improves things. The stock market with an S&P500 at 1250 has gone no where in 5 years. Will it continue to rise? I guess we can expect it to rise based on the assumption that it has been rising? In March of '07 Bill Miller said the 10 year rally in bonds was over. In '06 Warren Buffett said the US dollar was going to weaken dramatically. They were perhaps not wrong just early?

2008 Sep 14 08:09 AM