Free-Fall or More to Come?

Last Monday, September 29, we wrote about the market in terms of a potential meltdown, adjusting our outlook for the Dow downward to 9,500 from a previous prediction of 10,200. Sorry to say, at 2:45 p.m. EDTon October 6, the Dow came within 38 points (9,538.07) of our adjusted number before regaining some of its loss to close for the day just above 10,000.  

We doubt it will stay there - - - more bad news is on the way, and markets world-wide are in disarray as they struggle to accept the reality of what is coming. The words recession, depression, stagflation were all an anathema just weeks ago, but are now on the frontal lobes of economists around the globe. They should be on yours also.

The downtrend from this point may not have the volatility of these last weeks, but be assured, the slope of the trend is negative, and is not likely to turn upward until we are well into next year. Consider:

1. Government agencies (GSEs) like Fannie Mae, Freddie Mac, Ginnie Mae, etc. hold over $5.4 trillion in residential mortgages. There are also $2.6 trillion in commercial mortgages to account for.
2. There is another $20.4 trillion outstanding in consumer and corporate debt, and who knows how much of it is, or will be, delinquent.
3. The government bailout only cleans up current delinquencies, if it does that. What about future debts going sour as the economy continues to dwindle? Economies do not turn on a dime, and not even on billion dollar bail-outs.
4. Congress has committed $700 billion for Wall Street, $200 billion for Freddie and Fannie, $85 billion for AIG, $25 billion for the auto industry, plus another $150 billion of pork to pass their package. This amounts to $1.160 trillion, on top of an OMB projected 2009 federal deficit of $482 billion. 
5. Add to the above the continuing cost of military operations, and our picture grows dimmer by the week.

You have to ask yourself, where is this money coming from? Well, we either print it, which is inflationary because that drives down the value of the dollar relative to competing world currencies, making our imports (think, OIL) more expensive. Yes, a cheaper dollar would improve our export ability, but what do we truly have to export other than capital and technology? We long ago ceased to be a net exporter of manufactured goods.

If we don’t print paper to meet such a deficit, then we are forced to borrow. As of early April, our foreign debt totaled $13.77 trillion, against a projected 2008 GDP of $14.4 trillion. Not a healthy ratio! Creditors are bound to ask higher interest for the ever increasing risk of holding our paper. Key creditors like Japan, (#1 at $583 bil), China, (#2 at $503 bil), even Russia (#8 at $65.3 bil) are not likely to cut us any slack. Nor are any of the others, like Britain, Luxembourg, Hong Kong, Switzerland; and especially not the oil-exporting states: Venezuela, the United Arab Emirates, Ecuador, Iran, Iraq, Kuwait, Oman. 

If growing were a viable alternative to printing or borrowing our way out of this dilemma, it would have been at the top of this list. But considering the poor fiscal situation we are now in, plus the likelihood of higher taxes and greater deficit spending after the election, the financial future of the U.S is not likely to carry a Triple A rating in world markets.

Thus we urge you to move to cash, preferably to a Treasury Bond Money Market. (FSIXX and VMPXX come to mind.) Do so prudently as your stocks re-enter their Exit Zones. Do not be anxious to average down until the Entry Zone has leveled out (does not slope downward) and the short term trend line is positive. We expect volatility to remain high over these next months due to continuing uncertainty here and abroad. Thus there should be ample opportunities to adjust your portfolios.

Be patient. Do not act in panic.

Best wishes for brighter days ahead.

Disclosure: Author is long both SIXX and VMPXX

Comments

[jurrassic:]

100 points more to go on the downside for the S&P

2008 Oct 08 08:44 PM