The Bear Market Has Just Begun

by: Bill Cara

When the price of oil starts to come down there will be some relief to the US airlines. I anticipate some form of government intervention before most of the airlines go bankrupt again. The "New" shares will soon be required to become "New New" shares.

From the pockets of US airline employees to those of the Middle East oil sheiks. You'd think somebody other than Texas oil people who are running this Administration and the past one would be able to take control after the government changes hands in January. Rather than taking a unified political stance against Sudan, as they did this week, you'd think the three Presidential candidates might first line up against the urgent problems that exist today in America, which is the food and oil one that is bankrupting the country.

With commodity prices soaring, the commodity-based producers are being forced to raise prices, regardless of what happens to demand, which is likely to fall off. Dow Chemical’s (DOW) announcement is being followed by many others, including Monsanto (NYSE:MON), General Foods, Hershey (NYSE:HSY). Cost inflation is the focus today—wage inflation will follow.

Inflation will bring lower demand as well as higher interest rates. The banks simply cannot afford a higher rate structure at this time. That would trigger another round of the housing market crisis and that will worsen the asset-backed securities valuation problem of the banks, leading to more write-downs and hence the need to raise more capital, lay off more staff and also to tighten lending standards. Everybody suffers.

The bottom line is that Stagflation is worsening, and I have never seen such conditions do anything but tear apart the prices of equities and bonds. That too will really hurt the whole financial group, leading to more losses and more staff cut-backs in future.

As I see it, the Bear market has just begun. Unless there is a sudden and sharp pull-back like 1987, the Bear could linger. As long as fuel and food costs stay high and the housing industry remains in shackles, I think the equities Bear could last through 2009.

Traders ought to be able to make money long and short though.

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