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The Day that Was - November 28th 2007

Wow, how about that rally. It is amazing what can happen when those holding substantial blocks of shorts have to rush and cover. Today’s huge rally was mostly a result of massive short covering, regardless of what you may think, this is the fact. When analyzing today’s market rally, the stocks that rose the greatest were those that had the greatest amount of shorts riding the stock. The sectors up the greatest today were the sectors most in trouble, and with the highest percentage of shorts on them. Biggest sector moves today were Financial (XLF) and Consumer Discretionary (XLY), both of which had very high amounts of shares being held short. The gains in the broad markets today can be traced back to the movements started in the short covering on those sectors.

Fed speak today gave indication that they ‘may’ be inclined to cut Fed Funds Rates again when they meet on December 18th. The past two rate cuts have done nothing to keep the financial system of this country from deteriorating, or the stock market from deteriorating further, so will 3 times be the charm? Just how many times will they need to cut the Fed Funds rate before the banks and brokerages are rescued? Just how much damage to the economy are the Fed’s willing to take on in order to rescue the banks and the mortgage industry? Every action has a reaction and a counter reaction. Cut the Fed Funds rate makes it easier for banks to borrow and do business with each other, but it sends inflation higher and the dollar lower, action and a counter reaction.

The recession that the United States is heading into is a "consumer induced" recession. Where in 2000, the recession was the result of a corporate bubble and the substantial losses resulting from the burst of that bubble. Now we are faced with a recession that is the result of the consumer, it is the higher cost of living, the continuing decline of their equity, and the the ever shrinking value of their paycheck (value of the US Dollar) that has started this economy’s downturn. The big sub prime problems and the substantial losses by the banking industry are not the cause of the problems, they are merely symptoms of the problem, or disease if you will. If the Fed’s cut the Fed Funds rate again they will be treating the symptoms, not the disease. And in doing so the disease will continue to go untreated and get worse.

One must remember that for each time the Fed’s cut interest rates they are reducing the value of the US Dollar and making the causes of the consumer induced recession only more intense. You will see higher prices in many of the things needed every day in order to live our lives comfortably. If you can live without being comfortable then just cut out food, heat, and transportation!

The Feds are once again bowing to the pressures of the financial institutions, and without regard for the end result of their actions, the Feds will likely give in and cut rates again. In that case Lisa and I can only say "you think we have problems now, just wait and see what comes down the road"

If we are going to have a market rally going into the end of the year, so be it. We will work on capturing some of those moves while they last, but to think that this is the end of the market sell offs and a another down ward leg still to come would be to ignore facts. So if the market perceives another Fed rate cut as it’s savior, and the markets start an upward path towards the end of the year, so be it. We will take what we can from it. But no one should be "loading the boat" for the long haul, that would be a grave mistake. We still favor safety, not aggressive investing. Today we received more factual information of the slowing economy, rapidly declining consumer confidence, and a housing market crisis that continues down with no slow down in the pace yet. This bad news is NOT already priced into the markets, it had pain killer put on it today by the Fed speak and the idea that the Feds will rescue the markets. But as a drug junkie keeps craving it’s ‘fix’, the disease of the drug addiction only gets worse with each ‘fix’. The Feds unfortunately are not working on curing the disease, they only offer the quick hit for the junkie. And the junkies are the banks and brokerages.

Ok, so if we are going to have some upward moves in the market in the coming weeks then we will play it. But we need to see the charts tell us that some upward movement is taking place on its own steam, and not being pulled up by short covering panics. The chart shown below is of the DOW Industrials, at present we are STILL in a down trend. When we see consolidation above the downtrend, then we will know that any moves up from there will be more of a buying nature and not just more shorts exiting the market. But you should know that nothing has changed, absolutely nothing! All of the economic problems facing this economy only continue to worsen and will continue to deteriorate. The markets are not out of the woods, they are simply being led astray by a a man holding a dollar bill in front of him, Ben Bernanke, and he is leading them to the cliff.

Oh, a news item that has crossed the wire tonight is a report from Goldman Sachs economist reporting that home equity losses could rise by another 50 to 100
% in 2008. Now there is something to ponder.

DOW Industrials: