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Written by José D. Roncal
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Tuesday, 09 December 2008 05:37 |
The big news of Monday was the DOW hitting the 9,000 mark. The big question now is, “Have we hit bottom”? Our answer is, “Maybe, but don’t rush into anything on a single day’s news just because you’re worried that you might miss out.”
The pundits tell us, "The market is a discounting mechanism." But relying on market "fundamentals" falls far short of explaining what’s really happening. Colorful trend charts can’t gauge the true intentions of buyers and sellers, and plugging in discount rates, risk premiums or annualized growth rates into a formula is no measure of the true fair market value of a financial asset.
But there are a few facts that the market has apparently already discounted which might explain the rally of the past few days:
• Monday: Stocks Rally Worldwide, DOW hits 9,000, S&P 500 hits 1-Month High on Obama Plan
• The market withstood the 533,000 job loss report on Friday—worse than expected
• Obama presented a proposed stimulus package with the largest expenditures on U.S. infrastructure since the 1950's
• Over the weekend the Asian markets rallied, China announced expansions of stimulus package and India has approved it’s own $4 billion of stimulus infusion
• The future is uncertain for the NASCAR race car economy. Formula 1 is the first victim as Honda has pulled a $300 million plug
• A $15 billion bridge loan for the Big 3 U.S. Automakers will be voted on next week, which if signed would tide the industry over only until March 09
• Dow Chemical is slashing 11% of its workforce and shutting down 20 facilities
• Advertising expenditures are way down and today’s retail sales report was enough to harsh Main Street’s holiday buzz
The worldwide crisis isn’t going to get fixed over night. I expect further volatility in the days ahead. For instance, when corporate earnings are released in January, it could trigger more volatility. Things are likely to continue like this well into 2009 or 2010. You may agree as you consider the following:
• U.S. bailout packages have been bridges to nowhere
• First stimulus package of $160 billion led nowhere
• New structure of financial industry still not addressed
• Regulators and credit rating agencies don’t have their act together—the 23rd U.S. bank failed last week
• States like California and many others are going broke, if they haven’t already, and urgently need life-support
• Corporations are filing for chapter 11 or chapter 7 due to inept executives who claim they couldn’t foresee this coming
• Risk management is non-existent in most organizations today – “surprises” are becoming the new standard
• GM and Chrysler (even with the expected bailout) will be back for more sooner than later
• Commercial lending, even though better collateralized than residential lending, could bring the issue of their $900 billion credit cards debt to the handout table.
• Expect further losses and write-downs from JP Morgan, Bank of America, Citigroup as well as other major financial institutions
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I could go on and on without even mentioning our under-funded heath care system and other government program. There are simply not enough funds to do everything.
A situation that began as a housing crisis has turned into the worst financial crisis since the Great Depression. More than $31 trillion has evaporated through equity and debt losses. And the write-downs on the books of the world largest lenders and investors is approaching $1 trillion. We’d never want to be accused of saying, “We told you so!” but the fact remains that all of this was predicted in our book "The Big Gamble: Are You Investing or Speculating?” I’ve always maintained, that in the end, it’s all speculation. |
