| Limping into the Holidays |
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| Monday, 15 December 2008 05:24 | |
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We are now in the final full week of trading before the holidays. Wall Street is waiting to see how the $14 billion auto bailout failure will be resolved, what the Feds will do with the funds rate, and the results of a few high-profile corporate earnings reports. If Bush agrees to release TARP funds to the automakers, the deal should offer some temporary life support to GM and Chrysler, as well as the overall market indexes. Look for the Fed to lower the funds rate by a half a percentage point to 0.5%—the 10th rate cut since 2007. Both Goldman Sacks and Best Buy are expected to release worse than expected losses per share. We can also expect more bad economic news on housing and inflation with a continued slowdown in housing starts and building permits and a slightly higher Consumer Price Index—after you discount for energy and food prices. There are record redemptions in U.S. equity mutual funds—up to $70 billion for all of November, after already losing $68 billion in October. We’ve got a massive budget deficit, and now we are seeing negative yields in the Treasury securities. And just when you thought the worst was over on the mortgage crisis, brace yourself for the second wave. Over the weekend, the TV show 60 Minutes reminded us of something we reported on earlier—the next shoe that’s about to fall. The sub-primes have already melted down, but next to go will be the so-called "Alt-A" and "option ARM" mortgages. Those are the ones that had low teaser rates that are ready to reset to a high rate, and in many cases will double the monthly mortgage rates. There’s about $1 trillion in Alt-A loans, and another $500 billion to $600 billion on top of that in ARMs. An estimated 70% are expected to default. Finally on Friday we will have the usual quarterly "triple witching" day as stock options, equity index options and futures expire simultaneously, which can cause volatility in the underlying stocks. Needless to say, everyone is anxious for this week to be over! We’d like to get on with the holidays and forget about the housing collapse, the next wave of defaults, the credit freeze, the demise of major financial icons, rising unemployment, and the fact that global markets have lost as much as 50% in value. Not to mention the Bernard Madoff hedge fund ponzi fiasco that lost billions of dollars for a list of people that includes Steven Spielburg, Mort Zuckerman, the chairman of GMAC and the owners of the NY Mets and the Philadelphia Eagles. Nearly two trillion tax dollars have been dumped into the deep hole that Wall Street has dug and we still haven’t heard anything hit the bottom. What’s next to come? All I can say is that there are many unknowns, and while I think that 2009 could be a gloomy year for our economy, I feel certain we’ll all learn from this. I must say, in my entire professional career I’ve not seen this level of panic and uncertainty, but then again, it’s hard to tell so-called investors to calm down when they have seen so much of their life savings wiped out. On the other hand, I’ve never seen so many the bargains in so many asset classes. That’s not to suggest that you should automatically buy when everyone else is selling, or sell when everyone else is buying. Be patient. It’s not a big deal if you miss the bottom; you can still gain at some point if you’re willing to hang in there. As we enter 2009, even though the market has a built-in discounting mechanism, I believe there is still more to be discounted. Like I’ve outlined in my book, The Big Gamble: Are You Investing or Speculating?, you have a better chance of succeeding if you study the markets, understand the risks, and learn how to spot the next big financial bubble so you can avoid future losses. |
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