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We're in a Bear Market
TheStreet.com ^ | 8/17/2007 | Doug Kass

Posted on 08/17/2007 5:27:36 PM PDT by Old_Mil

Sir Larry Kudlow has got it, and I genuinely admired his flexibility in his view of the new economic reality. Unfortunately, in part based on the seduction of yesterday's remarkable rip back from disaster, others have not.

Many on this site and elsewhere, including the cheering squad from CNBC who partied like it was 1999 only a month ago as the DJIA eclipsed the 14,000 level, contended that Thursday's ramp was a "psychological positive" and could be interpreted as the end of the recent swoon. They are guessing, and guessing has no role in an uncertain market.

The market's action in and of itself is only sometimes a "tell." The markets are never that easy to interpret, and the direction of short-term change in a market in chaos is simply a guess. (There is a good possibility that gamma and delta hedges coupled with short-covering might be the reason for a portion of Thursday's volatile session; then again, maybe not.) That's why I have been advising smaller-than-normal trading/investment positions.

Overnight Asian markets continued lower, suffering the largest weekly losses in 10 years. Japan bore the brunt of the decline, dropping by over 5%, the largest daily loss in seven years. Our futures, which were down by over 20 points when I arose at 2 a.m. EDT, indicate another lower opening into options expiration.

Getting back to "Kudlow & Company," I thought the first segment of the show, which incorporated a Fed discussion with Bill Ford, Lyle Gramley and Wayne Angell, was the single best learning experience I have ever had on CNBC as Sir Larry's experienced and informed panelists were straightforward in their visions of the current economic landscape and recommendations on how the Fed should proceed. (Note: Though the attached tape of the segment is for subscribers only, it's worth the price of admission.)

On the show, I told Larry that one can attempt to solve the market's riddle (and future direction) by distilling it into one question: How much of the past prosperity of the last five to seven years in the real economy and in the financial vehicles that rule the universe (i.e., hedge funds) was based on the unusual creation of debt and leverage?

To make matters worse, we are now moving from an environment of high liquidity and low volatility to a period of low liquidity and high volatility. That means rapid and unpredictable market swings, not business as usual (or at least as usual as the last five years).

I went on to say that this decline has exposed the irrelevant rating agencies, opaque quants, misguided and momentum-based funds of funds as well as the avaricious packagers of stupid products on Wall Street. All will pay a price in this cycle. What I didn't have the chance to say is that all of the recent developments will likely serve the 2008 election to the Democrats on a silver platter, providing yet another headwind.

1. VMware IPO Debut Dazzles 2. Thornburg Postpones Dividend 3. Top 10 Potential Takeover Targets 4. The Top Buffett Value Stocks 5. The House That Won't Sell: Walk Away?

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I suggested last night that those who believe a Fed interest rate cut will be a cure-all are mistaken. The problem in the current cycle is that nonbank financial entities (hedge funds, mortgage companies, Wall Street derivative players, etc.) have taken a greater role in the economy and have bypassed Regulation T requirements and banking reserve requirements. And those entities have been on steroids, raising leverage to levels never seen before.

Finally, I opined that we have entered a bear market and that any rally, particularly a violent one on the anticipated Fed cut, should be used to sell positions and to short.


TOPICS: Business/Economy
KEYWORDS: economic; fed; market; stocks

1 posted on 08/17/2007 5:27:38 PM PDT by Old_Mil
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To: Old_Mil

If you bought in on a good company with good valuation, good fundamentals, a good product and good management, selling now — even on a rally — is a bad move. It’s a marathon, not a sprint.

Anyone who bought to get rich quick — yeah, sell, whatever, if you don’t lose your money now you’ll just lose it on something else later.


2 posted on 08/17/2007 6:03:32 PM PDT by Generic_Login_1787
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To: Old_Mil

Fundamentals will kick in.


3 posted on 08/17/2007 6:06:04 PM PDT by BunnySlippers (Buy a Mac ...)
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To: BunnySlippers

Eventually. If you think you’re going to need that money in the next three years or so, get it out now.


4 posted on 08/17/2007 6:12:14 PM PDT by Mountain Troll
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To: BunnySlippers

Fundamentals change in a poor economy.


5 posted on 08/17/2007 6:14:06 PM PDT by durasell (!)
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To: Old_Mil

What do you think?


6 posted on 08/17/2007 6:21:43 PM PDT by Son House ($$Proud Memeber of Vast Right Wing, Out To Lower Your Tax Rates For More Opportunities.$$)
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To: Old_Mil

Time to be poised with any excess cash...and use some dollar-cost
averaging to buy in near a bottom.

Yes, I know that’s easier said than done. But in the great country
at least we have the opportunity to make that sort of move.


7 posted on 08/17/2007 6:25:08 PM PDT by VOA
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To: Son House

I think this is a band aid. Cutting the discount rate half a percent is nowhere near enough to solve the looming disaster in the housing market. I don’t know if the Fed will end up cutting the prime rate 2 or 3 percent, but that’s what it’ll take to solve that problem...

...and, if they do cut it that far, there are other problems (inflation) that will set in.


8 posted on 08/17/2007 6:25:41 PM PDT by Old_Mil (Fred Thompson isn't the second coming of Reagan; He's the second coming of Dole.)
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To: Old_Mil
Cutting the discount rate half a percent is nowhere near enough to solve the looming disaster in the housing market.

I await the flood of posts which will accuse you of being unpatriotic and a democrat plant (that's what typically happens to anyone who is a realist and hasn't partaken of the Kudlow Koolaid!)

9 posted on 08/17/2007 6:30:43 PM PDT by ExSES (the "bottom-line")
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To: Old_Mil

I also thought it strange cutting the discount rate to avoid a futher drop in the stock market, a political strategy to make it all look nice could only be temporary.


10 posted on 08/17/2007 6:32:50 PM PDT by Son House ($$Proud Memeber of Vast Right Wing, Out To Lower Your Tax Rates For More Opportunities.$$)
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To: Old_Mil

I was listening to Doug Kass just a while ago on the Fast Money TV program...

and when he said “I just got off the phone with Ralph Nader” I tuned him OUT, and said to myself: “Well if this guy is getting his economics advice from Ralph Nader, no reason to listen to anything more he has to say.”

Case closed.


11 posted on 08/17/2007 6:36:16 PM PDT by UncleSamUSA (the land of the free and the home of the brave)
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To: Old_Mil

If we’re in a “bear market,” the time has come to accumulate cash and to prepare to buy. I doubt that we’ll see the kind of meltdown we got in the 2000 crash at least beyond certain portions of the financial sector. On the other hand, I wish that the Federal Reserve would quit printing so much money and start withdrawing some dollars from circulation to create a deflationary boom...commodities markets are very expensive right now, indicative of inflation.


12 posted on 08/17/2007 6:38:40 PM PDT by dufekin (Name the leader of our enemy: Islamic Republic of Iran, Mahmoud Ahmadinejad, terrorist dictator)
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To: Old_Mil
.you are right....it is a band aid....but more of a psychological one.....the fear and panic where so overblown and getting worse, the Fed stepped in mainly to say....yes, we get it.....the 90 day Treasury is like 3.5%.....very very low compared to Fed Funds....since the current credit debacle with it’s negative impact is Deflationary, I expect them to lower rates by 50 basis points....their neutral statement was correct....the current process was NOW much more deadly than any inflation....which is really curtailed except for energy and food.....this was a stabilizer.....
13 posted on 08/17/2007 6:39:56 PM PDT by NorCalRepub
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To: Old_Mil

“the looming disaster in the housing market”

Disaster to the lenders or the buyers?


14 posted on 08/17/2007 6:40:59 PM PDT by Son House ($$Proud Memeber of Vast Right Wing, Out To Lower Your Tax Rates For More Opportunities.$$)
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To: Old_Mil

Gee I should have known better than to buy some QQQs and see them smartly ahead a day later. Too bad I wasn’t able to see and use this great advice. I guess we will really remember this advice when the market is double the current levels just as the geniuses who said it was all over in 87 really helped in getting us out at Dow 1700 when we are now at 13,000.


15 posted on 08/17/2007 6:41:34 PM PDT by honestfreedom69
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To: Old_Mil

Larry K. did have an excellent analysis of this yesterday.


16 posted on 08/17/2007 7:05:42 PM PDT by Joann37
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To: NorCalRepub
you are right....it is a band aid....but more of a psychological one.....the fear and panic where so overblown and getting worse, the Fed stepped in mainly to say....yes, we get it.....the 90 day Treasury is like 3.5%.....very very low compared to Fed Funds....

They let the funds rate get in the mid 4's the past week, but now it's creeping back toward 5.25. I've been saying for a long time that the market should set the funds rate, and Kudlow says it should float (same thing). If the 90 day is at 3.5 can you imagine where the overnight rate would be if it was determined by the market?

17 posted on 08/17/2007 7:33:21 PM PDT by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)
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To: Old_Mil

This is either just a some blowing off of steam after a steady rise to Dow 14000, or we are entering a real multi-year bull market. But its way to early to make such claims.

But Kudlow really is just playing for ratings because even your basic economist and wall street trader knows it would take at least 3 to 6 months of this to be able to say its a bear market.

Right now, all you have short term volitility. Very different.

The problems with the stock markets right now are just blowback from the long overdue major issues facing the mortgage secondary markets. While I believe the problems are way more serious than most people realize, how much or how fast it effects the entire american economy will take years to see.

I compare the last two weeks news coverage on this, especially CNBCs, to the histrionic performances you saw from reporters during Hurricane Katrina.

Jim Cramer actually tried to take responsibility for the fed’s actions on his show today. Yahh Jim, like you dictate Fed policy with your tv show. Dream on.


18 posted on 08/17/2007 8:22:52 PM PDT by Proud_USA_Republican (We're going to take things away from you on behalf of the common good. - Hillary Clinton)
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To: Old_Mil
I think this is a band aid. Cutting the discount rate half a percent is nowhere near enough to solve the looming disaster in the housing market. I don’t know if the Fed will end up cutting the prime rate 2 or 3 percent, but that’s what it’ll take to solve that problem...

Agree...

19 posted on 08/17/2007 8:28:14 PM PDT by dragnet2
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To: Proud_USA_Republican
But Kudlow really is just playing for ratings because even your basic economist and wall street trader knows it would take at least 3 to 6 months of this to be able to say its a bear market.

Kudlow should be wearing a pink tutu and waving pompoms! He is basically a shill for the administration and wallstreet tycoons. He does have a variety of guests who express their OWN analysis (and are much more rational), so I do watch his program.

Think about it, his advertisers would disappear in a minute if his show wasn't ALWAYS seeing the glass "half full and rising".

He's been predicting $40/gallon oil WITH PROSPERITY for several years as if his words would somehow counter all the trends (growing nationalization of oil resources, continual turmoil in third-world "nations", increased oil exploration costs with declining success rates, China & India growing rapidly with MILLIONS of additional autos & trucks replacing ox-carts and peditrucks etc.)!

I subscribe to the old saying (morphed to today)... "Buy Oil Asset Rich Land, They Ain't Making Anymore of It!" Obviously, through investments in countries with a strong track record of supporting property rights (to the extent that any do these days).

20 posted on 08/18/2007 9:30:45 AM PDT by ExSES (the "bottom-line")
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