Skip to comments.We're in a Bear Market
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?
Options House Fisher Investments
E*TRADE FINANCIAL TD AMERITRADE
Zecco.com Charles Schwab
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.
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.
Fundamentals will kick in.
Eventually. If you think you’re going to need that money in the next three years or so, get it out now.
Fundamentals change in a poor economy.
What do you think?
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.
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.
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!)
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.
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.”
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.
“the looming disaster in the housing market”
Disaster to the lenders or the buyers?
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.
Larry K. did have an excellent analysis of this yesterday.
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?
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.
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).