The Next Leg Down
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Last Thursday I called for a bear market rally when the Dow was down over 300 points. A huge rally began within 30 minutes and we closed up 550 points for the day. An 850 point move in less than 3 hours….amazing. These kinds of moves used to take several days or even weeks to happen, and now they happen on a regular basis at the blink of an eye. This is not an indication of a healthy market, and when you add to this the fact that the same thing is happening in the currency and credit markets, it all adds up to an environment that NO ONE has ever witnessed before.
For the last two trading days I have expected the bear market rally to continue, and there were signs that the market wanted to go higher. Each day we opened with losses of 150 points or more on the Dow and then we fought our way back to positive territory (yesterday it actually went 50 points positive), but the gains just couldn’t hold. This is not a good sign folks…this market just cannot put together a solid 3-4 day rally.
Last Thursday all of the major market indices hit the October lows and then rallied sharply, which is exactly what you want to see in a successful test of the lows. Here’s the problem; we cannot maintain ANY positive momentum and investors are beginning to sense what’s about to happen….that here we go again feeling.
The Next Leg Down
There are two key data points: 7800 on the Dow and 840 on the S&P 500. In the coming days if we break decisively through these levels, look for the stock market to quickly drop another 10% or more. As much as I believe that the components for a bear market rally may still be in place, time is quickly running out. These brutal last hour collapses are also telling us that there is zero confidence in the stock market. All it will take now is one more 200 point down day, with a brutal close, and the next leg down will be underway. It’s beginning to look like this may be the most likely scenario. Obviously, if we break through the lows the place to be for short term investors is SDS, the ETF that moves higher as the S&P 500 drops in value (times 2). However, if we hold at these support levels, the bear market rally still has a chance.
The Weight Holding Us Down
No surprise here, it’s the economy. We’re buried with record amounts of debt at every level; government (Federal and state), corporate and individual. Levels of debt that would be nearly impossible to pay off in a good economy. In a bad one….and this is some kind of seriously bad economy…it’s almost a mathematical impossibility that we will never pay these debts off. There is now serious talk about the US losing its AAA credit rating. Obviously this has never happened and would be a terminal blow to our economy. And once the downgrades start…when you already have mountains of debt… they rarely stop at just one.
Former Goldman Sachs (GS) chairman John Whitehead just made some very interesting comments. He believes the economy faces a slump deeper than the Great Depression, a growing deficit that threatens the credit of the United States itself, and the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead warned the country's financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans. "I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America. Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds will no longer be the triple-A credit that they've always been. There are at least ten trillion dollar problems, facing the United States, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.”
Now, the mayors of Atlanta, Phoenix and Philly each asked for $50 billion from the TARP Program. I kid you not…”mayors” are asking for money from this secretive bailout fund. It’s become surreal…and we’re really just getting started.
Now we’re seeing why saving money really matters. When you spend $1.05 for every $1 you make, there is no financial margin for misfortune. And the pain hasn’t begun to kick in yet. Unemployment is only at 6.5%...we haven’t really seen layoffs start to kick in like they will in the next 3-6-9 months. This is when things start to get really ugly. Housing prices will drop even more rapidly, causing another wave of foreclosures and bankruptcies, not to mention additional rounds of derivatives blow-ups in banks and financial services co’s. The pattern will continue to repeat itself…over and over until we reach a real bottom in the economy. Once we reach 10% unemployment in the US and parts of Canada (and it won’t be any better in Europe), a harsh and stark reality will set in for tens of millions.
The culprit is that our economy is 70% consumer driven. Buying stuff that we don’t really want or need. Now that the economy is in trouble we are being forced to become savers, which is more bad news for the economy. In order for our system to work, we have to keep buying crap! Somehow I don’t think the Greatest Generation would be proud of what we’ve created. They brought us through the Great Depression and World War II. Then they built the world’s strongest economy based on manufacturing, which produced real jobs, real wealth and a strong middle class.
Now, the best we baby-boomers can do is bailout GM, Ford (F) and Chrysler (C)…and a bunch of banks….from their terrible business decisions. Government bailouts (taxpayer bailouts!!) are going to turn a bad recession into the Great Depression 2. Good money after bad is never a good idea, and in this case it is the worst thing they could be doing with OUR money. Yet, all of this TARP money is being spent in complete secrecy! When you have a lack of transparency, you cannot have a bull market….end of story. The reason? No one trusts our decision makers and we know instinctively that there are several more shoes to drop.
The sad reality is that our McMansion generation pretty much deserves the negative economy we have coming our way. This recession/depression will force us to rethink the way we make decisions and plan our futures. That is a very good thing long term…we just have a long ways to go before this is over.
Kip Herriage
Editor, VRA
