UNINTENDED CONSEQUENCES
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One of the best trades possible is shorting the market whenever Hank Paulson and Ben Bernanke make TV appearances. So, it should be no surprise that the market dropped 670 points (8%) on Monday as BOTH decided to grace us with their presence. The markets message is clear; more government interference is NOT what we need. Yesterday we got news that the government is looking at artificially reducing interest rates on mortgages to spur a housing rebound. While this might appear to be good news on the surface, the unintended consequences of these kinds of moves is almost always a short term fix while dramatically increasing our long term problems. We got into this mess because easy credit made it possible for anyone that could fog a mirror to get a 500k home loan. Corrections like the one we are going through now “right the wrongs” and restore balance to a system that is out of whack. In the 1930’s, a recession turned into a depression because of government meddling, and it’s beginning to look like déjà vu all over again. History repeats folks…
I continue to think a market rally into January is possible, as the Christmas period is seasonally positive one, but there are so many potential shoes to drop that it’s very difficult to recommend many long term positions. On Monday, the National Bureau of Economic Research (NBER) said its Business Cycle Dating Committee determined that the United States entered a recession in December 2007…please tell us something that we don’t already know! Folks, the economic downturn is accelerating and corporate earnings will be hit much more severely than most Wall Street analysts are even close to getting right.
The bottom line is that it will get worse before it gets better. I continue to look for an earnings bottom in the market in 12 months minimum, and will be making as accurate a judgment as is possible about when the down-cycle has bottomed. And, if you wait for the NBER to tell you the recession is over, you will have missed 50% of the upside move. We will not be making that mistake.
I’m putting together a new recommendation for VRA Subscribers in the energy space and will have it out soon. Oil is down $100 barrel from its highs and is due for a big move higher. The supply/demand issue in oil has not changed, and because oil is priced in US dollars the move higher will be accelerated once the bear market in the dollar returns.
Until then,
Kip Herriage Editor, VRA
