Daily Investment Interpretations

November 21, 2008

2008-11-21:  The stock market staged the predicted rebound today, climbing between 5¼ % and 6½ %. The NASDAQ rose 68.23 points or (5.18%) to 1,384, the Dow advanced 494.13 (6.54%) to 8,046, and the S&P 500 ambled up 47.59 points (6.32%) to close at 800. Oil meandered to $47.59, up $0.51, while gold exploded, gaining $43.10 to end the day at $791.80. The VIX tumbled to 72.67.
    That's nice, but what's going to happen on Monday?
Paul Krugman on our "lame-duck" administration: The Lame-Duck Economy
    Paul Krugman is concerned about what I mentioned last night: the fact that Treasury Secretary Paulson seems to me to have withdrawn from his active role. Dr. Krugman is concerned that irreversible damage might be done He says that, "Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet no new rescue plan is in sight. On the contrary, Henry Paulson, the Treasury secretary, has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by ... " [the] " ... political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead." He suggests that, at the pace at which events are unfolding, a lot could go wrong between now and Inauguration Day.
Fewer stocks are hitting new lows.
    One of my investment advisories is pointing out the fact that the number of stocks hitting new lows has been falling over the past few weeks, something that always occurs at market bottoms. Selling pressures are easing up!
Two ways of looking at what's going on
    I have the impression that there are (at least) two ways to look at what's going on.
    One is that this will be a recession lasting about four quarters, and that although there is talk about dire outcomes, the stock market will turn up some time soon in anticipation of a recovery. The stock market will seemingly defy common sense in that the economy will still be sinking when the stock market turns around, because this is what always happens.
    The other point of view is that this time, it really is different... that this time, those who hold that "the more things change, the more they remain the same." will get skunked... that this is the once-every-century perfect storm that doesn't fit the investment pros' rule book. The stock market slips down a slope of hope. The markets took three years to reach bottom during the Great Depression. You know that every time there was bear market rally between 1929 and 1932, investment pros were saying, "That last sell-off was it. That was the bottom and now we're on our way up."
    We'll see.
    The only way I know to approach this is to play it by ear. Today, I sold about all of my mutual funds that aren't closed to new investors. (If I sell those, I can't buy back into them.)
    Yesterday, I received the latest issue of Cabot's China and Emerging Markets newsletter. It's advising its investors to remain 100% in cash. That sounds like a good idea to me. If I invest any money, it will be a small fraction of my cash in order to limit potential losses.
    When the markets finally turn around--and it might occur in China before it happens in the U. S.--there should be ample opportunity to recoup our losses. I'm counting on my various sources of information to give me some idea about when this will happen. Right now, the rate of decline of the economy seems to me to be accelerating.
    I'll try to pass along some of the suggestions that services like Morningstar are suggesting on their websites.
Back in the present, layoffs are being announced at a stunning pace.
    It will take a while before these layoffs are fully felt, since people won't actually go out the door for a little while after a layoff is announced. It will be a while after that before unemployment benefits run out-- although even the threat of a layoff should be enough to spook consumer spending. We'll know better after the holidays just how much they've affected consumer spending.