Daily Investment Interpretations

December 17, 2008

2008-12-17:  The markets sagged a bit today, with the NASDAQ falling 10.58 (-0.67%) to 1,579, the Dow slipping 100 points (-1.12%) to 8,824, and the S&P shrinking 8.78 points (-0.96%) to 904. Oil remained unchanged today at about $40 a barrel, while gold rose another $25.80 to $868.50. The VIX dropped 2.53 to 49.84.
    All of the pages and pages I've written here aimed at one simple but elusive bit of knowledge: is the stock market going to enter a new multi-year bull market or is it going to drop below its October lows? As usual, clear-cut answers are as scarce as snowflakes in the Sahara. Paul Krugman, in a paragraph entitled "ZIRP!" (Zero Interest Rate Policy), says that America has turned Japanese... that "This is the thing Iíve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap. You can read my 1998 Brookings Paper on the issue 
here." He concludes: "Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too." Kevin Depew thinks that full recognition of the severity of this crisis still lies before us: Five Things You Need to Know: Point of Recognition Still Ahead of Us. Two other commentaries buttressing this viewpoint are Fed Slashes Interest Rates; Nothing Happens and Prieur de Plessis' After the Rate Cut?.
    Four articles that point to the possibility that the market has turned up from a major bear market bottom are: Economic deterioration slowing, Market Defies the Odds, Bad News, S&P Rally, S&P Resistance, and Four Tips for a Post-Volatile Market. So here we are again, facing either the princess or the tiger. Looking at the one-year chart of the S&P 500 (below) this current rally looks like the beginning of a new bull market. But the 10-year chart of the S&P 500 (also below) tells a different story. The current rally is fully consistent with the "sucker rallies" that occurred on the way down to the 2003 bear market triple bottom, and the rallies that defined the triple bottom itself. Another difference is that this isn't a classical inflationary depression but rather, a deflationary depression--a liquidity trap.
    In the meantime, the Cabot China and Emerging Markets Newsletter has given a very limited "Buy" signal for two Chinese investments. I can't list the stocks that the newsletter recommends, since that information is irestricted to paid subscribers of the newsletter, but one of them I can mention since it's the Chinese play in which I've previously invested: the FXI iShares TR FTSE ETF Index fund. 
Chart for FXI
The Newsletter doesn't recommend taking more than a small position in its two recommendations, and I wouldn't recommend this, either, in light of the fact that this isn't a typical recession, but a once-in-a-century event. 
    Since we now know that, since 1994, our prosperity has been fueled by going deeper and deeper into debt, we may expect to emerge from this day-of-reckoning transition with a lower, sustainable level of living in our futures. But that suggests that a rapid return to "business as usual" and a new bull market might be farther off than some of our pundits postulate.