Daily Investment Interpretations

December 22, 2008

2008-12-22:  Stocks didn't change hugely today, so let's look at a bigger picture before reciting today's market action.
    Paul Krugman thinks that "Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010." But he also warns that it will be a more subdued economy, since it can't be fueled by ever-rising indebtedness and a near-zero savings rate. Also, it will take more than a year or two of economic stimulus. A new boom, he observes, "
would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn’t seem like something to count on." Dr Krugman cites the New York Times' Thomas Freidman's concurrent article, "China to the Rescue" Not!": "As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations." Mr. Friedman points out that there is an unwritten contract between the Chinese government and the Chinese people to the effect that the Chinese public will accept an authoritarian regime as long as it can continue to deliver a rapid rise in the Chinese standard of living (in keeping with a "revolution of rising expectations" on the part of the Chinese populace). Mr. Friedman quotes Frank Gong, head of China research for JPMorgan Chase, saying, "the world should not have a false hope that China can cushion the global downturn by stimulating its domestic demand in a big way. The best thing China can do is keep its own economy stable.” In other words, we're on our own.
    I'm getting signals from a few advisory services that light may be beginning to show up at the end of the tunnel.
    Now to today's market talk. The indices were down a percent or two today. The NASDAQ fell about 32 points (-2.04%) to end the day at 1,532, the Dow pared 59.34 (-0.69%) to 8,520, and the S&P shaved 16.25 points or (-1.83%) from its opening price to close at 872. Oil was unchanged at $39 at $39.85, and gold added $9.80 to end the day up at $847.20. The VIX dropped slightly to 44.56. I received an analysis last Friday prepared by Bernie Shaeffer, in which Dr. Shaeffer addresses the Dramamine-demanding plunge in the VIX to about half its peak value of 89.53 on October 24. Dr. Shaeffer concludes that a continued defensive posture is still in order, although homebuilders and financial might be good long investments, while shorting energy and technology.