Daily Investment Interpretations

January 15, 2009

2009-1-15:  The markets dropped again today, came back up and closed slightly positive. The NASDAQ tacked on 22.3 points (1.49%) to end the day above 1,500, at 1,512. The Dow annexed 12.35 points (0.15%) to close at 8,212. The S&P 500 ratcheted up 1.12 points (0.13%) to 844. Oil backed up to $35.59 a barrel, and gold backed down to $807.30 an ounce. After peaking at 55, the VIX ended the day at 51.00. Why did the S&P end in the black after spending most of the day down 20 points? Morningstar's  analysts explain that it's too soon to say whether snapping this longest losing streak since October will put the rally back on track or whether it will be followed by further deterioration. Friday is options expirations day so that might be affecting what's going on. There's been excitement over aggressive monetary and fiscal policy and the natural optimism that accompanies each new year driving the markets up since November.
Note: Tonight, the Cabot China and Emerging Markets newsletter has reconfirmed last night's recommendation to sell or avoid the PowerShares China 25 Index Fund (FXI). Also, here's Mark Hulbert: Thoughts on whether Thursday was a successful retest of low. Mr. Hulbert basically concludes that today's market action probably didn't signal a classic market turnaround.
    Although some of our leading economists foresee a recession lasting until the end of this year, they don't see it continuing past that point. For example, Nouriel Roubini is calling for a U-shaped recovery, with the economy bottoming at the end of the year. (Note, though, that the 30-year Treasury bond market is predicting a protracted period of deflation rather than inflation: Consumer deflation is here and will stay, says bond market.) 

1-15 Early:    The key question is: is the "Santa Claus" rally over? Are the markets slipping into the next leg of the bear market? The charts suggest that this is the case. The S&P 500 closed yesterday at 843, 7 points below the support level that Michael Ashbaugh defined yesterday as the breakdown threshold below which the S&P would once again be in bear country. Its chart is beginning to look like it did during the September-October crash, with relentless selling. Of course, a market pattern that works its way up or down gradually is digesting its gains or losses as it goes. Otherwise, there's apt to be overbuying or overselling, followed by corrections as the markets adjust to their new levels. 
    I closed out (sold) my paltry "position" in the Powershares Wilderhill Clean Energy Fund, PBW this morning at exactly what I paid for it. (I'm not usually that lucky.) On the other hand, I'm several thousand dollars poorer from acting on the Cabot's China and Emerging Markets newsletter advice. The newsletter has just recommended dumping their recently  recommended 10%-of-portfolio interest in the iShares Xinhua China 25 Index Fund, FXI, which I just did, reifying my (20%) losses. (I bought it a few weeks ago at $30.79, and sold it this morning at $24.73.)

    Paul Krugman hasn't posted anything new on his website since Tuesday, but I discovered that I had overlooked an article he had written on Sunday: Ideas for Obama. These ideas aretintended to provide more bucks for the stimulus package, and more bang for the buck out of the bucks that already there.
    Here's the latest article from Peter Brimelow: Stocks' slide doesn't spook Slothower.
    What should you do? The indices are bouncing a bit, perhaps because of the just-announced news that mortgage rates have slipped below 5%. I have a few mutual funds left to sell: I may sell part of them before closing time today. I no longer have anything that trades as a stock except for some shares of one of the Cabot newsletter's recommendations that they don't recommend selling just yet. Otherwise, I would be selling gradually over a period of a few days what I had left.
    The Obama stimulus package seems to be running into the to-be-expected resistance that allows Congressional representatives to capture concessions from  the incoming administration. 
    The big concern is that just maybe government programs won't be perceived as bear-slayers, and in the months and/or years ahead, we see market levels that are well below the November 21, 2008, low of 741 on the S&P 500. At the outset of the Great Depression, it took three-and-a-half years for the Dow to fall from its high of 381 in the summer of 1929 to its low of 41 in the winter of 1932, with several bear market rallies along the way.
    What has happened is that as a society, we can no longer support our too-expensive lifestyles by borrowing money to pay for them. Not only are we having to cut back on our lifestyles... we're simultaneously having to rebuild our savings accounts ( because of the dangers of layoffs). Of course, it helps that the price of gasoline has dropped by 60%, and that other commodities are cheaper. It helps that home loan interest has fallen below 5%. People who have to face loan-interest resets this year and next will pay less than they would if interest rates were higher. People can restructure their debts at lower interest rates to help pay them off. Still, there's a yawning gap between what consumers can afford to spend versus what they were spending two years ago... what the economy is geared to produce. Can the government really fill that gap?