Daily Investment Interpretations

February 26, 2009

2009-2-26 The markets dropped a little more today than they did yesterday, by -1.22% for the Dow to -2.38% for the NASDAQ Composite. The NASDAQ lopped off 33.96 points (-2.38%) to close at 1,391,. the Dow faltered 88.81  points (-1.22%) to close at 7,182, and the S&P 500 gave back 12.07 points (-1.58%) to end at 753. Oil finished up a bit at $44.50 a barrel, and gold fell back to $942.60. The VIX was unchanged at 44.66.
    Slow moves like this have a way of insidiously sneaking up on us without raising the alarm that would attend their moves if they were sudden.
    One fact is clear, the economy is no longer in the kind of accelerating free fall that we saw last October. 
    Every living investor today... even someone like myself who grew up during the Great Depression... has only post-World War II experience to guide him or her. Over the decades, we've developed rules of thumb that have worked for the Fed-driven recessions we've experienced during our post-war working lives. Among these are the ideas that recessions behave like inverted bell curves, that the stock market bottoms at the inflection point (point of steepest descent) for the economy 6 to 9 months before the economy bottoms, and that the moment of greatest pessimism is the best time to buy (or that you should buy when you see excellent companies with strong balance sheets and recession-resistant products selling for a substantial discount from their fair-weather prices). And like most stock market rules, these rules work until they don't. Japan is the bellwether example of this. If you had jumped back into the Japanese market in the early 90's, thinking that its market carnage was just another correction, you would have been  creamed by now. A few years ago, Japan finally began to pull itself out of its "lost decade" thanks to a surge in global trade. Now global trade has gone south for the winter, and Japan is already in the throes of "its worst recession in more than 50 years", with worse yet to come,
Perilous outlook for Japan. But when I read articles like, Jobless claims push higher, or Worse before better, my inclination is to take the contrarian position that the worse the news, the better it is for the future of the stock market... that the bad news has already been priced in. In other words, my own post-war experience with inflationary recessions threatens to lead me down this same primrose path I'm warning against. It's hard for me to override 40 years of experience just as it must be hard for others.
    Given that last fall's decline began with threats to the safety of money market funds and bank accounts, this article might be of interest:
Federal Deposit Insurance Corporation paints bleak banking picture, $26 bln 4Q loss. Also of interest: Bond king Bill Gross hints that he's quitting on stocks