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By Ian Wyatt, Daily Profit |
C | Nov 06, 2008 |
*****Sell the News
*****Unemployment
*****What Commodity Prices Are Saying
*****I had a feeling we’d see a little downside for stocks. 500 points on the Dow was more than I had in mind, but again, that index was up 1,450 points in the last week. It shouldn’t come as a surprise that investors took some of their gains from the last week. Buy the rumor, sell the news.
Also, now that the election is out of the way, investors have nothing to focus on but the economy. That’s not necessarily a good thing.
We get the latest unemployment numbers tomorrow. Economists are expecting a loss of 200,000 jobs for October. That would push the unemployment rate to 6.3%. It’s important to remember that while a lot of job cuts were announced in October, many of them have not been implemented yet.
In fact, one research firm reports that 112,884 job cuts were announced in October. That’s 19% more than in September and 79% more than last October. Another 157,000 jobs were actually lost in October. That includes nearly 18,000 from the financial sector.
It’s virtually a guarantee that the unemployment rate will continue to rise in the coming months.
*****As I’ve discussed, the unemployment rate is the single most important factor for the economy and the stock market. We won’t see the end of this bear market until there is some light at the end of the unemployment tunnel.
Most economists believe it won’t be until the second half of 2009 that the job market stabilizes. Two areas to watch closely in the months ahead are the housing market and the auto industry.
Stability in the housing market could provide jobs. And stability in the auto industry could save some jobs. I’ll be watching these sectors for improvement, but I can’t say I’m optimistic either will show much strength.
*****Apparently, there’s some concern about how the Obama administration will follow through on the bailout plans. That seems to be the explanation for why both Citigroup (NYSE:C) and Bank of America (NYSE:BAC) posted double-digit declines yesterday. But I don’t think anyone is completely happy with the way Paulson has administered to the financially wounded.
For one, there were no requirements for how banks used the bailout money they’ve received. I can only assume that Paulson hoped they’d start lending again. But so far that hasn’t happened. There are even reports that banks have used some of the bailout money for bonuses, dividends and even acquisitions.
For instance, Paulson’s former employer, Goldman Sachs (NYSE:GS) got a $10 billion infusion. It’s reported the Goldman will pay out nearly $7 billion in bonuses for the year. I probably don’t need to remind anyone that Goldman’s stock price has been cut in half this year.
There’s also been criticism that healthy institutions are getting more of the money, while some financial institutions that really need the money are being turned down. It seems as though Paulson wants some banks to fail, or at least be acquired.
Of course, there are advantages if healthy banks buy weak banks. But that’s not what was said when the bailout plan was accepted.
*****For his part, Obama has reportedly already started building his Cabinet. And I read that he’s considering former Fed Chief Paul Volcker as his Treasury Secretary. In my opinion, that would be a coup.
Volcker headed the Fed during the Carter and Reagan administrations. Volcker proved he is an independent thinker when he hiked interest rates to all time highs to crush stagflation. The move was unpopular, but it worked.
Now, because of independent action and success in dealing with a difficult economy, Volcker’s become something of a hero in the world of finance. I even held him out as an example of what Bernanke should have done back in the summer when inflation was starting to run hot. Of course, inflation isn’t an issue now. If anything, it’s deflation that’s now looming.
In any event, Paul Volcker would be about the best man possible for the job of Treasury Secretary. And I think most investors would agree.
***** Gasoline prices also fell as inventories rose. Demand is running 2.3% lower than last year. Oil prices fell today, too. That’s not surprising given the economic picture and OPEC production cuts. Slowing growth means less oil used, and OPEC members are notorious for not complying with production cuts.
After all, the biggest OPEC countries are completely dependent on oil sales for revenue. When demand and prices fall, they lose money. If prices don’t recover after a production cut, then they lose more money. So they sell oil on the side to help make ends meet.
That’s good news for the U.S.
The bad news on the commodities front is that the drops in commodity prices are some of the most severe on record. Analysts are suggesting that commodity price declines are forecasting a recession that will last 16 months. Most are saying this recession will be at least as severe as the one that lasted from July 1981 to November 1982.
The esteemed economist Stephen Roach from Morgan Stanley believes the recession started in March, 2008. That would put the end in August or September 2009. Stocks tend to start moving higher approximately 5 months before a recession ends. That suggests the stock market will bottom in the Spring. It also suggests we haven’t seen a bottom yet.
I’m starting to see the potential for significant selling to end this year. There’s no doubt tax-loss selling will take stocks lower at some point before the end of the year. And if retails sales for Christmas come in as bad as some are predicting, that would be another catalyst for lower prices.
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