Some days I wish I was not previously a stock broker. Sometimes I hope that what I feel are likely outcomes in the stock market do not come to fruition. But time and again I find that I get it right, not always on the timing or the exact figures, but the trend. And I did it again.

Back on December 26, 2007 I wrote a post Will 2008 be a lump of coal or a nice present for investors? In essence I felt that the beginning or 2008 would be a horrible year for many investors. This also went in line with my thinking about gold and gold stocks.

Directly I stated,

“I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup - which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.”

Key in on the fact that oil has already hit $100 a barrel this year, and Citigroup announced

“The biggest hit came from a $18.1 billion write-down in the value of its investment portfolio. But the bank also set aside $4 billion on Tuesday to cover anticipated losses on loans to U.S. consumers — a sign that deflated home prices, high energy and food costs, and rising unemployment are making it difficult for many customers to keep up with their payments.”

I am wrong in that the Dow Jones Index closed today at 12,501. That is a far cry from 11,000 but all the financials have yet to announce their losses, oil has not maintained $100 a barrel or more, the Fed is cutting rates, and all the 4th quarter numbers are yet to be reported. Even so, the Dow now stands 12.5% below the high and beyond correction territory. It is a mere 7.5% from a bear market.

Is America in a recession? Will gold spot prices hit $903 as have been projected by some brokerage houses? Will more Americans lose their homes?

I would say yes to all. I could very well be wrong, and I hope that I will be. But I don’t see an end to this problem in the near-term. The Fed cannot prevent many of these issues with the application of rate cuts.

Those that are in trouble, or will be, with their mortgages will not be helped by lower rates as that will not cap increased heating and gasoline prices. Small businesses are not going to be able to get new loans as easily even with lower rates as financials scramble to find cash to absorb the losses they are experiencing. Effectively some degree of pain must happen and is not preventable.

I say all this for one reason. So that you my readers can be prepared. If I am correct even in part, then this nation will encounter times we have not seen for quite a while. I doubt that we will see the inflation and unemployment that existed in the 1970’s (when I was a child) but I am sure that we will see levels that those under 30 have never experienced.

Credit will get crunched, and credit card debt will increase for a time. New loans will become far harder to achieve. And costs of fuel will go higher even if ethanol additives were readily available for widespread distribution today.

And then there is the political component. Don’t be lured into the cheap vote purchases offered by some candidates. The stimulus plan proposed by Senator Clinton, equating to $500 per person filing taxes is a ploy. It’s a one time gift that will help no one. It may help you pay a bill, say heating, for a month but will do nothing else for you. Rather a tax cut might help more, adding $50 a week to your paycheck. Either way, don’t sell your vote on a quick fix that is neither.

Further, if a Democrat is elected expect the impending pain to be trebled. Increased costs for nationalized healthcare and other social entitlements will hit the pocket books. That is not to say that a Republican in office will avert any of this. They will not. Just that the historical fiscal impact of a Democratic President is view more harshly, whether or not they are the best person for the position.

So my readers, be prepared. If I am right on the trend, and it seems that I am increasingly becoming so, those that are ready will endure best. And I only wish the best.

Labels: bear market, Citigroup, credit card debt, democrat, Dow Jones Index, gold spot prices, mortgage crisis

While in New York City recently I visited with several old brokerage friends. During that visit we all discussed the market and what may potentially be on the horizon.

One broker, whom I respect and consider quite sharp [even when I disagree], had an interesting comment on my predictions. I believe that the move to junk rating of ACA, the probable $6 - 12 billion loss at JP Morgan [significantly higher than expected], eventual losses from Citigroup – which reinsures itself, oil breaking $100 a barrel, and the multiple overseas investments will all hit the market in mid-January 2008. Thus I think a move to 11,000 is more than probable.

My friend disagrees. His view is that if I am correct in these outcomes, then the Fed will be forced to lower rates further immediately. He feels that this is the only way to stem the problem that is the mortgage crisis. This is especially true when you consider the increase in credit card debt.

“All the people with million dollar homes that would be refinancing and getting an extra $200,000… They find it hard to change their lifestyle quickly. That says nothing about most people who are feeling deflation. And add those paying the mortgage with their credit card and you have a market that needs the Fed to cut.” – Paraphrase

Sound reasoning. But I don’t think a bear market is avoidable.

The fact that the mortgage crisis is far closer to its beginning than end. I expect that there are far more homes in danger than has been seen to date. Even with the highly selective mortgage bailout stated by President Bush, many are going to be at risk. Credit card debt can only float for so long. With the added pressure of oil at or above $100 per barrel, which I expect mid-January as I stated above, more will fail even if rates are lowered (less than 2 points).

Add to this the fact that financials are at high risk. The early infusion of foreign capital may look good now, but this does nothing for future and continuing losses. It’s window dressing. With re-insurers like ACA in trouble and Japanese banks are unwilling to help bailout the shortfall (due to very limited exposure to this risk), the sector will be weak. Historically if financials are stagnant or falling so goes the majority of the market.

That says nothing of the potential of a Democrat becoming President. Again historically a negative pressure on the market. It is even graver with several prominent Democrats nearly promising to increase corporate taxes (or outright take their profits – especially oil companies).

The Fed can lower rates, but that will not stop the general malaise I see coming. At the least the first half of 2008 will not be good. A move to 11,000 seems inevitable. If I am correct then the question is this.

Will those experiencing deflation outweigh the inflation fears? And if more people lose their homes how much of our financial institutions are we willing to sell to avoid the harshest realities of a crash?

Labels: ACA, bear market, Citigroup, credit card debt, democrat, JP Morgan, Michael Vass, mortgage crisis, New York City, overseas investments, President Bush