Market Update 1/22/10
Jim Cramer was outlining various scenarios that would be the end of the world as far as the stock market is concerned. I have found him and most of the other CNBC talking heads to be contrarian indicators. Whenever there is any selling in the market they assume that it is going to be the big one. There is such a fundamental difference between economic conditions today as compared to 2008 that it is difficult to conceive why anyone would think that we are going to see a repeat of that sell off at least for the time being. Back then the worldwide credit markets completely locked up. That is not the case today and while the credit markets are not operating at 100% efficiency they are certainly functioning much better now than they were then.
Companies like Google and Goldman Sachs reported blow out earnings but there was a sell on the news effect when the President started talking about regulating banks. Some democrats are now saying that they will not support Ben Bernanke’s reappointment as Fed Chairman. China has also announced it is tightening credit at least temporarily. According to some analysts that I follow and who live in China, that country is not in a bubble economy at all as they run a cash economy. Bull markets climb a wall of worry and that wall seems bigger than ever now but there is a wildcard present in the form of the politics that is currently being played out.
While some technical damage has been done to the major indices, the market is sending mixed signals and is clearly going through a period of indecision. Some stocks have cratered, some have pulled back to support levels and others have rallied. Corrections are perfectly normal in bull markets and the market has already corrected 5%. The markets quickly moved into oversold territory so I would expect at least a bounce to the S&P 1120 area. The bears are in all likelihood aggressively shorting this market so if there is a rally it’s possible that short covering could push the market to new highs. In any event I do not see any reason at the present time to panic.
Ben Bernanke will probably be reconfirmed and that may be the impetus needed to send the market higher. If for some reason he is not confirmed, that would be extremely negative for the markets as it is unclear who would take his place and what subsequent Fed policies might be. With Bernanke in control we know that he is going to continue to flood the markets with liquidity until the economy is self-sustainable.
Unfortunately the Republican Party starting under Bush and Cheney has become the Republican Party of old: pro-rich and screw everybody else. Their economic plan calls for reduced spending, cutting taxes and increasing interest rates. To implement those proposals at the present time would be economic suicide. The Republican’s exist for one purpose only: to oppose the Obama administration.
Now there are allegations that Timothy Geithner was involved in some sort of cover-up regarding the AIG bailout and that Bernanke had to have known about it. I’m not exactly sure what was allegedly covered up but I’m certain the Republicans will milk it for every ounce they can squeeze out of it. From what the Republicans have been saying, they could care less if the market crashes and people’s IRA’s get wiped out yet again. They’re a real bunch of working class heros.
I was watching a special on the great depression and while people were lined up in droves at soup kitchens just to eat, Henry Ford was on the radio expounding the benefits of hard work and enterprise. It is difficult to work hard and be enterprising when you can’t find a job, can’t borrow money, and can’t pay the mortgage. Thanks Dr. Henry, that’s just what the dying patient needed, a good pep talk. I’m sure he must have been a Republican.
Here is a 2 year chart of GLD. You will notice that it has been in this wide uptrend channel since August, 2008 and it is now sitting near the bottom of the channel. The stochastic is in oversold territory and has consistently rallied to some degree off these levels. While the U.S. Dollar has rallied and could possibly rally more, I believe that this is just another bear market rally and the downtrend in the dollar will eventually resume.
There is a misperception that the U.S. dollar is somehow a safe haven. That may have been true in the 1930′s when it was backed by gold or even in 2008 before the government printing presses were rolling but that is not the case now. The dollar has been severly devalued and when the reality of that sets in the rush will be out of the dollar and into gold and other commodities.
I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.
Wow, that is really nice info, cheers.