Every pundit is sure to have their own opinion on this past week’s events and the fairly dynamic rally that ensued. The rally happened in the face of weakening news from the retail sector, continuing write downs plaguing the financial sector as well as the fate of the US auto industry and the millions of union jobs it utilizes. Fundamentally, nothing has really changed. The Fed is trying to fix things by throwing money at the problem as in their recent decision to bailout Citibank which was deemed too big to fail. These decisions are weakening the US economy for a longer period of time but serve the purpose of potentially avoiding a full scale meltdown. The Fed is really just trying to provide confidence in the US economy by saying that they will stand behind the liquidity crisis.
I have said this before but what happens when we, the people, lose faith in the government? What are all the financial instruments that our government issues backed by? Not gold, thank you Mr. Nixon. He pulled us off the gold standard in 1971. These financial instruments are backed by the full faith in the US government. Well, if this crisis deepens and the citizens lose the faith, not to mention the global economy, what happens to these instruments? What are they worth and for that matter what is the paper money worth? All this leads to massive inflation and a complete devaluation of the currency. Obviously this is a Domino effect that looks at a truly worst case scenario. Could it happen? Sure, but it’s highly unlikely. If the strongest economy and military in the world folds, the globe would be plunged into something out of a futuristic novel.
The Fed must continue with this path of trying to stimulate our economy by injecting liquidity into it as well as making sure that key industries like the financial sector are in essence protected. The unfortunate thing is where does the Fed draw the line? That is a very sticky issue which will be hotly contested in Obama’s first 100 days in office.
So has the question been answered about a bottom or bear rally? No. Now is the time for the author to stand on his soapbox and use this as a bully pulpit. My belief is that we are not nearly done with the bad news that can come out and effect equity prices. These rallies that we the public see are really just institutions re-balancing their portfolios. That means that for all of the stocks that are being sold into the markets, institutions must actually buy when certain value levels are hit which causes these mini bear market rallies. The other contributing factor adding to the volatility and these “mini rallies” are institutional short coverings. Do not be fooled as the underlying mess is still that, a mess. If buying, be selective and be cautious. Trading in this market is for professionals only. As an individual pick some fundamentally good small cap companies and hold them for a longer period of time. Industries are key so be careful on investing in volatile sectors such as oil and gas and commodity related industries.
Happy Thanksgiving to all and let’s see how the numbers shake out for Black Friday. If these numbers are severely disappointing then it will be followed by Black Monday in the stock market.
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