A Recap of the Last Few Days
Oct 22, 2008
Posted by Jody Eisenman | Filed under Uncategorized
We’ve seen the stock market rise over 400 points Monday, then decline by over 700 points the next two days. On a positive note, the Lehman CDS settlement went well, and credit markets continue to ease. Some things to note:
1. We are now in earnings season. I think it would be foolhardy to bet on better then expected earnings going forward. The reason is simple: we are a consumer driven economy. Every American is besieged by sophisticated advertising urging us to buy cars, homes, electrical equipment, etc on credit. The Average American has little to no net worth, and lives in debt. People are frightened. Unemployment is rising. In this situation, people cut back to only what they need. Go visit the shopping malls and see how empty they are. No one wants to keep spending when the immediate future is so uncertain. When spending drops, corporate earnings drop, and we go into a recession (or worse). I think this is virtually inevitable. When you combine that with the fact that loans are much harder to come by, you have a tough economic outlook.
2. All I see everywhere are layoffs. Other than the financial sector which has been decimated, you are now seeing layoffs from many other sectors of the economy. Merck and Yahoo announced job reductions today. Worker layoffs are at the highest levels since 9/11.
3.As the credit crunch continues throughout the world, many countries are facing severe economic pressure. The emerging nations may be the hardest hit.
4. Even the “perma-bulls” on some of the syndicated TV shows are turning bearish. It is hard to get excited about putting money to work when some of the largest firms in the country are facing severe credit woes.
5. The housing industry does not show signs of rebounding. According to the Mortgage Banker’s Association, despite a decline in interest rates, mortgage applications declined 16.6% last week.
5. As a financial industry professional, I know that many brokers and financial advisors are too shell shocked to give investors any real direction here. What are you going to tell your client to do now that her portfolio is down 30-40% or more? Unfortunately, their firms, in many cases, are actually part of the cause of the decline due to the massive leveraging of their balance sheets.
6. As I mentioned Monday, the strategy of “buy and hold” is over for the time being. Due to both the extreme volatility, as well as the massive stock and bond price declines, investors need to be able to make quicker and different decisions on their investments. I will discuss this more fully over the weekend
