Sunday, December 28, 2008

Economy on the Ropes

The Bear Market Trap rally continues on Wall Street despite ever increasing bad data on all fronts. It leaves one to wonder why would stocks rally when we have, the lowest aggregate commodity prices since the Great Depression, the highest real unemployment claim filings ever on a weekly basis, the lowest retail sales since records were kept, the lowest retail profit margins since records were kept and the lowest Treasury Interest Rate in history. It is a classic bear trap rally to sucker the average investor back into the market while the hedge fund managers play with spreads clipping small percentages on each trade to try to boost the value of their funds before the year ends.

The next set of numbers will come out right after the new year turns and the market will turn with the year. Expect a steady erosion of the market indices throughout January right into the inauguration. If the Obama Administration can really hit the ground running with an immediate realistic stimulus package as they claim they can, we will see a knee jerk upward spiral in the market indices. Remember that all of these rallies are Bear Market Rallies and are unsustainable because of the underlying economic forces and profit margins. It will take corporations years to turn around these falling profit margins. Even if the Obama stimulus plan is passed on the day the new Administration begins, the kind of stimulus that they are talking about will take months to feed itself through the economy and years to actually begin to stem the tide of the economic downward spiral that the Republican Bush Administration has led us into.

Based on the real earnings of the Dow Jones Industrial Companies the realistic level of the Dow should be about 6800, with a bottom of 6000 and a top of 7800 until earnings begin to increase. With the Dow today at 8500 you can bet that 2500 of those points are still speculative investing by hedge fund and options traders.

The only way that the Economy can be turned around immediately by a stimulus package is to aim it at the consumers with cold hard cash that will instantly be spent to pay bills and buy goods, thus raising the abilities of retailers to maintain their payrolls, pay their bills and prevent them from adding massive amounts of workers to the unemployment rolls. Short of thousands of dollars being distributed to every household this recession will deepen for at least 6-9 months.
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