What Goes Up…
Lots of sour faces on Wall Street and around the country today, as it appears the Fed’s panicked, ground-breaking intervention in the last three business days was not enough to keep the markets from taking a nose-dive after all. I can bet you the analysts weren’t the least bit surprised, as the evidence of an extended and substantial decline is as plain as Mount Everest.
Quick review. Bear Stearns finished last Friday at $30 a share, but near the brink of insolvency. Investors spent Friday trying to extract any of their funds out of the beleaguered Wall Street mainstay in what resembled a good old-fashioned “bank run.” The Fed coaxed J.P. Morgan to assume the investment house’s outstanding debt in a stock swap valuing the company at $2 per share. Yikes!
The deal would not be possible, however, without a new Fed policy that allows investment firms and stock brokerages to belly up to the Discount Window for loans, a privilege previously reserved exclusively for banks. This will come back to haunt the Fed, as they will find that every weasely Wall Street speculator will go on a spending spree with government-borrowed money, then come looking for a bail-out when the ferret farm they dropped a hundred million bucks on comes down with fleas. But I digress.
Then, yesterday another three-quarter point cut in interest rates, the second this year, a first in the history of the Federal Reserve. Markets soared on the news, adding over 400 points to the Dow.
All of this is to ensure that markets are liquid and able to meet short-term obligations. That’s the friendly version. The truth is that the money is to pacify jittery investors looking to pull their holdings into cash and precious metals. They’ve got the right idea, and it doesn’t take repelling gear to figure it out.
Hard-core traders follow market signals. P/E ratios, moving averages, debt to equity, and charts. Bazillions of charts. One of the tried-and-true chart signals market mavens swear by is called the “triple-top”. It’s when a stock goes up, then retreats a bit, then goes up just a little higher, then retreats, then goes up not quite as far, then plummets. So three peaks with a tall one in the middle, and watch out — the party’s over.
Go get a chart of the Dow Jones Industrial Average for a five-year period, and look at the most recent year. Oh boy…
There’s the reason the Dow tanked nearly 300 points the day after a 400 point gain. The market couldn’t help but go down, gravity isn’t selective. Yesterday’s exuberance was just like somebody playing, “You Shook Me All Night Long” three minutes before closing on Ladies Night: those guys who don’t realize the party ended an hour ago are still trying to squeeze the last few ounces of fun out of the thing, but when it’s over and the lights come up it’s just them, their buddy’s ugly sister, two fat waitresses and the janitor. That was the floor of the NYSE yesterday at 4pm.
Party is over, people. I’m saying we have the Dow below 10,000 by this time next year, and that may not be the bottom. Safe bet is in Euros right now, as the U.S. dollar is sinking with no end in sight. Gold also looks good, however these levels aren’t sustainable and investors with large holdings will start taking profits at some point. When gold goes south it goes like lightning, and you won’t know until it’s all over. So be careful.
I hate giving out this kind of advice, it’s depressing. But it’s a public service. You need to understand that the pundits on TV can’t tell the truth about this kind of thing, they’ll get sued and the government will pull their broadcasting license (don’t think for a second that doesn’t happen). All they can do is report on what has already happened and try to keep a stiff upper lip. Every one of those pukes had their Blackberry just beneath the anchor desk, frantically e-mailing their online brokerage with sell orders.
Anyhoo, they can’t sue me, and I don’t have a vested interest in anything one way or the other. Where else are you going to get unbiased advice?
Go. Be smart. It won’t last forever, it never does.
