Those investors/readers who are of the persuasion that the U.S. stock market is about turn the corner should heed the words of caution from legendary banker Bill Seidman.
"There's always a chance of a large bank failure," Seidman told Newsweek. Seidman chaired the Resolution Trust Corporation, the federally-created liquidator for the last banking crisis in the 1980s.
Keep an eye on the big banks
A large bank failure would quickly extinguish what little momentum the market has established from mid July to early August, during which the Dow Jones Industrial Average has risen from about 10,850 to 11,734. Economist David H. Wang said he will not attach a more-positive descriptive to the 884-point move, because he "doesn't want to create unreasonable, and unjustified, expectations."
"First, our technical analyst friends would say the recent move up is still well within the range of a bear market correction," Wang said. "Second, from a fundamental standpoint, we still have major headwinds."
- Headwind No. 1 -- "public enemy No. 1" -- as far as the market is concerned is the housing sector -- both write-offs and falling housing prices, Wang said. The write-offs must subside to convince institutional investors that the housing-related damage has peaked, he said. Similarly, housing prices must bottom, "to provide some impetus for home sales, and of the positive lateral economic activity that goes with it," he added.
- Headwind No. 2 -- oil. It must continue to decline, in Wang's interpretation, into the $80-90 range to restore some semblance of disposable income and cost stability to the U.S. economy, and to a lesser extent, to the global economy. It's too soon to tell how much damage the plus-$100 oil period has done to business activity, but Wang is certain "it has been a major deflator of GDP." Moreover, $115 per barrel oil is better than $147, but the drop is still not enough for adequate growth to resume; it must drop considerably more for that to occur, Wang said. "The U.S. economy, no economy, really, can absorb the type of price increase in oil that has occurred in the past two years without entering a recession. It's just too much of a cost shock to the system, which is why we call it an 'oil shock' " Wang said.
- Headwind No. 3 is actually the absence of a tailwind -- a catalyst -- and a catalyst must appear for sustainable growth -- and a lasting market rally -- to occur, Wang said. "Every recovery has a catalyst. At the end of World War I, it was U.S. soldiers returning from Europe at a time of innovation at the start of the 1920s. They bought everything in site, got married, and then bought even more stuff," Wang said. "It produced the economic boom of the 1920s. In the 1990s, we had the birth of the Internet and the technology boom that increased productivity and transformed business processes." And the catalyst for 2008? "It hasn't appeared yet," Wang said.
Market Analysis: So keep your eye on housing, oil, and a catalyst. If those three do not line up constructively for the U.S. economy, don't expect good things regarding the DJIA.
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Reader Comments (Page 1 of 1)
8-09-2008 @ 2:07PM
william lindblad said...
While I frequently am in agreement with Mr. Wang, I usually have something to add. Today is no different.
As to obstacle #1, the housing sector ?? I really doubt that write offs are over. Carl and WCI are the harbinger of things to come. Everyone has been focused on the residential market. The commercial end is another matter and the full extent remains to be seen. Other things to consider are the State Laws that govern banking. In some, default is a matter of months and years in others.
Obstacle #2 ?? First, oil has to get to 115 and at least stay there or get below for anything positive to happen. The damage that has been created by housing, the credit crunch and excessive fuel has six months built into the economy. Unknown factors: storm season is not over until the end of October, the public returning to "gas guzzle" mode and the severity of Winter. The last one is important since diesel fuel and home heating oil are essentially the same distillate which results in competition between heating homes and having food and essentials delivered.
Obstacle #3 - absolute - something major is required to jump start this economy but it has to be real rather than another bubble.
I a have a further comment regarding the 1920's.
The real reason behind the boom was the Spanish flu. This is the pandemic that the CDC worries over every year. It was one of the most peculiar diseases to date for it was a selective killer. It's killing range was 25-45 and it was devastating. The result was an un-balanced age of population, idealistic and adventurous. All of this zeal ended in 1929.