Back on October 1st, I suggested that you should take advantage of the rise in the market to sell your stocks unless you could wait six years to get your money. The Dow then dropped 30% from 10,831 to as low as 7,552 on November 20. But then something strange happened -- stocks rose 18% to close at 8,924 Tuesday when a 360 point rally seemed to coincide with the Federal Reserve's cut of its Fed Funds rate to near 0.
If you didn't follow my October suggestion, with the market poised to fall today, should you use yesterday's rally as a gift to exit stocks? I really don't know because, like everyone else on earth, I can't predict the future. However, I think the factors pushing down stocks in the medium term outweigh the factors pushing them up. The biggest thing that could boost stocks would be a bigger than expected -- say $2 trillion -- infrastructure spending package from President-elect Obama when he takes office in January.
There are four factors pushing stocks down:
-
Continued uncertainty regarding bank solvency - Yesterday's financial report from Goldman Sachs Group (NYSE: GS) highlighted the depth of the potential asset writedowns due to Level 3 assets. In many cases, these writedowns could severely reduce banks' capital levels. And the appetite for injecting more capital into them is limited.
- Unknown depth and length of the recession - The economic statistics are grim with prices falling at record rates, unemployed workers hitting the streets in large numbers, and a significant economic contraction is expected to continue. This deflationary spiral will probably end some day but nobody seems to know when.
- Selling pressure from hedge fund redemptions - Hedge funds manage roughly $1.72 trillion in 10,000 distinct funds. The Madoff scandal is putting further pressure on hedge funds from investors who want their money back. Assuming that the hedge funds have investments that they can sell to give investors back their cash, those redemptions will push stock prices lower.
- Ineffectiveness of monetary intervention - As I've posted, the Fed's cut yesterday was its last bullet. Since investors expected the Fed to cut to 50 basis points and it cut even further, the market rallied. But as the Fed has been cutting rates from 5.25% down to 0%, the economy has not been responding. This could be due to banks' fear of lending out money due to the nasty economic conditions, which would boost the odds of future write-offs.
I hope I am wrong because I don't enjoy losing paper wealth any more than the next person. Are these the right factors moving the market? What am I missing? Will you sell, hold, or buy?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
Will Rich Ross really have a positive impact on Disney's movie operations?
Consumers sick of recession, may spend extra on holidays
Corrections, seasonality and Santa Claus
Reader Comments (Page 1 of 1)
12-17-2008 @ 10:21AM
Tom said...
Peter:
I am still looking for opportunities to buy over-sold, beaten up stocks. But I'm in no rush and am certainly not optomistic. This is clearly a new era where many of the old rules don't apply. One rule that does still apply is that our politicians on BOTH sides of the aisle are rotten through and through, and the small investor / working citizen is likely to continue getting screwed, regardless of "change."
12-17-2008 @ 11:10PM
crazyhorse said...
Sell your stocks take the loss and put all your money into Swiss bank accounts. Safe and will not tell anyone your amounts