The recession cat is finally out of its bag. We have been telling you for quite sometime that the US is facing a "Perfect Storm" scenario where Inflation, Energy Prices, and the Credit Crunch would derail the economy.
Clearly, the inflation rate is similar to what we saw in the early 1970's, and the Credit Crunch/ Real Estate debacle is similar to what we experienced in the 1980's. When you throw in the high costs of Energy, Raw Materials, and Commodities you have a situation that cannot be corrected by a single Central Bank.
The stock market will eventually clean out (if allowed) all of the excesses. This is done when unemployment and bankruptcies rise, and the consumer is forced to stop spending, and start saving. This cleansing of the economy will also force the major market indexes down 15-25%.
Less demand for goods and services will drive down commodity prices, forcing energy costs down, which will eventually bring down inflation.
We were holding out hope that a rally in January would allow us to reduce our allocation models by an additional 10%. While I still believe the market is due for a rally in January, it looks as if that rally will be an oversold which will fall short of reaching the highs set in 2007.
This being said we will reduce our asset allocation models by 5% immediately and another 5% if the Dow rallies back to the 13,500 mark.
Our current asset allocation is as follows;
70% Equities: (Normally 95%) Aggressive
60% Equities: (Normally 80%) Moderately Aggressive
50% Equities: (Normally 60%) Moderate
30% Equities: (Normally 40%) Moderately Conservative
15% Equities: (Normally 20%) Conservative
Today, we are reducing our allocations by 5%;
65% Equities: (Normally 95%) Aggressive
55% Equities: (Normally 80%) Moderately Aggressive
45% Equities: (Normally 60%) Moderate
25% Equities: (Normally 40%) Moderately Conservative
10% Equities: (Normally 20%) Conservative
Yesterday, the price of oil briefly broke the $100 mark. Cold temperatures and demand for heating oil is one of the excuses being used for the surge in price. The other reason given for the surge in energy prices was the inventory data which showed a larger-than-expected drop in crude oil inventories.
The use of heating oil to heat homes during the winter seems a bit archaic. When I was growing up in Detroit, our first home used heating oil and my dad had our heater converted to natural gas. Why in the world anyone would use heating oil today is beyond me.
Today we woke up to news that the unemployment rate rose to 5.0 percent in December. Since the fed is being held hostage by inflation, lowering the FF rate in January will do nothing to help the situation.
