It looks as if the oversold rally has played itself out, and now a retest of the January lows seems inevitable.
One reason I was sold on a retest was the hesitance of major bank insiders to add to their November purchases. Despite the big sell-off in January, insiders from banks like Bank of America (BAC), Wachovia (WB), and Wells Fargo (WFC) were reluctant to add to their holdings.
Despite this little tidbit of information, I believe the financials are forming an important bottom.
Today's ISM (Institute for Supply Management) report showed business activity declined to 44.6 in January from a revised reading of 54.4 in December. A reading below 50 indicates contraction. Many economists expected a slowdown but not of this magnitude. This is the first service-sector contraction in more than four and a half years.
Art Cashin from UBS has been calling for a retest of the January lows, but by the tone in his voice, I believe he thinks the markets will go much lower. Bear markets end when everyone throws in the towel, and we have yet to see this.
When the news media begins to put pictures of their floor traders in anguish on the front pages of business publications, you'll know we are close to a bottom.
My best guess is the panic mode will kick in if the January 22nd intraday low of 11,634 (DJIA) does not hold. A panic bottom could carry the major market index to 10.600 which would put the sell-off -25% from the 2007 highs.
I will be increasing client equity positions slowly at 12,000 (-15%), again at 11,300 (-20%), and again at 10,600 (-25%).
The DJIA currently stands 13 percent below its record close of 14,164 set on October 9th, 2007.
The yield on the benchmark 10-year Treasury note fell to 3.54 percent from 3.64 percent.
I am confident the Feds unprecedented lowering of interest rates will help nurse the financials back to health. The problem of course is inflation, which in time will mean higher interest rates in 2009.
A meaningful correction, in conjunction with an economic slowdown, should temporarily bring down oil prices enough ($75-$80/bbl) to lesson inflation fears. Once the financials strengthen their balance sheets, the economy will bounce back, oil prices will rise, and the Fed will raise rates.
Don't you find it odd that Crude and gasoline inventories are higher than expected, there are no hurricanes in sight, and yet oil prices are still at post Katrina highs? There always seems to be an excuse for why we are getting raped at the gas pumps.
All the talk about alternative energy makes me sick. In past years, whenever energy prices spiked, we heard about gasohol (now ethanol), battery powered vehicles, solar and wind energy, and making fuel out of garbage. This is nothing new, but like past energy issues, its just talk.
Making ethanol from corn is nothing more than moonshine!
If you stop and think about it, we have had the solutions to our energy problems for many years. But to create a real alternative for oil, the US consumer must experience enough monetary pain to create the demand.
The question that remains is how tight will the screws be tightened before the American people begin to yell "Uncle"?
Think about this for a moment. Most families have two vehicles. Both are run on gasoline and have an average top speed of 120-160 mph. If most highways in the US have a maximum speed of 65-75 mph, then why are cars made that go 120-160?
The answer is demand. To lessen demand, you jack up prices.
If every car sold in the US had a max speed of 80 mph;
1) High speed chases would not exist.
2) Highway's would be safer.
3) Oil demand would be less.
Let’s assume every family had two vehicles, one that runs on gas (for highway driving), and one that runs on battery (for in town driving). Since most gasoline powered vehicles get better gas mileage on the highway, and less in the city, wouldn't this alternative make the most sense?
No doubt.
My guess is the odds of this happening are remote.
The powers that run our nation and many of our politicians are oil people. Take for example this man.
David Rockefeller
Mr. Rockefeller is the "only surviving child and grandchild, respectively, of the prominent John D. Rockefeller, Jr. and the billionaire oil tycoon John D. Rockefeller, founder of Standard Oil."- Wikipedia.
He is also the founder of the Trilateral Commission, and honorary chairman of the Council on Foreign Relations.
I’ll leave the rest to your imagination.
