All in One Week

By Jerry Slusiewicz | September 05, 2008 | 5:00 PM | 0 Comments

Last week I talked about the market after Labor Day, the weak volume, and September's historical penchant for down markets in my Next Week on Wall Street podcast.  I started by saying that this week would be short and not so sweet.  Well we had only four trading days this week due to the Labor Day Holiday (short), and the not so sweet part came in the form of our over 5% price decline for the stock market from Tuesday's high to Friday's close!

The unemployment rate has jumped up to 6.1% and we now have had eight straight months of job losses.  Historically the US real estate market only goes down when the unemployment rate goes up.  The recent economy had the real estate market dropping in what had been a strong economy (2007), due to fancy financing.  Now with unemployment rising it is conceivable that we are going to have another leg down in real estate for the more traditional reasons.  This could potentially bode for a longer downturn for the overall economy and stock market. 

The other problem is that this is not just a domestic phenomenon.  The slowdown for real estate and economy has gone global.  There is no disconnect that so many scholars were hoping for.  Foreign and emerging markets are actually performing worse than the US markets.

The final point is that the "earnings model" for banks is broken.  The last 10 years or so, banks would free up their reserve capital to make more loans against, by packaging a group of home, auto, or credit card loans into a security and sell it off to a third party.  Those investment vehicle sales have all but ended.  Banks are now stuck with the loans they make and they can't free up their reserve capital to make more loans.  Lending standards have increased tremendously, as the number of loans being made has shrunk dramatically.

We are deleveraging America.  This is not the end of the world, but it has taken some time already and there is no clear end in sight.  The markets usually perform best in the fourth quarter of the year and that is just around the corner.  The four C's are Crude, Currency, Confidence, and Cycle.  I feel we are 2 - 2 with the four C's.  Crude is heading down, and our currency (the dollar) is gaining strength.  That is a good thing.  Investor and consumer confidence are down and we are in the bad part of the market cycle (September and retesting the July lows).   This is a bad thing.  But this too shall pass.

In closing last week I said; "Investors are holding their collective breath, hoping that we don't have a repeat of September 2002. I'm not so sure hoping is enough. Cash is the safest place to be in this environment. History and the current market environment are dictating that today. It is far nobler to apply trading restraint than to take excessive risk to try to make a few dollars. Sometimes the best trade is the one you don't make."  I still have the same sentiment today.

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