The Bear is Here to Stay

The S&P's down another 4%. Plan or no plan, the market is taking the negative view. I continue to question the notion that the market has priced in all of the bad news. As I have stated in an earlier post, the market is only currently reflecting an "average" bear market. However, we seem like we're in anything but an average bear market with demographic forces and credit conditions creating significant headwinds for the economy. This is most certainly going to lead to lower levels on the broad indices in the coming weeks/months.

A few short ideas: YHOO's looking bad. After rejecting MSFT's offer, it has suffered tremendously and the stock has acted terribly. Advertising revenues will probably fall for them given the weak economic conditions. I'd short FL too. It looks like it's rallied too much given retail's condition. Oil's broken down too and is likely to head lower for a bit as worries shift from inflation to deflation.

Morning Action

The market rallied after gapping down. It then came back to retest its lows and has moved back up slightly since then. Just a second ago, a higher low was made and the market has pushed up further erasing about half of its losses. As far as single names, HPQ and PLCE are looking really impressive. They both are showing pretty good relative strength and look to be headed higher.

What a Mess

House Republicans are apparently the hold up on the mortgage plan. I never thought that Republicans would veer this far away from Bush. But, it has happened, and the debate goes on. Everything will remain a mess until that plan is passed. However, even after it is passed, I think the best the market can do is lead us into another bear market rally before we stagnate or tumble again.

The WSJ outlined a couple different scenarios for the economy in an article published this morning, none of which are good. One scenario is an extended recession resulting from the housing bust and credit crunch. The WSJ states, "International Monetary Fund economists studied 122 recessions around the world since 1960 and found that the ones associated with housing busts or credit crunches were deeper than others." The second scenario is a longer, Japanese style deflationary period. However, they consider this situation unlikely stating, "For deflation to become a real problem, it would have to infect more than just volatile food and energy prices. At the moment, that doesn't seem likely, because prices outside of these sectors have remained reassuringly stable in the past few years."

I think the bottom line is that the current market environment and economic conditions are not just going to vanish. As I said before, things are going to take a long time to sort out and it'll take a while for businesses, financials, and consumers to regain confidence.

Financials along with the broad market are already getting hammered pre-market. The gap down will likely be pretty ugly and the tone could persist throughout the day unless some positive news on the Treasury's plan comes out.

Unprecedented Volatility Rules Market

The market continues to swing wildly as uncertainty about the Treasury's recovery plan haunts participants. Economic conditions are not helping either. This morning durable goods orders fell more than expected and jobless claims rose more than expected. Offsetting this negativity was some positive feedback from Congress, the Exec. Branch, and Treasury stating they can resolve their differences and put together a plan to buy distressed mortgage assets at hold-to-maturity values. Their hope is that such a grand plan will put a floor in mortgage debt prices, lower mortgage rates spurring demand for housing, and restore some liquidity to bank's balance sheets. The question is will banks lend and will people gain enough confidence and have access to capital to buy houses.

On CNBC, several charts of the DJIA a year after market crashes (and the RTC) were posted. Most of the markets were flat, slightly up at best, and down further at worst. All periods exhibited very volatile moves, but were very range bound and weak. I think that it'll take time to work through this period and an imminent recovery is not at hand.

Job losses are still a big concern (unemployment rate is at 6.1% currently). Europe is weak and Japan has already had one quarter of contraction. Gasoline is still at $4 a gallon virtually everywhere. Finally, you have baby boomers moving past their peak spending years causing a significant decrease in consumer spending. If the Treasury and Congress can't get a plan together, the markets are in trouble.

Another Victim of the Credit Crisis

The owner of the Hard Rock Park in Myrtle Beach has filed for bankruptcy after the credit crisis made it impossible to raise the amount of money to support the park. You can read the rest of the article here.

Things Are Getting Worse

It's pretty clear that things are getting worse--not stabilizing and certainly not getting better. With AIG down to $2 a share, FNM at 43 cents, and Lehman at 14 cents, the financials look like a complete wreck with even Goldman and Morgan (the formerly immune banks) getting punished severely. The S&P has made new lows after rounding off a bear market rally that could never push past the 1310 level.

What's to provoke a turnaround? No one's buying houses and prices keep falling. The consumer is being sapped by gasoline prices, declining home values, and job losses. Oil has gone from being a catalyst to a minor distraction. It is clear the drop has been because of slowing demand, a sign of a weakening economy. More and more companies are going belly up and the Federal Reserve is doing all it can (besides lowering rates). Nationalization's are not stemming panic, but creating more panic.

I still think we have more to go. However, the magnitude of today's drop will likely lead to some buying tomorrow and possibly the next day as well. After the slight bounce, then it's time to reconsider the short side.