Don’t Be Fooled

With oil prices down and the Fed completing another meeting,the market felt the need to rally today. But don’t be fooled – remember, the following facts still exist:

1. The Consumer is Decimated

The consumer is not getting pay raises commensurate with true inflation. The consumer also has no access to home equity anymore. Furthermore, the consumer might lose his job. They wouldn’t be doing THIS (article on extending unemployment benefits), if people weren’t losing their jobs.

Editor’s note: Check out these headlines outlined on the website Calculated Risk on July 1, 2008

Just to be fair, for a contrary opinion click HERE.

2. Inflation is Rampant

Check this out HERE: On this site, you can learn that if inflation were calculated by the government using the same criteria pre-Clinton, inflation would be much, much higher. Besides, anecdotal evidence should be obvious to you. Isn’t your gas, food, home heating oil bill etc much higher than a few years ago? Also, notice the prices of base materials (copper, iron, oil, zinc, corn, etc) – and the stock prices of base material supplying companies – both way up over the past 7 years.

3. Stock Prices Are, at Best, Fairly Valued – But Not Undervalued:

Stocks are not “way down.” They are still valued at average PE ratios historically. They need to fall further in order to truly be “down” and to potentially be a “screaming value” as some would have us believe. For your amusement, HERE is an interesting web page that allows you to enter a hypothetical current market PE and it shows expected future returns based on regression analysis of historical returns. As you can see, if you input a PE of 20, then the return range over the next 10 years shows potential positive or negative returns with decent probability – this is not reassuring!

4. The Real Estate Market Likely Has Another 15-20% of Downside:

Fewer applicants qualify for loans, people can’t afford higher payments as rates rise, and few have the 10-20% down to purchase a property. Accordingly, lower house values decrease available home equity loans and that potential boon to the economy. People feel (and are) poorer, thereby consuming less, borrowing less, and saving more. This helps cause economic contraction. And not to mention all of the real estate construction, sales, repair, and lending jobs evaporated by the end of the boom. By the way here is a great post on Businomics on breakeven dates for house price gains vs losses (after what date are you on average, negative on your house: HERE.)

For more on real estate, here is an interesting post from Mr Mortgage on the real estate landscape in California: HERE

Or more on mortgages blowing up (this further contracts capital and lending) HERE.

7.8.08 – interesting post from “The Market Ticker” HERE on a new accounting rule that might sink Fannie Mae

I can go on and on, but my point is, keep the big picture in focus. Yes oil may have dropped a bit today, and it may correct 20-40 per barrel short-term, in my opinion. But long term demand is increasing and so will oil’s price. Most other commodities will continue to be expensive, and the Fed can’t pump any more money into this economy. The big picture is the market heads down over the medium term. Don’t be fooled…

7.4.08 – Editor’s Note: The Fed is costing us again – read HERE

Chris Grande


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