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Entering The Final Inning
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: October 1st, 2007 at 10:42 am EST
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The Stock Market is entering the final quarter of this year. The major indices have recouped nearly all their losses from the downturn in July and August of this year. The charts look healthy once again with the potential for more new highs by the end of this year. It almost looks like the sub-prime crises never happened. This September the Market went against the usual trend and actually gained over 3%.
There seems to be a debate over whether or not the recent drop in short term interest rates by the Feds was a good decision. One could argue both sides based upon the different economic indicators and numbers available. One thing seems clear to me; the Feds obviously felt that the dangers of not dropping rates was higher than a weak Dollar or high commodity prices. Only time will tell if their move was a wise one. I did say in the past that no matter what the Feds do, they are increasingly in a Catch-22 situation.
It would however be a mistake to think that the problems in the credit market and the real estate sector are behind us. The recent read of new home sales points to major weakness with even more ahead. It is only natural with excess home inventories that home prices will fall. The number of foreclosures also remain high. Consumer confidence has taken a hit. The credit markets have improved a little, but investors are still wary and are hanging on to their cash. The latest inflation data says that inflation is low and under control. This is one bit of economic information I do not believe. But, I have been around the financial block a few times to know that it is unwise to argue against the Feds or the Market trend. The common belief on the Street is that the Feds will drop rates by another 0.25% in October. I do not know if they will do that, but if they do, it should help the Stock Market move up higher.
Next month will also kick off the 3rd quarter earnings season. I expect volatility to remain high and we should see trading volume increase, especially for street darlings like Apple, Google, RIMM and others. I have always thought that we will end this year with a few more new highs in the DOW. But we all know nothing goes in one direction non-stop. Expect a few drops along the way. I also think by December end we will see some LBO action coming back. That will give the Market some much needed assurance.
The US Dollar remains under attack, and commodities remain strong. I have noted over the past few years that the Chinese government is trying to convert their Uncle Sam issued IOU chits (Treasury Bills, Notes and Bonds) into more tangible assets like oil firms, technology firms and financial firms. If the Dollar remains weak, I expect to see them speed up that process and increase the size of their deals. That is one way of getting rid of all the excess IOU paper assets they hold. Whether or not they will continue to buy our debt also has a political aspect. If the U.S. does not play ball with them on issues that they care about, they could use finance as a leverage over us. They are very aware of how much we value our comfortable life style and our inability and unwillingness to sacrifice that life style. If they slow down or stop their purchase of our debt or start to liquidate the debt they own, it could give us a huge financial headache, and I am afraid Ibuprofen will not help. The recent compromise in the UN Security council that postponed new sanctions against Iran could be the beginning of that subtle and understated financial blackmail I think we will see more of in the future.
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Authors, Economics, Investing, Ravi Prakash, Stock Market, Trading
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