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Big Bada Boom
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: January 14th, 2008 at 2:27 pm EST
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The title reflects my thoughts as I poured over the charts for the major indices and the VIX. As predicted last week, we saw more weakness in the Market. The Feds did not drop interest rates as some may have hoped for. According to Goldman Sachs, recession later this year seems to be a given. The last couple of drops in the interest rates saw the Market indices drop further. So it would be prudent not to expect the market to fly up with another drop or two in interest rates. The gap between LIBOR and Fed Funds remains wide. That is never a good sign.
The Bull run over the last few years was based on inflated assets aka Real Estate. People did borrow a lot based on the equity in their homes. Today quite a few have negative equity in their homes. Lower interest rates are not going to help appreciate the value of those homes. That Market is dried up in many parts of the country. The other concern is employment. In an election year be prepared to hear more promises about tax cuts for the hard working common folks. What they need to do is figure out how to invigorate corporate America so they continue to employ people and keep them afloat. Tax cuts rarely if ever help people like you and me. They usually amount to a few hundred dollars maybe a thousand, but it gets lost in the yearly tax returns. They should also redesign our tax code from scratch. The current code would have given Albert Einstein a massive headache. Our current tax system encourages the wealthy to evade taxes and take advantage of every little loophole.
While one may be tempted to short everything in sight, be careful. Watch how Citi is getting more money from Saudi Arabia and now from China too. Bank of America is buying Countrywide and JP Morgan Chase might be close to buying Washington Mutual. The consolidation phase has started and this could slow down the selling. If we are in a bear market, short lived reversals are sharp and swift. Right now all the major indices are at or slightly below their 20 month moving averages. That average has provided support in the past and may do so again. We will find out soon enough.
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Economics, Investing, Options, Ravi Prakash
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