Insights & Advice


At The End of the Week: Bears 3, Bulls 2

By Tuesday morning, I thought it was over. The S&P 500 was a mere three points above 1270, a critical level of support. We faced the abyss, teetering on the edge of another 8-10% decline in the market and then, like and angel from the sky, Ben Bernanke appeared with yet another $200 billion bail out plan. By the end of the day the S&P was up 3.7% to 1320, well out of the danger zone of 1270-1300.

“Not fair, not fair,” grumbled the bears as they covered their shorts but by Friday the market’s gains were whittled away to 1288, five points lower than where we started the week. The Dow and NASDAQ actually gained a smidgeon.

Certainly Bear Sterns, caught in the woes of sub-prime lending, helped squash any upward momentum. The big investment bank finally came clean (after repeatedly denying rumors all week) and admitted they were having liquidity problems. That slammed the market back down into the danger zone on Friday.

But neither bulls nor bears were able to score a knock-out blow as the bell rang at week’s end. The S&P 500 closed at 1288 managing to hold support but just barely. From a purely technical perspective, this week saw a second successful testing of the bottom put in back in January.

By now, it should be clear to all of us that the bulls have the full weight and authority of you, the taxpayer, behind them in the form of the Federal Reserve Bank and the government. To date, my rough estimate is that the Fed has already dumped half a trillion dollars into this meltdown on your behalf. That’s about half the cost of the Iraq War in a much shorter time period. Believe me; we will pay for this in the future through higher interest rates and higher taxes.

Next week round three begins. Count on the Fed to cut interest rates again on or before Wednesday regardless of what happens in the market. Also expect a concerted global central bank intervention to stem the continued fall of the dollar. It won’t stop the decline unless it is more than a one-off deal. If past interventions are any guide the most it will do is give speculators the opportunity to sell more dollars at a higher price. Interventions have been know to work however, but only through persistent and long-term efforts coupled with changing economic fundamentals.

Commodities should see some volatility as well next week after both oil and goal rose to record highs. I believe most commodities will continue to climb the proverbial “wall of worry” but not without some sharp pullbacks. My short-term price target for oil is $116/bbl. while natural gas should see $13/mmbtu before all is said and done. The gold price is a bit more difficult to fathom now that it has topped $1,000/oz. I am convinced it’s in a long-term bull market as are most commodities, however; both gold and oil will react negatively if there is a currency intervention in the short-term

As for stocks, my advice: wait and see. Don’t be a hero here. There are still plenty of lions and tigers and companies like Bear Sterns lurking in these woods, Dorothy. Although the contrarian in me whispers, “nibble, nibble”, I will resist for just a bit longer.

Posted in At the Market, The Retired Advisor