The global markets took it on the chin from the beginning of the holiday-shortened week right up until the close Friday. It was the worst week in six years for world markets. The Dow, NASDAQ and S&P 500 were all down more than 2 percent and if you’ve been reading this column you know that there is more downside to come. The question is how much more.

We’ve said that the first stop on this down elevator would be somewhere between 1200 and 1180 on the S&P500. Right now we are at 1242. Yet, there’s no panic, the volatility index is not much higher than usual and NYSE volume although higher since Labor Day is still no where near historical records. That says to me that there just isn’t enough panic and pessimism out there yet to form a convincing bottom. In which case, we could find the S&P dropping further to possibly 1100 which would not make anyone happy.

The bears are taking very few prisoners in this battle. Even the classic defensive sectors such as utilities, consumer durables and healthcare are getting smacked. Overseas markets are faring no better with emerging markets leading the declines. Commodities, which provided a safe haven to investors during the first half of the year, have also lost their luster. Oil continues to fall despite the Labor Day hurricane as investors worry that a global economic slowdown will mean less demand for energy.

As I feared, the Wall Street heavy weights returned from vacation sized up the anemic August stock market recovery and decided it was time to get out. Hedge funds are also taking it down a notch. They call it “de-leveraging ‘. I call it selling. Big mutual fund companies are also seeing redemptions as retail investors, tired of the volatility and deluged with a steady stream of bad economic numbers, have decided to cash in.

“So where are the buyers?” one gloomy client asked, as he himself sold his more aggressive funds.
“They’ve been watching the conventions on television, listening to the political speak from both sides and have come away less then impressed,” I quipped, with more than a modicum of cynicism.
The truth is neither presidential candidate can do much of anything in the short-term to stem the losses in either the stock market or the economy (for more on this see this Thursday’s column). Even our sitting duck of a President George Busch’s multi billion dollar, fast-track stimulus package, barely budged either the averages or the downward trend of the economy. Speaking of which, the unemployment rate hit 6.1% this week up from 5.7% last month. That’s not good because the economy usually does not lose jobs in the summertime.

The Federal Reserve also issued their “Beige Book” report this week. This is a survey of economic conditions from the 12 regional Federal Reserve Banks released every six weeks. It indicated consumer spending, the engine of the American economy, continued to weaken throughout the summer. Together with the lousy employment number, this does not bode well for this quarter’s economic numbers.

Finally, just after the close on Friday, the Wall Street Journal reported and the government later confirmed that the U.S. Treasury is preparing to take over both Fannie Mae and Freddie Mac, the two troubled mortgage giants that together hold well over 50% of the nation’s mortgages. No surprise given the latest statistics that indicate 9% of mortgage holders in America are in foreclosure or are behind on their payments. In past columns, I have written of my concern that the government would need to bail out these companies. The buzz word for this mega billion dollar life preserver will be called a “conservatorship” (read nationalization). After hours both stocks were down over 20%.

So is there any good news? Well, gas prices are down and I suspect food prices might at least stabilize over the coming months. If oil continues lower, as I believe it will, (target price: $88-$90/BBL.) this winter’s fuel bill may be lower than we think. Then there is the impact of all the interest rate cuts by the Fed over the last year. It usually takes at least 12 months for those cuts to start impacting the economy. The first rate cut was in September of 2007 so we just might see an up tick in the economic numbers soon. That may be more of a prayer and a hope then an economic forecast but I was born an optimist.