Weekend Overview
Hello All! Sorry for the spotty posting, but I was out of town on business for a week and didn't have a reliable internet connection in the hotel... to top that off, my personal laptop is still crashed.
This was a tough week on the street. The DJIA lost about 60 points, The Nasdaq shed about $40, and the S&P 500 was down about about 4 points. This may not sound too bad, but the issue is that the market was incredibly volatile. At one point the S&P 500 was down more than 20 and up 5-6. I think we were luck not to have lost a lot more on the week...
I've been very bullish for almost a year now. Things have been going great, I can't seem to pick a loser (except for Xethanol (XNL) my worst trade ever). This week I made gains of about 2.5%, which isn't too bad when the market is going down (I wasn't shorting anything this week because I was out of town). However, it appears that things might be getting worse...
Things might be getting worse because (1) The dollar is plummeting; (2) inflation is still a worry; (3) earnings were big last quarter; (4) energy costs; and (5) signs of economic downturn.
Dropping dollar: This is both a plus and a minus. It is a possible blessing for U.S. exporters who ship to Europe and Japan, although I still don't know if they can compete with China and other countries that can abuse workers. The minus should be obvious. It means companies that import goods will have to pay more in dollars. This means customers will have to pay more and consumer sales will slow. This could be the start of the end. The government had a "strong dollar" policy for decades for a good reason. It protected us from rampant inflation. Congressional spending is killing our money and our low household savings rate doesn't help any. The Fed will have to raise rates to protect the dollar from falling too hard.
Inflation worries: Although core inflation seemed to be holding steady and then the dollar dropped by nearly 10% against the pound and euro. This means all those gains were nearly erased. Inflation is now a legit concern again and the Fed may have to raise rates to reign it in. This, combined with a dropping dollar, means we could see interest rates actually increase again in the first half of next year instead of stay steady (like I predicted) or drop like many analysts are predicting. This would protect the nation against inflation, but may squash the market.
Earnings: These were so big last quarter that I think we're getting ready to see a real disappointment in the fourth quarter. Next time earnings roll around I'm going to be scared... very scared. I might even go 50-60% cash to protect myself for that month and try to make money on the backside of disappointing returns. Normally, things balance out for a year to what was predicted. If you boom in the 3rd, you normally fade a little in the fourth. It's not because things are getting worse, it's because maybe a big deal came in earlier than expected...
Energy costs: Believe it or not, OPEC actually seems to be following through. This has got oil back up to $62, and I think we might see it peak back up to $65. This depends on how Iraq goes and what happens with Iran. But with Angola joining OPEC, I think the cartel is gaining strength. Furthermore, with more countries nationalizing resources, we may see prodcution efficiency drop, which means price will go up. Furthermore, gas prices are related to weather, and this fall is looking like it might be abnormally cold. Follow up a cold winter with a hot summer and a Democrat repeal of oil company tax breaks and you've ot $10/MCF natural gas and $68-70/barrell oil. Bad news for everyone but energy companies.
Economic downturn: All the signs of the economy slowing are starting to fall into place. This is a no brainer... economic downturn means companies get battered. Normally this is when you can make some money on the market by planning for a Fed rate cut, but when you have inflation and a dropping dollar, that is not going to happen. I think we're about to go into a recession come February or March, maybe sooner.
My suggestion to all of you is to be careful, only invest in best of breed companies, and companies that are trading at a real discount. There's still alot of money to be made, but you have to be careful doing it. I'm not ready to start shorting the market yet like I was when the tech bubble was about to burst (I shorted that market down for months after riding it up for months), but I'm trying to get my economic gauges fine tuned so I'll know when to pull the trigger.
One final note: Xethanol (XNL, formerly XTHN) are in a class action lawsuit. If you bought their shares between January and August, 2006 please consider joining the suit. They are corrupt, and deserve to pay. This, unbelievably, was the only trade (out of more than 200) that I've lost money on all year (lots of neutrals, and several that are only profitable because of the dividend), but this one was a real stinker. They intentionally misled investors, made false statements, forged records, and affiliated themselves with known criminals through shell corporations. They should go to jail. If that doesn't happen, maybe we can at least recoup some of our losses.
This was a tough week on the street. The DJIA lost about 60 points, The Nasdaq shed about $40, and the S&P 500 was down about about 4 points. This may not sound too bad, but the issue is that the market was incredibly volatile. At one point the S&P 500 was down more than 20 and up 5-6. I think we were luck not to have lost a lot more on the week...
I've been very bullish for almost a year now. Things have been going great, I can't seem to pick a loser (except for Xethanol (XNL) my worst trade ever). This week I made gains of about 2.5%, which isn't too bad when the market is going down (I wasn't shorting anything this week because I was out of town). However, it appears that things might be getting worse...
Things might be getting worse because (1) The dollar is plummeting; (2) inflation is still a worry; (3) earnings were big last quarter; (4) energy costs; and (5) signs of economic downturn.
Dropping dollar: This is both a plus and a minus. It is a possible blessing for U.S. exporters who ship to Europe and Japan, although I still don't know if they can compete with China and other countries that can abuse workers. The minus should be obvious. It means companies that import goods will have to pay more in dollars. This means customers will have to pay more and consumer sales will slow. This could be the start of the end. The government had a "strong dollar" policy for decades for a good reason. It protected us from rampant inflation. Congressional spending is killing our money and our low household savings rate doesn't help any. The Fed will have to raise rates to protect the dollar from falling too hard.
Inflation worries: Although core inflation seemed to be holding steady and then the dollar dropped by nearly 10% against the pound and euro. This means all those gains were nearly erased. Inflation is now a legit concern again and the Fed may have to raise rates to reign it in. This, combined with a dropping dollar, means we could see interest rates actually increase again in the first half of next year instead of stay steady (like I predicted) or drop like many analysts are predicting. This would protect the nation against inflation, but may squash the market.
Earnings: These were so big last quarter that I think we're getting ready to see a real disappointment in the fourth quarter. Next time earnings roll around I'm going to be scared... very scared. I might even go 50-60% cash to protect myself for that month and try to make money on the backside of disappointing returns. Normally, things balance out for a year to what was predicted. If you boom in the 3rd, you normally fade a little in the fourth. It's not because things are getting worse, it's because maybe a big deal came in earlier than expected...
Energy costs: Believe it or not, OPEC actually seems to be following through. This has got oil back up to $62, and I think we might see it peak back up to $65. This depends on how Iraq goes and what happens with Iran. But with Angola joining OPEC, I think the cartel is gaining strength. Furthermore, with more countries nationalizing resources, we may see prodcution efficiency drop, which means price will go up. Furthermore, gas prices are related to weather, and this fall is looking like it might be abnormally cold. Follow up a cold winter with a hot summer and a Democrat repeal of oil company tax breaks and you've ot $10/MCF natural gas and $68-70/barrell oil. Bad news for everyone but energy companies.
Economic downturn: All the signs of the economy slowing are starting to fall into place. This is a no brainer... economic downturn means companies get battered. Normally this is when you can make some money on the market by planning for a Fed rate cut, but when you have inflation and a dropping dollar, that is not going to happen. I think we're about to go into a recession come February or March, maybe sooner.
My suggestion to all of you is to be careful, only invest in best of breed companies, and companies that are trading at a real discount. There's still alot of money to be made, but you have to be careful doing it. I'm not ready to start shorting the market yet like I was when the tech bubble was about to burst (I shorted that market down for months after riding it up for months), but I'm trying to get my economic gauges fine tuned so I'll know when to pull the trigger.
One final note: Xethanol (XNL, formerly XTHN) are in a class action lawsuit. If you bought their shares between January and August, 2006 please consider joining the suit. They are corrupt, and deserve to pay. This, unbelievably, was the only trade (out of more than 200) that I've lost money on all year (lots of neutrals, and several that are only profitable because of the dividend), but this one was a real stinker. They intentionally misled investors, made false statements, forged records, and affiliated themselves with known criminals through shell corporations. They should go to jail. If that doesn't happen, maybe we can at least recoup some of our losses.
Labels: dropping dollar, investing, low capital, market, money, retirement, stocks, trading
posted by Dr. Cam at 4:04 PM
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