The Economy and the Stock Market
As for the economy and the stock market, let’s discuss the immediate impact first. Thousands of people died in this attack and businesses will have to be repaired. The attack was designed to strike at the heart of the international capitalist system. By destroying the World Trade Center, the terrorists successfully shut down the US stock market and caused stock markets around the world to crash. By damaging the infrastructure of large international banking firms the terrorists also slowed up the flow of finance across the world. In short they caused the flow of financial liquidity to slow and in many instances come to a halt. That liquidity is the heart of the world system.
In the aftermath money has flowed to gold and bonds as a safe haven. The dollar has dropped and people have sold long term treasury bills and there has been huge buying interest in short term bills, creating a very steep yield curve. What this means is that people are selling corporate bonds and going into short term treasury bills as a safe haven.
If this continues through the open of the stock market then you can expect to see a huge gap down. The largest foreign stock exchanges dropped 5-10% immediately after the terrorist attack. It is logical to expect a large down open for the US market. We won’t have any idea how large it will be until the futures begin to trade that morning.
The Federal Funds futures contracts have priced in an 85 percent chance that the Federal Reserve will slash its fed funds target rate by 75 basis points to 2.75 percent by the end of October. The market is now giving a 60 percent chance of a rate cut before the Oct. 2 meeting.
What this means is that you can assume that the Federal Reserve is prepared to dramatically cut interest rates if the market gaps down and continues to drop. Even if it doesn’t do an emergency cut interest rates will be much lower by November.
I am expecting the markets to open dramatically lower. When it does there will be people who are forced to sell. People on margin getting a margin call. Others who are so overexposed that they can’t risk waiting to see if there is another downtick. These people will be selling in a panic and the market won’t stop falling until they are finished selling. I don’t know if that will take an hour or a few days. But I do know that I will be covering my short positions after the open. All of them except scam company Genesisintermedia.Com(GENI). It is the stock I am short that is least likely to rally if the market does and by coincidence is owned by an international arms dealer who has had business deals with terrorists. Not Bin Laden, but with Qadaffi. I would personally like to see the stock completely destroyed.
History suggests that when the markets fall due to an event they quickly bounce right back. I don’t plan on going long though unless I am confident that I see the market form an intraday base to rally off of. I do not care about guessing bottoms. My strategy is to short weak stocks and go long stocks in strong sectors that breakout. That strategy is not going to work in the next few days because the market is going to trade with extreme volatility and you can throw basic charts patterns and technical analysis out the window. Unless I see a great opportunity, I will be content to sit and watch until the markets establish a rhythm and form tradeable chart patterns on daily charts. Trying to take positions in the next few days will be like flipping coins.
What we’ve seen is a calamity that has killed people. It shut down the stock market, but by itself it will not fundamentally alter the economy or the market. I would not pay too much attention to what the market does when it opens back up.
I have been bearish on the economy and the stock market for over a year and a half. Before the markets were shut down on Tuesday I had expected them to make large drops before the year was over. Even if this attack didn’t happen the market would have eventually dropped anyway. I thought the Nasdaq would go to 1000-1400 and the DOW would go to low 75000-8,000. I never wrote that, because I didn’t want to get caught up in trying to make predictions of where the bottom would be. But if the markets do fall to those levels they will probably mark intermediate term bottoms.
I think the most likely thing we will see is a large down open when trading resumes followed by interest rate cuts which will spark a market rally. If the market “bottoms” at a low enough level this rally will probably last for several weeks. It WILL NOT mark the beginning of a new bull market. At best the market will drop to create a real bottom and the bear market will end. We’ll then see a trading range market, which consolidates for over a year before breaking out to create a new bull market. At worse we’ll see a Fed created rally and then a resumption of this current downturn. We’ll get a handle on it in the coming weeks and need to see where the market bottoms out at to get a more definitive opinion.
There are some people I’ve seen on TV who have been saying that this is a great opportunity because the Fed will cut rates and stocks will go up. I almost get the impression that some of them are happy. I don’t want to be pessimistic in light of what has happened, but I have to deal with reality. Interest rates cuts will be used to solve the liquidity crisis brought about by the terrorist attack, which shut down the market and has temporary removed many large players from it. They will not cause the economy to suddenly begin growing at a fast pace. They will not fix the economic imbalances – personal and corporate debt and the current account deficit – that I have been talking about for the past year. And until those subside the economy will not grow very much. It may bottom out, but it won’t grow fast enough to make earnings attractive.
We entered this week in the middle of an economic slowdown. Data released today shows that unemployment rose and consumer confidence took a large drop – and this data is valid for the period immediately before the attacks. It is likely that consumer confidence and spending will tumble further in the wake of these attacks. The shutdown of the markets and grounding of airlines these past few days will have its costs.
With the Fed poised to cut interest rates even more it is likely that inflation will creep into the economy later next year. Rising gold prices and a steep treasury yield confirm this. If the dollar continues to drop and commodity prices bottom out and rise then you can be sure of it. The market drop and liquidity crisis will end and once it does you can expect interest rates to rise. That means that you can push out a real economic recovery until the next cycle of interest rate cuts begin. We’ll be watching the bond, gold, and commodity markets for signs of what is going to happen and I’ll explain how to read these once they settle down from the attack.
I am still in a state of shock over the terrorist attacks and am working with incomplete information. With the financial markets closed – and poised to open with a week of abnormal trading – it is difficult to make much meaning out of them. So I am making tentative conclusions and speculations. This will change once the markets resume a normal trading pattern.
To sum up these are my basic thoughts:
1)Do not put too much importance into what the market does when it opens. If you do not have to then do not sell. It is likely that the markets will begin to rally within the next few days. Odds are that they will finish the week higher than were they opened at.
2)The Fed is likely to lower interest rates next week and this will fuel a rally. It is not clear whether or not the market will make a true bottom or not.
3)The interest rate cuts will not create a new bull market. At best they will end the bear and create a trading range market. At worse the downtrend will continue after the rally fades. A lot depends on where the market ultimately stops falling next week. Or in other words were they let it fall to.
4)Although the terrorist attack was a horrible calamity, it is not a turning point for the stock market or the economy. Both were already in downtrends. Both will eventually bottom. There is no need to panic because of this attack.
5)The market is going to be extremely volatile over the next few days with no real discernable trend. Chart patterns will be thrown out of whack. Things will return to normal within 1-2 weeks. |
