News flash: "Weak economy still needs low interest rates"

This afternoon the familiar low volume “two guys trading” are driving stock prices higher again, supposedly based on Fed Chairman Bernanke's testimony today that the US economy is still weak and still needs emergency low rates to try and stave off a retrench into recession. Wow that is exciting!
The options speculation index today is back at record-breaking bullishness, about 30% higher than it was when the stock market peaked in 2007! We are living in wacky times indeed. I can't help but shake my head that we could be back in the wack so fast this time. Usually it takes at least 3 or 4 years for stock prices to soar this far past the realm of reality. This time, it has happened in record time albeit with remarkably few participants. This is precisely of course, what makes present price levels so incredibly dangerous for investors now. Week by week the market taunts a few more “sheeple” into the madness. Those who suffered heavy losses in 2008 are particularly vulnerable here. They feel desperate to regain losses. They want to believe in the market again. They want to somehow end the agony.
Stock markets are a mental game. They prey on those who are unable to ignore the taunts, those unable to sit tight and wait for attractive prices to re-appear.
But at times like this it is more important than ever to resist the temptation for wild abandon. Rational people must plug their ears and hum. They must say focused on rational facts in order to avoid the looming sink holes.
The facts are that government intervention notwithstanding, the US housing market and its dependent economy have stalled out again and are sliding back into decline. Today’s data shows that US new home sales hit a new record low in February. The emergency rescue has cost more than a trillion and failed in lasting effect: housing inventory is back towards 9 months supply and that is not counting some 5-10 million homes just heading into foreclosure. There are more than 18 million residential units sitting empty in the US today; homebuilders are on average taking more than 14 months after completion of new units to find a buyer. Meanwhile international markets are no better off; in fact some have more downside ahead of them than even the US at this point. Canada, New Zealand, Australia and China are blowing up their own latent credit and real estate bubble as I write. Most European countries are slipping back into recession and worse. Global demand is decelerating off its sugar high of the past few months. The Shanghai index has stalled since December and several other emerging markets have registered negative gains year to date.
Meanwhile the VIX has fallen back to 17 (the level it last touched btw at the S&P peak of October 2007 and the TSX peak of 2008).
Now is not the time to fall asleep with complacency in these markets. Protect yourselves. Remember crazy prices can go crazy for longer than we like; but that doesn’t mean they are right, good or rational. Protect yourselves. Think about your plans for summer fun. Then plug your ears and hum.

This entry was posted in Main Page. Bookmark the permalink.

2 Responses to News flash: "Weak economy still needs low interest rates"

  1. Anonymous says:

    You have to be careful not to miss the forest for the trees though. Have a look at Apple for example. EPS estimates are up nearly 50% just in the past 60 days. Estimate revisions like that warrant big moves in stock prices.
    Draw your own conclusions but remember not every stock is driven by the predictable business and debt cycles. Liquidity and sentiment go a long way as well. The fact that so many investors continue to hate this rally means there is likely more room to the upside.

Leave a Reply

Your email address will not be published.