With the Dow looking for new lows, I've asked Finance Fanatic of Crash Market Stocks to give us his take on the upcoming market. So read on and see why although future conditions may not be pleasant, the bears may make it out just fine.
During the last couple of months, it seems as though the entire NYSE has become one giant day-trader’s gathering that we use to only see exist in the penny stock markets. The new volatile Dow coupled with the addition of 2x, 3x, and even 4x leveraged ETFs, has helped gambling day-traders find a new place to hang out during the day. A year ago, most would not consider companies like General Electric (GE), Bank of America (BAC), and Wells Fargo (WFC) as “day-trading” material. However, today alone, they had a combined trading volume of 532.26 M. Well, these are the times we are in today.
Although, currently, many people feel that it is pointless to try to value stocks “fundamentally”, I beg to differ. As I look at the fundamentals, I see the market following them quite closely…Downward (See Below).
Sure, daily movements are volatile with the help of government intervention, but our down-trending correlation is right in line with the technicals of the market I have been looking at. Here are just a few of the reasons I see a feast of bears for the coming months:
1) Housing market is still in the Pits
We should not be confident that anything is getting better as long as our housing market struggles. People underestimate just how important that number is. Housing values are the number one driver of consumer sentiment, because in most cases it is people's biggest investment. All across the county, most people's biggest "investment" (Their house) has lost anywhere from 20-60%, depending on the market. That takes a lot out of people’s expectations. Also, as we continue to be very sluggish in new home sales, we continue diluting the housing market with a mass surplus of available inventory. At this rate, we could match the demand for housing without adding a single house for the next 10 years. As long as our housing market remains in the gutter (which our most recent numbers have confirmed), I believe we are not done hurting.
2) Many retailers plan to go bankrupt this year
Think of hundreds of mini GM scenarios going across the country. Even though many of these retailers will not have the giant influences that the big 3 autos do, they still will do their damage. They have people that rely on their pension and laborers across the country. Also, it is easy to tell from recent months, without lending, many businesses in a capitalist market cannot survive. For so long, most US retailers have been paying for their inventory with expensive debt, relying on strong and fast sales to pay off the inventory. Well, with sales slowing the most we’ve seen in years (even with liquidating sales!), this debt piles up and retailers go under, like Mervyn’s. With the continuing loss of small and large businesses, I still see a significant downside risk.
3) Commercial real estate foreclosures
This could be one of the biggest factors. Look what the initial subprime crisis did to the market from 2007 to 2008. Well, commercial real estate is running about a year behind them. We have just begun to see foreclosures in the commercial market. These are going to pile up in 2009. The amount of debt that will be handed back to banks is unreal. Much of the commercial real estate that was purchased between 2003-2005, was done on 5-10 year, CMBS/Conduit loans that are very highly leveraged, with very low interest rates. As these properties come up for refinance the next 3-4 years, I expect to see some serious foreclosures. In my opinion, it will be World War III when it happens, which makes me feel we're not at the bottom.
4) Government's Out of Bullets
After President Obama signed off on the latest stimulus, he fired off one of his last, long anticipated bullets that people hoped to have made a significant impact. Unfortunately, the praise has not lasted as long as most had hoped. With treasuries already oversold, the discount rate a 0%, two huge stimulus plans already passed, and a new “hope bearing” president now in office, I would like to think we’re almost out of ways to artificially ignite this market. Sure, we may see some more “programs” announced, but I don’t see many silver bullets left.
With these and several other elements, I continue to be on my toes and very bearish in this market. I have been finding much success in the inverse ETFs as well as put options on certain retailers and other companies. Inflation is our next beast to tackle in my opinion. Being in a bear market does not mean we are without hope of making money, we just have to be making the right moves.
Crashmarketstocks.com is a site that focuses on macro-economic news and discusses new tips and strategies to help make money during a recession. Most entails different equity vehicles that are performing well in a bear market, but can feature any profitable vehicle. Finance Fanatic is a specialist in the Real Estate market and has been engaged in equity markets for about 8 years now. His degree is in Finance and Capital markets.