Is The Bull Back?

The DOW soared 10% yesterday and most investors were feeling good. The impetus was likely expectations of a Federal Reserve interest rate cut today. The Yen, which has been gaining strength against all currencies, finally broke down which provided positive news on the economic front.



We wrote on Monday that investors should expect a rally in anticipation of the Fed's next move but it was hard to predict the skyrocketing move. It is unlikely the beginning of the new bull market. It was probably hope that lower rates will spur the economy, lots of short covering, and the inching closer to the end of earnings season.



Many more companies reported third quarter earnings yesterday and most companies are focused on the economic recession. USG, Masco, and Whirlpool all reported yesterday and on their calls they sounded alike. They are focused on containing production, improving working capital, minimizing capital expenditures, curtailing stock buybacks, improving liquidity, and reducing payrolls. Each of the companies also tried to assure investors that they had strong credit lines, cash, and plenty of flexibility to deal with any debt maturities. We are definitely in a recession and companies are hunkering down. Unfortunately, the conservative posture being taken by companies will act as an additional catalyst to slowing down the economy.

Fear is everywhere and the market is flying. We expect to see some other days like yesterday but it feels like it is too soon. Perhaps the market will go up a little again this morning but unless huge volume pushes it to the new heights, we think the market will start to drift down again after a rate cut. Lower Fed Funds are not going to improve the economy. Leverage needs to continue to work its way out, bankruptcies need to pick up steam, housing needs to hit bottom, and banks need to begin to lend again. The market will forecast these events well in advance of the economy bottoming but we still need to see some additional shakeout in the market.

As always, don't chase the ralleys. Buy quality and buy on weakness.