Where Do WE Go From Here II?

Last week we saw a huge rally on Monday followed buy an extremely volatile market that fluctuated all day long every day. The markets ended up about 4.5% for the week even though Friday was in negative territory. It became clearer that we are in a recession as the retail numbers, housing numbers, and industrial production numbers were reported. Oil prices are half of what they were not long ago when market prognosticators were predicting $200 per barrel. Gold is also down to $800 as the new concern is deflation. Pessimism reached its peak and many money mangers have begun to believe the market has hit bottom.

What can we expect now? Markets will remain very volatile. This week might show another uptrend as more and more investors don't want to miss a potential rally. In the end, it will again all be about the economy. Many more earnings reports will come out this week and there will likely be surprises which will lead to more volatility. State and City municipalities are struggling and will become an increasing focus in the newspapers and a huge drag on the economy as taxes will have to go up or services and employment will have to go down. States and Cities can't print money like the Federal Government. Lower all prices should help the consumer as their gas bills will decline and their purchasing power incrementally improves. Will the consumer spend those savings? Perhaps, but when each individual counts up his/her losses in the value of their home, the losses in the 401K, and the significant drop in their stock portfolio, the excess cash may move right into the bank to rebuild some savings.

There is reason to feel better. The government bailout plan and the massive global liquidity injections into the financial system has prevented The Great Depression II. Interbank interest rates are finally declining and perhaps some confidence is being restored in the banking system. The corporate credit markets are still concerned with bankruptcies, which will sure be coming, but activity has been extremely busy as investors rejigger their portfolios and hedge funds continue to liquidate some assets. Market pundits should start to feel good about the effect of a lower Libor rate and the prediction of better times ahead could produce a big market rally. Don't get sucked in. Continue to buy quality stocks slowly and watch the tea leaves. Christmas season will be slow and corporate earning will be weak. Lower oil prices will be a positive but housing isn't turning around anytime soon. Companies aren't about to expand capital expenditures and Government debt will continue to soar. Eventually these trends will improve but it will take time. We might see the big rally but we are also likely to see stocks reach the lows again. Be cautious and safe in your investing as there will be plenty of time to take big risk.