Where's The Good News

The Federal Reserve and its counterparts around the world as well as the U.S. Treasury and its global partners injected enormous amounts of liquidity into the financial system to relieve the strain of the credit crisis. The goal was to improve lending and lower rates. The objective seems to be on track as money market rates dropped significantly, the commercial paper market is open again, libor has moved below 4%, and investment grade bond yields are falling. The conclusion must be that we are back to normal and the stock market is ready to march ahead again.

Wrong. It is still all about the economy. Today was another painful day in many markets all around the world. The question is where to look first for trouble. The commodity markets are in free fall led by copper which was down 7.8%, oil down by 6.5% and gold down by 5%. Inflation has been a concern for most investors as oil was spiking and now its precipitous drop is leading the way toward deflation and all commodities are following. The reason these commodities are declining is that consumers and businesses are spending less as demand dries up. OPEC may be getting ready to discuss production cuts to stabilize oil prices but it is unlikely to be successful. Demand for oil will continue to fall and the OPEC countries as well as Russia are likely to cheat on their production as oil revenues are desperately needed to feed their economies and stimulate their stock markets.

Next on the list is Argentina. The Argentinian government is planning to take over 10 private pension plans. The country is enraged as it is rumored that the government will dip into the funds for its own use. A weak economy and a sour stock market were caused by the rout in commodity exports. The expectations for this potential government theft resulted in bond yields reaching 30% as the market believes the Government's weak financial situation could result in a default.

Pakistan even made the economic news as S&P may cut its credit rating given its weak current account balance. Belarus needs aid from the Monetary Fund. Iceland is a disaster. South Korea's government is pumping liquidity into its financial system to keep markets afloat. Australia is likely to see its economy and currency tumble as the commodity bear market continues to pick up steam. Europe, as we have mentioned in other posts, may be weaker than the U.S. The Euro dropped another 2% today and doesn't seem to be turning around anytime soon. The point is that there is no place to hide. Pick your market. Pick your country. Pick your stock. Pick your commodity. We are in a Global Recession and the bear market abounds.

Let's get to the United States. The dollar is rising against most currencies and falling against the Yen. One would think the economy and the stock market was doing okay. However, we aren't. It is just that the rest of the world is in worse shape. The U.S. led the world down and it will have to lead it to better times. The stock market wasn't fun at all today. Last night Apple reported strong numbers and its stock flew. It was easy to believe the rest of the market would follow along. It clearly didn't. Many companies reported today. McDonald's had terrific numbers but AT&T didn't. It looked like more companies reported numbers that beat analyst expectations but it didn't matter. Why? Most companies lowered future earnings guidance or tabled giving guidance as the economic uncertainties clouded their judgement. The result was a 6% drop in the S&P to its lowest level since 2003.

Fear is rising again as panic is everywhere. It looked like capitulation struck on October 10th but after days like today, we wonder whether new lows can continue to be set. Capitulation will likely come on the day we throw the towel in. At 4PM, it was nice to have the markets close as Amazon was going to report their third quarter numbers. Thankfully good news would be coming and it did. They beat the analyst expectations for the quarter. Internet shopping is picking up market share and the Kindle is a hot product. Sounds great but the economy is about to bite Amazon too. They drastically cut their 4th quarter forecast, the stock dropped like a rock, and the day ended on a weak note.

Asia is falling over night and new challenges will be in front of us tomorrow. Hope is out there for the Fed to cut interest rates again. We don't think that is the way to go. The banking system is improving, liquidity is ample, and the deleveraging process is underway. The economy will be weak for a long period and the markets need to be flushed out. Lowering rates may give some short-term relief but it is still all about the economy. Time is the only healer of the mess we are in. As long as the Great Depression II can be avoided, the leverage needs to be addressed through infusions of equity, bankruptcies, or consolidation of industries. This is a private market problem. The government is doing their part but the excesses of the past decade won't vanish over night. It may be painful but eventually the United States economy will recover, the stock market will rise, and perhaps the U.S. will reappear as an economic power and lead the global economy back to prosperity.