It's All About the Economy II

The Presidential election is over and the market had its run up leading to the big event. It is now time to get down to business. Investors rolled up their sleeves yesterday, looked into the crystal ball, and didn't like what they saw. The economy is still quite weak and the financial institutions still need fixing.

The DOW was off about 500 points yesterday and progressively became weaker during the day. After the market close, Cisco reported good numbers but then projected a drop in revenue of 5-10% in the fourth quarter. Investors and analysts were not prepared for such a dire forecast and the stock dropped in after hours. In Asia, Toyota surprised the markets with disappointing numbers and expectations. Their stock was quite weak before they announced the beaten down expectations.

This morning the other parts of the world decided to catch up to the Federal Reserve's aggressive rate cuts as the Bank Of England cut rates 1.5 points and the ECB cut theirs 1/2 point. We also started to get retail sales numbers this morning which seem to be bleak. Walmart had strong numbers with same store sales (SSS) up 2.4% but Target (-4.8%), Gap (-16%), Limited (-9%), and Costco (-1%) had declining SSS. Target expects sales to be weak right through Christmas with a projection of down 6-9% in November. The economic relief is not approaching any time soon.

The Government will need to institute a new stimulus package to help jump start the economy. However, as we have been saying, the leverage throughout the economy needs to come down and it is a long process. The recession will be long and deep but the market will discount it, eventually. The bear market rally we just had was a blip in the downward trend. The bottom of the market may still be the levels of October 10th but unless it takes some time to get there, the bottoming process will result in continued volatility. Great value in large liquid unlevered stocks will be created but this is a process that must be navigated cautiously. The economic environment will continue to be weak and we may get some more shocks in the financial system. Citigroup seems to still be a company with a lot of work to do to clean up its balance sheet but the government is at least focused on many of the impending problems. The new Treasury Secretary will not be getting much sleep for the next year so he/she needs to have stamina and be in good physical shape.

Today may not be a fun day in the markets but that may mean new opportunities arise as stocks get beaten up.