The Volatility Shall Continue

This market is too treacherous for the novice investor as most professionals consistently lose money also. The swings in the DOW and S&P on Thursday and Friday can lead one to drink. Therefore, it is prudent to remain cautious, buy on market dips and only purchase safe liquid companies with few debt payments. We keep repeating similar phrases but it is advice the average investor needs to adhere to.

Losses may still pile up in the short run but someday in the next few years one will look back and realize that good investment judgement in 2008 and 2009 resulted in a solid portfolio with above average returns.

There should be more debate this week about the auto industry and the impending bankruptcies unless the government provides needed cash to General Motors. We still believe the best scenario would be either to let General Motors go bankrupt or better yet, negotiate a prepackaged bankruptcy. Barron's suggestion this weekend mimicked our previous thoughts on the situation They advised the government to invest $25 billion each in Ford and GM, but demand concessions from labor, management and shareholders. We believe this process is best served in a bankruptcy format but if not, the U.S. government needs to require the auto companies to restructure their debt while also lowering their operating cost structure. If these steps aren't taken, it won't be long before Uncle Sam will need to provide another $25-$50 billion to the auto industry.

The market pundits that specialize in technical analysis have watched the S&P bounce off its lows a few times and expect stocks to start to rise. We are not experts in this type of analysis but stocks certainly feel like they will go lower before they go higher. The economy is hitting all businesses and earnings expectations continue to be lowered by company managements and Wall Street research analysts. This recession is likely to be deeper and longer than most investors have anticipated and stocks will need to adjust to those assumptions. Great value is being created today but greater value may appear in a month or two. We will try to call the bottoms as we did on October 9th but that bottom may soon be pierced when the market closes below it. Friday represented the lowest close yet but not the lowest intraday low. This week may lead us down to new levels.

Retail is exceptionally weak, technology is falling off a cliff, housing is not improving much, and the financial system is incrementally improving but more problems are around the corner. Even when we reach a bottom in the stock market, it may stay there for a long period because, the corporate bond market and the leveraged loan markets need to dramatically improve before stocks can go up. The credit markets led the stock market down and they will ultimately lead it up.