Where Is The Bottom?

As we have said for a long time--It is all about the economy. The economic climate is bleak and getting bleaker. We were quite negative for many months but it clearly was hard to predict that the stock market would slide as quickly as it has. Buying quality stocks with limited leverage and plenty of liquidity remains good advice but it hasn't prevented investors from losing money. Stocks will likely go lower but we should see some rallies in between. The best news we might have is that prognosticators are starting to expect the DOW to drop to as low as 4000. It is the mirror image of the bull market predictions of the DOW hitting 36,000. Although stocks never reached such heights, the bull market pleased most investors. We are unlikely to see the DOW hit 4000, but the downdraft of stocks will keep most people miserable.

Today, Merck agreed to buy Schering-Plough for a 34% premium. This should be good news for the market but it isn't helping stocks this morning. We expect to see many more acquisitions this year and consolidation is definitely needed in this economic crisis. What else is needed is some more pep talks by President Obama. Consumer confidence is very low and unless Americans believe better times are ahead, spending will continue to decline and the economy will shrink further.

Taxing the "wealthy" is not the brightest idea in weak economic times. In the current environment, Americans who earn $250,000 or more have most likely lost large sums of their net worth and those people are also feeling economic pain. High end retailers are suffering because the wealthy have cut back on spending so to tax them more is likely to hinder economic growth even more. The President needs to find revenue to pay for his stimulus plan but increasing taxes today is the wrong policy.

The economy will suffer until housing bottoms and the financial system is cleaned up. Citigroup needs to be sold off in pieces, BankAmerica and Wells Fargo need more equity, and AIG needs to be assumed by the government. That still leaves the auto manufacturers, GE, and many other industries and companies who are financially stressed. GM and Chrysler need to do a prepackaged bankruptcy so the auto industry can support itself in good and bad times. GE needs to refocus its business and once again become an industrial company with a financial arm and not a financial company with an industrial arm. The housing industry will takes years to recover but as home prices decline and financing becomes more available, buyers will reappear and set the housing industry on a path to recovery.

There is no easy solution to fix the plethora of problems the U.S. and global economies have but in time there will be a light at the end of the tunnel. Optimism will return and the markets will again begin to rise. It is just a long path to better times.