Economic Outlook: Bearish 6/18/08

DJIA: 12,029

S&P: 1,337

NASDAQ: 2,429



In order to invest in this market one must try to gauge the direction of it. Although current market levels appear low and equities appear cheap compared to July-August highs, I believe the direction of the market continues downward for the intermediate future (6-8 months) and that investors like myself must remain patient for opportunites to present themselves. For the mean time I will be keeping the majority of my portfolio in either cash or within short term trading ranges i.e stop gain/loss orders. And the reasonings behind my beliefs are as follows...



1. Today 6/18/08, Economic Bellweather Fedex missed analyst expectations and issued lower guidance through 2009 citing higher fuel costs as a major hinderance on profits. When the distinguished straight shooting management from Fedex speaks the street listens. What this means: if high fuel costs are showing up in the balance sheets of Fedex they will shortly be showing up almost everywhere else.



- On a side note I heard the apprehension on the state of the economony from the CEO of Fedex himself, Frederick Smith, firsthand as he delivered the commencement address to Penn States SMEAL College of Business class of 08'



2. Follow the "smart" money. As in my previous post about the 20 tips, it is easy to become distracted by the talking heads on television who are often swayed in their opinions by those writing their paychecks. "Smart" money is hedge fund manager John Paulson, http://online.wsj.com/public/article/SB120036645057290423.html, who made Billions of dollars over this past year as he shorted positions in the credit markets and financial stocks that payed off dearly as the Housing Market unraveled. Today, Paulson remains short the credit markets and will avoid equities as the U.S consumer gets squeezed forcing the U.S economy into a prolonged recession.



-An excerpt from Economist Nouriel Roubini will follow suit...



3. The Triple Whammy: Higher Inflation in the form of Food & Energy prices, Rising Unemployment (4.5%), and continuing weakness of the USD are all working in unison to curb the purchasing power of the American Consumer. Market pundits and analysts continue to preach that the worst of the credit crisis is behind us. The only thing that will be shortly behind us are the band-aid like government stimulus checks designed to pump up the consumer. With gasoline at a national record of 4.08 a gallon the only thing getting pumped is the gas into our cars.

4. Investor Sentiment is low, Bulls seem to have run out of steam, buy the dips and sell the rallies has been hearsay the last month. Value investors will always remain in markets providing temporary relief and support when needed. They have 2 luxuries that I lack at the moment, millions of dollars and a 3-5 year time frame although I am working on achieving both. Besides the fact that equity prices look relatively cheap compared to recent levels I cannot foresee any catalyst but one to spark the next bull market. Fact: GDP is slowing, unemployment is rising, inflation is higher than the Fed's comfort level, Mortgage defaults continue, extension of credit tightening, and the value/direction of the USD is stagnant. All in combination should pull down the projected earnings forecast of equities across the board. Analyst projections for $130-140 bbl place many U.S Airline Carriers back into bankruptcy circa 2001. If sustained the question will be when not if the first will fail.

-I believe the only catalyst worthy of reversing this trend is a reversal in the price of oil, if it in fact does reverse course than a prolonged recession may be avoided.

In conclusion, how much lower do we have to go? I have no idea but I will leave you with Bob Janjuah's, credit strategist at RBS, prediction that the S&P may have another 300 points to the downside and the DOW below 11,000.


My next post will map out a strategy for a buy side investor like myself to take advantage and make gains in this market in line with this stated projection.