Friday, February 8, 2008

November Newsletter

The Dow breaks primary support - Indicates official down trend

A market never goes straight up or down. If it is in
an up trend, it tends to go up, then pullback, go up higher than last time
and pull back, but stay higher than the last pull back. Bottom line is
an up trend will have higher highs and higher lows. On the same note,
a down trend will have lower highs and lower lows. We are always
looking for changes in the trend. One of the ways to tell if a
positive trend has turned negative is by watching support areas. If
the price stops going down at the same place it stopped going down last
time, then the support level is working. If it breaks through the
previous support levels, then weakness has crept into the trend.

The primary trend of the Dow has been up for a long time.
The big support level that we have been watching has just been broken.
This level was at 12,800 and was broken Monday the 26th. There was an
immediate bounce after this break, but will probably only turn out to be
that. As they say, even dead cats will bounce (a market saying, I
actually LIKE cats!).



In my humble opinion, the Dow has been running on empty all
year. Very few of the indicators I follow substantiated the new highs
the Dow was putting in. Every thing pointed to volatility and
volatility normally points to some kind of crash. It appears the Dow
race car has finally run out of gas and has bald tires, but the race isn't
yet complete.

Recession AND Inflation



I have said all year that I felt a recession is coming on.
We have been very conservative because of this. I have never been more
certain now that this is the case. The chart below shows the historic
recessions going back to 1965. These are the purple areas in the chart
below. The purple line is the difference between the blue and yellow
lines. You will see that each time this line hits zero, a recession
follows. You will see it just hit zero earlier this year. As
they say, financial history doesn't repeat itself, but it rhymes quite well.
If this is true, a recession should be just around the corner.



Inflation usually isn't a problem during recessions.
As people spend less money in the economy, prices don't continue going up
very rapidly. This probably won't be the case during this next
recession. As you have felt in your pocket book, oil prices and food
prices haven't been going down or even staying the same. They are at
all time highs and have had the tendency to stay there. There are many
reasons why I believe inflation will not only continue to increase but
increase rapidly. This email isn't where I'm going to go into that
detail. Maybe I can touch base on that within a week or two. The
bottom line is that the market will be effected in a very negative manner
and we will be addressing it accordingly.

Banking Crisis Deepens



Anecdotal evidence of severe problems within the banking industry continues,
with stories abounding of troubled institutions and instruments, and of
back-door actions taken by worried central banks. As the U.S. recession
deepens, the problems with structured financial instruments will widen
quickly, extending far beyond the issues with problem mortgages. The Federal
Reserve can be expected to spend every dollar it needs to create in order to
maintain the solvency and stability of the domestic banking system.

The Fed have their hands tied now. If they decrease the Fed Funds rate
to stimulate the economy, it will accelerate the dollar sell off.

What's Next?



We will continue to act defensively. The short positions we have held
in the RIA accounts have paid off handsomely. We may even increase
these positions in the future. Accounts that can't be shorted will sit
in short term bonds or cash until a better opportunity arises. If the
market decides to change it's mind and start going back up, we will
re-evaluate. Until then, we will be patient and see what happens.

You can check out my website at 401k plan facts

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