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Midday Market Update . . . U-G-L-Y

Posted by Larry Doyle on March 5, 2009 12:45 PM |

I had written that yesterday’s 2-3% upward move in the market was very likely a Dead Cat Bounce. Well, that cat is burrowing further into the ground as markets have more than fully retraced yesterday’s upward move and are making new lows. This type of price action, known as lower highs and lower lows, confirms bearish trends

I hope our readers know that all financial information you could possibly want is on the Market Data tab on the Sense on Cents header. That resource provided by the Wall Street Journal is not only a great way to get a quick and comprehensive snapshot of all sectors of the market, but also a great way to keep your brokers and financial planners on their toes and working for you!!

Let’s take a quick look at the markets and then I will offer some commentary.

Stocks are down 3-4% across all major market averages. The market started the day with a negative sentiment given the fact that China is hedging on the stimulus package they proposed yesterday. That proposed package had helped out a lot of infrastructure stocks and base commodities in yesterday’s market, but in today’s trading the bloom is right back off that rose.  Base commodities are down 2% on average.

The biggest boogie man in the room is the overhang of commercial real estate defaults. Who holds this commercial real estate? For the most part, insurance companies, banks, private equity funds, and yes General Electric in its GE Capital division.

On the day, insurance companies are down on average 10-15%, while major banks are down 10%.

Another factor likely weighing on certain banks with large mortgage origination business units is language in the loan modification program that would promote 2nd liens being extinguished. I will reserve comments on the social benefits of that proposal, but from a financial standpoint the initiative would cause further chargeoffs by banks thus forcing them to take more reserves. The increase in reserves directly affects the funds available for credit. Life ain’t fair!!

Well, if stocks are doing poorly, hopefully my bond portfolio is holding up a little better. Let’s check!! Corporate bonds are down anywhere from 2-5%, mortgage-backed bonds are down .5-1%, municipals are flat, and government bonds are up .25-.5%. Not exactly a lot of safe havens there.

Cash remains king.

Speaking of which, a number of readers have asked whether the current buildup of cash in short term funds would serve as fuel for a stock market rally. My belief is that as much cash has built up is more than offset by the amount of demands for that cash. Our domestic banking system and insurance industry are still facing at least $500 million in embedded losses and perhaps $1 trillion. The government is merely trying to buy time with all of its policies and proposals to generate revenues to offset these losses. 

A loyal reader shared a piece that highlights one of our Economic All-Stars, Nouriel Roubini. While Mr. Roubini is out there with his projection of losses and economic distress, he hasn’t been proven wrong yet. He writes in Forbes how The U.S. Financial System is Effectively Insolvent. Thanks Andy for sharing!!

As you peruse Sense on Cents, please let me know what you like or don’t like. Additionally, please let me know what you may like to see me address. Please leave comments and share this site with friends. I will  try to be as responsive as possible in helping us all navigate the economic landscape!! 


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