(click on picture to enlarge)
CHART AU COURANT: Here is the monthly bar chart of the Dow. Click on it to enlarge it to readable size. You'll see several things that the market is telling us. One, that pink line labeled "From 1974" has been cleanly broken, with the Dow now 1000 points under it. This is the first break of this 34 year trend line since the last recession in 1991. Not even after the Dot.bomb debacle and 9/11 Attack selloffs did the Dow close so far under this powerful market support line. This is the markets way of telling us that the BEAR MARKET (not just a correction) HAS BEGUN. Two, the first red line that crosses around 7200 is the next support target with any chance of keeping prices from free-falling. Three, the pink line labeled "From 1987" that crosses around 6500-6800 in the next few months is the next support target after 7200. Four, the lower red line that crosses around 4000 is quite possible before the bottom shows up. Read is and week, because the market does what it wants when it wants, and there is no denying it. You can deny it at your own peril I guess. Five, light blue lines at the right are my halucination of the path toward either 7200 or 4000 in the coming four to six years. And six, the stochastic study at the bottom window of the picture shows that the Dow hasn't been this "oversold" since 1981. After becoming this extreme back then, it took another year and 30% further decline in the Dow before the ultimate low was registered. Since this appears to be a much larger degree BEAR MARKET, build upon much worse debt, foreclosure, savings rate, and leverage, we should expect a worse outcome. In other words, this current economic condition is closer to its beginning than its ending.
Bottom Line: So, here are some of the ramifications that should be kept in mind. If you have college funds exposed to the market that will need to be accessed in the coming six to ten years, you need to evaluate if you can still afford college if your portfolio takes a 40% to 70% hit by the time you need to write the checks. Add at least two to four additional years to get back up to current levels from where the final bottom happens, and you should also consider if your retirement funds can take that kind of hit. Remember, that these percentages reflect the Dow Jones, and the S&P will be a bit worse, and the Nasdaq will be a lot worse. Short term Treasury bills have outperformed the S&P 500 since 1999, so consider prioritizing the "return OF your capital" above the "return ON your capital" if you may need to access funds within the next several years.
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MARKETS: The Fed said over the weekend that there are 300 banks on the "At Risk" list for potential failure, and IndyMac was seized by the FDIC. Yet, everything is fine, and there is no need to worry, according to the same government statistic generating machine. Hey, maybe they only show us the statistics that they want to? Ya think? Many are just now realizing that the FDIC insurance cap of 100k is really all you'll get in a failure. IndyMac is also paying those customers with "uninsured" deposits (meaning deposts over 100k) 50 cents on the dollar. That sounds nice, but that means if you had 200k in the bank, you are only getting 150k back, and that is not required of them to do. Guess what, most of the coming banks that fail won't be doing that. In fact, if enough fail at the same time, which WILL happen in the next year, even the FDIC will not have the cash to pay everyone immediately, and will need the Treasury Deptartment to print some nice new Benji's to get the job done. Like that won't hurt the diving dollar further...
I've been saying it for months, in fact years, it is not safe out there on the risk curve, so don't take any. All your neighbors that say they made and are making a fortune in real estate development, house flipping, foreclosure investing, stock trading, gold coins, fine art, fancy carpets, collectables, etc. have likely been fibbing (lying is such an ugly word), and are absolutely fibbing now. They're NOT. So, stop being jealous of those that are not really your friend (since they're not telling you the truth), and play it safe for you and your family.
Remember when your broker told you to buy bonds and shares in "perfectly safe" Fannie Mae or Freddie Mac, because they are "backed" by the government? Well, turns out they weren't so safe. Even worse, if you bought stock in either of them, you are down about 95% from last summer's price levels, and not out of the woods yet. Since they combine to hold about half the nations mortgages, their failure will be catastrophic to America's financial system. To keep them from imploding, the average American Taxpayer (that's right, you and I) will be sacrificed. Get ready. This is the time to go sue your broker for misrepresentation if they told you they were just like treasury bonds, or at least ask to be made whole. And, if Congress actually approves the equity investment of government funds into these companies (per Treasury Secratary Paulson's plan), sue your legislator.
Like I said last week, this is NOT the time to panic out, as it was when I mentioned it weeks ago. Read comments from July 11 for the near term action plan if you haven't already. After the upcoming low comes in (either this week or next), use the short, sharp rally that follows for a few weeks into August to do your exiting. Prices should then give way to the nastiest decline in recent memory, or at least since 2000-2002. If that decline into the Fall lasts through Election Day, Obama will win with a wide margin. If the decline can finish (at least for a couple weeks/months) prior, then rally into Election Day, the race will be closer, but still likely go to the Democrats.
Here are the 10 riskiest banks in the country, according to Research Associates of America, based upon a banks' ratio of assets and reserves to non-performing loans (known as the Texas Ratio). Above 100 means most likely to fail, based upon what happened to Texas banks in the 1980's.
Colorado Federal Savings Bank, Greenwood Village, CO = 244.8
Eastern Savings Bank, FSB, Hunt Valley, MD = 222.7
Integrity Bank, Alpharetta, GA = 191.6
Ameribank, Inc., Welch, WV = 153.7
First Priority Bank, Bradenton, FL = 122.6
First Security National Bank, Norcross, GA = 112.1
Magnet Bank, Salt Lake City, UT = 110.4
Security Pacific Bank, Los Angeles, CA = 102.8
First National Bank of Brookfield, Brookfield, IL = 102.1
The State Bank of Lebo, Lebo, KS = 100.6
For what it's worth,
Ken
