The Economy Guy

Stocks were calmed down by Bernanke’s comments today, and lost a little ground.  Bonds also lost ground for the same reasons.

Oil and Gasoline spiked upward today with Gasoline making the big drive upwards.

Gold climbed back a little from its recent low, and ended at $900 per ounce.

In the news today…..

Bernanke made the big R statement, claiming that we will be in a “shallow” recession the first 2 quarters of 2008, and will recover with “normal” growth in 2009.  It is very important to know that Bernanke couldn’t say we are going into a severe recession even if he wanted to.  His statements are self-fulfilling, so he MUST be careful and calming in his words.  In other words, you can’t believe what he says a lot of the time.  Got it???

The sound you are hearing is the sound of “second shoes dropping.”  The first shoes dropped over the past 5 months as those financial institutions started to write down their bad debt.  You can count on more “surprises” that no one can anticipate, and no one can even imagine will happen.  (Sarcasm intended.)  The big guys know they are holding bad debt.  They just don’t want to publically admit how bad it really is.

You see there are many people (small guys) who don’t even know that they have some of the “toxic” paper that our favorite people in the derivatives market place wrote.  This is a true statement.  There will be some really surprised people as they become aware of their portfolio. One area to look for a problem is all the mutual funds, hedge funds, bond funds, etc.  What these funds really own isn’t truly obvious all the time, as the funds buy and sell their portfolio.

The other issue in the sub-prime market is that the “value” of the mortgage portfolio is unknown as long as the housing market in the big markets (California, Las Vegas, Phoenix, Miami, etc.) continue to decrease in value.  The decrease is caused by a “new” market bottom being set each time someone buys a house in a neighborhood from a “short sale or REO”.  A new sale causes a new “comp” and then bank is incentivized to sell it for less than that new bottom, causing a new, new bottom.  This downward spiral will stop only when the supply and demand curves come back into balance – more than one year in the markets I’m familiar with.

Here are yesterday’s Numbers:
Dow Jones 30 Industrial - 12,608 (Down 45 points)
10 Year Treasury Bond - 3.58% (Up 0.04%)
Euro - $1.5690
Gold - $900 (Up $12) - This is still a major buying opportunity.
Oil - $104.83 (Up $4.83)
Gasoline - $2.77 (Up $0.13) - This increase is indicative that gasoline prices will be setting new highs very soon in the US.