Market Taken to the Woodshed
Research for Online Investors

by John Dalt

2/5/10

The market has been taken to the woodshed by traders and investors are looking around for some good news to rally the market.

This week saw a failed auction in Portugal which brought the European Union country’s credit problems into consciousness, again.  Last week we learned that China is trying to slow their economy so it doesn’t overheat.  The fear becomes, “how does the U.S. economy rebound with China trying to slow down and Europe on its back?”  The prospect of credit problems has pushed the dollar higher against most currencies.  Not that anyone loves the dollar; they just like it better than the other currencies.

We talked to a friend in Florida, a former broker and one time financial publisher.  What does he think?  “People don’t understand once unwinding starts; it takes a long time, and will drive the market lower.  This is not panic, funds are unwinding, very orderly.”  I asked A.M. what he thought of the news out of Greece and Portugal, “It is bad, much worse than people realize.  The Greek government is the major employer, and people are lazy, they don’t want to work.”

I won’t get into government employees here, but would say competition in business tends to force change, whether we like it or not.

As we go to press, the market has tried to rally, but been unsuccessful. We expect the S&P 500 to continue trading down to 1017 (the 200-day average). We could find support at 1035, but wonder if there has been enough pain yet.  The late day rally, if it holds, is more likely short covering before the weekend.

Who can rescue a country that goes broke?  The PIIGS are facing this prospect, and it will not be pretty.  Portugal, Italy, Ireland, Greece and Spain all spend too much and produce too little.  I heard a comparison today of Greece and Lehman Brothers.  When Lehman failed it set off a series of moves against other investment banks.  One by one each company's stock was taken to the woodshed by short sellers until they cried uncle.  What will happen if the 'bond vigilantes' start moving against countries, one by one?

This morning, the Labor Department reported that nonfarm payrolls (jobs) decreased by 20,000 in January. Today's chart puts that decline into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). The current job market has suffered losses three times the average recession/job loss cycle. 25 months after an average recession/job loss cycle began since 1950; the job market recouped all losses and was already in process of adding new jobs. This time at the same 25 month mark, the job market is still suffering losses.

To the Mailbag:  On Researching Stocks, “…all this research you do.  Someday I will learn.  Very cool and very time consuming.  Thank you.”---paid up Long-Term subscriber T.M.

John’s Reply:  T.M., I am still learning.  Arrogance in trading will reward you with a smaller account balance.  Whenever a surprise comes along, I ask, “Why didn’t I know or anticipate that.”  Constant questioning of methods and testing of your work keeps your antenna on alert.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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