Investtalk.com

After a strong first day of trading on Friday the market started off on a weak note this morning. There is a well known statistic that reads as follows: as goes the first day of the year, as goes the first week and as goes the first month so goes the year for the stock market. The first day was up strongly; we will see if the week will hold up. Last year the first day, week and month were down and we all know how the rest of the year went.

The big economic report this week will be released Friday where we will have December's employment data. There is an expectation of a loss of 500,000 jobs and the unemployment rate rising to 7%. Before this weak economic cycle is over expect the unemployment rate to rise to at least 8% and maybe as high as 10%. It will depend on the success or failure of Obama's economic plan.

Meanwhile, although construction spending for November was estimated to be falling by 1.3% or so, this morning it is reported that it actually fell only .6%. Is that good news or bad? With expectations all negative any less bad news is good news for the market.

The market builds into the prices of stocks all the expectations it sees and of course that has meant a severe bear market. Now investors need to ask: "has there been enough price depreciation to anticipate the bad news in the economy we are going to have over the next few months?"

Mortgage Rates

The Fed announced a couple days ago that they have set a self imposed goal of buying $500 Billion of mortgage backed securities by mid 2009. I think the announcement was an effort to push mortgage rates down. The actual purchase will likely do the same thing. They are going to start buying these assets in January and $500 Billion seems very aggressive.

Overall, I think this is a good thing. It will provide a couple benefits. One, it will give banks the ability to put cash back in their coffers which gives them incentive to make new loans. Banks can only make money by lending it. Also, it gives them a market for these assets with transparency as to the value of these assets. Without a market there is no telling what these assets are worth and this unknown is a problem for the banks.

The other benefit is for you and me. This effort has already driven mortgage rates down and with the Fed Funds rate (the rate at which banks can borrow money from the government) near zero, all the interest they charge us is profit. This means that with competition, and less fear in the banking industry, mortgage rates should continue to fall. They are very likely to go under 5% and could go to 4%. That will help the consumer put money in his pocket on a monthly basis.

Good Trading
Steve Peasley

Where's the Rally?

There has been very little sign of a Christmas rally and now we are looking for the New Year rally. Traditionally, these rallies come in the last couple weeks of December and the first couple weeks in January. However, this has been a year of non traditional moves for the market.

It has been the worst year for the S&P 500 and Nasdaq indexes including the great depression. For the DOW it has been the second worst, but just barely. Even though prices of stocks are at historic lows, when compared to price to sales, price to book and other financial relationships it does not mean the market 'has' to rally at year end.

Sometime in the new year we are going to see a very strong rally, but that may be several months away. No one can predict the timing of a rally or a fall in the market. However, there are huge amounts of cash sitting on the sidelines, but even if it just sits there for a while you have consumers who are finally getting a break at the gas pump with very low prices for gasoline, historic low mortgage rates, and the Obama stimulus package.

All these factors should give us a strong rally. The biggest fear is that there is some unknown or unknowable event that could panic investors. A little hint of that kind of thing are Israeli air strikes this weekend with oil prices spiking as a result. The rally is assured but it is the 'when' that is always impossible to gauge.

Good Trading
Steve Peasley