Wednesday, September 5, 2007

Get Out and Stay Out!

Today's headline should have appeared on all financial news outlets as a warning to investors. The waters of the US investment wading pool have been poisoned by bad sub-prime and interest only mortgage loans, mortgage-backed securities that are now not even worth the paper they're written on and a pile of derivatives - a true house of cards ready to collapse - as high as the moon.

There are numbers chartists will tell us to keep an eye on. These are, upside resistance and downside support on the S&P at 1490 and 1430 respectively. On the Dow, those figures are 13,695 and 12,860. Breaking to either side of those figures will indicate further movement in that particular direction.

People with practical risk aversion will see the problems looming - and already apparent - in the credit markets, and stay out of the market until a direction is confirmed. Those who have no appropriate understanding of risk will bet on one side or the other and go along for the ride. Unfortunately, the vast majority of US investors are always bullish, never willing to believe that there's anything wrong with the economy or the country, even when the evidence is clear.

And the evidence cannot be much more clear. The National Association of Realtors today released its index of pending sales for existing homes, which fell 16.1% in July from a year ago and 12.2% from the June reading. July's reading was the second-lowest ever for the index and its lowest since September 2001.

Of course, selling new and existing homes pales by comparison to the trillions of dollars that have been and will be blown up in the mortgage securitization fiasco. Meanwhile, the greed line on Wall Street starts with the analysts calling on the Fed for a rate cut. Easier credit, they assume, will save everyone's behind.

That's a fiction of the highest order. Repricing debt lower may have some soothing effect, but it's not going to heal the already deep wounds inflicted on mortgage companies, banks, hedge funds and others who trafficked in bundled mortgage-backed securities. And the president's plan is only going to shift the debt from the banks to the government (via the FHA), weakening the already weak dollar even more.

So, the message to investors should be GET OUT AND STAY OUT. Beware of falling stocks, which, by the way, took another tumble on Wednesday.

Dow 13,305.47 -143.39; NASDAQ 2,605.95 -24.29; S&P 500 1,472.29 -17.13; NYSE Composite 9,583.17 -115.51

Declining issues pounded advancers by a 5-2 margin while new lows surpassed new highs, 130-109.

About the only thing showing a gain today was the price of oil, which added 65 cents to $75.73. Talk about being out of touch! Gold and silver suffered marginal losses.

Tomorrow may see some moderation or more drifting to the downside, but Friday, when the Labor Dept. releases August jobs data, there will almost certainly be a wicked downdraft. Nothing's written in stone, however, so be patient until the markets confirm either bearish or bullish sentiment.

I know it's difficult, but SIT ON IT!

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