Tuesday, December 30, 2008

Consumer Confidence, Housing Collapse

While investors were busy buying up stocks (the only plausible reason would be a combination of short-covering and year-end window dressing by funds), a couple of economic reports sent shudders through the remainder of humanity.

First, the Conference Board's measure of consumer confidence sunk to an all-time low reading of 38 in December, from 44.7 in November. Somehow, the "experts" were expecting the reading to rise to 45. Apparently, the wizards of Wall Street weren't out shopping this Christmas season, or else they would have seen people shrugging off discounts of 50-60% or more and hanging on tightly to their purses and wallets.

The other report came in the housing arena, which hasn't had a dose of good news in well over a year now. The Case/Schiller 20-city index fell 18% in October, the worst decline since the index was launched in 2000. Prices are now said to be back to 2004 levels. While that may sound encouraging to some, anyone in the real estate business with half a brain realizes that prices began skyrocketing long before that, so there is likely to be a further decline ahead.

What most people fail to understand - beyond the government bailout money doing essentially nothing to alleviate the housing crisis - is that $2.2 trillion in ALT-A and ARM mortgages are due to re-set in 2009 and 2010. The number of foreclosures from this wave of defaults will extend the real estate and liquidity crisis to gigantic proportions. Subprime, in other words, was only the beginning.

But, stocks set sail higher from the outset and finished with strong gains.

Dow 8,668.39, +184.46 (2.17%)
NASDAQ 1,550.70, +40.38 (2.67%)
S&P 500 890.64, +21.22 (2.44%)
NYSE Composite 5,670.00, +135.36 (2.45%)

For the session (correction: tomorrow will be a full session, not a half session as I previously reported), advancers led decliners, 5134-1682, a very broad-based advance. New lows continued to dominate new highs, however, 240-25. Volume was light, and considerably better than Monday's pathetic no-show.

NYSE Volume 953,198,000
NASDAQ Volume 1,413,810,000

Crude oil futures for february took a 99-cent dip, closing at $39.03. Gold was also down slightly, losing $5.30, to $870.00. Silver (maybe the best investment of 2009) bucked the trend, gaining 17 cents, to $10.98.

Why silver for 2009? A couple of reasons are that all asset classes are going to get hit again in the coming year, but silver has already lost close to 50% from its high. There's also somewhat of a floor around $6, so prices, if they decline, should not go down much, whereas with gold, already inflated, could see $650. Also, silver is highly accessible to everybody. It's $10 or $11 per ounce, not $800. You can buy silver in multiple forms form multiple sources as well, so it may be the choice for small-time scroungers and fledgling investors, plus, it is readily liquidated. Those are some positive reasons beyond silver being well below the traditional gold-silver ratio.

If you can't buy gold, silver makes a nice substitute.

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