Posted By thestatedtruth.com on January 10, 2010

Here are some comments from the Alan M. Newman Stock Market CROSSCURRENTS  Report out for January 2010……………..

On the hourly charts, there are a series of bottoms just above Dow 10,200 dating back to November 12th.  When this level breaks, we should be on our way and accelerate down to anticipated support between 8100-8400.  We do not see the Dow testing the March ‘09 bottom unless there is a catalyst at least as significant as the crisis that took us to the precipice last year.  

The psychological aspect is fascinating.  Given the fundamental background of a near economic and financial collapse, to see investment advisors at their least bearish in 22 years is just mind numbing.  The economy requires jobs.  Each decade from the 40s to the 90s witnessed at least 20% growth in payroll employment.  There was ZERO job creation in the 00s.  We expect recognition of this plight to soon surface.

                                                         The Odds

                             

The highest odds scenario we offered for last year was 30% for the recession to worsen and clearly, it did.  A “double dip” return to recession is again our biggest fear and highest odds scenario.  Despite the modest gains for the economy in late 2009, we have reason to suspect that there was a bit of illusion created by the inevitable rebound from the abyss.  As we have stated before, business is not good, it is just less bad than before.  The consumer is not well heeled, just less strapped than before.  A double dip into recession is quite possible.

We have raised the odds for a major Terrorist Event from 10% to 15%.  While we would like to believe the odds grow smaller over time, the reports of terror episodes in other countries have not abated.  It is likely only a matter of time before we suffer a disaster that while not on the scale of 911, may temporarily bring a large segment of our commerce to a halt.  

We have increased the odds of another derivative event to 20%.  We have conclusive evidence that the skew provided by credit default swaps (CDS) and collateralized debt obligations (CDOs) incentivized parties to create uncertainty where none existed or to dramatize and exaggerate uncertainties to profit from short sales.  We need go no further than a recent NY Times article on the debacle that nearly took the country to ruin (see http://tinyurl.com/yejhqgd).  As well, we hasten to reference David Einhorn’s October 19th speech to the Value Investing congress (see http://tinyurl.com/ykcb3m5) wherein he claimed, “trying to make safer credit-default swaps is like trying to make safer asbestos.”  As you can see at bottom left, the $136 trillion in notional values for SWAPS comprises roughly two-thirds of all derivatives, and their share is still growing.  Over the years, we have continually referred to a worst case of 1% to 2% of notional values at risk.  Losses thus far from the 2007-2008 disaster are within that range.  The risks remain in place.  As always, it’s not a question of if, but when.  

Armed conflict remains at 15%.  The principal trouble spots appear to be limited to insurgencies but we worry about a re-ignition of an Iran-Iraq conflict that would disrupt fuel supplies as  Iran’s radical leadership attempts to re-focus opposition within the country.  Clearly, U.S. forces are already spread too thinly and any further confrontation would likely cause the markets great concern. 

There is also a modest chance that the Federal Reserve will at some point be forced to raise interest rates, even if the economy remains under pressure.  Add to the mix the odds of debt implosions, such as those seen in Iceland, Greece, Dubai, Spain and others, and we have the backdrop for increased uncertainty and the possibility of sovereign debt problems.  Uncertainty is never good for stocks. 

The above is the opinion of the writer and is for informational purposes only.

Categories: Charts and Graphs, Commentary, Economy, Finance, Wall Street
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