Being in the business of money management, you are almost held hostage to financial television. You have to watch a certain amount of it to catch breaking news. Besides the CNBC cheerleaders celebrating Dow 10,000, that level is nothing more than a round number with 4 zeros. Sorry, President Obama, it is neither a milestone nor evidence that your economic stimulus package is working. However, that was a nice sound bite this past week.
So the question arises why can’t I just acknowledge the bullish case and join in with the madness of the crowds? Well, it comes down to those pesky fundamentals. They represent reality and not the fantasy world where the politicians reside and everyone else that has skin in the game live. The reality is that the economic backdrop does not support what is occurring in the stock market. As I have written before, it is going to be quite the rude awakening when those lights come back on and the clean-up of the after party begins.
Every week we get more reality. Soon enough it is going to be tough for this market to block it out. Last week we received the latest on the foreclosure crisis. During the last 3 months, 937,840 people received a foreclosure letter. That means 1 in 136 homes were in foreclosure. That is also the worst 3 months on record. All of this is going on at the same time that the government has rolled out all types of programs to prevent this from happening. This of course is just one example of reality. The real estate markets cannot even begin to bottom and recover while this is occurring.
Potentially further the problem is the fact that we are starting the second wave of adjustable rate mortgage adjustments. The re-setting of adjustable rate mortgages are a main contributor to the foreclosure crisis. You can read about it here.
There is some good news. Yes, I did utter the words “good news”. Businesses are figuring out how to work in the new normal. Beyond some improvement in the economic numbers the only thing that has been positive has been the stock market. Banks are still not lending and consumers are still in lock down mode and unemployment is still at dangerous levels.
Even within that backdrop, businesses are figuring out how to start getting deals done and activity is picking up. So, I don’t think that we are going to find ourselves again in the economic meltdown where everything comes to a grinding halt. Businesses are figuring out how to navigate in our new normal. The strong businesses will become stronger. The bad business models will go away. Well, the ones that are not on government life support.
So, how do you handle this environment? It is standing advice. You watch the amount of risk that you are taking with your investments. Know the risk, be comfortable with the risk, and have a plan B in the event that we run into trouble again.
As for this week, watch corporate profits. Minus the earnings report for Alcoa, the market didn’t particularly care for many of these reports. The Dow should be heavily impacted (one way or another) as many of the Dow components report this week.