Eye of the Hurricane

Like standing in the eye of the hurricane, to the uneducated it may seem like the worst is done. The sun may come out for a time; the wind dies down almost completely; and for a moment hope takes over. However to the knowledgable, this is only a small respite with the worst possibly still to come.

The long awaited bear market rally I thought would come late last year has been in place for over a month now. Could this be the start of a new bull market?...yes. However, the likelihood of that in my opinion is definitely less than 50%. All that has happened is the government has thrown trillions of dollars into the economy and into banks to try to stop the tidal wave. This will obviously help, but probably only short-term. For one thing, the great majority of this money has not been used for anything that will help the economy over the long-run. Just like in '02 when the fed dropped interest rates drastically, the market rallied. However, giving easy money to people and the United States as a whole, is a horrible approach when the debt levels are already at historic highs. There are no free lunches! If I gave a person with 100k of debt and an annual income of 20K another 100k that he must spend; he will have some fun for a while and may even feel more wealthy. Yet, when the debt has to be repaid and his job still pays the same, he isn't better off. In fact, he is far worse off! Where we are right now is in the midst of the fun money spending.

I could see this lasting anywhere from a couple more months to maybe a year or more. However, when it does end, it will be ugly with a capital U G L Y. My high end expectation on the DJIA is around 10,000. So I think this rally could have a ways to go. During this time, gold will likely continue to suffer (with a max downside target of $700/oz, it is currently at $870/oz) as people believe the worst is behind us. I expect this to be the last great buying opportunity for it for some time (for silver too). By the end of the market's bounce, most individuals and market professionals will believe the bear market is long gone and start putting all their cash back into play. The overall mood will probably be borderline exuberant again despite that the underlying fundamentals of the economy will have not improved much or at all.

Remember, this is just my best guess. I would put my estimate at maybe 60-70% likelihood. Another scenraio is just a retest of the March lows in the 6500 range on the DJIA (10-20%). The last and best case scenario would be that we already hit the lows and the future is bright (10-20%).

Amendment: I just listened to a great interview talking about economics and the current state of the economy. I would strongly recommend this not just for a learning tool, but also as a must know for anyone concerned about the direction of our government and in particular the fed.

Here is the link (it is the April 11th episode 2nd Hour): http://www.financialsense.com/fsn/main.html