Year From Hell Attacks Stock Market

The Year From Hell roared in with a vengeance and attacks the stock market as one of its first orders of business.

The U.S. New York Stock Exchange kicked off the new year in record style. The Dow fell 220 points, the biggest first trading day of the year point drop in the history of the index and the worst opening percentage loss since 1983.

Then on Friday the Commerce Department releases the Non Farm Payroll (NFP) report and the AP reports soon afterwards that “The unemployment number jumped from 4.7 percent in November to 5 percent in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Payrolls – both private and government – grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.”

The stock market was quick to respond. The DJIA lost another 256.54 points only to be outdone by the NASDAQ in percentage terms. The NASDAQ was down 98.03 points to 2504.65, a jaw dropping, bone jarring,  3.77%. For the first week of the year the Dow dropped 4.2% and NASDAQ was down by 6.4%. Happy New Year indeed investors.

I may have to go back to my drawing board and come up with another estimate of losses to be guesstimated for 2008. My earlier guesstimate of a 25% drop in the Dow may prove to be too conservative.

The perfect terrifying financial storm is brewing for the US economy and for the US stock markets. Wealth is being transferred from West to East. The falling dollar will make sure that this process continues as cheap American assets in weak dollar terms continue to be snapped up by foreign investors.

The American consumer’s habit of buying products made overseas that they don’t really need and paying for the products with money that they don’t really have adds considerably to this wealth transferring process. Asian countries now own about 75% of the world’s foreign exchange reserves. Americans sometimes brag that “they sweat (the Asians) , we think” in reference to how manufacturing operations have largely moved overseas, especially to Asia, while service industries take over the US economy.

We may think but it seems not very well. While the Asians have huge inflows of funds from the sale of real products America and other Western nations, especially our British cousins, have run up huge mountains of debt in part by buying those products. And our most notable service “thinking industries”, real estate and financial services, are rapidly sinking under debt burdens that they are just not capable of sustaining.

Then there are our “thinking” Wall Street geniuses. These smart highly overpaid financial engineers have build a gigantic business by taking risky assets and converting them by trickery and I suspect out right fraud into AAA rated investments. The subprime mortgage leading disaster is only the tip of the rapidly approaching iceberg. Our Wall Street geniuses have used the same “make believe evaluation” models to package risky credit card debt into AAA “investment” packages. That bomb shell is about to hit as credit card delinquencies reach record levels.

As if that weren’t enough our Wall Street busy fellows have created Trillions of dollars of weird and largely unmarketable derivative financial instruments that even the creators don’t fully understand. As the dominoes have started falling among the financial service “thinking” institutions and firms the derivative market is a fiasco waiting to happen that will make the subprime mortgage lending disaster look like a stroll in the park on a beautiful April day.

With oil at $100 a barrel, with gold at all time highs above $860 an oz, and the S & P Index about to take out a support line at roughly 1400.00 that goes back to 2003 the beginning of 2008, the Year From Hell, portends a lot more pain and misery to come as we head into the first full trading week of the year.

Unfortunately, 2008 will be the year that millions of Americans lose their homes to foreclosure. It will likely be the year that sees trillions of dollars in stock market losses. Home prices will keep falling. The dollar is at risk of a full scale panic collapse.

The US Federal Reserve Bank, at their next FOMC meeting, will very likely again lower interest rates, after the sorry NFP report, by perhaps 50 basis points, but they are now pushing on a string. They can lower rates all the way to zero as the Japanese central bank did, and still not be able to prevent the correction that must occur after the largest financial bubbles in history collapse.

Markets always regress to the mean at some point and the American financial markets and real estate markets still have a long way to go to get there.  It is smart to remember that on the downside markets usually overshoot the mean before recovering at a long term equalibrium point so watch out for a deep, deep, bottom before the recovery. The return to the mean process could take a number of years starting in 2008.

2008. The Year From Hell. I expect that we all will remember it well. And be very glad when it is over. We think. They sweat. But they are the ones now getting rich while we suffer. The transfer of wealth from West to East is probably not going to reverse within the 21st century. Americans will have to adjust to a lower relative standard of living.

But even with all of the likely grief that will be about in 2008 there is one very good thing that will take place in America. We will vote into office a new President. That alone will be enough to ease the pain and suffering that 2008 will bring to so many.

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