What Goes Up, Must Come Down

Or so the adage goes, though it certainly looks like it may hold a kernel of truth when applied to the stock market. The DJIA crashes 400 and change today, the largest loss since the day markets opened after 9/11. The Chinese market took a dump over night and that cascaded through the intestines of the world economy like so much undercooked chicken. What does it all mean? Hell if I know but here’s some thoughts.

Lots of people currently in the market have never seen a day like this, one where seemingly small events have a huge impact on the market. We probably saw a ton of panic all day and may continue to see some. Is this the trigger that starts a correction? I think it might. We’ve been flying high for a long time in the face of cascading bad news and maybe Mr. Market is finally paying attention. I think another 7% loss over the next 6-12 months wouldn’t be a bad thing at all, returning the market to a semblance of balance and making a lot of stocks look much more attractive.

I think building a decent sized chunk of cash over that time frame would be a good idea, one I’ve already started. If the panic continues, stocks have a lot of room to fall before they become super attractive. If it doesn’t, I see the market pretty much moving in a narrow range over that time frame until the housing market and the debt market hit the wall.

Some interesting news from today: US Consumer Confidence hit a 5 year high. That’s probably a great reason to sell all the stock you own. Wanna bet it goes down a tad next month?

Existing home sales rose to a 7 month high with the chief economist from the National Association of Realtors predicting a small bump in the road from February storms but “that will be followed by a continuing recovery in home sales”. Always be nervous when it seems like there might be a conflict of interest like the chief economist of a Realtor’s association predicting every things is fine.

The subprime mortgage market continues to get killed though this should hardly be a surprise to anyone (surprisingly, it was a surprise to lots of people). Subprime lenders write mortgages to people to have bad credit. They have been able to do this in the past because home prices have been increasing at an ungodly rate of 14% and change year over year. Turns out, when you loan money to people who can’t possibly pay it back without their house going up 14% in value every 12 months, you happen to have a bad business model. The ARMs and the no-interest loans we saw everywhere in the past will be gone soon and they may take the American economy with them.

Jim Jubak writes a mostly good article on what happened in China today though I do have a nit to pick. About halfway through, he throws this interesting bone out there:

    The stock market has become a prime tool for passing a big hunk of the country’s growing wealth to the elites whose support the Communist Party needs to maintain its hold on power. (You’ll be excused if you think this is strikingly like how capitalism works in overtly capitalist countries.)

Now I’m pretty sure Jim leans to the left when he farts but to me, that seems like a stretch. In one country (China), the government basically controls the stock market as he explains. In another (America, sure one of the overtly capitalist countries he disparages), the government doesn’t. The elites do tend to make more money in the market in capitalist countries but not because of the government. The US Govt. doesn’t hold 2/3rds of most of the public companies here. The US Govt. doesn’t have a single party that needs to bribe the elites. C’mon Jim, that’s just a pretty ridiculous thing to say unless I completely misunderstand the point.

All this and more makes me worry about the economy and the market over the short run (12 months). I’m happy to have a big position in cash, waiting to see what happens next. Can’t wait to see what tomorrow brings.