Stock prices fell sharply yesterday in response to "disappointing" corporate earnings announcements, and from Federal Reserve Chairman Ben Bernanke's "enlightening" comments about the ongoing fallout from the subprime mortgage market.
Those of you who follow my regularly commentaries know that there is nothing surprising about either of these events. Yet market participants seem to have been caught unaware — once again.
Intel, the world's largest maker of semiconductors, announced that it expects the company's gross profit margin to fall to 54 percent during the first quarter, down from its earlier forecast of 56 percent. Intel cited lower-than-expected prices of chips that store data in cameras and music players for the reduced forecast.
Staples, the world's largest office-supplies retailer, announced that it expects its fourth-quarter profit to decline on lower North American retail sales to small companies and consumers. The company cut its full-year forecast.
Adding to yesterday's pressures, Dubai International Capital announced that Citigroup, the biggest U.S. bank, might need additional capital from outside investors as a result of ongoing losses stemming from the subprime mortgage meltdown.
Meanwhile, Fed Chairman Ben Bernanke said in a speech to bankers in Florida that home foreclosures and late payments on home mortgages are likely to rise "for a while longer."
Gee, what a surprise! I would have never been able to recognize such a problem. I guess we should thank Mr. Bernanke for his insights.
Too bad Bernanke and former Federal Reserve Chairman Alan Greenspan couldn't have foreseen the destructive effect that giving loans to persons with bad credit would eventually have on the housing market.
Are we to assume that these esteemed economists couldn't recognize that making zero-down-payment home loans to people would cause house prices to rise to ridiculous levels? And that those same home "owners" wouldn't be able to make payments on their mortgages, once adjustable-rate loans reset higher?
In addition to the rout in the equities market, commodity prices also fell sharply yesterday, as astute investors decided to take some profits. These investors realize that a continuation of the slowdown in the U.S. economy will reduce the demand for commodities such as oil, coal, natural gas, and industrial metals during the months ahead.
Somehow, financial pundits began telling investors only a few days ago that the best place to invest now is in commodities. Sound familiar?
Meanwhile, several Wall Street "experts" commented in usual fashion on yesterday's rout in the financial markets by telling investors that the U.S. economy is still on sound footing and that stocks are "cheap."
Despite these pronouncements on the financial TV shows, the financial institutions that employ many of those so-called experts have continued to invest a substantial portion of their assets into money market funds.
Um, I don't quite understand… Why would those investment professionals add to their money market accounts rather than to equities if the economy is strong and stocks are cheap!
Now, let's review the facts. A preponderance of economic statistics strongly indicates that economic growth in both the U.S. and numerous other countries will continue to slow during the next few months.
Meanwhile, commercial banks and other lending institutions have significantly tightened their lending standards, the employment situation has worsened, several financial institutions recently took more asset writedowns, and U.S. consumers are highly in debt.
These factors clearly suggest that stock prices will likely continue to trend lower over the near-term.
By the way, I began warning our readers in July of last year about the economic events and developments in the financial markets that are happening now.
Although stocks have traded essentially sideways since the beginning of February, my models suggest that stocks are now in danger of testing their Jan. 23 lows.
On the positive front, for investors who hold long positions in the equities market, recent comments from officials suggest that the U.S. government may come to the rescue once again with initiatives to save certain home "owners" (they don't own the homes, or they wouldn't need help, right?) and Wall Street speculators from their irresponsible financial decisions.
Such initiatives, if they occur, would likely propel stock prices higher — for a few days.
However, if stocks break down through price-support levels (around 12,000 on the Dow Jones Industrial Average), I expect stock prices in general to fall precipitously over the coming weeks. So, I urge you once again to sit on the sidelines for now, rather than foolishly speculating on the near-term direction of stock and commodity prices.
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