The market enjoyed a good week last week with the popular averages increasing by more than 2%. The market focused on good earnings growth from technology companies, continued strong international demand, and reassuring news about the mortgage morass. The market shrugged off $90 oil and forgot about its principal worry of the preceding week – Structured Investment Vehicles (SIVs). Energy and SIVs are serious concerns. Squeezed refiners margins, and fear of government action, have limited the increases in the price of gasoline but how long can that continue? Further increases in the price of oil will have to be passed along, if not now, next spring when gasoline demand begins its seasonal increase. Even more worrisome is the impact of cold weather on home heating costs. SIVs are off balance sheet investments (remember Enron), so nobody really knows what going on with them but its safe to say that the question of the quality of their investments hasn’t disappeared in one week. 

 

Two key events take place this week: the Fed meets on Tuesday and the employment report is released on Friday. A cut in the Fed Funds rate would be greeted as a positive by the market but what would it really accomplish? It won’t help the mortgage market because most mortgages are priced against LIBOR (which the Fed can’t control). It won’t help the homebuilders or homes for sale because price is far more important than a small change in mortgage rates in build and buy decisions. Friday’s report will be the more important of the two. Employment figures will give us a further clue as to whether the economy will continue growing, albeit slowly, or if we’re moving closer to a recession.

 

Economists have a poor record of predicting big swings, such as oil going from $30 to $90 a barrel, and major shifts such as a recession. They can’t hit the curveball, but neither can most of us. We’ll only strikeout if we try to chase every pitch, every economic signal. We need to be long term investors. If there is no recession, the market will be significantly higher by next spring, as I’ve written about over the last few weeks. If there is a recession, the market will retract by some 20% but then it will start up again before the recession is over and, probably, when the outlook is bleakest.   This isn’t the time to take risks but to stay in the stock market and stick to your long term investment strategy.

The market may not be a living thing but it is schizophrenic, swinging between optimism and pessimism.   The market currently is in a negative frame of mind as illustrated by its reaction to the recent economic news.  The market’s been worried about a recession, so the increase in industrial production should have been greeted as good news. Instead, the market focused on an increase in inflation. And, it took the view that if industrial production continued to grow, it would lead to higher inflation.  Mark my words, if you follow the market long enough you’ll see a time when it views expanding industrial production as good and shrugs off an inflation report. Right now, though, the market is in a “the glass is half-empty” frame of mind.  (Yes, I know it opened higher this morning but my time frame is longer one day.)   My conclusion? If you’re looking for investment advice, see your psychologist.