http://blog.mutualdecision.com/articles/2007/12/03/the-bobbing-cork en-us 40 Insight from the minds behind MUTUALdecision <div>The stock market rebounded this week like a cork popping up after a fish wiggles off the hook.&nbsp;The Dow opened the week below 13,000, declined to 12,725, then railed 647 points to close on Friday at 13,372.&nbsp;The S&amp;P and NASDAQ turned in similar performances.&nbsp;From a 10% correction, fears of a meltdown in the financial sector and recession the preceding week, the market rallied for four consecutive days and closed at its high for the week.&nbsp;What caused this swing?&nbsp;Equity investments in Citicorp and e*Trade demonstrated that capital was available for the financial sector and the financial stocks rallied on the news. &nbsp;Treasury Secretary Paulson proposed a moratorium on rate adjustments for certain subprime mortgages and Fed spokespersons, including Chairman Bernanke, hinted at the possibility of another rate cut in December.&nbsp;And, overshadowed by all the good news in the financial sector, oil closed at $88.70 a barrel, below $90 for the first time in weeks.</div> <div>&nbsp;</div> <div>Has the economic outlook improved that much to justify an almost 5% move in the stock market?&nbsp;No.&nbsp;The only change was the infusion of capital into the financial sector.&nbsp;That&rsquo;s good and the financials responded, although I think their lows will be re-tested, but it doesn&rsquo;t solve their problems.&nbsp;Neither does the government program.&nbsp;The proposed rate freeze for selected mortgages is a band aid which will benefit some homeowners but does not address the underlying problems facing mortgage lenders.&nbsp;The mortgage industry is in for a period of contraction due to the economic slowdown, slowing new home construction, a slowing re-sale market for existing homes and the ability of homeowners to meet their payment obligations, particularly if the employment picture weakens.&nbsp;Interrelated are the tighter lending standards which the major mortgage originators have implemented. &nbsp;Reality will set in when the initial euphoria wears off.</div> <div>&nbsp;</div> <div>As for oil, who knows how much of the recent movement, in both directions, was due to speculators adding to, or closing out, their positions.&nbsp;Demand for energy is increasing worldwide, even the US is consuming more gasoline this year than last, so don&rsquo;t expect prices to fall for long.&nbsp;Even if crude prices do fall, consumers are in for a disappointment.&nbsp;Retail prices for gasoline and home heating oil did not rise as much as crude oil, the refiner&rsquo;s margins took the hit, so don&rsquo;t expect prices at the pump to fall by much.</div> <div>&nbsp;</div> <div>The economy is still the big fish (a feeble attempt to tie to my opening sentence).&nbsp;&nbsp; The economic outlook and the problems facing the economy haven&rsquo;t changed.&nbsp;&nbsp; Thus, the swing in investment sentiment we saw last week is not justified.&nbsp;Don&rsquo;t get caught up in the moment.&nbsp;This is not a time to become aggressive.&nbsp;Stick with your long term investment strategy and don&rsquo;t get hooked.</div> <div>&nbsp;</div> Mon, 03 Dec 2007 13:16:00 -0600 urn:uuid:39360221-e27a-481d-9c58-f8a2f130b94c Bill Byrnes http://blog.mutualdecision.com/articles/2007/12/03/the-bobbing-cork Market Mutual fund blog Mutual Funds Market Economy Economic Outlook