Grappling With The Bear

Financial advisors are busy grappling with the economic bear.Extreme volatility may occur this week as the markets react to the Federal Reserve's interest rate decision on Wednesday and the employment report on Friday,as well as other data.Jessica Paige of Paige Capital Management advises staying in cash.The debt market is in a crisis,and many companies will file for bankruptcy.One that has already done so is Quebecor World(QBRWF),a Montreal-based printing concern.The company,which prints textbooks,books of the month,catalogs and pamphlets,cites a need to restructure itself.Local management in Fairfield,Pennsylvania says they will not be reducing staff or cutting wages and benefits.The firm has secured one billion dollars U.S. in financing from Morgan Stanley(MS) and Credit Suisse(CS).Ms. Paige observes the market is going through a transition phase right now.Anything you want to buy will be cheaper in six months.The S and P 500 index will drop to 1200 within 6-12 months.Robert Hormats of Goldman Sachs(GS) notes that the economy is heavily in debt-much of it bad.Decoupling of other economies from the U.S. economy hasn't happened.The financial and goods markets of the U.S. are very important to other countries.It is hard for them to grow robustly without the U.S. markets.Economist Ben Stein feels the market was ridiculously oversold by hedge fund traders.They are making a fortune by shorting the market.Three hundred trillion has been knocked out of the market.Federal Reserve chairman Ben Bernanke needs to fight them and be as ruthless as they are.Jim Awad of J.P. Stewart Asset Management says that it is the most volatile market in his forty years in the business.There is a fear of more write-downs,and it will take time to get over that.According to Joe Battipaglia of Stifel Nicolaus,the corrective process is well underway,but you still have to work through the credit mark-downs.We are one-third of the way through.The process has to unfold naturally.While this goes on,some investors are sheltering in tax-free money market funds such as Alpine Municipal MMF/Investor and Vanguard Tax-Exempt MMF.

Conference Board Charts Downdraft

The Conference Board's Consumer Confidence Survey registered 87.3 last week-a drop from 105.3 a year ago,and down 8.3 from last month.A combination of high gas and food prices,coupled with a decline in home values and a nervous stock market,are giving consumers their most cautious frame of mind in two years.Billionaire Wilbur Ross of W L Ross and Company says the consumer is quite a bit overstretched.Spending has exceeded income growth for the past six years.Donald Ratajczak of Morgan Keegan feels that the pressures should create a recession,but the economy's internal dynamics have allowed for absorption to this point.Still,there is a 50-50 chance of a consumer-led recession.Goldman Sachs(GS) issued an analysis upping the chance of a recession to 40-45%.Gross Domestic Product growth will be below trend for an extended period-through 2008.Unemployment will rise to 5.5% from 4.7%.The housing downturn will worsen,and credit availability will decline.To Joe Battipaglia of Stifel Nicolaus,the U.S. is going through financial difficulty that will affect the general economy.We may be in a recession right now.That bonds are outperforming stocks is an indication of this.The equity risk premium is only 2.25%,yet the slowing economy suggests there is actually more risk than that.The correction of stock prices could have as much as 15% more to go.You'll see more rate cuts.Financial institutions will write more losses off.The economy won't pick up till the end of next year and into '09.A growth portfolio should contain 50% U.S. equities,25% international equities and 25% short term,risk averse instruments and gold.David Rosenberg of Merrill Lynch(MER) puts the odds of recession at 60%.Financial and brokerage stocks are already pricing it in.The Federal Reserve is pushing on a string,as we are in a rare environment of national real estate deflation and a credit crunch.Robert Albertson of Sandler O'Neill thinks the market will fall another 15%.The Federal Reserve can't do much about the mortgage problem.You should stockpile cash,as there is no pressing need to buy stocks right now.If you must buy them,then defensive areas such as tech and health care would be best.The iShares Lehman Brothers SHY and TIP bond funds have been good refuges for cash this year.

Wary Sentiment Wells Up

For the past several days,a wary mood has been expressed by Wall Street analysts.David Greenlaw of Morgan Stanley(MS) notes a powerful flight to the safety of government bonds.Banks are still tightening credit,which will slow the economy over the next several quarters.Peak foreclosure on homes will not occur until mid-2008.Jack Ablin of Harris Private Bank thinks the world has changed now.There is the high price of oil coupled with the weak dollar.The trend has changed.As the Federal Reserve lowers interest rates,the price of commodities spikes.Fifteen of twenty commodities have gained over the past six months.Billionaire Wilbur Ross of W L Ross and Company says we are in the fourth or fifth inning of the crisis.It will be at least a few more years until foreclosures and write-downs end.More credit card and loan delinquencies are being recorded,which suggests that consumers are tapped out.Oppenheimer's Michael Metz feels we are in for a period of very slow growth.This will last for about two years,as we've been in a leveraged economy.The big growth wasn't real.Now we will see a period of 1-1.5% growth.To Joe Battipaglia of Stifel Nicolaus,we are in a contraction from housing,and consumption will be weak for some time.It will take years to work this out.Housing prices are just beginning to fall.The biggest consumer asset is losing its value.Credit is harder to get,so the market is properly going down.We've only dropped 5% in home prices so far.The clock is ticking on 600 billion of mortgages,so he is staying in a lot of cash and some multinational stocks.Cash has been pouring into money market funds,sending them to record levels.Oppenheimer offers its customers the Advantage series of funds.Other stable funds are TIAA-Cref Instit MMF/Retail and Vanguard Tax-Exempt MMF.Procter and Gamble(PG) and Johnson and Johnson(JNJ) are favored multinational stocks.