Wednesday, January 18, 2006
The Big Picture Now
Early January 2006 showed the market wants to go up this year. It has recently taken a sideways turn. Here's why:
- Interest rates - not such a big deal right now. Expect a big pop after the first FOMC meeting with no interest rate hike, but not much downside at this point.
- Iran - they have nuclear bomb ambitions, and the country is run by a messianic madman. If Hitler had the bomb, the world would be very different today. Bush and Olmert are not Chamberlain. Iran will not get the bomb, although they will probably get bombed. Perhaps in March. That will be a short term shock to the market, perhaps providing some buying opportunities with available cash. This risk to the market is holding it back now. If the situation somehow gets settled non-militarily (unlikely) the market will pop.
- Oil - not just Iran, but Nigeria is falling apart too. Iran and Nigeria together put out about 6.5M barrels of oil per day. The Nigerian supply could be cut in half, and the Iranian supply could completely go away for some time. Oil is going to stay high for a while. Bad news for the SUV dependant portion of the auto industry (especially GM). Will shock the rest of the economy, but not nearly as big a deal as the Yom Kippur War that caused the last great 1970's oil crisis, since only 15% of our economy is directly tied to oil these days, unlike then when the the figure was more like 60%. (Our economy is still very energy dependant, but it is based on electricity now, which is coal, nuclear, natural gas, and water based). Higher oil will be a hit to consumers, which could be serious, but a lot of that is already baked in to today's market, and the 2005 market.
- Technicals - 11,000 on the Dow triggers every programmed trading routine out there, which can account for 60-75% of market activity. It's going to take a heck of a push to get through that barrier. Selling in the Dow stocks triggers broad based selling.
- Technology - There will finally be a replacement cycle this year, but probably only near the end of the year once Windows Vista rolls out. Lots of evolutionary developments until then, but not a full hardware turnover cycle until then. The market is forward looking by about 2 to 3 quarters, so this will hit soon. Many specific technology shifts continue (LCD's, telephony, broadband ubiquity, music, digital photos and books, etc.)
- IPOs - the market is alive again, and is the place to be in 2006, but there have been no interesting issues in early January, so buyers are sidelined.
- Housing - no meltdown. The worst case will be that high end, overpriced homes may take a hit, average to lower priced homes will hold steady or slow their increases. Mortgage lending risk is completely different today than in past years, dominated by derivatives trading. The best case is that it continues on just like it has, based on demographics. The Fed is trying (unsuccessfully) to kill this market by chopping at everything. Perhaps Bernanke will be more targeted, or at least less obsessive.
Some of these are big bad looming scary things on the face of it, but probably not so bad (for the US Market) once they actually happen. Looming events hold the market back much more than actual events - the market hates uncertainty. But the opposite cliché is true too: the market climbs a wall of worry.
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10:48 AM
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