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A Gloom and Doom Week Ends On a High Note

Gentle Ben, Wise Warren talk about hope and eventual prosperity

By Fred Yager
ConsumerAffairs.com

August 23, 2008

Personal Finance • Consumer Spending, Saving, Both Rise • Economic Trends Looking Better For Consumers • Consumers Feeling Better About Financial Security • Banks See Hard Times Even After Bailout • Consumers Remain Thrifty In April • Feds Shut Down Florida Bank • Consumers Reminded to Investigate Before Investing • All 19 Banks Pass Stress Tests • TARP Ripe For Scams, Warns Inspector General • Consumers to Spend Same or More on Entertainment in 2009 • No Sign of Inflation in March • Consumers Cut Spending in March • Key Corporate Earnings Due This Week • Employers Trying To Avoid Further Job Cuts • Two Million Jobs Lost So Far in 2009 • People Feeling Economic Stress At All Turns • Consumer Prices Rise More Than Forecast • Survey Shows Consumers Preparing For The Worst • U.S. Employers Foresee Subdued Hiring Activity • Banks Lost $26 Billion in Fourth Quarter • Congress Takes Up Boomer Retirement Woes • Economists See Recession Continuing Through First Half of 2009 • Derailed Boomers Changing Retirement Plans • Recession Likely to Have Health Consequences • More Than 500,000 Jobs Lost in December • Staying Healthy in a Sick Economy • How Retirees Can Survive the Bear Market • Are Men Hardwired to Overspend? • Feds Report More Signs of Recession • Cheap Oil May Be Economic Stimulus • An Upside to the Down Market: A Lower Tax Bill • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession --- • More Personal Finance News

Just when we thought it was safe to go back into the water, some doom and gloom market gurus start talking about how the worst may not be over. Whether it’s in the credit debacle or that stocks, primarily financial stocks, may not have hit bottom as originally thought.

CNBC’s Mad Money guy Jim Cramer immediately disagreed, reaffirming that the bottom in financials was indeed hit on July 15th. He also predicted that bottom was going to hold..

Well, it looks as if Cramer was right at least so far. After all the talk of a continued meltdown and the possibility of another big investment bank going under something spectacular happened. On Friday August 22nd the clouds parted.

And what caused this shift? Apparently more talk. Positive talk to be sure but it’s possible it was talk that triggered Friday’s rally just as it may have been depressing talk that drove the market down earlier in the week as well.

Powerful words

Let’s look at the power words have on moving the stock market.

Early Friday morning the stock market futures were predicting a slightly lower opening. Then at 6 am Eastern Daylight Time Warren Buffet appeard on CNBC. He predicted that Freddie Mac and Fannie May were just too big to fail even if their stocks went to zero. He even said stocks were more attractive now than a year ago and that there are probably some pretty good bargains to be had.

Within minutes of Buffet’s comments the futures changed direction and began to rise. Around this time oil prices started to fall as well so we have to give some of the credit to that.

Later in the morning Federal Reserve Chairman Ben Bernanke appeared and said the dollar had stabilized, commodity prices were declining and predicted both events should lead to moderate inflation later this year the rally had begun.

The market climbed even higher. And by the end of the day the Dow Jones Industrials had gained nearly 200 points. Now that still wasn’t enough to put the Dow in the black for the week because it closed down about three tenths of one percent. But it sure put a wrinkle in the doomsday scenario being discussed just two days before.

Even Lehman Brothers, who had appeared ready to say goodbye, gained more than 16% at one point on Friday after a Korean bank talked about how Lehman may be an acquisitions target. The stock went down to about only about five percent higher when it turned out it was just talk and that there were no deals on the table.

Keep in mind all of this came just two days after giant asset manager BlackRock's Global Investment Advisor Bob Doll went on CNBC and said we still haven’t seen the worst of the credit crisis. He added that financials would only hit bottom after there was more consolidation and layoffs. That day the market sunk.

Too many banks

Doll actually put it more succinctly. He said: “We still have in this country thousands of banks. We don't need thousands of banks. Pick your favorite European country — you can count the number of banks on one, maybe two hands."

Meanwhile he admitted that BlackRock was cautiously buying some financial stocks. Later we learned on Friday that Warren Buffet had recently bought a large block of a financial stock.

So how are we supposed to assess all this seemingly contradictory information? Did this end of the week rally mean we really are on the way to recovery or is it all just talk?

It seems even the biggest minds on Wall Street can’t agree on that. So let’s do what the analysts do and look at the fundamentals — those indicators used to predict future growth or more erosion.

Has the housing market improved yet? No. Has unemployment started to drop? No. What about oil? The price of oil dropped $6 last week but it’s still over $110 a barrel and most analysts believe oil prices are due to remain high.

Do some financial services companies have to write down more of their bad debt? Apparently. Half a dozen companies recently reached settlements to reimburse clients with billions of dollars worth of Auction Rate Securities and pay the states 100s of millions of dollars in fines.

So was Friday’s rally a mere reaction to people like Warren Buffet and Ben Bernanke talking positive combined with a slide in oil prices? Do we know? Should you care?

As we said one week ago, as an investor it’s not that important to know when the bottom is. Keep your eye on your particular financial goals and stick to a financial plan. If you don’t have a financial plan now is as good a time as any to create one. Meanwhile let the market take care of itself because in the end it usually does no matter what anyone is saying.

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