Special Market Meltdown Analysis Issue
Wednesday, February 28th, 2007
By Michael Lombardi, MBA for Profit Confidential
Ouch. That hurt! But to my readers, at least, it was expected.
I’m talking about yesterday’s Dow Jones Industrial Average plunge of 416 points — a loss of 3.3%. It was the single biggest one day drop by the Dow since just after the September 11, 2001 terrorist attacks. For the year, the Dow is now down 2%. (And I’m keeping my forecast that big cap stocks like those in the Dow will be down for the year as a whole, as I forecast early in 2007.)
While most of what you read today will blame the previous day’s drop by the Shanghai and Shenzhen 300 Index as precipitating the plunge on North American Exchanges, my perspective is much different. Yes, China’s government did approve a task force to reduce investment speculation. And yes, that caused the main China index to plunge 9% on Monday. But that’s not what caused the pull-back here in America.
Stocks dropped for the many reasons I’ve been writing about over the past few months. Here they are again: The damage to the U.S. housing market is filtering into the huge U.S. economy. and the stock market is finally seeing it. The demand for U.S. dollars by foreigners is declining, which means U.S. interest rates could move higher to attract foreigners back to U.S. dollars. The stock market hates nothing more than rising interest rates.
And finally, we have to acknowledge stocks had become severely overvalued. There’s a lot of “easy money” around and it’s been pushing stock prices to silly high levels. At some point, dumb money gets burned. How many times have I warned about a correction coming in the stock market? Too often. In fact, just yesterday I wrote about how the big U.S. stock brokerage stocks were already moving lower in anticipation of a general decline in stock prices.
Where do we go from here? You are reading a commentary written by an analyst who believes the bear market that started in late 1999 never ended. You are reading the thoughts of an economist who believes the U.S. housing market could fall apart. Sure, an upward rebound in stock prices from this quick and sharp decline is likely. But over the next few months, I expect nothing but lower stock prices.
Next Post: What Gives the Small-Cap Investor an EdgePrevious Post: Why the Housing Downtrend Will Continue
Tags: bear market, interest rates, stock market, U.S. housing market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
