Sincere Concern for Stocks Amid Mass Liquidity Injection

The largest international act of economic co-operation since 9/11 took place yesterday, as the U.S. Fed and four other world central banks said they would pump billions of dollars into the credit markets to alleviate the squeeze started by the subprime problems.

How did the stock market respond to the news of massive liquidity hitting the system? It responded with a yawn.

As an avid market watcher and analyst, I think the response of the stock markets, in particular the Dow Jones Industrials, to yesterday’s massive liquidity efforts by banks could mean two things:

First, because the stock market was expecting a bigger rate cut on Tuesday than the Fed delivered, this “extra” help was viewed simply as an additional “we care” move by the Fed. But the stock market doesn’t want the Fed to calm the markets; it wants economic expansion, because that is what makes company stock prices rise. The stock market is saying, “Thanks for the added liquidity, but that’s just a quick fix. A deeper interest rate cut to spur economic activity would have been definitely more appreciated.”


I’ve always been a big believer in the stock market being a leading indicator of what lies ahead for the economy and for various industries based on the actions of stock prices as a group and in industry groups. This brings me to point number two: the stock market sees very difficult times ahead for the economy in 2008. And the $64.0-billion pledge by central bankers yesterday will be a drop in the bucket compared to what the financial fallout from the housing recession and credit market squeeze will eventually take out of the market.

So what is an investor like me or you to do with our stocks? I’ve always been a believer that small-cap and special situation stocks act on their own because their performance is based on specific activities (e.g. discoveries, new products, new management, medical or process breakthroughs, etc.). It is the large-cap and big blue-chip stocks that are related to consumer spending and the general economy that I’m most concerned about. Maybe that’s why I don’t own any right now.

NEWSFLASH — According to the Mortgage Bankers Association, the number of U.S. homes in the foreclosure process jumped in the third quarter of 2007 to the highest level in 35 years. Almost six percent of all home mortgages in the U.S. are 30 days or more past due, the highest level since 1986. I was fascinated to read some reports in the popular newspapers this weekend about the bottom of the housing market having been hit. Really? These reporters must have forgotten to tell the readers they were talking about a housing market in another country. I continue to predict that 2008 will be an exceptionally difficult year for the U.S. housing market.