In what was a somewhat surprising move, when the U.S. Senate voted against $14.0 billion in emergency funds for the big three, the ailing U.S. auto sector was hit hard. The failure of the United Auto Workers union to readjust their pay scale in line with autoworkers at the U.S. plants of Japanese automakers led to the dismissal of the bailout.
The news drove massive selling in Asian and European markets on renewed fears that the automakers will be forced into bankruptcy and will drive the U.S. economy into a deeper and longer recession. In my view, the failure comes at a very bad time for stocks. Any hopes of optimism heading into 2009 may have been eliminated with the bailout rejection.
Yet the scary thing is that autoworkers now face a bleak future. I know of people who work on the auto assembly lines and I can tell you it will not be good news. I’m not sure of the consensus feeling from autoworkers, but I can tell you that these people I know would gladly take a pay cut to reduce the possibility of losing their jobs down the line when the auto sector worsens and capacity is further reduced in line with lower global demand for vehicles.
Where this leaves us is amongst more potential selling and lower confidence for the economy heading into 2009, which so far could set up to be full of pain for investors.
Consumers are not spending. Many of my friends, including myself, have cut back on unnecessary expenditures in these grave times when asset values in stocks and property are falling. And the worst thing is that I expect things to get even worse given the severity of the housing and jobs market and its ultimate impact on confidence and spending. If you don’t have confidence, you cut spending. And when more and more do this, the economy sinks further.
I have been bearish since the start of the year. Take a look at some of my comments I wrote in an article here on January 31, 2008:
“The soft housing markets are impacting the wealth and consumer spending in what is called the poverty effect. When housing prices decline, homeowners believe they are poorer and hence spend less, and this impacts the economy. Lower prices translate into less material wealth and this negatively impacts the way homeowners spend, especially in regards to bigger ticket items.”
“As we move forward, we expect to hear of more impacts driven by the fragile state of the subprime market and increased credit concerns in the banking system.”
“My feeling is that the ripple effect from the housing market may continue to spread into 2008, unless we see some stability in the credit and housing markets. For those looking to buy, prices have come down in some of the pricier regions across America.”
“Clearly, the credit and housing market is not improving and could get worse. Foreclosures are at record highs across the nation and homeowners are beginning to be scared, as evidenced by the declining consumer confidence sentiment.”
Fast forward nearly 11 months and my opinion remains unchanged, as many of you who have read my articles know. The best thing to do is to do some tax-loss selling and readjust your portfolio. Take a look at your situation and remain cautious in trading and other expenditures. This could be a long, bumpy ride for stocks and the economy. While 2009 brings fresh hope to some, it could turn out to be another year of hardship in the markets.