Observations & Commentary

By on October 20, 2007

The market took a big dive (366 Dow points) yesterday on concerns about the economy expressed by Caterpillar. 3M also came out with a disappointing sales forecast. However, the earnings reported by tech companies, in general, have been stellar. Here lies the hopes of the bulls.

The U. S. dollar has been grinding lower and stands at an all-time low against the euro and a 30 year low against the Canadian dollar. Inflation seems to be picking up and commodities are still in a sustained uptrend. The bond market is pricing in a near certainty of another rate cut by the Fed at the end of this month. A further Fed easing can’t be good for the dollar or the future prospects of inflation. However, we still have housing in a free-fall which shows no signs of abating anytime soon. These cross-currents are extreme and I think the resolution will be a market break to the downside. When this happens is anyone’s guess. A couple of months ago, I thought it was a certainty the Dow would not get over 14,000 again, but it did.

During yesterday’s weakness I sold about 1/2 of my Ultrashort Russell 2k position and bought two extremely beaten down small caps (SPC and CPWM). There are quite a few stocks hitting multi-year lows, so there seems to be some value out there unless we go into a very severe recession (which I think is more likely than almost all pundits believe).

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