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-- Posted Wednesday, 6 December 2006 | Digg This Article | Source: GoldSeek.com

Rick’s Picks

Wednesday, December 6, 2006

“Phenomenally accurate forecasts”

Shares of bellwether IBM are on the move once again, beckoning the broad averages to get back in bullish gear. We died holding IBM November 95 calls last month, but with the stock now pushing against that strike with eight trading days to go before December expiration, we’ll be looking for the rally to reach the century mark, and soon. In percentage terms, a similar move by the Dow Industrials would bring the blue chip average almost precisely to the 13045 target first flagged here quite some time ago.

Could the Indoos reach that threshold by the end of next week? I seriously doubt it, although stranger things have happened. IBM shares are surely capable of doing their share via a blow-off to 100. But the Dow Average is unlikely to keep pace with Big Blue, even if the 13045 target is practically in-the-bag. Under the circumstances, we should expect the Dow to lag IBM by perhaps a week or two.  Another bellwether we have watched closely, Merrill Lynch, is still reeling from a steep post-Thanksgiving correction, but if and when it gets traction, look for it to move in tandem with IBM to new all-time highs.

Alarming Signs

Putting aside such foolishness, we note that the economy is continuing to deteriorate at an alarming pace. For one, the ongoing collapse in sub-prime loans is all but certain to make this the worst year ever for the category. Furthermore, the evidence is clear that that delinquencies are metastasizing to other parts of the $10 trillion mortgage market. Not surprisingly, the Wall Street Journal has reported on this gathering storm with the usual, obligatory disclaimer:  “Economists don't expect any significant harm to the nation's economy or financial systems,” the Journal noted. “But if late payments and foreclosures continue to rise at a faster-than-expected pace, the pain could extend beyond homeowners and lenders to the investors who buy mortgage-backed securities.”

This is the mendacious Greenspan view of things, spun to make us believe that the collapse of the housing market is somehow manageable. But it shows only that most economist remain as ignorant of deflation’s power as Neanderthals were of the Ice Age.  The Journal did note that burgeoning delinquencies have begun to unsettle investors, but the implications of “unsettling” a market as big as the mortgage market seem to have been lost on the reporter. For our part, we remain very skeptical that the housing bust has seen its worst, as some would assert. Granted, the Fed has promoted a credit blowout in the  last few months to stabilize things, even as Helicopter Ben has talked tight and professed to “fear” inflation. The effect can be seen in the rise in shares of homebuilders like D.R. Horton (see above).  But the steady buying in housing-sector shares is so egregiously misguided as to beggar belief. It cannot end other than badly, and we shouldn’t be taken in by the stock market’s psychotic propensity to keep rising. This is merely a reflex response to the enormous liquidity that still exists in the financial system. That could end overnight, and we should not allow ourselves to be lulled into ignoring the possibility.  

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Wednesday, 6 December 2006 | Digg This Article | Source: GoldSeek.com

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