Market Wrap
Week Ending 12/26/08
The Economy
The National Association of Realtors reported that home resale's were down 8.6% to an annual rate of 4.49 million. The median price fell to $181,300.
The Commerce Department reported that new home sales fell 2.9% to a 17 year low. The median sales price dropped 11.5%.
Builders are reducing inventories faster than sales are falling. The number of new homes for sale is down a record 7% to 374,000.
There was some good news that came out regarding consumer sentiment. The University of Michigan's index of consumer sentiment advanced to 60.1 from November's reading of 55.3. The index of consumer expectations increased to 54 from 53.9.
The current conditions index rose to 69.5 from 57.5. This reading gauges consumer's confidence in their financial affairs and indicates whether they believe now is a good time to purchase larger ticket items such as cars. Hopefully consumer expectations will continue to increase.
Gross Domestic Product
Real gross domestic product (GDP) fell 0.5% during the third quarter. In the second quarter GDP was up 2.8%, so the decline represents a significant drop.
The weaker reading shows an expanding contraction in consumer spending and slower growth in exports.
It was also reported that businesses reduced inventories, but not as much as in the second quarter. Defense spending actually picked up. At this point we'll take what we can get.
As the financial storm intensifies, the average citizen is sick and tired of hearing the same old spin regarding the problem. People want honest answers - not talking heads that speak as if they're living on a different planet from the rest of us mere mortals.
Leo Gerard, president of the Pittsburgh-based United Steelworkers, made the following remarks to the news media:
"People feel very much like they're being screwed. I really think you'll see tens of thousands of people if not hundreds of thousands taking to the streets and protesting across the country."
Harley Shaikin, a labor relations professor at the University of California, Berkeley agreed, saying:
"We'll see more rather than less of this. "With nothing left to lose, militancy gave them their one hope."
Corporate Profits
Third-quarter corporate profits declined 1.2%. This is the fifth consecutive quarter of losses.
Very telling is the breakdown of non-financial versus financial profits: nonfinancial profits increased 6.7%, while financial profits fell 20%.
The era of paper promises is dying a slow death, while it takes structured finance and leverage down with it. Hopefully the new administration will implement policy changes that are more than just a quick fix. A good starting point would be to seek the advice of Congressman Ron Paul.
Few saw this storm before it hit - Ron Paul did. Who is better qualified to address the problems than the one who knew of them before they occurred?
U.S. automakers are receiving help from Congress. This means that the average American is donating money to fund bailouts of private corporations. Such policy is the antithesis of free market capitalism.
New York University finance professor Edward Altman does not seem convinced of the efficacy of the latest auto industry deal:
"It's almost impossible for a management that invested in the assets, that hired the people, that put forth the strategy, to change so dramatically in such a short period of time."
So far the market has not been thrilled with the latest economic statistics or with the auto-bailout plan. The S&P has been locked in a trading range for weeks now. A break above resistance or below support will show if a rally is to occur or if the next leg down of the bear market begins.
The chart below of the Dow shows two clearly defined primary moves down so far. It remains to be seen if the rally continues or fades into the next major leg down.
Gold
Gold was about $34 dollars for the week for a 4% gain, closing at $871.20. As repeatedly mentioned in past reports, the $850 level for gold is very important. It represents the previous bull market high and defines the intermediate term trend for gold.
On the weekly chart, MACD has put in a positive crossover and the histograms have moved up as well. RSI is above 50 and rising.
The $850 level has become support, but price is bumping up against its upper trend line and 50 dma.
Both price levels provide significant resistance and a move above them would be very bullish. $850 needs to hold as support on any corrections.
Gold Stocks
The precious metal stocks had a good week, closing up 5.43%, as represented by the GDX index. Almost all the gain occurred on the last trading day of the week.
Price is still below its 200 day moving average and RSI shows negative divergence. Histograms are receding towards zero and MACD has flattened out.
If the stock market continues to rally, look for the precious metal stocks to lead it up. Which way the dollar goes will determine the fate of both.
Although the GDX has performed well, there are several individual precious metal stocks that have outperformed the index.
In the past month some of the gold and silver stocks in the Honest Money Gold & Silver Report's stock watch list have gone up 20-30%.
One gold stock highlighted in last week's report made a double top breakout on its point and figure chart on Friday of this past week. A few others are in the position to do the same.
To view the stock watch list and the latest full-length version of this week's market wrap visit the Honest Money Gold & Silver Report website. All major markets are covered with the emphasis on the precious metals. In today's turbulent times of financial crisis gold and silver are more important than ever.
Just made available on the site is an audio version of the book Honest Money. A free copy is included with new subscriptions along with a free special report: Investment Vehicles for Bull & Bear Markets. A list of over 50 ETF's and other investment vehicles offering profit potential on both the long and short side of the market: stocks, bonds, currencies, gold, oil, water and more.
Good luck. Good trading. Good health, and that's a wrap.
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