We’re Nowhere Near the Bottom

David Frazier
Wednesday, Feb. 6, 2008

Here we go again.
The Wall Street cheerleaders continue to claim that stocks are cheap and that investors should be taking advantage of the recent downturn in stock prices to add to their equity portfolios.

However, the facts suggest that stocks will continue to decline during the months ahead and that investors should stay out of stocks at this time.

As I've pointed out in several recent articles, a host of economic statistics clearly indicate that the worst is far from over on the economic front. Stock prices will continue to trend lower over the near term.

Earlier today, the U.S. Department of Commerce reported that auto sales fell sharply during January. Reports from the major U.S. automakers suggest that auto sales will continue to decline during the months ahead.

Meanwhile, the Institute of Supply Management reported that its index of service sector activity fell during January to its lowest level since October 2001, declining to 41.9 from 54.4 in the prior month (chart below). Index figures less than 50.0 indicate economic contraction in the service sector. So much for the supposedly strong service sector!

In regards to the employment situation, outplacement firm Challenger, Gray & Christmas reported yesterday that job cuts announced by U.S. employers rose 19 percent in January, as compared to the same period a year ago.

Worse, the number of planned job cuts surged 69 percent in December.

Yet Federal Reserve Chairman Ben Bernanke seems to think that lowering the overnight interest rate at which commercial banks borrow from one another (the target Fed funds rate) will somehow jumpstart the economy.

Although I've rarely criticized the actions of well-educated and knowledgeable economists such as Mr. Bernanke, I now feel forced to question this academic's thinking.

Just today, the Federal Reserve reported that commercial banks have significantly tightened their lending standards to both consumers and businesses over the past few months — an event that I forecast several months ago.

Approximately 80 percent of banks raised standards on commercial-property loans, a record, while a majority of banks tightened terms on prime home mortgages. In commercial real estate, the proportion of banks that tightened their lending standards was the highest during January since the Fed began collecting information on such loans in 1990.

Many banks have raised the rate of interest they charge on loans. Meanwhile, 45 percent of the banks surveyed by the Fed reported that the demand for both business and consumer loans have weakened during the past three months.

[Editor's Note: Special: A Bubble on the Verge of Bursting. Act Now.]


Bernanke has to realize that he can't force banks to make more loans, or make consumers and businesses increase borrowing (and spending) merely by lowering the Fed funds rate. Maybe there's no mathematical formula to explain such a phenomenon!

However, one outcome is certain to occur from the continued cuts in short-term interest rates — the exchange value of the U.S. dollar will continue to decline. By the way, legendary investor Jim Rogers agrees with my analysis. "The dollar's in serious trouble," he said in an interview on CNBC on Jan. 26.

The onslaught of negative economic developments should come as no surprise to those of you who've been regularly reading my commentaries or who are subscribers to my monthly investment newsletter, The ETF Strategist. I've been telling our readers for several months now that economic growth in the U.S. would continue to slow and that stock prices were headed lower.

So, where do we go from here?

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