Stock prices fell sharply today, with the Dow Jones Industrial Average falling 312 points (2.3 percent), the S&P 500 Index declining 35 points (2.3 percent) and the Russell 2000 Index dropping 21 points (2.6 percent).
The major financial media was quick to blame today's sell-off on concerns that higher borrowing costs may slow the recent wave of private equity and M&A transactions. But, there's actually much more to the story:
-The sub-prime mortgage debacle has resulted in huge losses at hedge funds,
-Banks have begun to tighten their lending standards,
-Consumer debt is near an all-time high,
-The housing market is continuing to collapse,
-Oil prices are approaching all-time highs,
-The U.S. dollar is plummeting, and
Actual, as opposed to government-reported, inflation is continuing to rise.
Yet, many of today's "experts" on CNBC advised their clients to stay fully invested and to take advantage of the market sell-off by adding to their equity portfolios.
In response to these comments, I suggest you keep the following in mind: Most of these "experts" make their money by managing mutual funds, and the more money invested in those funds, the more money they make. So, you might want to pay little attention to these "experts"!
Interestingly, I heard very little today about corporate profits. Neither did I hear anyone mention the fact that most of the stock market's recent gains have come from only a handful of companies.
Maybe the Wall Street "experts" and big mutual fund managers don't want you to know that corporate profit growth has slowed dramatically and that fewer and fewer stocks have been participating in the market's gains. (For more information on this subject, you many want to read an article I wrote earlier this week entitled "Increase in Market Volatility Ahead"). (Go here for this article.)
Looking forward, I expect stock prices to stabilize over the next few weeks. There's even a good chance that stock prices (as represented by the major stock market indices) will rally over the coming weeks, especially on those days when big international companies that derive a substantial portion of their revenues from abroad report their second-quarter profits.
But don't get sucked into believing that today's market "correction" was only a one-day event. Contrary to what the "cheerleaders" on Wall Street would have you believe, the worse is yet to come. And, while the stock market bulls continue to look in the rear-view mirror, I suggest you consider the following: inflation and long-term interest rates both here and abroad are on the rise, the U.S. hurricane season is only about two-months old, several measures of employment indicate job creation will slow over the coming months, and the worldwide liquidity boom has probably come to an end.
By the way, if today's declines represented a "correction", then shouldn't stocks continue to fall or at least not rise to ridiculous levels again – if the recent gains were being "corrected" wouldn't that imply that stock prices are now at a more "correct" level. Obviously, the term "correction" is just another word that Wall Street money managers use to convince investors to add to their mutual funds.
Now, on a more positive note, I suggest you take a look at our Financial Intelligence Report, where John Browne has been warning investor for months about an impending recession and a pullback in stock prices. Those of you who may be looking for a way to preserve your capital and to even profit from a looming bear market may want to consider subscribing to this monthly newsletter.
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