CHESSNOID

Last November I wrote a quick post about Starbucks being an indicator of the economy. Yesterday, more bad news would confirm that our economy is actually becoming worse than expected when Starbucks announced that it would shut down 600 stores and layoff up to 12,000 employees. Obviously, Starbucks is not a recession proof business and is hurting just like most other businesses during these tough times. I think this also symbolizes on top of the housing bust, the killer gas prices is definitely making everyone cut back on everything including that daily latte.

In the overall stock market, the DJIA average fell to its lowest level and passed the 20% mark from its all time high in October last year. This signals a change in investor mentality and how they will invest in the short term. The Nasdaq is already down 21% and the S&P is just shy of making it official and joining the Bear Club.

The Dow lost 166.75 points, or 1.5 percent, to 11,215.51. The S&P 500 plunged 23.38, or 1.8 percent, to 1,261.53, extending its 2008 loss to 14 percent. The Nasdaq Composite Index slid 53.51, or 2.3 percent, to 2,251.46. More than five stocks fell for each that rose on the New York Stock Exchange.

Technology and consumer shares also helped fuel the market’s retreat after a private report showed a bigger-than-forecast drop in jobs last month. The 30-stock Dow average extended its retreat from the October record to more than the 20 percent, the first time since 2002 the gauge has closed below the threshold that signals a so-called bear market.

The S&P 500 has dropped 19.4 percent from its October record, while the Nasdaq has lost 21 percent from a nearly six year high on Oct. 31.

It’s difficult to say when the bottom of this downtrend will hit. I like to use the stock market charts and get an idea through the technical analysis. Fundamentally, I don’t think there are any signs we are near the bottom. Many buyers that come in looking for bargains are starting to realize that they should wait because stocks will continue to have their prices reduced.

I don’t think it is any different in the housing market. We are still digesting the bad performance from last quarter, but there are a new wave of mortgage loans that are about to go sour. When these loans start to get written off, foreclosure inventories will go into higher record numbers. Could you imagine being able to buy a house for less than $150,000 all over the place in southern California? Not now maybe, but in a year those type of prices may become a reality.  In Dr Housing Bubble’s last post:

The evolution of the housing decline is now engulfing the entire region. The California Association of Realtors came out with their monthly report stating that California is now down a whopping 35% on a year over year basis:

Single-family Detached Home

May 2007: $594,530

May 2008: $384,840

Nominal Decline: $209,690

Dr HousingBubble is my favorite housing bubble blog that I like to read. He makes more sense than any economist or analyst you see on TV and Dr HB backs up his critical thinking with facts and figures.

Even though the federal reserve has mistakenly lowered rates 7 times in 7 months down to a paltry 2%, that type of return on your money at the bank is still better than the returns you would get in a falling housing market (-20 to -40%) and a falling stock market (-20%). Personally, I believe if the federal reserve let our economy operate the way it is suppose to in a free capitalist market, oil and other commodities would not have skyrocketed like they did in the exact same time period when it executed the rate cuts. When other countries and investors who are heavily invested in the dollar keep losing money by holding their currency in the dollar, then it is only natural to find something that won’t lose its value such as oil, commodities and metals. There was a flight of wealth that has flown out of our falling dollar thanks to our incompetent federal reserve and treasury. In a regular company, Bernanke and Paulson would have been fired 10 times over. The federal reserve did know that this would happen when it reduced rates unnecessarily in an effort to slow down the housing bust. Unfortunately, the fed was actually throwing more fuel in a blazing fire burning down our economy. The fed gambled by going all in on a bluff hand, and the recession has called and raised its bid. OUCH!

This unofficial recession we are going through under the Bush administration keeps getting worse. If we don’t start doing the right things, it could go from a severe recession to a mild depression. As a consumer, the best thing to do is get rid of your debt and stretch your dollar as far as it will go. Hold off on making that house purchase (not that you would qualify for a loan without a 25% down payment and an 800 FICO score) and do not double down on your falling stock portfolio just yet. I personally would wait until the downtrend not just flattens but actually reverses. How long will that be? That is the million dollar question. If you think we are at the bottom, then the time to buy is now. I am staying all in cash and sitting this quarter out until I see the fundamentals change.