Market Update: 2008-07-07

Until the banks break way down (which I thought they were doing today until they rebounded a bit), we can't say that support has been broken. The one day during the past ten years that BKX was below 60 was intraday in October 1998 when the Long Term Capital Management scare hits the markets. On that day it fell intraday to under 55 (which it briefly did today), but closed above 60 (which it didn't do today). So in that sense, 54-55 offers just a tad of intraday support; maybe that is why it bounced today. But for support to really break, the BKX will need to stay under 60 (as it has for a few days now) and then just tank, with a really big move to the downside. Again, I thought today was going to be just that day until it turned back up. Thing is, if it does break down, then there is no support to really speak of until 30, which means that banks could lose another 50% from their current values!

Right now I would not own individual bank stocks (I do own a little WB, but my main position in banking is being built with KBE). I just think that things are too scary at the moment to tie up a lot of money in one bank, because we don't know which bank may go bust (which is totally possible, given the problems out there). People think that the Fed won't let it happen, and that big banks are immune to going under, but if you look at history (like the 1930s), banks can go bust. The banking sector actually has historically been a troublemaker. Remember the Savings & Loan bust that occurred almost 20 years ago? If I recall correctly, 100s of them went under (sure, small institutions, but not so small in their aggregate). At this point, I would be patient and add to a KBE position on days when there are big moves down. But just try not to get to anxious when you think you are getting a deal, because there may always be a better deal later. If banks do drop 75-80% from their highs as the homebuilders have (ITB, I will really pile in for the long haul. For now I am trying my best to not buy anymore KBE and just sit back and see what happens next.

BTW, the homebuilders looked like they were ready to break their January lows today, but rebounded as well. If ITB falls further from here, I just don't see how you can lose in the long run. With ITB, I am going to wait for it to rebound 60-100% up from here and then start selling because I don't think it will do much more than double over the next few years. Like the Nasdaq and tech stocks, it will take a long, long time to return to old highs (the homebuilding sector would have to quadruple from here to get back to its 2005 high, and that isn’t going to happen for a really long time). But, the homebuilders very well could double from their bottom relatively quickly over the next 12-36 months and then just do nothing after that. Keep posted, but once they do have a substantial gain don’t be surprised if I tell you to sell. My guess is that by then I will find something better to put my money in.

I could go on and on about this stuff, cause I love it. But I won't. But I did want to mention that I bought more China shares (FXI) today. I think China is just about done falling, and I am going to be in this for a long time because I have a feeling China is going to be THE market in a few years. My Dad believes that China could end up having a bubble like Japan did in the 1980s. I kinda agree with that, and I want to ride it up all the way up (I just hope that I can get out in time)! There is just no way that a large economy can grow at over 10% a year without stopping to breathe and the value of its stock market gain accordingly. Since China's market was the worst world market in the first half of 2008 (down 40% since January 1, and over 55% since October 2007), the contrarian in me is getting excited about Chinese stocks again (the last time I got this excited was back in 2003 and 2004, before China’s market went up 500%). China never had a bubble like the Nasdaq did, so sitting in a valley some 55% or so off its 2007 high, China’s market is looking pretty good to me now.

For now, I will sit and watch the market unravel before me. For now, we don't know when the bottom will occur, but we will know more later. Until then, Happy Investing!

Gregory