Prague Twin

Saturday, April 21, 2007

Another Impetuous Move?

The Dow has closed at a new record high for the third day in a row, largely due to better than expected earnings reports and higher oil prices. I'm sure consumers will be glad to know that Caterpillar is cutting huge profits and oil is surging up above $63 a barrel.

But all kidding aside, if you look at a one year chart, you will see that the big dip in February has been erased almost as if it wasn't there. What I though would be a wakeup call for investors to show a little restraint has been so quickly forgotten.

I had predicted a correction down to 11,700 before it would turn around. I missed by about 300 points (quite a significant amount). When I posted about "the golden ratio" a couple of weeks ago, I pointed out that if the 61.8% level were to be broken, we could expect a new high in "short order". Well, here we are.

I fear though that this all too fast. I am of the opinion that the February correction was a good thing, but that it didn't temper the market as it should have. We are off and running again. Let's see what happens in May when investors typically "go away."

UPDATE: Great article here by Larry Kudlow about inflationary risks, confirming my belief that the Fed should not, and probably will not lower interest rates. (h/t reality-based educator)

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  • Larry Kudlow wrote this at NRO on 4/13:

    "In my book American Abundance, published in 1998, I talked about the Four Dead Bodies theorem of inflation. Just as you should strongly suspect murder if you discover four dead bodies in an alley, you should be very wary of future inflation if four key market-price indicators are acting in unison. These include rising gold, a soft dollar, expanding bond spreads, and strong commodities. Right now, all point to inflationary money from the Fed."

    The whole column is pretty interesting, since you can't find a bigger Bush Boom cheerleader than Larry, but even he seems to be concerned about slowing growth and rising inflation.


    By Blogger reality-based educator, at 1:56 AM  

  • Do Federal moves on interest rates have any effect on the housing market? I've been told that this is not the case, but if it is, wouldn't a downward move on interest rates stimulate some activity in the housing sector? Or would that just add to inflationary pressure?

    By Anonymous Anonymous, at 12:57 AM  

  • Both actually. A downward move on interest rates would help the housing sector in that it would eventually lower mortgage rate, but it would lead to inflation which hurts us all. This is the ultimate paradox.

    By Blogger Praguetwin, at 2:25 AM  

  • Existing home sales plummeted in February...largest fall in 2 decades...8 straight months of falling prices...they're blaming it on bad weather and saying March should be better...

    Thoughts, pt?

    By Blogger reality-based educator, at 9:30 PM  

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