Economics-(3) 7/20/2008

Sun July 20 2008

Hello Family

With the Stock market doing that bad, I thought it would be a good idea to summarize what is happening.

The Dow Jones Industrial DOW, reach 14,100, soon there after went down slowly and surely to 11, 300 by today. This occurred due to slow earnings, and  more losses particularly with the Banks in USA and around the Globe. Oil, Wheat, Corn, Rice, and other commodities' prices shut up, and on the other hand a slow economy and rise in the unemployment is happening in front of our Eyes.  Accordingly the robust DOW started loosing steam and now is 3000 points from the high, a similar level of June of 2006. The DOW is considered in a Bear Market since it dropped down more than 20 % of the high.

The future of the DOW may be further down due to so many factors that currently happening.

This happened before,  In 1999 before the presidential election of 2000, the DOW took a dive from 11000 Plus to almost 7500, and as the economy started picking up under J. Bush, the DOW moved up etc...

This time it looks like a repeat to what happened before. Yet there is a little twist.

Stagflation may be in the work. High inflation, High Intrest Rate, and slow economics. GM, and Ford, decided to stop manufacturing certain Guzzlers and move to energy saving, Cross, and Hybrid cars with so much pain, Layoffs, market share, profit down. This should have happened 15 years ago.

The commodities are causing inflation world wide. Oil, Corn, Wheat, Rice, Eggs, Milk, Meat, etc.

US economy slowed down and it may take 2 years to pick up the previous speed of GDP 3-5%.

UK started slowing down with similar housing problems occuring. Japan, Europe also started slowing down and some expect the rest of the world, China and India to follow.

Now what to do?

No body knows exactly what to do. In order to support my theory that no body knows, there is 2 examples I have for you.

First: The founder of Country Wide, Mazolla, had Millions of shares that he could have sold them a year ago for over $40 and now is approximatley $5 per share.

Second: The head of Bear Stern, had millions of shares which sold them recenly for 50 Million Dollars. Had he sold them a year earlier he would have been a Billionaire. from $ 180 to $10 a share.

No body knows what can happen a year from now, but the commentators see slow down in economics, and Higher prices world wide. The oil prices also pressuring every body who drives a car, heats a home, etc

The oil crisis has a solution if those who are in charge took action to do the right thing. However, those who has money, don’t care what they pay for their cost, impacting those who don’t have and unable to pay for theirs… Accordingly, we all will pay for it dearly. Now it is the time to buy smaller cars, conserve energy all around it, and support the measures that help solve this crisis.

The Government will start stimulating the economy as soon as a new president start and the policy will be more clear for businesses to invest under the new administration. This will take almost a hear and a half for the economy to pick up speed.   However, this time there is a problem that may complicate life

Inflation in China, India, Europe, and America etc just too much and accordingly, Central Banks of these countries will raise the intrest rate to slow down the inflation and that will lead to recession Big Time, and World Wide. a slow down on the economy is happening as we speak.

The sub prime cost so far is 401 Billion Dollars write offs world wide, and impact is a trillion Dollars including losses on the shares of Banks, Real estate, Builders, etc.

Also, every decade or so, the market eliminate the extra money that has been thrown in investment without care, printed by so many countries and end up in USA, or Japan, China… etc

In the Eighty’s, Japanese bought Rockefeller Center for 1.2 Billion Dollars, few years later sold it for 750 Million Dollars

China bought almost 9 Trillion Dollars of US treasury, and now with the Dollar down 20%, you do the math. They lost 20% of their Debt.

The Sub prime issue took out almost one trillion Dollars and every body is waiting for the end of this problem. We all are paying for it.

House Prices will take more time just to reach what it was in the hype of 2005. Prices in general will continue to go down until the new cost of oil is built in the mix.

For 401K, what you contributes now may loose some of its value as the DOW move down. In case the Dow moves down, and the opposite is also true.

1-The stock market is losing steam, however your contribution is going in regardless. You don’t have control over what time your contribution enter the market. To control the process, have your contribution enters into the Fixed Interest Account. So what you contribute does not loose its value, may not make that much, but it is better to make 3% a year than loosing 10% or more.

2- When you started this 401 K you had certain choices that was good at the time, this may have changed big time today. Real Estate, Builders, Banks, Financial Inst have lost so much and now the time is different.

3- Estimate how long would it take for the stock Market to recover and starts moving up again. You can figure this out by watching certain television Channels. Today I say by the end of 2009, after reaching around Dow 9000. No doubt I can be wrong. But this is my strategy for now, which may change in 6 months.

4- As the Market starts to move upward, you can switch your money to Stock Index, which guarantees better return than many other alternatives.

5- Take control of your own finances, when you contribute, when you stay, and when you move money around. Time changes and you should change your style also. Please note there is some limitation of moving the money so check with your company.

 Send your questions  or your fantastic Gains    

Nazeeh