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Recession Fears Continue

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Tuesday proved to be another rough day in the markets. Monday's late day bounce continued into Tuesday thanks to news that the Federal Reserve was going to step into the commercial paper market. However, the bounce didn't last very long and U.S. markets sank to five-year lows. The DJIA lost more than 500 points. The NASDAQ sank 5.8%. The S&P 500 followed with a 5.7% loss.

Fed Chairman Bernanke spoke at the National Association for Business Economics annual meeting. Bernanke warned that the U.S. economy was likely to slow for the remainder of this year and well into 2009. His comments did suggest that the Fed was poised to cut rates to help soften the recession but fed fund futures had already priced in a 50 basis point inter-meeting rate cut. The FOMC is due to meet again for a two-day summit in the last week of October.

Bernanke's comments about a continuation of the slowdown into 2009 would certainly support a growing consensus that we're only halfway through this bear market. A typical bear market tends to last 500, maybe 600 trading days. Currently we're only about 250 trading days into the current bear market. This would suggest we easily have another year to go. This does not mean that there won't be significant rebounds but the overall, big-picture trend is going to be down.

Speaking of down, OPEC President Khelil shared his opinion today that crude oil prices would continue to slide lower into 2009. Yesterday I suggested that oil might find a trading range in the $85-100 a barrel zone. Yet if projections for a deep, widespread global recession are true then falling demand for oil could certainly push prices lower. A Goldman Sachs analyst on Tuesday corroborated this view that oil demand will weaken into 2009 and suggested that energy analysts may need to adjust their price forecasts lower. Next year should see a number of large production projects finally come online. This will bring more oil to market and if we're in a recession then prices really could drop. Looking ahead any oil price declines in 2009 will be a temporary reprieve.  We live in an energy hungry world. Inevitable demand and perpetual depletion will push the supply-demand balance out of whack and into crisis mode.

The 40 percent drop in crude oil from its summer highs is starting to have an affect on our wallets. We are beginning to see prices at the pump soften again. A Bloomberg article on Tuesday predicted that gasoline would fall under $3.00 a gallon for the first time in almost a year. The average price is about $3.50 a gallon now and falling demand could reduce prices to $2.70. The price shocks over the summer and sliding consumer confidence thanks to the stock market sell-off and the constant media barrage over the banking and credit crisis has had a major impact on American driving habits. If the trend continues 2008 may be the first year since 1980 that the number of miles driven in this country actually falls.

Wednesday is not off to a good start. The meltdown in the U.S. is fueling similar declines in Asia (again). As of early Wednesday morning the Japanese market is down more than six percent and hitting levels not seen since November 2003. The Hong Kong market is down another 5.5% in spite of news that Hong Kong cut interest rates by a full 1% to 2.5%. Crude oil futures were slipping again, down about 78 cents to $89.28 a barrel.

Wednesday also brings the weekly inventory report here in the states. There are a lot of differing opinions on what this week's report would look like but most industry analysts are expecting a one-million barrel drop in crude oil supplies and a one-million barrel build in distillates.

Wednesday will also see the end of the short-ban on several hundred financial stocks effective at midnight.

Jim Brown


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