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The U.S. stock market took a huge beating on Tuesday as this once unstoppable battalion ship became lost at sea due to a tsunami incident in China and news of a big plunge in durable goods orders here in the United States. The perfect storm, people might call it, led to the big sell-off in global Asian stock markets overnight. It was triggered for the large part by the brutal 9% overnight drop in the China Shanghai stock market due to a feared tightening of monetary policy in China in order to curb stock market speculation and to soften hyper economic expansion.
Even without the negative external Asian influences on the U.S. stock market, I believe that the market here was a bit overvalued to begin with two weeks ago. A lot of margin debt was borrowed and created by traders to finance their stock gambling addiction, betting the house that the U.S. market would continue its sharp upward swing since coming off the bottom in 2002. Here is the picture: The margin debt level seen today is at its highest point now since 2000. That's a scary thought.
If you can picture the magnitude of this problem, you can bet that the picture does not look good for the coming weeks and months ahead. I believe the U.S. market is in serious trouble here. The huge drop yesterday is just a wake-up call because more fallout will come due to margin calls and the softening of our economy. I believe the tightening of capital in the housing market, due to the recent subprime mortgage fallout, will cause a cripple effect throughout our whole economy. The sharp 7.8% drop in durable goods tells this disturbing story. Consumers no longer are acting as irrational spenders -- they will be spending less money on automobiles, furniture and/or household appliances because, frankly, consumers are out of expendable income and the savings rate is now at an all-time low. Where consumers once were able to finance their big-spending lifestyle habits by borrowing against their homes, now they begin to worry about negative equities, high debt levels, the credit crunch and home foreclosure concerns.
The only short-term cure now is for the Fed to start instilling confidence back into the markets by loosening its credit stance to fight inflation.
I believe the markets will continue to trend down from here until the debt picture looks better. I will be waiting for the storm to pass. I believe the Nasdaq ($COMPX) could fall further, to the 2,300 level. The Dow Jones Industrial Average ($INDU) could drop another 200 points soon. If you haven't been able to amass some cash before, now is a good time. I will venture to say that this perfect storm that wreaked havoc across the global markets on Tuesday will not be the last one you see or hear about this year. The U.S. economy is definitely starting to soften, and the durable goods number is a strong indicator of what will lie ahead six months in advance. The upcoming GDP report will not look great in my opinion, and that may just induce another psychological panic into another huge sell-off.
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