iBooyah.com Investment Matters

In order to predict where the market will go, let’s first look back at how we got to where we are. The stock market in the past year has largely been driven by huge corporate mergers. These mergers include private equity firms aggressively buying companies to two big companies deciding to join forces. Mergers and Acquisitions (M&A) consequently drove up the market despite high oil prices and increased inflationary pressure. It got to the point where investors began to ignore important signs. Complacent attitude started to emerge. The optimistic attitude started to spread to where the individual investors were starting to feel comfortable investing again. The lure of easy money as the DOW sets new record high was hard to ignore.

The industry that benefited greatly from the M&A activities were the companies that provided funding for these deals. The Bear Stearns (BSC) and JP Morgan (JPM) of the world made a ton of money as their services were in great demand. For evidence, look at these companies’ stock chart and you will clearly see.  These companies were doing so well that their employees walked away with huge bonuses last year.  Keep in mind; we are talking six and seven figure bonuses here, serious money.

The point I am trying to illustrate here is the recent ascent of the DOW is primarily driven by the very same people on Wall Street that took everyone to the cleaner in the last two days. In our opinion, it is the classic “pump and dump”.  They hyped the market by luring in new investors to the point where it hit 14,000. Once this magic number was reached, they finally decided it was time to cash out and pull the plug.

The media is blaming the housing market for this sell off. That is not entirely true. Common, unless you have been living in a cave the last three years, the housing slump should not be news. We all know there were problems with subprime mortgages and the overall housing market is still in decline. To blame this on subprime and housing data alone is just silly. Housing is being made the scapegoat, just an excuse. Do not misunderstand our position; we are not saying the housing market has no role. What we are saying, housing is not the primary reason the market is dropping.

The answer to our original question; the sell off is not done. We believed the market will continue its descent until we are below 13,000.  Until then, we are looking at companies we would like to buy and taking a cautious attitude about the future.