Halfway Through the Year – How is 2008 Shaping Up?

Back in January of this year, I wrote a special report entitled “The Themes That Could Shape 2008.” Well we are just about midway through 2008. How are those themes shaping up and what could the second half of the year look like?

We will get the crystal ball out and see what we can find.

Main Theme for 2008: Expect the Unexpected

“I didn’t even see _______ coming.” I felt that this would be what most people would say as we head into the end of the year. If you look over the last two or three years, we just haven’t really had any shocking financial news. I came up with several scenarios as to what could be the unexpected. However, I did expect $130 plus oil and $4 gasoline.

So how does the rest of the year look for high oil prices? Personally I am of the opinion that we will see oil prices come down within a few months. A slowing global economy should put a damper on oil prices. This is all predicated on a mild hurricane season. I would hate to think what would happen to oil and natural gas prices in the event of a serious hurricane.

Of course, no one also expected that the 3rd largest investment banking firm in the world would almost be insolvent and its 85 year history as an independent investment bank come to an end. Well, we saw the end of Bear Sterns as an independent leading investment banking company as JP Morgan was forced to rescue them.

Theme for 2008: The Continuation of the Real Estate Bust

Adjustable rate mortgages are the main problem. The interest rates and payments increase on these mortgages, causing many homeowners to go into default. As a result, foreclosures continue to rise. As foreclosures rise, more homes go on the market, which causes prices to continue to fall. We still have a lot of pressure from foreclosures. Unfortunately, that doesn’t seem to be something that is going to ease up anytime soon.

In addition, credit is very tight, making mortgages tough to get. Going forward, I think that we see more of the same this year.

Theme for 2008: Consumer Spending Diminishes

This is one of those themes that falls in the category of the obvious. I was just surprised to see consumer spending holding up as well as it has. I think that the real reason for this is the continual use of credit. However, I think that is changing. Credit card companies are starting to tighten up.

Once the availability of credit diminishes, we should see consumer spending start to really weaken. I watch the total overall consumer held debt for signs that this is happening. It looks like total debt might have topped out on April 1st of this year at $5.3 trillion. As of yesterday, it stands at $5.2 trillion.

Theme for 2008: The Government is Running Out of Ammo

The Fed was doing everything humanly possible to prop of the economy through lowering interest rates and pumping money into the system. What has been the result? Now we have high inflation and a weak economy. Their methods have ceased to work.
Now they face the ultimate tough spot. If they raise rates to control inflation, they could send the economy over the edge. If they hold off, inflation remains a problem.

Theme for 2008: The Elections Might Cause a Problem for the Stock Market

In January I felt like the markets would like either Rudy or Clinton in the White House. They were both market friendly candidates. McCain might be somewhat market friendly. I didn’t mention him in January because I would have never believed he would have had a shot.

I also mentioned that there was a good possibility that Obama would get elected. You could see his popularity growing. I think that the markets will have a huge problem with Obama. He wants lots of change and has an extremely liberal mindset. You always have to be concerned when a politician wants to change everything. Politicians don’t change things. They make things worse.

I am of the opinion that he will get the presidency, which would not be market friendly.

He is very appealing to the voters of this country right now. Unfortunately, electing a president is more about charisma than anything else when it comes to the votes of the masses. It appears that he is reaching the masses as no other candidate has done in a long time.

Theme for 2008: There is a High Probability that We Might See a Bear Market

I gave a lot of statistics in my special report as to why I thought that this would be the case. Today, we have been in this decline for almost 8 months without a 20% or more decline in the stock market. That is the accepted definition of a bear market.

So, is the worst behind us? Well in my stock market outlook, I highlighted the last three big bear markets. During the first 255 days of this market decline, we are down more on a percentage basis than the other bear markets that I highlighted during their first 255 days. In other words, those turned into full fledged bear markets by definition without experiencing a large decline in the first 8 months.

Going forward, I still feel like we are going to see a full fledge bear market. I think that there are too many issues facing this market that will be tough to ignore.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.