Friday, October 2, 2009

Ten reasons for a stock market crash?

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The stock market has taken a dive the past two days. Will that trend continue? I don't know.

What I do know is that on September 24th, SeekingAlpha published an article written by Robert Baggio entitled "Ten Reasons for an Imminent Stock Market Crash." Was Mr. Baggio prescient with his article? Only time will tell but its definitely worth a read.

What are his ten reasons? Well, I encourage you to go over to SeekingAlpha and read the article for yourself but I'll give you a taste here. In my own words, his ten reasons are:

1. Rampant insider selling.

2. Much of the current rally has been (a.) based on trading in bankrupt companies (Fannie Mae, Freddie Mac, Lehman Brothers, etc) (b.) made up of investors trying to cover their shorts and (c.) of a low volume.

3. Most investors are short-term bullish and long-term bearish. Furthermore, market psychology does not currently correlate with the economic fundamentals.

4. A lot of the market is short on the U.S. Dollar and long on ... "everything else."

5. Household incomes are going down while the number of people living in poverty is growing. "Income dispersion" is growing.

6. There is a Chinese commodities bubble. The rise in commodities prices isn't because the Chinese economy is really growing as fast as it appears to be, its the result of the Chinese investing in commodities so as to avoid the U.S. Dollar. The Chinese business model is just as flawed as the American one.

7. Under President Obama we have more government intervention into the economy, there is increased protectionist sentiment and there are "socialist tones" to our political rhetoric.

8. The money supply and credit continue to contract at alarming rates.

9. The market is very complacent and everyone is (falsely) assuming that everything is okay.

10. The European economy is still in shambles despite proclamations from European political leaders that "the recession is over" there. To quote Baggio:
"What happened to Latvia’s currency crisis or the Swedish Banks? Are Hungary and Poland ok? Has the Austrian Banks’ exposure to Eastern Europe disappeared? Is Spain back on its feet? Is the UK solvent again? Are Irish banks lending like there is no tomorrow? How about Germany’s manufacturing base—is it solid with a EUR at 1.48 and the US consumer missing-in-action? Is Deutsche Bank’s $3 trillion balance sheet made up of only physical Gold? Are German banks profitable and healthy again? I guess somebody waved a magic wand and fixed all Europe’s problems overnight!"

This is just a very basic summary of Mr. Baggio's article. This summary doesn't do it justice so I encourage you to go over to the actual article and read it in-depthly.

So there you have it. Are you convinced? What are your thoughts on the future of the stock market?


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