First Stock Shock; Second Economic Data

A: So, we went from the very front lines of the credit crisis and breaking down the negative announcements, to stock shock around the globe. Whats next? The hard data! We must be prepared for how this cycle will likely play out. Now that stocks adjusted, with the help of a very aggressive 3/4 point inter-meeting rate cut by the fed, the economic reports (jobs, gdp, inflation measures) are going to be coming out and the news is widely expected to be sobering! Stocks are now pricing this in and adjusting to slower growth. Question is, will it actually come via weak data releases?

So we had a fierce market adjustment and it got a lot of people's attention! How does this compare to past market crashes? Barry Ritholtz over at The Big Picture shows us:

Stocks are one thing, real economic data is another. Lets stay ahead of the curve and look out to the economic reports that will be released soon. Here is a schedule of the more important market moving releases that are coming:

HOUSING

TODAY ---> Existing Home Sales
JAN 28th ---> New Home Sales
FEB 7th ---> Pending Home Sales

ECONOMY

TODAY ---> Initial Jobless Claims
JAN 29th ---> Durable Goods Orders
JAN 30th ---> GDP (advance)**
JAN 30th ---> FOMC Statement
JAN 31st ---> Personal Income & Outlays
FEB 1st ---> Employment Situation
FEB 1st ---> ISM Mfg Index

Now seriously, do you think these reports are going to far exceed expectations? Chances are, unemployment is going to rise, jobless claims will start to rise (may be lagging closer to mid 2008), gdp will fall, and homes data will either stay bad or get a bit worse. Anything better than that will be viewed ultra positively! So, there is a lot coming that we will need to digest and trust me on this one, if these reports do come in on the disappointing side, the chatter in the media will change from whether we will go into a recession to how severe will the recession be!

Its clear that our fed is favoring growth over inflation right now to deal with this crisis and its also clear that we have more rate cuts coming! Totally different situation over at the ECB in Europe whose primary reason for existence is to guard against inflation; rate cuts won't come over there until growth is clearly slowing or things get real hairy.

While we undergo stock shock right now, prepare for the data reports and how the street interprets them. In addition, watch out for the proverbial 'other shoe to drop' in the credit markets that may result in all banks/brokerages writing down way more losses than expected; i.e. more bond insurer downgrades, disruptions in CRE secondary markets, rising defaults in other areas of debt markets (alt-a, prime, credit cards, auto loans, helocs, etc..). That will certainly cause a second shock wave through equity markets, especially if we see problems arise in global economies/markets.

Luckily for us, yesterday's rally was most likely a result of a rumor that the NY State Insurance Association is in talks with major banks to help bailout the bond insurers; a rescue plan of up to $15 Billion. I just don't see how that will have any effect given the hundreds of billions of dollars worth of CDO's/CMO's, etc held and insured on the books of these financials.

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