This is The Wall Street Digest Hotline Update for Friday, February 8, 2008, at 6:00 p.m. EST.
Credit worries continue to weigh on the markets. At the close, the Dow lost almost 65 points, closing at 12,182, while the Nasdaq gained almost 12 points, closing at 2,304.85. Oil closed $3.58 higher at $91.69 per barrel, and gold closed up $15.50 at $925.50 an ounce.
Congress just passed a $152 billion bail-out of the economy, but American consumers won't receive checks until May or June.
In the meantime, the Fed is holding two monthly auctions totaling $60 billion each month. However, the best news is that the Bernanke Fed is creating money at near record levels. In the past two weeks, the Fed has created $88 billion in new M2 money. The Fed is hiding the weekly M3 money supply creation number because the amount of money creation underway now is highly inflationary.
M2 money creation at $88 billion translates to at least $132 billion in M3 money in just the past two weeks. This money is in the banking system right now. The economic power of $132 billion in new M3 money dwarfs the power of the $152 billion bail-out by Congress, which by comparison was simply posturing by the politicians.
Current money creation by the Fed will solve the credit crisis and create an economic boom during the second half of 2008. However, money creation is inflationary. Interest rates will be rising in 2009 to fight the coming inflationary boom. Bernanke's money creation proves he is far more concerned about a deflationary meltdown, and is willing to fight the resulting inflation in 2009.
Gold traders watch the Fed's money creation. I am not surprised that gold was up $15.50 today.
I would continue to avoid both the entire real estate sector and the financial sector, including the builders, banks of all sizes, brokerage companies, and insurance companies. Going forward, billions of collateralized debt obligations and collateralized mortgage obligations will be written down in 2008 and 2009.
Residential real estate will not bottom in 2008. However, the Fed is finally flooding the banking system to stop the housing slide.
The S&P 500 is still undervalued by more than 50 percent, which means the S&P 500 Index could double and still be below fair value. After the market bottom, which I believe is near, stock prices should rise 22 to 25 percent over the next twelve months. The U.S. is still the engine for global growth. Consequently, the global boom will follow the U.S. lead.
Let's stay fully invested! The Smart Money and the institutions have been purchasing U.S. stocks on every pullback. The Smart Money is never wrong. Historically, that has been a reliable indicator of a market bottom.
The next Hotline Update will be on Tuesday, February 12, 2008, at 6:00 p.m. EST.