This is The Wall Street Digest Hotline Update for Tuesday, February 12, 2008, at 6:00 p.m. EST.
Warren Buffet's offer to assume muni bond liabilities produced a 210-point rally today. By the close, however, the Dow trimmed its gains to 133 points, closing at 12,373, while the Nasdaq remained flat at 2,320. Oil closed $0.81 lower at $92.78 per barrel, and gold closed $15.60 lower at $911.10 an ounce.
Current money creation by the Fed will produce a mini-economic boom during the second half of 2008. However, money creation at current levels is inflationary. Interest rates will be rising in 2009 to fight rising inflationary pressures. Bernanke's money creation proves he is far more concerned about a deflationary meltdown, and is willing to fight the resulting inflation in 2009.
Credit spreads are still too wide. The Fed must cut Fed funds from 3 percent to 2 percent as soon as possible.
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. A record five million homes are for sale in the U.S., home prices are still falling and one million home foreclosures are expected in 2008. However, the Fed is finally flooding the banking system with new money that will provide needed mortgage funds to banks and other lenders.
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. Historically, that has been a reliable indicator of a market bottom. The Smart Money has never been wrong.
The next Hotline Update will be on Friday, February 15, 2008, at 6:00 p.m. EST.