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Recession Fears, Part II

Written By Brian Hicks

Posted January 20, 2008

I screwed up. On January 18, my “Dow 12,400 by November 1, 2007” article mentioned we were headed sub-12K.

At the time the article was written we were at 12,300. But any one reading this today would justifiably say, “We are headed for sub 12,000 within a year? Wow. What a great prediction when we are at 12,032 as I write this note. Rather than commenting on something so obvious why not take a stab at where the Dow will be at year end,” noted Mike F. in that article’s message board.

Okay, I will.

But before I go into my new “wild” prediction, let me just say this. The smart investors that were ridiculed for calling for 12,400 on the Dow, the death of the consumer, housing, and for ignoring the possibility of Dow 16K are having the last laugh.

As an example of the ridicule, one editor recently predicted that it would be best to ignore the analysts and newsletter editors, that investors should remain bullish on U.S. consumer spending for the rest of the year. It was a prediction made in November 2007.

But as we’ve seen, ignoring the analysts and newsletter editors was a bad move. Says the Wall Street Journal:

"The retail industry appears to be skidding toward its first big wreck in 17 years.

Chains are slamming the brakes on store openings, cutting back on inventory and girding for leaner times as consumer spending chills. The speed with which sales slowed during the holidays caught even cautious retailers off-guard, prompting a flurry of profit warnings.

And while data on December consumer spending won’t be released until the end of the month, plummeting sales suggest consumers are snapping shut their pocketbooks."

But I digress…

By the end of 2008, we’ll see Dow 11,000.

A long recession , stimulus plan failure, and Fed rate cuts, which will do nothing more than temporarily prop up a deflating bubble, coupled with election uncertainty, higher inflation (thanks to the Fed), a lower dollar, $1,200 gold, sky high oil, and higher charges at the gas pump will take us there.

But, hey, who am I to make such bold calls?

Technically, after a massive breakdown following a head and shoulders pattern, we’ve already broken 2007 support at 12,000 with no real support again until 11,000. So how do you protect yourself?


DJIA chart


As I told Small Cap Trading Pit readers on Friday, one way is to buy the SPY March 131 puts as downside protection. Be sure to stay tuned for more ideas in Small Cap Trading Pit and right here at Wealth this Tuesday.

Ian L. Cooper

To learn more about Ian Cooper’s letter, Small Cap Trading Pit, click here.