Farrell: This is What a Bear Market Does

There was a lot of stuff to cover on "The Call" today (see video) with financials selling off and dismal economic numbers to digest. The Producer Price Index was dramatically higher than expected, but the headline number of 1.2% and 9.8% annual gain has to be looked at in the light of a recent decline in oil prices. Inflation is a lagging indicator (as long as the right stuff lags!) and the recent decline in commodity prices will be reflected in future reports.

More worrisome is the "core" rate of .7% and 3.5% annual. It appears that the headline is percolating down to the core level and, while we shouldn't overreact to one month's numbers, the trend is worrisome and bears watching.

Watching is all we can do at this moment since the Fed can't/won't raise interest rates which is the usual remedy for hot inflation numbers. Inflation fighting will have to wait till the credit crisis's end is in sight, if ever!

There was more bad news on that front as Goldman Sachs warned investors off American International Group fearing that the company will need to raise more capital when it reports yet more CDO type losses. Lehman is rumored to be trying to sell assetsto raise capital and there is a worry that the credit crisis has a ways to go.

While the intuitive reaction to the low housing start number that was reported earlier is to moan about the woeful state of housing, the number needs to be low if we are ever to clear the inventory overhang that is now about 11 months of sales. It would be better to have this number fall off a cliff to be done with anxiety.

But this is bear market type action. What the market gave us recently with a 300 point up day, the bear is taking back, as the bear will. I'm guessing/hoping that the July lows we saw will prove to be the bottom, but a bear market cannot end without whatever might prove to be a low being tested.

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