Oh yes there’s Trouble, right here in River City… That starts with “T” and that rhymes with “C” and that stands for CRAZY!!

Yes, my friends, there’s Trouble right here in River City.

The January 5th, Financial Times’ headline was “Jobless rise fuels recession fears.” That referred to January 4th’s jobless figures that were so poor that President Bush called a special meeting to consider a “possible fiscal stimulus package based on tax cuts to boost the economy.” In December only 18,000 jobs were added, the lowest number since August 2003 with Government hiring accounting for more than the entire increase. The Unemployment Rate rose to 5%, the highest since November 2005, from 4.7% and Goldman Sachs suggested the US was “on the edge of a recession.”

The only positive conclusion was that these figures made a quarter-percentage cut in interest rates by the Federal Reserve a virtual certainty and greatly increased the likelihood that the cut would be a half-percent despite a higher risk of inflation from a weak dollar and higher oil prices. We, however, do not believe that even a half-percentage cut will turn the battleship.

The S&P 500 index closed down 2.46% on Friday, January 4th, while the Dow was down almost 2% (1.96%). For the first short week in 2008 the Nasdaq was down 6.3%, the Dow Jones Industrials fell 4.3% and the S&P 500 index 4.5%. The yield on the two-year treasury was the lowest since November 2004.

We will try to summarize some of the problems we are now facing and those that could arise.

The employment figures, actually the first private sector decline since July 2003 as the above-mentioned Government hiring accounted for more than the 18,000 increase, reinforced suspicions that we will face or are actually now in a recession. While these figures can and probably will be revised, the direction of unemployment is clearly upward.

Many Americans are already heavily in debt and are facing falling house prices, higher interest and credit requirements in addition to higher food, gasoline, fuel oil and other energy prices. They can no longer use their home as an ATM machine. Add to these facts the potential effects of higher unemployment along with 1,800,000 U.S. mortgages being reset with higher interest rates beginning right now.

Banks, as a result of the turmoil in the credit markets that has been triggered by the subprime mortgage credit crisis, are being much more careful regarding credit standards and are reducing credit (loans) for individuals and businesses. Employers facing a slowing economy are going to be much more reluctant to take on new workers in this scenario.

Adding these factors together one can begin to imagine the potential ripple effect of a turndown in the economy. Housing, the locomotive of consumer spending for the last five or so years, will not be there to help.

And we almost forgot Pakistan, the U. S.’ only real ally in the Middle East aside from Israel. The politicians running for president have forgotten Pakistan; the “mainstream” press has forgotten Pakistan. We say that because it is no longer mentioned in their debates or in the press.

Aside from the fact that if the country were to be taken over by radical Muslims, they would control the country’s atomic bomb facilities, we don’t have much to worry about.

Ever since the murder/assassination of former Prime Minister Benazir Bhutto in Rawalpindi on December 27th there has been no functioning government in this huge and extremely important country. The elections that were to be held on January 8th have been postponed for six weeks. We wager they will not be held then either. Benazir Bhutto’s 19 year old son and Oxford student has stated on January 8th: “I fear for my country. I fear if free and fair elections are not held, it may disintegrate.”

Aside from the effects on the fight against terrorism, India, China, Iraq, Iran, Russia, Afghanistan, the U.S., and many other geopolitical aspects of total chaos in Pakistan, we still cannot stop thinking about the Atomic Bomb in the hands of Radical Muslims.

And not even the world-wide Credit Crisis has gone away. Actually, it really is not even very far into its beginning. Please see our August 16, 2007 Commentary – “THE CHICKENS ARE COMING! THE CHICKENS ARE COMING! “ – Home to roost, that is – where we described very accurately what is happening in the markets at this time and how those events could impact not only our but the rest of the world’s economy. This Commentary can be seen on our Web site www.HamiltonAdvisors.com, or we will gladly send you a copy on request.

Yes, my friends, there’s Trouble right here in River City, and Mr. Market doesn’t like it.

A positive is that we are only in the first week of 2008 as of this writing and a great deal can and will happen between now and the end of the year. Let’s hope for the best….we always do.

Debbie, Brock and I extend our very best wishes to you for the New Year!

John W. Hamilton
January 8, 2008