Saturday, November 29, 2008

Be Alert to The "Canaries in the Coalmine"

The stock market closed higher Friday making it the best 5 market day streak since 1932. It seems like the is the year of breaking records. That said, I believe the market will eventually be retesting the lows made last week for the following main reason: there is still too much optimism among the general public.

Just look at all the hoopla and crowds still being generated for the Black Fridays sales event. People are still more eager to spend money and "charge it" than they are worried about the looming recession. I remember a conversation I had with some co-workers, and all the signs I pointed out as warnings were easily discounted:

Soul: Circuit City and Linen and Things going out of business..
Response: No big deal, those companies were just beat out by stronger businesses like Best Buy and Bed, Bath and Beyond.

Soul: CitiGroup slashing 53,000 jobs.
Response: They are not all in the US - that's worldwide.

Soul: The economy is slowing down.
Response: People just need to go out and do more shopping.

See a pattern here? There's no real fear yet despite the market drops.

This makes me think of Hurricane Ike in Texas this year- how news reports warned all those in the Galveston area to evacuate. The weather service even sent out a warning that said anyone who didn't evacuate faced CERTAIN DEATH. Even with that, many folks still decided that they knew better and remained in the area. When the hurricane finally arrived, many of those who decided to stay and ride it out died. Those who needed to be rescued afterward now admitted that they had made a mistake by staying.

It's apparent that some people are unable or unwilling to read the early warning signs and take heed......only responding when disaster is on the verge of overtaking them and it's too late to do anything about it.

It's clear to me that Circuit City, Linens and Things, and Mervyns, are the canaries in a coalmine signaling worse things to come. For those unfamiliar with the expression "canary in a coalmine"- it dates back to a song made by the musicgroup The Police. Just kidding- it goes back much farther than that. In the olden days miners working in caves underground were in danger of dying by breathing in methane gas...which had no odor and was undetectable until it was too late. The miners discovered that canaries were highly sensitive to methane and could be used as a warning of its presence before the levels became lethal for humans. Therefore the miners always took a canary with them when went into the mines as a safeguard. Of course I'm sure there must have been doubters back then when they saw a canary die and dismissed it as something else and not a warning to evacuate.

Unfortunately many people still fail to connect the dots and dismiss the early warning signs, which leaves them entirely unprepared to handle bad news when it arrives on their doorstep. I'd much rather be preparing for a worst case scenario and be pleasantly surprised that it doesn't happen, then not to prepare at all and be caught fllat footed if things really get bad.