You think this is bad? It might get worse..

Finally Wall Street seems to be catching up with main street. We’ve been wondering for months about this. But now that it has, what’s next?

Today seems to be a good day, but that doesn’t mean a thing. Oversold conditions spark some bounce, and any news will be interpreted as good news justifying the bounce. So today, a bad jobs report was interpreted as a good sign: the Fed won’t have reasons for rising interest rates soon.

Also, the European central bank (ECB) raised rates, putting further stress on the US dollar. But this was also seen as good news, as Trichet, the ECB’s head, said that this was not necessarily the first move in a series of rate hikes.

Any bad news interpreted as good news, it’s almost like we’re in some 1984 speak. But it won’t last. It’s really ugly out there:

1) The US economy is moving inexorably into a recession, jobs are disappearing, wealth is disappearing (falling house and equity prices), purchasing power is disappearing (falling dollar and rising inflation), confidence is disappearing (consumer confidence at decades lows), policy options have already disappeared (taxes can hardly be lowered again and the Fed is facing an awkward dilemma, should it raise rates in order to combat inflation, or lower them further in order to keep the economy going)…

2) We might very well get housing crash part 2. Once a recession start and interest rates won’t fall because of the inflation problem, more people will get into trouble.

3) We might very well get credit crunch part 2. Just when people argued the worst was over in the credit markets, up comes a recession which put more consumers and businesses in potential default. First sub-prime mortgages, now it’s the turn of your garden variety consumer loans, credit cards, and business loans to turn sour.

4) Thought that the rest of the world could escape the economic downturn? Think again. Stockmarkets in China have crashed more than 50%, those in India are rapidly falling as well. These countries have serious inflationary pressures, and they need further monetary measures to deal with them.

This will curb domestic demand and put their currencies on an upward path, further adding to inflationary pressures elsewhere and reducing demand for US exports, the one bright spot as a result of the falling dollar.

What to do with your stock portfolio?

It depends on your time frame. If you have a longer time frame, sit it out. If not, use these short bounces to lighten up.

There are opportunities. We see things that will hardly be affected by the present economic conditions, like TSL, which is now ridiculously cheap as we argued a couple of days ago. But that doesn’t necessarily mean it can’t get a little cheaper still.

EFUT is another company that we think has very good prospects which will largely escape the current downturn. And it has never been cheaper.

If you can stomach the risk, you could start nibbling at these companies, because once this is over, they will rapidly increase in value to reflect their prospects. But don’t go overboard.