INVESTING: Weak sectors could have broader effect on economy

We all know that the hip bone is connected to, well, you know how it goes. But a lot of people seem to be missing the point that the same principles controlling that biology are an active force in the markets and economy.

All the brilliant economists out there are telling us what we already plainly know-finance and consumer-related sectors are weak. There isn’t enough talk about the next connection, though, or how a cancer spreads from one body part to another.

California represents 13 percent of our gross domestic product and is one of the largest economies in the world. It doesn’t take a stretch of the imagination to see how a slowing California can affect the rest of the country, which can affect the rest of the world.

Think about that as you consider this: Unemployment, which moved from 4.5 percent to 4.7 percent nationally, is already up to 5.6 percent in California. Home sales fell almost 40 percent there in the last year. Tax revenue is dropping, and the government is talking about tax hikes.

Another issue being overlooked is how many industries are going to start to feel the financial sector’s pain. New CEOs have been installed at places like Citibank and Merrill Lynch, and these leaders are going to call for changes. The layoffs are just in their early stages.

The financial industry is one of the biggest customers of companies like Cisco and Intel, large tech firms supposedly immune to the slowdown. But the new phones, and the like necessary when banks and brokers were adding employees will stop-without a replacement. If you wait until the April earnings reports from those companies to react, it will be too late.

Yet another common misperception is that foreign markets are going to keep flying along regardless of how weak the U.S. economy gets. In 20 or 30 years, maybe that holds. America is sneezing today, though, and the rest of the world is slowly catching a cold.

In 1999, there were billions of dollars misallocated to the technology sector. A lot of people correctly recognized the bubble, but failed to see the extent of the damage the popped bubble would cause. The NASDAQ fell over 70 percent in that bear market, but the Dow Jones industrial average also fell almost 40 percent. When the bubble finally broke, it took everything down with it.

Now the credit bubble has burst. The cancer is in the very early stages of spreading. It will eventually infect the entire body, and there is no telling how panicked investors will react after they have suffered some serious losses.

The market has recovered some recent losses in what many are labeling the Christmas rally. This is a gift, and a rare one at that. Use the strength to put the defense on the field.

The negative ripples that got started last summer will keep going until they run out of steam, and that won’t be for quite a while yet.