As expected the market salivated this morning over the news of the government taking equity stakes in the nine large financial institutions. These companies saw their stock prices take-off (except for J.P. Morgan) but then concerns about the economy led to the stock market finishing with a weaker tone. During the day, there was great anticipation for Apple's presentation of new products but Steve Jobs couldn't pull off his usual magic. He introduced some new computers and lowered the price on others. The result was an expectation from the financial community that it won't be enough to drive sales growth in this weak consumer environment and margins could shrink. The stock took a swan dive and so did the market.
The next bellwether was Intel reporting after the close. They announced numbers which met analyst expectations but their uncertainty with regards to the fourth quarter caused some concern after the stock initially rose 5%. It looks like it will open down tomorrow. This won't bode well for the overall market as it might foreshadow negative results for the computer industry and other technology companies.
As we have said all along, the market is now for stock pickers and those companies that are economically sensitive in nature should be avoided until they report their numbers and the stock declines. We would continue to avoid building products companies, auto supply companies, and any company that could be hurt by a lousy Christmas season.
An interesting area to start to look at is the bank loan market. Typically bank debt trades close to 100 cents on the dollar or par value. On average it is now trading at historical lows of 75 cents on the dollar and is the most senior part of the capitalization. Bank debt is typically secured by the assets of the company and if the company should go into bankruptcy, the loan holder has first claim. Most times these loans will return 70 cents on the dollar after a reorganization. Hence, even if 5-10% of the loans default in this deep recession, the loans should have minimal downside. The best way to play this market is by buying a mutual fund or closed-end fund for leveraged loans. If you are compelled to buy securities, bank loans are a safer bet than the stock market. You will receive interest payments and have far less downside risk.
We are in earning season and tomorrow has many companies reporting. A few which will give us some insight into the economy are Marriott, J.P. Morgan, Wells Fargo, CSX, Delta, Spansion, EBAY and AMR. Some bad news here could result in a sloppy market as those who profited on Monday could turn around and sell stock tomorrow. Don't expect the market to go up tomorrow. We will be lucky to see a little rally during the day unless we get surprisingly good earnings.
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