Most investors are already expecting poor holiday sales so everybody is focused on this today's shoppers after the Thanksgiving break. Today should be a quiet day in the market as most professional investors take the day off. It is surprising that stocks held up well during the Mumbai terrorist attack. This is another good sign as the market this week shook off all the bad news and advanced higher. We believe their is a big short squeeze occurring and if the market continues to inch up, we could get another big rally next week. Our reasoning is the fear of a rally will cause the shorts to cover and force stocks even higher. That rally would then lead to another downdraft which could test the old lows.
We will watch the markets closely but don't expect much news today. The Obama effect seems to be positive for the market and at some point he should come out and say no tax increases next year. It will be onto next week where the volatility shall continue and the market should have another big swing. The only question is which way?
Friday, November 28, 2008
Wednesday, November 26, 2008
It Is Still All About The Economy
Today's release of economic news shows the economy is not getting any better any time soon. Durable Goods dropped 6.2% in October after a downward revision of another 1% in September. The jobless claims report was weak but slightly better than expectations. These numbers will likely continue to be ugly and at the point where the markets see the bottom, stocks will begin to build a positive trend.
Yesterday, the U.S. Government committed another $800B focused on improving the mortgage market and other consumer loans. This is the area in the economy that certainly needs a jump start and it looks like the Federal Reserve gave it a good push. Mortgage rates declined and consumers with good credit raced to their mortgage brokers to refinance their home loans. Lower interest rates for individuals will free up cash to spend on other items. This process will not be instantaneous but it is certainly another Tea Leaf in our road to recovery.
The stock markets were up slightly yesterday for the third day in a row. However, in reality stocks were mostly neutral waiting on the next piece of news. Today we got it and we are seeing lower trends. It is likely investors won't be too bullish today as Black Friday approaches and the reality of retail sales for the holiday season will be discussed all weekend. It would be shocking to see shoppers pulling out their wallets this holiday season but we wait to see if spending is as bad as forecast. The markets should lean to the downside until next week.
Yesterday, the U.S. Government committed another $800B focused on improving the mortgage market and other consumer loans. This is the area in the economy that certainly needs a jump start and it looks like the Federal Reserve gave it a good push. Mortgage rates declined and consumers with good credit raced to their mortgage brokers to refinance their home loans. Lower interest rates for individuals will free up cash to spend on other items. This process will not be instantaneous but it is certainly another Tea Leaf in our road to recovery.
The stock markets were up slightly yesterday for the third day in a row. However, in reality stocks were mostly neutral waiting on the next piece of news. Today we got it and we are seeing lower trends. It is likely investors won't be too bullish today as Black Friday approaches and the reality of retail sales for the holiday season will be discussed all weekend. It would be shocking to see shoppers pulling out their wallets this holiday season but we wait to see if spending is as bad as forecast. The markets should lean to the downside until next week.
Monday, November 24, 2008
Financials and Oil Lead The Way
Citigroup's government bailout sparked a rally in financials while the weak dollar led to strong commodity prices and higher oil. The oil stocks and commodity stocks flew as did the bulk of the market. There only seemed to be good news in the air as President-Elect Obama named his economic team and showed his urgency to get the economy back on the right path.
Stocks were up all day and got stronger in the last hour before fading a little at the close. The volume was decent but not spectacular. The various markets are up 10-12% in the past two days and will likely need to take a breather in the next day or so. Even the weak existing home sale numbers couldn't keep the home builders down today.
Tomorrow's economic reports will certainly fuel the volatility for stocks as we get 3rd quarter GDP, Case/Shiller home prices, consumer confidence, and the Richmond Fed Manufacturing Index. The strength of the market will surely be tested by the negative numbers we should expect to see.
Gold is now over $800. The weak dollar is driving the momentum in the short-term but the government's debt burden keeps growing with each new bailout. This leveraged U.S. balance sheet and the growth of the monetary base will surely lead to a much higher price of gold in the future.
Today was easy to pick stocks as almost everyone went up. Not everyday will be like this as the bad can't always rise with the good. Keep sticking with quality and the future will be bright.
Stocks were up all day and got stronger in the last hour before fading a little at the close. The volume was decent but not spectacular. The various markets are up 10-12% in the past two days and will likely need to take a breather in the next day or so. Even the weak existing home sale numbers couldn't keep the home builders down today.
Tomorrow's economic reports will certainly fuel the volatility for stocks as we get 3rd quarter GDP, Case/Shiller home prices, consumer confidence, and the Richmond Fed Manufacturing Index. The strength of the market will surely be tested by the negative numbers we should expect to see.
Gold is now over $800. The weak dollar is driving the momentum in the short-term but the government's debt burden keeps growing with each new bailout. This leveraged U.S. balance sheet and the growth of the monetary base will surely lead to a much higher price of gold in the future.
Today was easy to pick stocks as almost everyone went up. Not everyday will be like this as the bad can't always rise with the good. Keep sticking with quality and the future will be bright.
One Albatross Taken Care Of
The government finally stepped in to keep the patient alive as Citigroup was injected with a second life. The U.S. Government is guaranteeing $306 billion of troubled mortgages and other toxic assets while also injecting another $20B into the company. Losses on the bad assets will accrue 90% to the taxpayers and 10% to Citigroup. The government also will receive as compensation $27 billion of an 8% preferred stock and 254 million warrants to buy stock at $10.60. This package will go a long way to stabilize Citigroup and allow it to survive. It would make sense for the company to begin to sell some assets now and clean up its balance sheet before more assets become depressed.
The combination of this bailout and President elect Obama's $500 billion stimulus plan should lead to another stock market rally. It is also clear that taxes are not going up next year. The economy is still bad and getting worse but each of these tea leaves is important for the bottoming process. Once we get all the research analysts to drop their projections for next years' earnings, we will be at a bottom. Today, Goldman lowered their 2009 earnings expectations for the S&P by 22% and we would expect others to follow.
Enjoy the day or at least the morning as positive news is in the air but remember volatility is still present and the market won't go straight up. Bad news will continue to present itself but high quality companies will be around when the dust clears. Gold should continue to become more valuable as the printing of dollars continues to 24 hours a day.
The combination of this bailout and President elect Obama's $500 billion stimulus plan should lead to another stock market rally. It is also clear that taxes are not going up next year. The economy is still bad and getting worse but each of these tea leaves is important for the bottoming process. Once we get all the research analysts to drop their projections for next years' earnings, we will be at a bottom. Today, Goldman lowered their 2009 earnings expectations for the S&P by 22% and we would expect others to follow.
Enjoy the day or at least the morning as positive news is in the air but remember volatility is still present and the market won't go straight up. Bad news will continue to present itself but high quality companies will be around when the dust clears. Gold should continue to become more valuable as the printing of dollars continues to 24 hours a day.
Friday, November 21, 2008
The Sign of New Tea Leaves
Yesterday was clearly another rout. All industries were beaten down led by oils. The banking system was crumbling and even the most pristine companies saw their stocks decline. Dell ended the day by beating expected earnings and rose after the close. That may have been the bright spot of the day.
Citigroup was a highlight yesterday as its stock closed down at 4.39. This bank has been in a tailspin for over a year now and reality is finally sitting in. Two of the biggest issues facing the deleveraging of our economy is Citi and the auto makers. It looks like Citi is now preparing to either sell some assets or sell the whole company. Perhaps Goldman Sachs can get out of its own funk by merging with Citi's branch network.
As for the auto manufacturers, the Government may finally be getting it right. There seems to be a movement toward pushing General Motors into a prepackaged bankruptcy with Government financial assistance. This is the right approach and will be the best long-term solution.
The sale of Citigroup and the deleveraging of GM are another set of Tea Leaves that the markets need to right themselves. We are still in times of great volatility and it certainly feels like the world is coming to an end but the cleaning up of the massive excess in this country will take time. The next month might bring us closer to those goals.
Citigroup was a highlight yesterday as its stock closed down at 4.39. This bank has been in a tailspin for over a year now and reality is finally sitting in. Two of the biggest issues facing the deleveraging of our economy is Citi and the auto makers. It looks like Citi is now preparing to either sell some assets or sell the whole company. Perhaps Goldman Sachs can get out of its own funk by merging with Citi's branch network.
As for the auto manufacturers, the Government may finally be getting it right. There seems to be a movement toward pushing General Motors into a prepackaged bankruptcy with Government financial assistance. This is the right approach and will be the best long-term solution.
The sale of Citigroup and the deleveraging of GM are another set of Tea Leaves that the markets need to right themselves. We are still in times of great volatility and it certainly feels like the world is coming to an end but the cleaning up of the massive excess in this country will take time. The next month might bring us closer to those goals.
Wednesday, November 19, 2008
Another Ugly Day
Today the lows were tested again and then broken. We are now at the levels last seen in 2003. Yesterday, the breadth of the market gain was narrow but today the downward route was broad and deep. On the NYSE, for every stock that rose,16 declined. The DOW was off 5.1%, the S&P dropped 6.1%, and the NASDAQ declined 6.5%. The VIX fear factor was up 10% which propelled the downdraft. If only the volume soared to extreme heights, we would have had another moment of capitulation. We are still expecting that day to come and hopefully it will be soon.
The news was unpleasant from everywhere today. The CEO's of GM, Ford, and Chrysler were begging Congress for a loan while taking a beating from the House Members. Commercial Mortgage securities showed new signs of stress which rocked the real estate market and put a crimp in financial stocks. Bank America, Citi, and JP Morgan all hit new lows. Housing starts hit another new low also. Just as all the news seemed so rosy, the Federal Reserve cut its growth forecast.
With days like this, who needs to wake up tomorrow. Junk bond yields are at new highs of about 20% while leveraged loans are back down to 70 cents on the dollar. The economy is a mess and financial institutions seem to be in the continual downward spiral. Where is the bottom? Fear is building and investors couldn't be more frustrated. Losses continue to pile up and we haven't even seen the corporate bankruptcy cycle kick in yet. We would suspect the default rate to be at least 10% next year. The stress on balance sheets continues to build and it is imperative that investors avoid stocks that have debt obligations coming due in the next 2 years.
There is no safe place to hide in the stock market unless you are short. It is best to be in high quality liquid companies but the short term may still mean painful losses. When the tide turns, you will be well positioned to take advantage of the rising market. Times are tough but brighter days will appear when we least expect it.
The news was unpleasant from everywhere today. The CEO's of GM, Ford, and Chrysler were begging Congress for a loan while taking a beating from the House Members. Commercial Mortgage securities showed new signs of stress which rocked the real estate market and put a crimp in financial stocks. Bank America, Citi, and JP Morgan all hit new lows. Housing starts hit another new low also. Just as all the news seemed so rosy, the Federal Reserve cut its growth forecast.
With days like this, who needs to wake up tomorrow. Junk bond yields are at new highs of about 20% while leveraged loans are back down to 70 cents on the dollar. The economy is a mess and financial institutions seem to be in the continual downward spiral. Where is the bottom? Fear is building and investors couldn't be more frustrated. Losses continue to pile up and we haven't even seen the corporate bankruptcy cycle kick in yet. We would suspect the default rate to be at least 10% next year. The stress on balance sheets continues to build and it is imperative that investors avoid stocks that have debt obligations coming due in the next 2 years.
There is no safe place to hide in the stock market unless you are short. It is best to be in high quality liquid companies but the short term may still mean painful losses. When the tide turns, you will be well positioned to take advantage of the rising market. Times are tough but brighter days will appear when we least expect it.
Tuesday, November 18, 2008
Will The Rally Continue?
The day started strong with Hewlett-Packard leading the way but the rally faded during the day when suddenly the DOW rose to finish up 151 points. Investors came away feeling good with some hope for tomorrow.
In reality, the market's rise was only driven by four stocks: Hewlett-Packard, Exxon, Chevron, and IBM. Those four companies represented 67% of the DOW's rise. The S&P was up 8 points and 80% of its move was driven by the oil, pharmaceutical and computer industries. Furthermore, of all the New York Stock Exchange stocks, only 840 rose while 992 declined.
The conclusion is that the rally today was very narrow and we should expect some weakness tomorrow. When volume is high and the advance/decline ratio is significant, we will get a sustained rally. At this juncture, it is back to testing the lows and probably making new ones.
In reality, the market's rise was only driven by four stocks: Hewlett-Packard, Exxon, Chevron, and IBM. Those four companies represented 67% of the DOW's rise. The S&P was up 8 points and 80% of its move was driven by the oil, pharmaceutical and computer industries. Furthermore, of all the New York Stock Exchange stocks, only 840 rose while 992 declined.
The conclusion is that the rally today was very narrow and we should expect some weakness tomorrow. When volume is high and the advance/decline ratio is significant, we will get a sustained rally. At this juncture, it is back to testing the lows and probably making new ones.
Will HP Save The Day?
This morning Hewlett Packard beat Wall Street estimates for the third quarter and raised guidance for the first quarter of next year as well as for the full year. This is the first technology company in recent months that has not only displayed some visibility into the future but also had a positive outlook for next year. Perhaps they are gaining market share and keeping costs down but in either case the market will like the news.
Yesterday was another volatile day in the market and the broad indices closed down at their lows. Today, PPI came out with a record drop which was driven by the large decline in oil prices. This should bode well for the cost side of corporate income statements and raise the specter of deflation. We still believe deflation is a short-term issue and the bigger problem will be inflation in a few years.
The market will continue to be volatile and we expect another big drop at some point. We have recently been excited about the bargains developing in the market for cyclical stocks. Many great companies with minimal debt requirements and plenty of liquidity are trading below$10 and have declined 60%-80% this year. We believe these companies if bought today will result in returns of 3-10x one's money over a five year period.
The market continues its bottoming process and we will continue to add to our portfolio. Our focus is on technology companies, Internet stocks, closed-end loan funds, energy stocks, gold, and deep cyclicals. A rebound in the market will likely start with the technology sector first and deep cyclicals last. We encourage the diversification by industry so you can broadly participate in the next bull market. Optimism is far away but opportunity is greatest when times are bleak.
Yesterday was another volatile day in the market and the broad indices closed down at their lows. Today, PPI came out with a record drop which was driven by the large decline in oil prices. This should bode well for the cost side of corporate income statements and raise the specter of deflation. We still believe deflation is a short-term issue and the bigger problem will be inflation in a few years.
The market will continue to be volatile and we expect another big drop at some point. We have recently been excited about the bargains developing in the market for cyclical stocks. Many great companies with minimal debt requirements and plenty of liquidity are trading below$10 and have declined 60%-80% this year. We believe these companies if bought today will result in returns of 3-10x one's money over a five year period.
The market continues its bottoming process and we will continue to add to our portfolio. Our focus is on technology companies, Internet stocks, closed-end loan funds, energy stocks, gold, and deep cyclicals. A rebound in the market will likely start with the technology sector first and deep cyclicals last. We encourage the diversification by industry so you can broadly participate in the next bull market. Optimism is far away but opportunity is greatest when times are bleak.
Sunday, November 16, 2008
The Volatility Shall Continue
This market is too treacherous for the novice investor as most professionals consistently lose money also. The swings in the DOW and S&P on Thursday and Friday can lead one to drink. Therefore, it is prudent to remain cautious, buy on market dips and only purchase safe liquid companies with few debt payments. We keep repeating similar phrases but it is advice the average investor needs to adhere to.
Losses may still pile up in the short run but someday in the next few years one will look back and realize that good investment judgement in 2008 and 2009 resulted in a solid portfolio with above average returns.
There should be more debate this week about the auto industry and the impending bankruptcies unless the government provides needed cash to General Motors. We still believe the best scenario would be either to let General Motors go bankrupt or better yet, negotiate a prepackaged bankruptcy. Barron's suggestion this weekend mimicked our previous thoughts on the situation They advised the government to invest $25 billion each in Ford and GM, but demand concessions from labor, management and shareholders. We believe this process is best served in a bankruptcy format but if not, the U.S. government needs to require the auto companies to restructure their debt while also lowering their operating cost structure. If these steps aren't taken, it won't be long before Uncle Sam will need to provide another $25-$50 billion to the auto industry.
The market pundits that specialize in technical analysis have watched the S&P bounce off its lows a few times and expect stocks to start to rise. We are not experts in this type of analysis but stocks certainly feel like they will go lower before they go higher. The economy is hitting all businesses and earnings expectations continue to be lowered by company managements and Wall Street research analysts. This recession is likely to be deeper and longer than most investors have anticipated and stocks will need to adjust to those assumptions. Great value is being created today but greater value may appear in a month or two. We will try to call the bottoms as we did on October 9th but that bottom may soon be pierced when the market closes below it. Friday represented the lowest close yet but not the lowest intraday low. This week may lead us down to new levels.
Retail is exceptionally weak, technology is falling off a cliff, housing is not improving much, and the financial system is incrementally improving but more problems are around the corner. Even when we reach a bottom in the stock market, it may stay there for a long period because, the corporate bond market and the leveraged loan markets need to dramatically improve before stocks can go up. The credit markets led the stock market down and they will ultimately lead it up.
Losses may still pile up in the short run but someday in the next few years one will look back and realize that good investment judgement in 2008 and 2009 resulted in a solid portfolio with above average returns.
There should be more debate this week about the auto industry and the impending bankruptcies unless the government provides needed cash to General Motors. We still believe the best scenario would be either to let General Motors go bankrupt or better yet, negotiate a prepackaged bankruptcy. Barron's suggestion this weekend mimicked our previous thoughts on the situation They advised the government to invest $25 billion each in Ford and GM, but demand concessions from labor, management and shareholders. We believe this process is best served in a bankruptcy format but if not, the U.S. government needs to require the auto companies to restructure their debt while also lowering their operating cost structure. If these steps aren't taken, it won't be long before Uncle Sam will need to provide another $25-$50 billion to the auto industry.
The market pundits that specialize in technical analysis have watched the S&P bounce off its lows a few times and expect stocks to start to rise. We are not experts in this type of analysis but stocks certainly feel like they will go lower before they go higher. The economy is hitting all businesses and earnings expectations continue to be lowered by company managements and Wall Street research analysts. This recession is likely to be deeper and longer than most investors have anticipated and stocks will need to adjust to those assumptions. Great value is being created today but greater value may appear in a month or two. We will try to call the bottoms as we did on October 9th but that bottom may soon be pierced when the market closes below it. Friday represented the lowest close yet but not the lowest intraday low. This week may lead us down to new levels.
Retail is exceptionally weak, technology is falling off a cliff, housing is not improving much, and the financial system is incrementally improving but more problems are around the corner. Even when we reach a bottom in the stock market, it may stay there for a long period because, the corporate bond market and the leveraged loan markets need to dramatically improve before stocks can go up. The credit markets led the stock market down and they will ultimately lead it up.
Friday, November 14, 2008
The Volatility Never Ends
The market slightly moved below the October 10th lows yesterday and appeared to be heading lower then suddenly we had a huge rally. We don't believe this is the beginning of the next big bull market. It looks like 20% of the rise was due to energy with Exxon and Chevron leading the way. However most industries participated in the excitement.
The best news was the downdraft in the beginning of the day provided opportunities to buy large liquid stocks with minimal debt requirements. Those moments will continue for awhile. Bad news will keep coming as we saw today with very weak retail sales numbers for October and Freddie Mac asking the government for another $13.8B.
We may open lower today but the market wants to ultimately move higher. We would expect investors to try to keep the rally going. Most stocks aren't going to zero (General Motors is worth zero.) but the bottoming process is taking its time. This will allow investors to keep accumulating quality stocks.
The best news was the downdraft in the beginning of the day provided opportunities to buy large liquid stocks with minimal debt requirements. Those moments will continue for awhile. Bad news will keep coming as we saw today with very weak retail sales numbers for October and Freddie Mac asking the government for another $13.8B.
We may open lower today but the market wants to ultimately move higher. We would expect investors to try to keep the rally going. Most stocks aren't going to zero (General Motors is worth zero.) but the bottoming process is taking its time. This will allow investors to keep accumulating quality stocks.
Thursday, November 13, 2008
Fear Is Building
Yesterday was just another bad day in the market. The highlight was Secretary Paulson scrapped the idea of the Tarp buying distressed assets in favor of supporting consumer loans such as credit cards, auto loans, and student loans. Stocks did not take that as a positive move but showed lack of decisiveness or lack of money to fix the impending problems in our economy. The next bit of news was Best Buy cutting its earnings forecast. The number one retailer is saying the holiday season is definitely going to be weak and likely worse than analysts were predicting. Finally, GE fell under the FDIC umbrella as they received insurance for $139 billion of their debt.
The day progressively felt worse right into the close as each bit of key news took the market lower. After the close, Intel, a leading technology company, cut its forecast. At that point we believed today was set up for another moment of capitulation. Asian markets were down 5% which matched the U.S. declines but Europe is about flat. This morning Walmart announced its third quarter numbers which beat estimates but it trimmed full year expectations based on the strengthening of the dollar. The market probably won't be as disturbed with this lower forecast as business is clearly better than most companies.
Today should be interesting as volume in stocks wasn't huge in the last few days but the trend in prices was clearly lower. We expect to see a big down moment with high volume as we saw on October 10th. It may not happen today but it is coming again. The recession is becoming longer and deeper than most people initially thought and stocks are just adjusting to that fact. Great companies will survive the downtrend and blossom in years to come as they pick up market share or lead the consolidation phase.
The day progressively felt worse right into the close as each bit of key news took the market lower. After the close, Intel, a leading technology company, cut its forecast. At that point we believed today was set up for another moment of capitulation. Asian markets were down 5% which matched the U.S. declines but Europe is about flat. This morning Walmart announced its third quarter numbers which beat estimates but it trimmed full year expectations based on the strengthening of the dollar. The market probably won't be as disturbed with this lower forecast as business is clearly better than most companies.
Today should be interesting as volume in stocks wasn't huge in the last few days but the trend in prices was clearly lower. We expect to see a big down moment with high volume as we saw on October 10th. It may not happen today but it is coming again. The recession is becoming longer and deeper than most people initially thought and stocks are just adjusting to that fact. Great companies will survive the downtrend and blossom in years to come as they pick up market share or lead the consolidation phase.
Wednesday, November 12, 2008
Watch Out For China
The stimulus package China put into place this week is designed to maintain the growth in its economy. We wrote a few weeks ago that China has been the engine for growth for many U.S. companies' export sales. Of course, Europe has also helped with driving exports but China and other parts of Asia have been growing faster than most countries around the world. If the U.S. and Europe are in recession, global companies must be pinning their sales expectations on China. It looks like China is slowing and thus the stimulus package is attempting to keep the Asian growth booming. Investors may start to ratchet down the growth expectations for China which could create another pitfall for the stock market. Watch out below.
The stock indices were weak again yesterday but the volume was limited because of the Veteran's Day Holiday. Fannie Mae and Freddie Mac announced a new plan to restructure mortgage loans by lowering interest rates and extending maturities. This may curtail the foreclosure rates but it is just another tea leaf which is helpful to our vast economic troubles. Citigroup also announced a plan to keep people in their homes.
Perhaps we are getting closer to the bottom of the market but our fear seems to be increasing this week as earnings continue to be bleaker than anyone has predicted. The Las Vegas Sands Casino raised $1.5 Billion yesterday to feed its cash needs as it was about to breach loan covenants. The company leveraged its future on the growth in McCau but weaker financial results and the impending debt concerns led to the suspension of some of the construction projects and the necessary sale of fresh equity. This company is still highly leveraged and bankruptcy concerns are still valid.
Russia looks to be a house of cards as its economy is being brought to its knees with the collapse of oil prices and commodities. What is going to happen with the rest of the emerging market countries? It isn't likely to be pretty. There isn't much good news to report and certainly the push in Congress to bailout General Motors won't help. These are scary times so keep preserving liquidity and only buy large liquid stocks with limited debt requirements.
The stock indices were weak again yesterday but the volume was limited because of the Veteran's Day Holiday. Fannie Mae and Freddie Mac announced a new plan to restructure mortgage loans by lowering interest rates and extending maturities. This may curtail the foreclosure rates but it is just another tea leaf which is helpful to our vast economic troubles. Citigroup also announced a plan to keep people in their homes.
Perhaps we are getting closer to the bottom of the market but our fear seems to be increasing this week as earnings continue to be bleaker than anyone has predicted. The Las Vegas Sands Casino raised $1.5 Billion yesterday to feed its cash needs as it was about to breach loan covenants. The company leveraged its future on the growth in McCau but weaker financial results and the impending debt concerns led to the suspension of some of the construction projects and the necessary sale of fresh equity. This company is still highly leveraged and bankruptcy concerns are still valid.
Russia looks to be a house of cards as its economy is being brought to its knees with the collapse of oil prices and commodities. What is going to happen with the rest of the emerging market countries? It isn't likely to be pretty. There isn't much good news to report and certainly the push in Congress to bailout General Motors won't help. These are scary times so keep preserving liquidity and only buy large liquid stocks with limited debt requirements.
Tuesday, November 11, 2008
The Next Phase In The Market
Yesterday Deutche Bank lowered their price target on General Motors' stock to zero. It is not surprising as the stock is worth zero whether the government provides a new loan or not. Earnings disappointments will continue to push stocks down until positive surprises arise. Most analysts will now start to lower their earnings estimates to a point where they will be very conservative. The goal is to make sure the earnings prediction is lower than the actual reported numbers. If every research analyst follows this line of thinking, the stock market will adjust prices to much lower expectations and the markets will be set to rise again. Expect to see these adjustments to occur frequently for the rest of the year.
Last night Starbucks reported ugly numbers. The quality of the coffee is inconsistent and in times of recession, how many people want to spend $4 for a cup of coffee? McDonald's is also a thorn in Starbuck's side as consumers appear to be buying their coffee at this growing value oriented food chain. Starbuck's could be in big trouble.
The market was down yesterday but it never had large volume. Most investors took the drop as just another day in the market. Google and Goldman Sachs were two key losers. These are two well respected companies that seem to be struggling lately in the market. We are very focused on Apple and RIMM. Both stocks have been weak lately. Everybody loves Apple and we wrote a couple of weeks ago that Apple would be very vulnerable if some negative news came out. Perhaps the company has a slight slowdown for the holiday season. If this happened, the stock might take a dive. That would be the day to buy it for the long-term.
The markets will open down today as were overseas exchanges. We need to see some good news to turn the trend. We are getting close to hitting some October 10 levels on individual stocks and great value is starting to appear again in large liquid stocks. Let's fight through the trauma and hope to be smiling when the markets turn around.
Last night Starbucks reported ugly numbers. The quality of the coffee is inconsistent and in times of recession, how many people want to spend $4 for a cup of coffee? McDonald's is also a thorn in Starbuck's side as consumers appear to be buying their coffee at this growing value oriented food chain. Starbuck's could be in big trouble.
The market was down yesterday but it never had large volume. Most investors took the drop as just another day in the market. Google and Goldman Sachs were two key losers. These are two well respected companies that seem to be struggling lately in the market. We are very focused on Apple and RIMM. Both stocks have been weak lately. Everybody loves Apple and we wrote a couple of weeks ago that Apple would be very vulnerable if some negative news came out. Perhaps the company has a slight slowdown for the holiday season. If this happened, the stock might take a dive. That would be the day to buy it for the long-term.
The markets will open down today as were overseas exchanges. We need to see some good news to turn the trend. We are getting close to hitting some October 10 levels on individual stocks and great value is starting to appear again in large liquid stocks. Let's fight through the trauma and hope to be smiling when the markets turn around.
Monday, November 10, 2008
It's A New Week
Friday was another sign of the bottoming process in the market. Investors were expecting weak non-farm payroll numbers and they weren't disappointed. The loss of jobs was much worse than expected. The market was unsure how to interpret these numbers but ultimately rumors abound about another Federal Reserve rate cut and the stocks rallied at the end of the day.
Over night, China instituted a $586 billion stimulus package which provided new impetus for the overseas markets to rally. The U.S. markets also appear to have a positive tone even thought the Government restructured the $85B AIG loan and is now providing $150B of support. Circuit City which has been struggling for a couple of years finally filed for bankruptcy this morning. This event should put pricing pressure on all electronic retailers during the holiday season. However, the consumer shall benefit as Circuit City slashes prices in order to move out inventory.
On a positive note, McDonald's once again had strong sales in October. Walmart and McDonald's seem to be providing enough value for consumers to migrate to their stores. The Christmas season is likely to be quite bleak and only those stores discounting heavily or providing extreme value will benefit.
There shall be more discussion this week on the GM bailout. We continue to believe the government should let the auto company file for bankruptcy and restructure its debt. However, if political pressure results in some government help, the result for stockholders is likely to be similar to AIG. There won't be any value left for common stock shareholders. If you own General Motors stock, sell it. It will be worthless.
The markets will remain volatile for awhile. Stimulus packages in China and elsewhere will put a floor on the economy at some point but bankruptcies will rise and the economy will be weak. The strong businesses with little debt requirements will be the winners when economic times improve.
Over night, China instituted a $586 billion stimulus package which provided new impetus for the overseas markets to rally. The U.S. markets also appear to have a positive tone even thought the Government restructured the $85B AIG loan and is now providing $150B of support. Circuit City which has been struggling for a couple of years finally filed for bankruptcy this morning. This event should put pricing pressure on all electronic retailers during the holiday season. However, the consumer shall benefit as Circuit City slashes prices in order to move out inventory.
On a positive note, McDonald's once again had strong sales in October. Walmart and McDonald's seem to be providing enough value for consumers to migrate to their stores. The Christmas season is likely to be quite bleak and only those stores discounting heavily or providing extreme value will benefit.
There shall be more discussion this week on the GM bailout. We continue to believe the government should let the auto company file for bankruptcy and restructure its debt. However, if political pressure results in some government help, the result for stockholders is likely to be similar to AIG. There won't be any value left for common stock shareholders. If you own General Motors stock, sell it. It will be worthless.
The markets will remain volatile for awhile. Stimulus packages in China and elsewhere will put a floor on the economy at some point but bankruptcies will rise and the economy will be weak. The strong businesses with little debt requirements will be the winners when economic times improve.
Friday, November 7, 2008
Just Another Friday
The market was off about 10% in the last two days. This morning Ford announced its weak earnings and a higher drain on cash of $7.7B. The good news is they still have $29.6B left in the coffers which the company claims will be sufficient to get them throught 2009. At 8:30 non-farm payrolls will be announced and there is anticipation that it could be worse than the expectation 200,000 jobs lost. Lost jobs is the key to how long and deep the recession will be. A very negative number could cause the markets to plummet again but much of the past two days activity was foreshadowing today's unemployment.
General Motors is also reporting at the end of the day and those numbers promise to be worse than Ford's. Disney reported last night and they indicated advertising was weak and getting weaker as their stock dropped after the close. Sprint reported weak numbers this morning and this trend will continue for a while.
It is getting tougher to forecast short-term moves in the market but we are getting close to the October lows and large liquid stocks are starting to become attractive again. Many of the great stocks may not hit those bottoms but if the market keeps declining they will get close so be prepared to buy.
General Motors is also reporting at the end of the day and those numbers promise to be worse than Ford's. Disney reported last night and they indicated advertising was weak and getting weaker as their stock dropped after the close. Sprint reported weak numbers this morning and this trend will continue for a while.
It is getting tougher to forecast short-term moves in the market but we are getting close to the October lows and large liquid stocks are starting to become attractive again. Many of the great stocks may not hit those bottoms but if the market keeps declining they will get close so be prepared to buy.
Thursday, November 6, 2008
Should The Government Bailout The Auto Companies?
No. The U.S. Government has grown its debt to levels that will strangle this country for many years to come. The U.S. automobile industry has not been competitive for many years as can be seen by its declining market share. The high cost structures led by legacy health care costs, pension plans, and union worker's salaries and benefits have resulted in three extremely weak companies. On top of these high costs is the astronomical debt levels GM, Ford, and Chrysler have on their balance sheets. This leverage is a burden that isn't easily going away any time soon.
The auto companies' responses are to get more loans from the government. The reply should be to force these companies into bankruptcy and let them reorganize their balance sheets. Hard choices need to be made and leverage needs to decline. In bankruptcy, the auto industry could improve its cost structure, keep many workers employed, but in turn, the ownership of the company will pass on to its lenders. This process may need a government loan to facilitate the process. At that time the United States could provide debtor-in possession financing. These loans will be the most senior debt and upon a completed reorganization, the government will get its money back.
The only caveat which the government needs to weigh is how a bankruptcy affects the auto financing companies. These entities are separate companies but tend to rely on the manufacturers. If the government deems a financial crisis would result with negative implications for the economy, then direct loans to these companies may have to be made.
The auto companies' responses are to get more loans from the government. The reply should be to force these companies into bankruptcy and let them reorganize their balance sheets. Hard choices need to be made and leverage needs to decline. In bankruptcy, the auto industry could improve its cost structure, keep many workers employed, but in turn, the ownership of the company will pass on to its lenders. This process may need a government loan to facilitate the process. At that time the United States could provide debtor-in possession financing. These loans will be the most senior debt and upon a completed reorganization, the government will get its money back.
The only caveat which the government needs to weigh is how a bankruptcy affects the auto financing companies. These entities are separate companies but tend to rely on the manufacturers. If the government deems a financial crisis would result with negative implications for the economy, then direct loans to these companies may have to be made.
It's All About the Economy II
The Presidential election is over and the market had its run up leading to the big event. It is now time to get down to business. Investors rolled up their sleeves yesterday, looked into the crystal ball, and didn't like what they saw. The economy is still quite weak and the financial institutions still need fixing.
The DOW was off about 500 points yesterday and progressively became weaker during the day. After the market close, Cisco reported good numbers but then projected a drop in revenue of 5-10% in the fourth quarter. Investors and analysts were not prepared for such a dire forecast and the stock dropped in after hours. In Asia, Toyota surprised the markets with disappointing numbers and expectations. Their stock was quite weak before they announced the beaten down expectations.
This morning the other parts of the world decided to catch up to the Federal Reserve's aggressive rate cuts as the Bank Of England cut rates 1.5 points and the ECB cut theirs 1/2 point. We also started to get retail sales numbers this morning which seem to be bleak. Walmart had strong numbers with same store sales (SSS) up 2.4% but Target (-4.8%), Gap (-16%), Limited (-9%), and Costco (-1%) had declining SSS. Target expects sales to be weak right through Christmas with a projection of down 6-9% in November. The economic relief is not approaching any time soon.
The Government will need to institute a new stimulus package to help jump start the economy. However, as we have been saying, the leverage throughout the economy needs to come down and it is a long process. The recession will be long and deep but the market will discount it, eventually. The bear market rally we just had was a blip in the downward trend. The bottom of the market may still be the levels of October 10th but unless it takes some time to get there, the bottoming process will result in continued volatility. Great value in large liquid unlevered stocks will be created but this is a process that must be navigated cautiously. The economic environment will continue to be weak and we may get some more shocks in the financial system. Citigroup seems to still be a company with a lot of work to do to clean up its balance sheet but the government is at least focused on many of the impending problems. The new Treasury Secretary will not be getting much sleep for the next year so he/she needs to have stamina and be in good physical shape.
Today may not be a fun day in the markets but that may mean new opportunities arise as stocks get beaten up.
The DOW was off about 500 points yesterday and progressively became weaker during the day. After the market close, Cisco reported good numbers but then projected a drop in revenue of 5-10% in the fourth quarter. Investors and analysts were not prepared for such a dire forecast and the stock dropped in after hours. In Asia, Toyota surprised the markets with disappointing numbers and expectations. Their stock was quite weak before they announced the beaten down expectations.
This morning the other parts of the world decided to catch up to the Federal Reserve's aggressive rate cuts as the Bank Of England cut rates 1.5 points and the ECB cut theirs 1/2 point. We also started to get retail sales numbers this morning which seem to be bleak. Walmart had strong numbers with same store sales (SSS) up 2.4% but Target (-4.8%), Gap (-16%), Limited (-9%), and Costco (-1%) had declining SSS. Target expects sales to be weak right through Christmas with a projection of down 6-9% in November. The economic relief is not approaching any time soon.
The Government will need to institute a new stimulus package to help jump start the economy. However, as we have been saying, the leverage throughout the economy needs to come down and it is a long process. The recession will be long and deep but the market will discount it, eventually. The bear market rally we just had was a blip in the downward trend. The bottom of the market may still be the levels of October 10th but unless it takes some time to get there, the bottoming process will result in continued volatility. Great value in large liquid unlevered stocks will be created but this is a process that must be navigated cautiously. The economic environment will continue to be weak and we may get some more shocks in the financial system. Citigroup seems to still be a company with a lot of work to do to clean up its balance sheet but the government is at least focused on many of the impending problems. The new Treasury Secretary will not be getting much sleep for the next year so he/she needs to have stamina and be in good physical shape.
Today may not be a fun day in the markets but that may mean new opportunities arise as stocks get beaten up.
Wednesday, November 5, 2008
Can President Elect Obama Wave His Wand On The Economy?
The election is over and Barack Obama ran an unbelievable campaign. His victory is clearly historic and change is on its way. Yesterday we had the relief rally that the Bush Administration is leaving but reality will start to set in. President Obama is going to effectuate change but how quickly can he make housing prices rise or businesses earn more money?
Our new President can help in the short-term if he boosts consumer confidence but the American people still need to go home and look at their bills, their shrunken net worths, and their declining incomes. Our country may feel better about itself today as we can move beyond the worst Presidency of all time but the United States is buried with debt and all the new loans the federal Reserve and the Treasury have proposed or put in place will create an arduous task for our new President.
Can China's growth continue to bailout the negative growth in the rest of the world? Unlikely, as one big surprise for 2009 will likely be that the China engine slows down. This only means it will take a long time to deleverage all parts of the economy and it may be a painful process. The markets can now focus on the future and volatility may reappear. In the next two months, some investors will sell stocks to minimise capital gains taxes which will put pressure on the markets. It imperative that Mr. Obama quickly back track on 2009 tax increases or we are in for a period of weaker stock prices and poor economic times.
Our new President can help in the short-term if he boosts consumer confidence but the American people still need to go home and look at their bills, their shrunken net worths, and their declining incomes. Our country may feel better about itself today as we can move beyond the worst Presidency of all time but the United States is buried with debt and all the new loans the federal Reserve and the Treasury have proposed or put in place will create an arduous task for our new President.
Can China's growth continue to bailout the negative growth in the rest of the world? Unlikely, as one big surprise for 2009 will likely be that the China engine slows down. This only means it will take a long time to deleverage all parts of the economy and it may be a painful process. The markets can now focus on the future and volatility may reappear. In the next two months, some investors will sell stocks to minimise capital gains taxes which will put pressure on the markets. It imperative that Mr. Obama quickly back track on 2009 tax increases or we are in for a period of weaker stock prices and poor economic times.
Tuesday, November 4, 2008
The Rally For Change
The S&P 500 is up about 3.5% as investors are looking forward to change. It doesn't seem to matter who wins the election as long as we get a new administration. Next on the agenda will be the excitement of the naming of the New Treasury Secretary and then the likelihood of another stimulus package. The markets may grasp onto these new events and propel the market higher as we proceed through the balance of 2008. Don't be fooled. It is still All About the Economy and investors will continue to evaluate the weakness in the job market, housing softness, the emerging commercial real estate problems, the strengthening dollar, the softening of the export market, and the weak financial institutions.
Monday, November 3, 2008
Bad News Keeps Coming
Manufacturing contracted in September at the fastest pace we have seen in 36 years. Exports are also falling off a cliff as are auto sales. In fact, October represented the worst sales month for the auto industry since World War II. Wait until Friday when employment numbers are reported. They will be quite ugly and the unemployment rate is no doubt going to rise. With all this bad news, the stock market barely moved today and closed virtually unchanged. The quiet market presumably is related to the Presidential Election tomorrow.
Market pundits are starting to say if stocks aren't going down on the bad news, we must be at a bottom. We believe a bottoming phase has begun but the market will retest the October 10th lows again as the economy continues to weaken in the fourth quarter and companies once again lower guidance. As we have been saying, stocks discount the future earnings weakness but this recession will be deeper and longer than most investors presume.
Most companies are reluctant to forecast what will happen in 2009 until they see some stabilization in their businesses. The consumer, who has lost a large part of his/her net worth from their homes, is financially weakened. If they can't pay off their credit card bills or their auto loans, it will only be a short time before they don't pay their doctors and lawyers. Hence, no luxury shopping is on the horizon and only necessary staples will be purchased. The holiday season will be bleak, as we have been saying for a couple of months, and cyclical companies might be shocked at how bad business can actually become.
In looking for new stock investments, make sure to peruse the balance sheets of companies in which you want to invest. These are the times when rising accounts receivable and bloated inventories will be the sure signs of trouble looming. Companies tend to extend more credit to their customers in weak economic environments in order to generate sales but it may also lead to rising bad debts. Retailers and distributors may also curtail purchases of new goods as their sales slow which may leave unwanted inventories at the manufacturer. The manufacturer will in turn cut production as their sales slow. Companies who are growing fast sometimes get caught off guard by this unexpected sales slump. If such a scenario happened to a company like Apple, the stock would dive. It is important to be cautious and not chase the market.
Most companies have are prudently managing their businesses in these trying economic times. We haven't heard any cyclical company forecasting better times in 2009 as they can't even figure out what is likely to happen in the fourth quarter. However, Mohawk Industries, a stock we have been short, reported third quarter numbers which were slightly weaker than analysts expectations. The company said they expect a weak fourth quarter also but 2009 would be a better year. Mohawk manufactures flooring products for homes and commercial buildings. It is amazing that they must be the only company that can predict an upturn in the housing market, a better commercial real estate environment, and a stronger consumer. We believe they will start to extend more credit to their customers as internal sales forecasts lag their expectations. Housing renovations will not likely pick up in the near future and new home construction is nowhere in sight. As for commercial real estate, it is just about to get weaker. Mohawk is a great company but the economic cycle is likely to still negatively impact their business.
The markets may be quiet tomorrow until polls start reporting expected results of the election. A McCain victory could cause a rally as businesses would be spared some taxes and capital gains will be preserved. If Obama wins, we have to believe he will become realistic and not raise taxes in 2009 but defer the thought until the financial crisis and the faltering economy are well behind us. The next topic of discussion for the markets will be: Who is going to be our next Secretary of the Treasury? We like the thought of Tim Geitner, the New York Fed President. His involvement throughout the financial crisis might lead to a smooth hand off of the baton from Hank Paulson.
Market pundits are starting to say if stocks aren't going down on the bad news, we must be at a bottom. We believe a bottoming phase has begun but the market will retest the October 10th lows again as the economy continues to weaken in the fourth quarter and companies once again lower guidance. As we have been saying, stocks discount the future earnings weakness but this recession will be deeper and longer than most investors presume.
Most companies are reluctant to forecast what will happen in 2009 until they see some stabilization in their businesses. The consumer, who has lost a large part of his/her net worth from their homes, is financially weakened. If they can't pay off their credit card bills or their auto loans, it will only be a short time before they don't pay their doctors and lawyers. Hence, no luxury shopping is on the horizon and only necessary staples will be purchased. The holiday season will be bleak, as we have been saying for a couple of months, and cyclical companies might be shocked at how bad business can actually become.
In looking for new stock investments, make sure to peruse the balance sheets of companies in which you want to invest. These are the times when rising accounts receivable and bloated inventories will be the sure signs of trouble looming. Companies tend to extend more credit to their customers in weak economic environments in order to generate sales but it may also lead to rising bad debts. Retailers and distributors may also curtail purchases of new goods as their sales slow which may leave unwanted inventories at the manufacturer. The manufacturer will in turn cut production as their sales slow. Companies who are growing fast sometimes get caught off guard by this unexpected sales slump. If such a scenario happened to a company like Apple, the stock would dive. It is important to be cautious and not chase the market.
Most companies have are prudently managing their businesses in these trying economic times. We haven't heard any cyclical company forecasting better times in 2009 as they can't even figure out what is likely to happen in the fourth quarter. However, Mohawk Industries, a stock we have been short, reported third quarter numbers which were slightly weaker than analysts expectations. The company said they expect a weak fourth quarter also but 2009 would be a better year. Mohawk manufactures flooring products for homes and commercial buildings. It is amazing that they must be the only company that can predict an upturn in the housing market, a better commercial real estate environment, and a stronger consumer. We believe they will start to extend more credit to their customers as internal sales forecasts lag their expectations. Housing renovations will not likely pick up in the near future and new home construction is nowhere in sight. As for commercial real estate, it is just about to get weaker. Mohawk is a great company but the economic cycle is likely to still negatively impact their business.
The markets may be quiet tomorrow until polls start reporting expected results of the election. A McCain victory could cause a rally as businesses would be spared some taxes and capital gains will be preserved. If Obama wins, we have to believe he will become realistic and not raise taxes in 2009 but defer the thought until the financial crisis and the faltering economy are well behind us. The next topic of discussion for the markets will be: Who is going to be our next Secretary of the Treasury? We like the thought of Tim Geitner, the New York Fed President. His involvement throughout the financial crisis might lead to a smooth hand off of the baton from Hank Paulson.
Sunday, November 2, 2008
Election Week Is Here
Is it Obama or McCain? A McCain victory might elevate the markets more as the promise of lower taxes might spur the economy along quicker. However, the relief of anybody taking over as President will also be a positive. Therefore, we should expect some kind of rally this week. In the end though it will still all be about the economy and any weak numbers may bring the S&P and the DOW lower.
Friday was the first time in October that the market had two positive days in a row. It is likely that more upward trends will entice other investors to part with their cash. However, the economy is bad and is likely to get worse over the next few quarters. Unemployment will rise and consumers and businesses will conserve cash. Countries all over the world are lowering rates and injecting cash into their financial systems as the global deleveraging process, which may take a while, is clearly in full force.
Oil has had a mini rally in the last week but softening demand should keep a lid on prices for a while. OPEC is praying for higher prices as their own economies seem to be suffering. Slumping oil is also a big drain for Russia and Venezuela. If the United States continues to be proactive in trying to stabilize its economy, it can once again become the global economic and military power it has been in the past. This will be a four or five year process but the dollar has proven to still be the currency of choice in a destabilizing environment.
The United States needs to aggressively develop alternative sources of fuel while also drilling for more oil. We need to become more energy self-sufficient and as the economy bottoms out in the next year or two, perhaps a consumption tax on oil would be one way to limit the demand for gasoline while funding new projects. This should be a key part of the next President's agenda.
Tomorrow could be another positive day in the market as investors continue to pick up bargains but as we have been saying, volatility will continue and as it becomes apparent that the recession is deeper and longer than expected, stock prices will begin to reflect those realities. Quality is key and everyone should take advantage of a once in a life time opportunity to create massive wealth. Five years from now, we will look back and realize how cheap many stocks are today. Let's not forget, high yield bonds and leveraged loans are also creating the same types of opportunities. Be conservative and be smart but don't miss the opportunity.
Friday was the first time in October that the market had two positive days in a row. It is likely that more upward trends will entice other investors to part with their cash. However, the economy is bad and is likely to get worse over the next few quarters. Unemployment will rise and consumers and businesses will conserve cash. Countries all over the world are lowering rates and injecting cash into their financial systems as the global deleveraging process, which may take a while, is clearly in full force.
Oil has had a mini rally in the last week but softening demand should keep a lid on prices for a while. OPEC is praying for higher prices as their own economies seem to be suffering. Slumping oil is also a big drain for Russia and Venezuela. If the United States continues to be proactive in trying to stabilize its economy, it can once again become the global economic and military power it has been in the past. This will be a four or five year process but the dollar has proven to still be the currency of choice in a destabilizing environment.
The United States needs to aggressively develop alternative sources of fuel while also drilling for more oil. We need to become more energy self-sufficient and as the economy bottoms out in the next year or two, perhaps a consumption tax on oil would be one way to limit the demand for gasoline while funding new projects. This should be a key part of the next President's agenda.
Tomorrow could be another positive day in the market as investors continue to pick up bargains but as we have been saying, volatility will continue and as it becomes apparent that the recession is deeper and longer than expected, stock prices will begin to reflect those realities. Quality is key and everyone should take advantage of a once in a life time opportunity to create massive wealth. Five years from now, we will look back and realize how cheap many stocks are today. Let's not forget, high yield bonds and leveraged loans are also creating the same types of opportunities. Be conservative and be smart but don't miss the opportunity.
Subscribe to:
Posts (Atom)