On November 6, 2008 we wrote a story titled "Should the Government Bailout the Auto Companies?" and we followed that blog up on December 19th with a piece called "The Government to the Rescue." Both stories discussed why General Motors needs to go through a prepackaged bankruptcy and now the Obama administration has finally come to the same conclusion. The markets cratered yesterday as this news seemed to put a bleak tone on stocks but in the long run a true restructuring of GM and Chrysler will make them competitive globally while improving the U. S economic outlook.
Stocks also took a drubbing as Mr. Geithner made some negative comments about the banking system. He expressed the reality that a bunch of banks will need more financial help. This apparently gave investors a chill as positive GDP growth is contingent on a healthy financial system.
The markets continue to be in a bottoming process but nobody said it will happen over night. The consumer is weakened, the housing market has a few positive signs, commercial real estate is teetering, and consumer credit default rates are rising. Stocks need to digest these realities and conclude that the economy is not going to turn up in 2009. At that point, we can begin to see some positive momentum in stocks and properly discount the future tea leaves.
Tuesday, March 31, 2009
Sunday, March 29, 2009
Where Are the Markets Headed?
Friday's stock market decline capped off a pretty strong week for stocks. Three weeks in a row investors were able to garner positive returns. We continue to remain cautious as the quarter comes to an end. This week the G-20 meeting could be the start of some future uncertainty if little is agreed upon during this period of financial and economic stress globally.
The firing of GM's CEO is just one painful step for the restructuring of the auto industry. Much pain is needed to deleverage General Motors and Chrysler and to significantly lower their cost structures. This is an arduous process as we have been discussing for many months. We still believe the stock is worth zero and the best solution is for the government to orchestrate a prepackaged bankruptcy for GM.
The other immediate obstacles to the market heading higher will be the grim earnings season approaching and the uncertainty of the public-private partnership. We have touched on some of these recently and believe it will be hard for the markets to move higher until there are some positive tea leaves coming from each of these important catalysts in the next month.
The firing of GM's CEO is just one painful step for the restructuring of the auto industry. Much pain is needed to deleverage General Motors and Chrysler and to significantly lower their cost structures. This is an arduous process as we have been discussing for many months. We still believe the stock is worth zero and the best solution is for the government to orchestrate a prepackaged bankruptcy for GM.
The other immediate obstacles to the market heading higher will be the grim earnings season approaching and the uncertainty of the public-private partnership. We have touched on some of these recently and believe it will be hard for the markets to move higher until there are some positive tea leaves coming from each of these important catalysts in the next month.
Friday, March 27, 2009
The Markets Remain Excited But....
The DOW and S&P rose about 2.3% yesterday as the strong rally continued. Short sellers have been covering stocks and many tidbits of better economic news have led investors to become a little more complacent about the future. We are encouraged by recent signs in the retail sector, industrial production, and housing but the economy isn't ready to rise yet.
Earnings season is coming as we approach April. Yesterday both Best Buy and Dr. Pepper reported strong profits and the markets liked the news. However, Circuit City is out of business and we would expect Best Buy to pick up huge market share. The grimmer earnings news will be coming and the resiliency of stocks will surely be tested. As 2009 progresses, we still remain concerned with the effects of a looming commercial property disaster. Defaults on buildings will not only hurt real estate but banks, insurance companies, and REITs could all feel the pain. The defaults on credit cards and other consumer loans should also be rising throughout the year and let's not forget the trouble in the auto sector.
The market could rally until the end of the month but there are many concerns ahead and we will remain cautious as we ride the trend. The current run up in stocks was catapulted by the Geithner public-private partnership. The success of this plan is clearly not a given and if it fails, watch out below.
Earnings season is coming as we approach April. Yesterday both Best Buy and Dr. Pepper reported strong profits and the markets liked the news. However, Circuit City is out of business and we would expect Best Buy to pick up huge market share. The grimmer earnings news will be coming and the resiliency of stocks will surely be tested. As 2009 progresses, we still remain concerned with the effects of a looming commercial property disaster. Defaults on buildings will not only hurt real estate but banks, insurance companies, and REITs could all feel the pain. The defaults on credit cards and other consumer loans should also be rising throughout the year and let's not forget the trouble in the auto sector.
The market could rally until the end of the month but there are many concerns ahead and we will remain cautious as we ride the trend. The current run up in stocks was catapulted by the Geithner public-private partnership. The success of this plan is clearly not a given and if it fails, watch out below.
Wednesday, March 25, 2009
Keep Watching The Tea Leaves
Durable Goods orders increased last month for the first time in awhile. The markets will like any good news even if last month the numbers were revised down. However a failed government bond auction in England points to the fragility of the crisis being navigated. Stocks were off yesterday after the big rise on Monday. This is not a big surprise but perhaps the rally on the heels of the toxic asset plan was more than the fundamentals warranted. As we have been saying, keep looking for the positive signs but the economy is still getting weaker. Corporate earnings are bleak and expectations aren't getting better. The market may move higher until the end of March but we expect stocks to again trade lower until they can properly discount the expectations of future corporate earnings and the bottoming of the economy.
Monday, March 23, 2009
The Bull Moved Into Action
The Government finally announced details of its toxic asset partnership and Wall Street thinks it has merit. The financial crisis has dragged on as many banks have been stuck with loans and securities that are highly illiquid. This illiquidity has put a damper on lending activity not only in the United States but globally. We have all been waiting for this plan to roll out as the only way to improve the balance sheets of the banking system is to get private investors to buy some of the garbage that lies dormant on bank books. The joint public-private joint venture will provide investor's with about 95% leverage which should result in enticing returns.
The fix will not be over night but in a month or two investors will likely start to buy or at least bid on some of the illiquid depressed assets. We should also expect the banks to begin to raise additional equity to fully recapitalize their balance sheets and establish enough liquidity to begin lending again. Perhaps we will then see stronger credit markets and corporate access to growth capital. The bottoming of the economy should ensue.
We still expect corporate earnings to be weak this quarter and next but the light at the end of the tunnel might be getting closer. Higher stock prices should improve consumer confidence as the wealth effect kicks in. The S&P and the DOW were both up about 7% today with about 90% of all stocks rising on large volume. If the shorts haven't been scared out yet, another day or two of rising stock prices will certainly bring fear to those bears.
We still don't believe the new bull market has begun but it is hard to fight the tape. This bull could keep rising for another week as it is quarter end and many under invested portfolio managers may feel compelled to put money to work before they have to explain to their investors why they missed the big rally. As April approaches, earnings season will kick in and reality will set in as the dismal numbers temper everybody's enthusiasm. We are still in a bottoming process but the markets will still need to properly discount the end of the recession and we may move too fast on the upside as corporate earnings and outlooks are announced.
We continue to see positive tea leaves as existing home sales rose 5.1%. 45% of those sales were for distressed homes and prices continue to fall. On the negative side, the inventory of homes increased to 9.7 months which is above the normal levels of 5-6 months. At this point, we are happy to see that low mortgage rates and tax credits are at least driving first time buyers to purchase their dream homes at affordable prices.
If housing can continue to improve and the financial industry gets cleaned up, we can begin to see the economic environment improve. The result will be stronger corporate earnings and the next bull market. The depression scenario is now miniscule and the recession is likely to end within a year but caution is still in the air. Participate in the rally but be careful as earnings season is coming.
The fix will not be over night but in a month or two investors will likely start to buy or at least bid on some of the illiquid depressed assets. We should also expect the banks to begin to raise additional equity to fully recapitalize their balance sheets and establish enough liquidity to begin lending again. Perhaps we will then see stronger credit markets and corporate access to growth capital. The bottoming of the economy should ensue.
We still expect corporate earnings to be weak this quarter and next but the light at the end of the tunnel might be getting closer. Higher stock prices should improve consumer confidence as the wealth effect kicks in. The S&P and the DOW were both up about 7% today with about 90% of all stocks rising on large volume. If the shorts haven't been scared out yet, another day or two of rising stock prices will certainly bring fear to those bears.
We still don't believe the new bull market has begun but it is hard to fight the tape. This bull could keep rising for another week as it is quarter end and many under invested portfolio managers may feel compelled to put money to work before they have to explain to their investors why they missed the big rally. As April approaches, earnings season will kick in and reality will set in as the dismal numbers temper everybody's enthusiasm. We are still in a bottoming process but the markets will still need to properly discount the end of the recession and we may move too fast on the upside as corporate earnings and outlooks are announced.
We continue to see positive tea leaves as existing home sales rose 5.1%. 45% of those sales were for distressed homes and prices continue to fall. On the negative side, the inventory of homes increased to 9.7 months which is above the normal levels of 5-6 months. At this point, we are happy to see that low mortgage rates and tax credits are at least driving first time buyers to purchase their dream homes at affordable prices.
If housing can continue to improve and the financial industry gets cleaned up, we can begin to see the economic environment improve. The result will be stronger corporate earnings and the next bull market. The depression scenario is now miniscule and the recession is likely to end within a year but caution is still in the air. Participate in the rally but be careful as earnings season is coming.
Friday, March 20, 2009
Capitalism or Socialism?
The stock market ended down a little yesterday after being up at different parts of the day. Volatility will continue as companies report earnings and new economic data is announced. We expect the economy to remain weak for some time and earnings, in most cases, to be bleak. The market has had a strong run in the last couple of weeks and caution should be in the air.
The most significant event yesterday occurred in Washington DC. The House voted to tax employee bonuses up to 90% if the employer is a company that received at least $5 billion in government funds through Tarp. The Government has an uncanny ability to do dumb things and yesterday proved it. Everybody is outraged that AIG distributed retention bonuses to the same employees who wrecked the company. In the context of the bigger picture, these bonuses only represent 1/10% of the money given to AIG by the government and perhaps Congress should move on and focus on the many problems facing this country. Of course the insensitivity should have been avoided however, not all companies receiving TARP funds should be painted with the same brush.
The United States is the leading Capitalistic nation in the world. Companies are started with an entrepreneurial spirit and grow to be larger organizations by incentivizing workers to be innovative and work hard to improve the profitability of that company. Wall Street firms thrive on a system where workers' base salaries are an insignificant portion of their total compensation. These employees work 60 to 100 hours a week with the hope of generating out sized profits which in turn will lead to large bonuses.
2008 made it clear that many financial institutions garnered excessive profits because they used too much leverage. The result was a financial calamity never seen before by most investors. The Federal Reserve and the Treasury Department have supplied trillions of dollars to stimulate the economy and liquefy the banking system. Government money was given to many unstable banks to not only bolster their balance sheets but to also stimulate lending. Companies like Goldman Sachs will use the government funds to grow their businesses and increase their lending to corporations. However, companies like Goldman will not sacrifice their entire organization for the good of the country. Taxing employee bonuses at companies who received TARP funds is paramount to asking the most successful professionals to get on the elevator, hit the lobby button, and join a company unencumbered by TARP.
Is this what Congress wants? They don't know because the House hasn't thought out the consequences of their actions. Are we becoming a Socialist society? Hopefully not but we guarantee you that Goldman Sachs and others will be giving back TARP funds by December 31, 2009 as they will be out of business if they can't incentivize their employees and partners to generate high returns on capital. Of course, corporate leverage needs to be lower but capitalism must persist. If Congress wants TARP funds to be used to invigorate the lending environment, it must wake up and smell the coffee.
The most significant event yesterday occurred in Washington DC. The House voted to tax employee bonuses up to 90% if the employer is a company that received at least $5 billion in government funds through Tarp. The Government has an uncanny ability to do dumb things and yesterday proved it. Everybody is outraged that AIG distributed retention bonuses to the same employees who wrecked the company. In the context of the bigger picture, these bonuses only represent 1/10% of the money given to AIG by the government and perhaps Congress should move on and focus on the many problems facing this country. Of course the insensitivity should have been avoided however, not all companies receiving TARP funds should be painted with the same brush.
The United States is the leading Capitalistic nation in the world. Companies are started with an entrepreneurial spirit and grow to be larger organizations by incentivizing workers to be innovative and work hard to improve the profitability of that company. Wall Street firms thrive on a system where workers' base salaries are an insignificant portion of their total compensation. These employees work 60 to 100 hours a week with the hope of generating out sized profits which in turn will lead to large bonuses.
2008 made it clear that many financial institutions garnered excessive profits because they used too much leverage. The result was a financial calamity never seen before by most investors. The Federal Reserve and the Treasury Department have supplied trillions of dollars to stimulate the economy and liquefy the banking system. Government money was given to many unstable banks to not only bolster their balance sheets but to also stimulate lending. Companies like Goldman Sachs will use the government funds to grow their businesses and increase their lending to corporations. However, companies like Goldman will not sacrifice their entire organization for the good of the country. Taxing employee bonuses at companies who received TARP funds is paramount to asking the most successful professionals to get on the elevator, hit the lobby button, and join a company unencumbered by TARP.
Is this what Congress wants? They don't know because the House hasn't thought out the consequences of their actions. Are we becoming a Socialist society? Hopefully not but we guarantee you that Goldman Sachs and others will be giving back TARP funds by December 31, 2009 as they will be out of business if they can't incentivize their employees and partners to generate high returns on capital. Of course, corporate leverage needs to be lower but capitalism must persist. If Congress wants TARP funds to be used to invigorate the lending environment, it must wake up and smell the coffee.
Thursday, March 19, 2009
The Fed To The Rescue
Ben Bernanke and his minions announced bold moves yesterday to jump start the housing market. The Federal Reserve Bank will buy $300B of U.S. Treasuries and billions more of mortgage securities. The result will be lower mortgage rates and a stimulus for housing demand. We have been arguing that the economy and the markets need help from housing and this could be the catalyst.
The short-term reaction to the Fed's moves were lower mortgage rate, higher treasury prices, and rising stock prices. However, the dollar is falling fast and gold is rising. We have been concerned with the potential for excessive inflation coming from the Fed's actions and the government stimulus programs. Those worries escalated yesterday with these new moves. If you don't own gold, it may be a mistake.
Stocks may continue to go up a little but we believe this is still a bear market rally. The Federal Reserve said the economy is getting weaker and they are responding to the dire conditions. The economy is not going to bottom anytime soon and if we are extremely lucky, we will see the light at the end of the tunnel by year-end 2009.
Unemployment claims were only 646,000 last week which was lower than the previous week. That doesn't sound like good news to us but the markets will view it as a positive sign. This is a market where the strong will get stronger as we have seen in the tech sector lately with Oracle's earnings, and acquisition news from IBM and Cisco. We continue to like well capitalized companies but have big concerns in the short-term with the rising market. Oil is up as are other commodities. The Fed is flooding the economy with dollars in hopes of spurring the economy. Investors are giddy but earnings season is coming so beware.
The short-term reaction to the Fed's moves were lower mortgage rate, higher treasury prices, and rising stock prices. However, the dollar is falling fast and gold is rising. We have been concerned with the potential for excessive inflation coming from the Fed's actions and the government stimulus programs. Those worries escalated yesterday with these new moves. If you don't own gold, it may be a mistake.
Stocks may continue to go up a little but we believe this is still a bear market rally. The Federal Reserve said the economy is getting weaker and they are responding to the dire conditions. The economy is not going to bottom anytime soon and if we are extremely lucky, we will see the light at the end of the tunnel by year-end 2009.
Unemployment claims were only 646,000 last week which was lower than the previous week. That doesn't sound like good news to us but the markets will view it as a positive sign. This is a market where the strong will get stronger as we have seen in the tech sector lately with Oracle's earnings, and acquisition news from IBM and Cisco. We continue to like well capitalized companies but have big concerns in the short-term with the rising market. Oil is up as are other commodities. The Fed is flooding the economy with dollars in hopes of spurring the economy. Investors are giddy but earnings season is coming so beware.
Tuesday, March 17, 2009
Is The Bear Rally Over
Stocks took a breather yesterday as the markets dropped a little. Industrial Production was down 1.4% and Alcoa cut its dividend. Markets cannot keep going up without more good news. AIG seems to be a big focus of frustration for the O'Bama Administration, The Fed, and anybody else who reads about the big bonuses being paid to their executives and the large sums of money given to them by the government to keep them from failing.
Today, we got some good news as housing starts beat expectations and grew a little from last month. The markets are waiting on the Fed's comments this afternoon as well as details on the private/public partnership. Perhaps stocks can get a little bounce on the housing numbers but unless we get a steady stream of good news, the shorts won't get scared and stocks will again retreat as earnings reports spew out bad numbers and dismal forecasts.
Today, we got some good news as housing starts beat expectations and grew a little from last month. The markets are waiting on the Fed's comments this afternoon as well as details on the private/public partnership. Perhaps stocks can get a little bounce on the housing numbers but unless we get a steady stream of good news, the shorts won't get scared and stocks will again retreat as earnings reports spew out bad numbers and dismal forecasts.
Sunday, March 15, 2009
Does The Rally Still Have Legs?
Last week the DOW was up 9% and the S&P rose 10%. We were looking for a 10%-20% Bear rally so we just need to see how much higher we can go. The OPEC ministers aren't going to cut production at this time so oil prices won't be a drag on the economy. Mr Bernanke expects the economy to bottom this year but only if the financial system is fixed. It seems realistic to believe that we won't have a depression but unemployment will continue to rise. All these factors lead us to believe the market may rise some more but it will likely retest last Monday's lows before it can resume a longer term uptrend.
Bank profitability on an operational basis is strong but many more asset write downs are in the cards. Hence, the financial industry is not out of the woods yet. Bank stocks had a very strong performance last week as some optimism from the CEO's of CITI, BofA, and JPM created some bullishness in the sector and probably a bunch of short covering. The market needs the financials to recover before it can resume its upward movement but stability in housing is needed also.
Let's watch for the next wave of mergers and acquisitions and perhaps a few more positive tea leaves to keep a bright light on stocks but it is very likely we are just having a bear rally. If the economic recession is going to end this year, then maybe stocks can start a new bull market in a couple of months but until then earnings season will likely bring some negative surprises and falling stock prices once this rally ends.
Bank profitability on an operational basis is strong but many more asset write downs are in the cards. Hence, the financial industry is not out of the woods yet. Bank stocks had a very strong performance last week as some optimism from the CEO's of CITI, BofA, and JPM created some bullishness in the sector and probably a bunch of short covering. The market needs the financials to recover before it can resume its upward movement but stability in housing is needed also.
Let's watch for the next wave of mergers and acquisitions and perhaps a few more positive tea leaves to keep a bright light on stocks but it is very likely we are just having a bear rally. If the economic recession is going to end this year, then maybe stocks can start a new bull market in a couple of months but until then earnings season will likely bring some negative surprises and falling stock prices once this rally ends.
Friday, March 13, 2009
A Bit Of Good News Pushes The Market
A year ago Bear Stearns was trading at 30 and was getting unexpectedly ready to fall into JP Morgan's arms. That was the beginning of the financial crisis where one major financial institution after another began to crumble. Of course Thornburg Mortgage, Peloton Partners, and Carlyle's Mortgage entity all had evaporated at this time but the true wake-up call to the world sounded when the mighty Bear began to falter.
Bad news seemed to be coming out everyday for the past 12 months. The economy has steadily weakened and a major financial crisis has been upon us for about eight months. Stocks have dropped 50% from their highs and net worth for Americans dropped 18% last year. The government and the Federal Reserve have flooded the markets with liquidity and stimulus plans to avoid a depression and to reverse the crashing economy.
So far unemployment continues to rise and the economy appears to be getting weaker. However, most astute financial observers would bet that this country has avoided a depression. Many days the world seems bleak and as many of one's friends lose their jobs, it certainly feels like a depression.
We expect the economy to be weak throughout 2009 but it is still important to search for the positive Tea Leaves. Until yesterday, the markets have been driven by the crumbling auto industry, the toxic waste on banks' books, a depressed housing environment, and concerns about the stimulus plan. Yesterday we saw a few bits of positive news. GM said they won't need a $2 billion loan from the government in March as its cost cutting efforts have been working. B of A indicated that it was profitable for January and February. We have now had positive earnings news from Cit, JPM, and B of A in the last few days. GE got downgraded but S&P put the company at stable for the foreseeable future. All these little events are the positive signs investors have been waiting for.
To top off the corporate news, the President seems to be ready to discuss cutting corporate taxes which would be welcome. Finally, China made comments this morning about adding additional stimulus when needed. The DOW is up 9% this week and the S&P has risen 11%. We would expect commodity and infrastructure companies to perform well today. The financials could continue their run and more bears may rush to cover their shorts. Can we get four days of rising stocks? Perhaps but this is no time to be complacent. We started off this rally expecting a 10-20% rise. It looks like that is happening as tidbits of good news seem to be emerging every day. However, the economy is still weak and we would expect stocks to drift down again after this run ends.
The true bull market will likely resume when home prices stop declining and housing sales increase. The large banks have been able to spark a rally with some positive comments. If the home builders also weigh in with optimistic words, the economy will likely be bottoming and investors can breathe easier.
Bad news seemed to be coming out everyday for the past 12 months. The economy has steadily weakened and a major financial crisis has been upon us for about eight months. Stocks have dropped 50% from their highs and net worth for Americans dropped 18% last year. The government and the Federal Reserve have flooded the markets with liquidity and stimulus plans to avoid a depression and to reverse the crashing economy.
So far unemployment continues to rise and the economy appears to be getting weaker. However, most astute financial observers would bet that this country has avoided a depression. Many days the world seems bleak and as many of one's friends lose their jobs, it certainly feels like a depression.
We expect the economy to be weak throughout 2009 but it is still important to search for the positive Tea Leaves. Until yesterday, the markets have been driven by the crumbling auto industry, the toxic waste on banks' books, a depressed housing environment, and concerns about the stimulus plan. Yesterday we saw a few bits of positive news. GM said they won't need a $2 billion loan from the government in March as its cost cutting efforts have been working. B of A indicated that it was profitable for January and February. We have now had positive earnings news from Cit, JPM, and B of A in the last few days. GE got downgraded but S&P put the company at stable for the foreseeable future. All these little events are the positive signs investors have been waiting for.
To top off the corporate news, the President seems to be ready to discuss cutting corporate taxes which would be welcome. Finally, China made comments this morning about adding additional stimulus when needed. The DOW is up 9% this week and the S&P has risen 11%. We would expect commodity and infrastructure companies to perform well today. The financials could continue their run and more bears may rush to cover their shorts. Can we get four days of rising stocks? Perhaps but this is no time to be complacent. We started off this rally expecting a 10-20% rise. It looks like that is happening as tidbits of good news seem to be emerging every day. However, the economy is still weak and we would expect stocks to drift down again after this run ends.
The true bull market will likely resume when home prices stop declining and housing sales increase. The large banks have been able to spark a rally with some positive comments. If the home builders also weigh in with optimistic words, the economy will likely be bottoming and investors can breathe easier.
Thursday, March 12, 2009
Maybe It's Time For News That Isn't So Bad
GE was downgraded by S&P to AA+. This is a negative for financing costs of GE but it isn't a big surprise and the stock is rising on the news. Retail sales were down .1% in February but January sales were revised upward. That seems to be good news. Of course unemployment claims increased 654,000 which was worse than expected. The markets will digest all the news but so far stocks haven't tanked in the futures market. We expect unemployment to be bleak for many months to come but the bulls are searching for the positive tea leaves. Perhaps the market can stabilize in the short term and the big question is can the market rise three days in a row? This hasn't happened in a while but the Bear rally could still be in place.
Wednesday, March 11, 2009
Investors Grasp For Good News
Citigroup said they were profitable on an operating basis for the first two months of 2009. When a company that has been one of the biggest drags on the stock market has good news the bulls perk up and the short sellers get a little scared. The result was a broad rally in stocks which catapulted the S&P up 6.4% and the DOW 379 points. Barney Frank's comments about reinstating the uptick rule and Ben Bernanke's re insuring words also fueled investor excitement.
The powerful move in stocks is certainly being met with skepticism. Is this a bear rally or the beginning of a new bull market? Bull markets typically start 6-8 months before the economy bottoms. Unemployment is rising and corporate earnings are falling. Home prices continue to decline, commercial real estate is beginning to crack, and consumer credit is a looming problem. We don't think the economy will begin to show any positive signs until we reach into 2010. Hence, this is likely a bear market rally.
This short term rally could tack on 10-20% gains but will likely peter out as first quarter earnings season begins. Stocks need to adjust to a level that discounts economic realities. The markets have come down too far too fast so a bounce is warranted but an adjustment down will occur again before we begin the new bull run.
We will see what today brings and another few positive days in the market would be welcome but in the end, "It Is Still All About The Economy".
The powerful move in stocks is certainly being met with skepticism. Is this a bear rally or the beginning of a new bull market? Bull markets typically start 6-8 months before the economy bottoms. Unemployment is rising and corporate earnings are falling. Home prices continue to decline, commercial real estate is beginning to crack, and consumer credit is a looming problem. We don't think the economy will begin to show any positive signs until we reach into 2010. Hence, this is likely a bear market rally.
This short term rally could tack on 10-20% gains but will likely peter out as first quarter earnings season begins. Stocks need to adjust to a level that discounts economic realities. The markets have come down too far too fast so a bounce is warranted but an adjustment down will occur again before we begin the new bull run.
We will see what today brings and another few positive days in the market would be welcome but in the end, "It Is Still All About The Economy".
Tuesday, March 10, 2009
Merger Monday Didn't Help
Merck announced a deal to buy Schering Plough, Rohm & Haas is being bought by Dow Chemical, and Genentech is getting closer to being acquired by Roche. This good news didn't effect stocks yesterday as they fell about 1%. In the bull market such a day would have been met with euphoria but this Bear doesn't seem to care. Stocks gyrated all day and concern about the banking system, the budget and the stimulus plan still dominated investor's thinking. Warren Buffett's interview on CNBC highlighted the economic weakness in this country and the concerns of some of the negative effects from new tax increases and other Democratic agendas being proposed in the budget.
It is time this administration focuses on fixing the problems at hand and put off tax increases, cap and trade, new union rules and other policies which should remain as long term goals. We are still in crisis mode and the President needs to narrow his agenda to fix the financial system, housing, and get the economic engine moving forward.
The stock market gyrated from positive to negative territory and back many times yesterday. It looks like we will be in positive territory today but we need a few up days to bring some smiles to investors' faces.
It is time this administration focuses on fixing the problems at hand and put off tax increases, cap and trade, new union rules and other policies which should remain as long term goals. We are still in crisis mode and the President needs to narrow his agenda to fix the financial system, housing, and get the economic engine moving forward.
The stock market gyrated from positive to negative territory and back many times yesterday. It looks like we will be in positive territory today but we need a few up days to bring some smiles to investors' faces.
Monday, March 9, 2009
Where Is The Bottom?
As we have said for a long time--It is all about the economy. The economic climate is bleak and getting bleaker. We were quite negative for many months but it clearly was hard to predict that the stock market would slide as quickly as it has. Buying quality stocks with limited leverage and plenty of liquidity remains good advice but it hasn't prevented investors from losing money. Stocks will likely go lower but we should see some rallies in between. The best news we might have is that prognosticators are starting to expect the DOW to drop to as low as 4000. It is the mirror image of the bull market predictions of the DOW hitting 36,000. Although stocks never reached such heights, the bull market pleased most investors. We are unlikely to see the DOW hit 4000, but the downdraft of stocks will keep most people miserable.
Today, Merck agreed to buy Schering-Plough for a 34% premium. This should be good news for the market but it isn't helping stocks this morning. We expect to see many more acquisitions this year and consolidation is definitely needed in this economic crisis. What else is needed is some more pep talks by President Obama. Consumer confidence is very low and unless Americans believe better times are ahead, spending will continue to decline and the economy will shrink further.
Taxing the "wealthy" is not the brightest idea in weak economic times. In the current environment, Americans who earn $250,000 or more have most likely lost large sums of their net worth and those people are also feeling economic pain. High end retailers are suffering because the wealthy have cut back on spending so to tax them more is likely to hinder economic growth even more. The President needs to find revenue to pay for his stimulus plan but increasing taxes today is the wrong policy.
The economy will suffer until housing bottoms and the financial system is cleaned up. Citigroup needs to be sold off in pieces, BankAmerica and Wells Fargo need more equity, and AIG needs to be assumed by the government. That still leaves the auto manufacturers, GE, and many other industries and companies who are financially stressed. GM and Chrysler need to do a prepackaged bankruptcy so the auto industry can support itself in good and bad times. GE needs to refocus its business and once again become an industrial company with a financial arm and not a financial company with an industrial arm. The housing industry will takes years to recover but as home prices decline and financing becomes more available, buyers will reappear and set the housing industry on a path to recovery.
There is no easy solution to fix the plethora of problems the U.S. and global economies have but in time there will be a light at the end of the tunnel. Optimism will return and the markets will again begin to rise. It is just a long path to better times.
Today, Merck agreed to buy Schering-Plough for a 34% premium. This should be good news for the market but it isn't helping stocks this morning. We expect to see many more acquisitions this year and consolidation is definitely needed in this economic crisis. What else is needed is some more pep talks by President Obama. Consumer confidence is very low and unless Americans believe better times are ahead, spending will continue to decline and the economy will shrink further.
Taxing the "wealthy" is not the brightest idea in weak economic times. In the current environment, Americans who earn $250,000 or more have most likely lost large sums of their net worth and those people are also feeling economic pain. High end retailers are suffering because the wealthy have cut back on spending so to tax them more is likely to hinder economic growth even more. The President needs to find revenue to pay for his stimulus plan but increasing taxes today is the wrong policy.
The economy will suffer until housing bottoms and the financial system is cleaned up. Citigroup needs to be sold off in pieces, BankAmerica and Wells Fargo need more equity, and AIG needs to be assumed by the government. That still leaves the auto manufacturers, GE, and many other industries and companies who are financially stressed. GM and Chrysler need to do a prepackaged bankruptcy so the auto industry can support itself in good and bad times. GE needs to refocus its business and once again become an industrial company with a financial arm and not a financial company with an industrial arm. The housing industry will takes years to recover but as home prices decline and financing becomes more available, buyers will reappear and set the housing industry on a path to recovery.
There is no easy solution to fix the plethora of problems the U.S. and global economies have but in time there will be a light at the end of the tunnel. Optimism will return and the markets will again begin to rise. It is just a long path to better times.
Thursday, March 5, 2009
The End Must Be Near
Yesterday gave some investors hope but today's 4.25% drop in the S&P 500 produced some reality. The market can't see a bottom but it certainly feels like investors may throw the towel in soon. As we said at the beginning of the week, everybody is focused on tomorrow's employment report. Another bad number could be the recipe for capitulation and the market could have an intraday drop of greater than 5%. If this occurs with heavy volume, it will be time to buy stocks and wait for an ensuing rally.
Every day brings limited good news and mostly bad news. The markets have left investors numb and frustrated. It is clear the economy is not turning around any time soon but another 5-10% drop in the market could finally put us at a point where all that bad news is discounted. Stay tuned for tomorrow's unemployment report.
Every day brings limited good news and mostly bad news. The markets have left investors numb and frustrated. It is clear the economy is not turning around any time soon but another 5-10% drop in the market could finally put us at a point where all that bad news is discounted. Stay tuned for tomorrow's unemployment report.
Can Oil Lead The Way?
Oil prices jumped 9% yesterday which helped propel the market higher. In addition, China reiterated its 8% growth expectations this year which excited the commodity market and infrastructure stocks. Investors spent the day trying to determine if the bear market rally was starting and could we see a surge of 10-20%? It looks like there was some false hope as markets ended up about 2.4% after rising as much as 4%. GE was the one stock that weighed down the DOW as there is a large concern about a downgrade and the effects it would have on GE Capital.
Today, the futures are weaker as China didn't increase its stimulus plan. There is also news about GM getting a qualified opinion from its auditors. This should not be a big surprise to anyone. Who thinks GM is a going concern without a major restructuring and a capital injection? Nobody who lives on this planet. We have said many times that the GM stock is worth zero so it is only a matter of time until it gets there.
The hope for oil bottoming may just be a big wish. Unless the economy stops declining, it seems unlikely that oil will continue its rise. We would anticipate a big increase when that moment occurs. Until then, we may see stocks hit some new lows. Hopefully we are wrong but since the market didn't end on its highs yesterday, we remain cautious but ready for a rally.
Today, the futures are weaker as China didn't increase its stimulus plan. There is also news about GM getting a qualified opinion from its auditors. This should not be a big surprise to anyone. Who thinks GM is a going concern without a major restructuring and a capital injection? Nobody who lives on this planet. We have said many times that the GM stock is worth zero so it is only a matter of time until it gets there.
The hope for oil bottoming may just be a big wish. Unless the economy stops declining, it seems unlikely that oil will continue its rise. We would anticipate a big increase when that moment occurs. Until then, we may see stocks hit some new lows. Hopefully we are wrong but since the market didn't end on its highs yesterday, we remain cautious but ready for a rally.
Tuesday, March 3, 2009
Volatility Doesn't Want To gGo Away
The markets ended down a little over a half percent today but it easily could have been up. Stocks swung up and down as Secretary Geithner was chastised once again during the Congressional hearings. It is a little sickening to listen to the folly but until the Treasury Secretary proves that he has a plan to fix the financial markets, Congress will put on a show for their constituencies.
The government is working hard but their scorecard so far is tilted toward the losing column. The market is due for a rally but until we see Friday's unemployment picture, investors are unlikely to become too bullish.
The government is working hard but their scorecard so far is tilted toward the losing column. The market is due for a rally but until we see Friday's unemployment picture, investors are unlikely to become too bullish.
Monday, March 2, 2009
Another Day of Water Torture
The DOW dropped another 4.3% today while the S&P declined 4.6%. Although the carnage was broad, total panic didn't seem to be anywhere. This slow and steady drip is likely to keep the majority of investors on the sidelines until we get the unemployment report on Friday. This piece of economic news will give the markets a better sense of the state of the economy.
Investors headed the warnings of Warren Buffett while also feeling the pain of an additional bailout for AIG. The government has invested a significant amount of capital into financial institutions since the fall but nothing has seemed to help. The Obama administration and Congress have had no problem criticizing Hank Paulson's use of Tarp funds but now reality is upon them.
Our financial system is in uncharted territory. The Federal Reserve and the Treasury in 2008 seemed to move from one forest fire to another on a daily basis. Many decisions were made to prevent a financial system collapse. Some were probably good and others were poor but in those times of crisis, it wasn't easy to always think through the negative ramifications of decisions that needed to be made at a moments notice. Saving Bear was good but letting Lehman fail was bad. Was the structure of the AIG deal good? How about the Citi bailouts? We can go on and on but the most experienced financial professionals can't get all these decisions right in such a short period of time.
It is about 45 days into the new administration and their results are no better than Paulson's attempts. Mr. Geithner needs to take charge and make some quick decisions. The financial system is still crumbling and the markets have no confidence that the tide will turn anytime soon. Tomorrow we will get some details about the public/private partnership to buy distressed assets and it appears that the structure will incorporate some of the ideas we wrote about on February 12th. This outline may not prop up the markets tomorrow but a well thought out detailed plan is what investors are waiting for.
Hopefully tomorrow the markets will get a little bounce but unless some good news is on the way, expect to see stocks go lower.
Investors headed the warnings of Warren Buffett while also feeling the pain of an additional bailout for AIG. The government has invested a significant amount of capital into financial institutions since the fall but nothing has seemed to help. The Obama administration and Congress have had no problem criticizing Hank Paulson's use of Tarp funds but now reality is upon them.
Our financial system is in uncharted territory. The Federal Reserve and the Treasury in 2008 seemed to move from one forest fire to another on a daily basis. Many decisions were made to prevent a financial system collapse. Some were probably good and others were poor but in those times of crisis, it wasn't easy to always think through the negative ramifications of decisions that needed to be made at a moments notice. Saving Bear was good but letting Lehman fail was bad. Was the structure of the AIG deal good? How about the Citi bailouts? We can go on and on but the most experienced financial professionals can't get all these decisions right in such a short period of time.
It is about 45 days into the new administration and their results are no better than Paulson's attempts. Mr. Geithner needs to take charge and make some quick decisions. The financial system is still crumbling and the markets have no confidence that the tide will turn anytime soon. Tomorrow we will get some details about the public/private partnership to buy distressed assets and it appears that the structure will incorporate some of the ideas we wrote about on February 12th. This outline may not prop up the markets tomorrow but a well thought out detailed plan is what investors are waiting for.
Hopefully tomorrow the markets will get a little bounce but unless some good news is on the way, expect to see stocks go lower.
Sunday, March 1, 2009
Thankfully It Is March
Let's take an account of how we are doing this year. Last week ended in typical fashion with the DOW down 4.1% and the S&P 500 down 4.5%. This puts those indices down 19.5% and 18.6% respectively for the first two months of the year. At this pace the market might drop 62% in 2009. So where's the rally? If it comes, it may only be short lived.
GDP was revised downward for the fourth quarter as the decline was greater than 6%. We have been saying the economy is getting worse and it clearly is. Unemployment keeps producing 600,000 plus job losses each week and will likely continue for awhile. The banking system is in a shambles as the equitizing of the Citi balance sheet portends bad news for other large banks. We don't think Citi is free and clear and BofA and Wells Fargo could be next on tap for some new government medicine. This is going to be a long painful process to rid the financial system of the leverage and excesses of the past decade. It can't be fixed over night. Hence, neither can our economy.
Warren Buffett's recent shareholder letter is plain and clear as he says the economy is going to be in bad shape for years to come and he is uncertain as to when the markets will go up. This opinion explains the structure of many of the Berkshire deals in the past six months as Mr. Buffett is buying debt with big coupons and getting equity kickers for potential upside in a company's stock. He is happy to collect a large coupon with a free option on the stock price. We love his thinking. That said, many of Berkshire's other investments are tied to the stock market and could produce red ink in these volatile markets.
We keep searching for the tea leaves but lately it is hard to find any glimmer of hope. We find it a little disturbing that the Geithner plan is rolling out very slowly. Investors need direction and thus will sit on the sidelines until there is some clarity about all the government actions to fix the financial system. The Obama budget also brings bad news. In these difficult times, whether one is rich or poor, everybody is feeling some economic pain. How can this administration propose increased income taxes and capital gains taxes on those earning greater than $250,000? Most Americans are cutting back and the expectations of increased taxes will accelerate the decline in spending while reducing the dollars available to propel the capital markets to function normally. President Obama is keeping his promises to tax the "rich" but it is poor economic policy in these strained economic times. The only worse legislation will be for Congress to jump on the bandwagon and increase the taxes even more. We will wait to see the response from our beloved Senators and Congressmen.
Tomorrow is the beginning of a new month for the markets. It should be a fun day as the snowy weather in the northeast could bring a chill to the week. The government is reporting construction spending, manufacturing activity, and personal income. Let's hope the number are bad but not disastrous. Perhaps a brief rally will appear but the negative news shall persist. The markets need to fully digest the upcoming economic weakness and discount stock prices enough so investors can start to put some cash back into the market. Most sophisticated investors are happy to sit on the sidelines until businesses can once again feel comfortable predicting their futures. Until CEOs and CFOs can foresee how much business they will do next quarter, why should investors throw the die? Let's hope some new tea leaves start appearing soon.
GDP was revised downward for the fourth quarter as the decline was greater than 6%. We have been saying the economy is getting worse and it clearly is. Unemployment keeps producing 600,000 plus job losses each week and will likely continue for awhile. The banking system is in a shambles as the equitizing of the Citi balance sheet portends bad news for other large banks. We don't think Citi is free and clear and BofA and Wells Fargo could be next on tap for some new government medicine. This is going to be a long painful process to rid the financial system of the leverage and excesses of the past decade. It can't be fixed over night. Hence, neither can our economy.
Warren Buffett's recent shareholder letter is plain and clear as he says the economy is going to be in bad shape for years to come and he is uncertain as to when the markets will go up. This opinion explains the structure of many of the Berkshire deals in the past six months as Mr. Buffett is buying debt with big coupons and getting equity kickers for potential upside in a company's stock. He is happy to collect a large coupon with a free option on the stock price. We love his thinking. That said, many of Berkshire's other investments are tied to the stock market and could produce red ink in these volatile markets.
We keep searching for the tea leaves but lately it is hard to find any glimmer of hope. We find it a little disturbing that the Geithner plan is rolling out very slowly. Investors need direction and thus will sit on the sidelines until there is some clarity about all the government actions to fix the financial system. The Obama budget also brings bad news. In these difficult times, whether one is rich or poor, everybody is feeling some economic pain. How can this administration propose increased income taxes and capital gains taxes on those earning greater than $250,000? Most Americans are cutting back and the expectations of increased taxes will accelerate the decline in spending while reducing the dollars available to propel the capital markets to function normally. President Obama is keeping his promises to tax the "rich" but it is poor economic policy in these strained economic times. The only worse legislation will be for Congress to jump on the bandwagon and increase the taxes even more. We will wait to see the response from our beloved Senators and Congressmen.
Tomorrow is the beginning of a new month for the markets. It should be a fun day as the snowy weather in the northeast could bring a chill to the week. The government is reporting construction spending, manufacturing activity, and personal income. Let's hope the number are bad but not disastrous. Perhaps a brief rally will appear but the negative news shall persist. The markets need to fully digest the upcoming economic weakness and discount stock prices enough so investors can start to put some cash back into the market. Most sophisticated investors are happy to sit on the sidelines until businesses can once again feel comfortable predicting their futures. Until CEOs and CFOs can foresee how much business they will do next quarter, why should investors throw the die? Let's hope some new tea leaves start appearing soon.
Subscribe to:
Posts (Atom)