The economic news isn't much better but investors seem to remain optimistic. GDP was down 6% but consumer confidence perked up. The swine flu seems to be spreading and raising global concerns but the stock market is discounting its economic effect. If that news isn't negative enough, will the imminent bankruptcy of Chrysler create any waves?
We have said many times that the auto companies need to restructure their operations, deleverage significantly, and lower their employment costs. Everybody seems to have moved in that direction but the only stumbling block is how the stakeholders divide up the company ownership. Fierce negotiations and high stakes poker are typically involved in massive restructurings and it is no different for Chrysler and GM. Shareholders will get virtually nothing and the debtholders, unions, and government are just fighting for their fair share. The result will be more competitive companies that will have a fighting chance to prosper when economic conditions improve.
We are seeing some positive earnings reports from Starwood, Proctor & Gamble, Owens Illinois, and DOW Chemical. This will surely lead to some higher stock prices. We continue to own core stock positions but remain cautious on the economy for the rest of the year. Stocks don't go up forever just like they didn't go down forever. The key is to understand what is happening between the relationship of stock prices and future earnings. Bear rallies can last awhile and produce sharp spikes in stocks. We believe that is what is going on now but we are happy to ride the wave with fear every day. Don't forget that the banks still own many toxic assets, the commercial real estate problems are around the corner, and consumer loan defaults are rising.
Thursday, April 30, 2009
Tuesday, April 28, 2009
The Swine Flu Sneezes On The Markets
Perhaps the swine flu rage is the black swan which will be the catalyst to lead stocks down. Investors are raising cash as the concern for a greater slowdown in economic conditions will develop from the spreading disease. Should the sickness continue to spread, travel will decline and many industries will be affected.
The new shocking news is that Citigroup and BankAmerica need to raise more capital says the Wall Street Journal. If this is a surprise to anyone, then they must be living on another planet. The banking crisis is not over yet even then the financial markets are more stable. Many banks need to rid themselves of toxic assets and raise additional capital to bolster their balance sheets. The results of the stress tests should only confirm what we all know.
It is still earnings season and earnings are weak. U.S. Steel had lower volume and lower prices; Masco lowered its forecast; and Pfizer lowered its forecast. If companies continue to reduce forecasts, the markets will readjust their expectations and investors will sell stocks. We remain cautious and await more company earnings reports.
The new shocking news is that Citigroup and BankAmerica need to raise more capital says the Wall Street Journal. If this is a surprise to anyone, then they must be living on another planet. The banking crisis is not over yet even then the financial markets are more stable. Many banks need to rid themselves of toxic assets and raise additional capital to bolster their balance sheets. The results of the stress tests should only confirm what we all know.
It is still earnings season and earnings are weak. U.S. Steel had lower volume and lower prices; Masco lowered its forecast; and Pfizer lowered its forecast. If companies continue to reduce forecasts, the markets will readjust their expectations and investors will sell stocks. We remain cautious and await more company earnings reports.
Sunday, April 26, 2009
A New Week Approaches
Last week we were expecting weak earnings reports from many companies along with dismal outlooks. That is exactly what we got and the markets ended the week on a positive note. Perhaps investors were expecting much worse but the picture certainly appears gloomy for the balance of the year. We continue to have core positions in stocks but remain highly cautious. As the markets move higher we add to our S&P put position because we are not convinced that the raging bull since March 9th is not just another bear rally. The financial system does not look like it will implode but significant risk is everywhere in the credit markets.
The restructuring of the auto industry is still a question mark as is the weakening consumer credit markets and the impending collapse of the commercial real estate industry. We hate to be a broken record but risk management is the most important aspect of investing and unless one remain focused on the major issues staring at us, it is easy to get lulled into complacency. Simply being a long term investor is much more difficult with the current volatile markets. Each day brings a new challenge and portfolio adjustments are needed to address the news and events as they unfold.
More earnings reports are on the way as are the details of the banks' stress test. Perhaps this week the negative news will bring a swoon to the markets.
The restructuring of the auto industry is still a question mark as is the weakening consumer credit markets and the impending collapse of the commercial real estate industry. We hate to be a broken record but risk management is the most important aspect of investing and unless one remain focused on the major issues staring at us, it is easy to get lulled into complacency. Simply being a long term investor is much more difficult with the current volatile markets. Each day brings a new challenge and portfolio adjustments are needed to address the news and events as they unfold.
More earnings reports are on the way as are the details of the banks' stress test. Perhaps this week the negative news will bring a swoon to the markets.
Wednesday, April 22, 2009
The Volatility Continue
The banks led the stocks lower on Monday and they drove them higher yesterday. The world didn't change in a day but Secretary Geithner spoke sweet words of encouragement about the banks and investors leaped at every positive word. Many companies reported yesterday with very few having good numbers. The important aspect of the earnings reports were not what happened last quarter but how does the future look? It appears that some companies feel that the bottom has arrived while others don't see any hint of sunshine. We have seen minor signs of positive economic activity in the past that ultimately faded away. Such a period was last spring. Will that happen again? Time will tell but for now we remain cautious as the replenishment of inventory phase could be giving companies some false hope.
Tuesday, April 21, 2009
Investors Get Punched
We have been cautioning for weeks that the bull is not quite back yet? Bank America finally woke everyone up. Their numbers were good for the last quarter but credit is deteriorating in all sectors. The next few quarters will remain quite bumpy. The negative comments by its CEO and the notion that the government will convert TARP loans into common equity helped to trash the whole banking sector yesterday. The result was plummeting financial stocks and the overall market declining more than 4%.
Remember, it is earnings season and the 1st quarter may have shown some bright spots but we are in for some tough economic times ahead. Investors have become more bullish over the past six weeks as stocks have soared but we have cautioned that companies will not meet future expectations. Dupont, Caterpillar, Merck, IBM, and Bank of NY Mellon all have reduced expectations for the year.
Our readers are not surprised by the dismal corporate news but investors seem shocked and dismayed. This week we have a ton of earnings reports and the news is likely to stay negative. It will be interesting to see if the market remains resilient. We believe the bear rally is now officially over and investors will try to properly discount where stocks should be. Perhaps we will retest the lows of March 6th but if not, stocks should remain weak until more positive tea leaves indicate there is economic light at the end of the tunnel. 2009 can be written off for any growth so we need to see if there is any visibility into the first quarter of 2010.
Remember, it is earnings season and the 1st quarter may have shown some bright spots but we are in for some tough economic times ahead. Investors have become more bullish over the past six weeks as stocks have soared but we have cautioned that companies will not meet future expectations. Dupont, Caterpillar, Merck, IBM, and Bank of NY Mellon all have reduced expectations for the year.
Our readers are not surprised by the dismal corporate news but investors seem shocked and dismayed. This week we have a ton of earnings reports and the news is likely to stay negative. It will be interesting to see if the market remains resilient. We believe the bear rally is now officially over and investors will try to properly discount where stocks should be. Perhaps we will retest the lows of March 6th but if not, stocks should remain weak until more positive tea leaves indicate there is economic light at the end of the tunnel. 2009 can be written off for any growth so we need to see if there is any visibility into the first quarter of 2010.
Sunday, April 19, 2009
What Will This Week's Earnings Bring?
Last week we had a few high profile earnings reports from financial companies which helped to drive the markets higher for the sixth straight week. This week promises to be a little more interesting as an onslaught of companies from most industries will announce their earnings or losses. The first quarter is over so the important news is what will happen in the next few quarters.
Stocks reflect improved economic reports but will earnings forecasts be bullish enough to carry them higher? Trends don't seem to be as bad as they have been only a few months ago but slim inventories may have accounted for some increased production and lower mortgage rates are spurring increased housing activity. However, the financial crisis is still in progress and most large banking institutions are not able to raise sufficient capital from private investors to separate themselves from the government's clutches.
Stocks came down fast and they have rallied sharply. The bulls now are fighting the bears and we are clearly in the camp of expecting a big pull back in stocks. Spring is here and nicer weather coupled with higher stock prices have drawn more investors to feel like things are getting better. We certainly are happier with higher stock prices but have been selling stocks into the rally while increasing some shorts. We hope the rally continues but there are many risks ahead and we suggest caution is the way to go.
Perhaps we will see more positive economic signs in the next few weeks but by summer the malaise may resume. The truth will be told this week from cyclical companies like USG, Terex, Arkansas Best, Temple Inland, and Ford. We care less about what happened from January to March as we do about what will happen from May to December. Read the tea leaves next week and control the exuberance.
Stocks reflect improved economic reports but will earnings forecasts be bullish enough to carry them higher? Trends don't seem to be as bad as they have been only a few months ago but slim inventories may have accounted for some increased production and lower mortgage rates are spurring increased housing activity. However, the financial crisis is still in progress and most large banking institutions are not able to raise sufficient capital from private investors to separate themselves from the government's clutches.
Stocks came down fast and they have rallied sharply. The bulls now are fighting the bears and we are clearly in the camp of expecting a big pull back in stocks. Spring is here and nicer weather coupled with higher stock prices have drawn more investors to feel like things are getting better. We certainly are happier with higher stock prices but have been selling stocks into the rally while increasing some shorts. We hope the rally continues but there are many risks ahead and we suggest caution is the way to go.
Perhaps we will see more positive economic signs in the next few weeks but by summer the malaise may resume. The truth will be told this week from cyclical companies like USG, Terex, Arkansas Best, Temple Inland, and Ford. We care less about what happened from January to March as we do about what will happen from May to December. Read the tea leaves next week and control the exuberance.
Friday, April 17, 2009
What Has Earnings Season Told Us So Far?
If we focus on the high profile companies that reported this week, we can conclude that the first quarter was weak but not a disaster. J.P. Morgan, Google, Citigroup, and GE all reported in the last two days. The leaders of these companies believe the consumer is still weak, credit losses will continue to rise, and the economy is not turning around yet. The stock market liked each of these earnings reports as they all beat analyst's expectations. That is great for the short term.
It is a good thing that we try to take a longer term approach to investing. Stocks discount earnings and growth. The economy will be weak for a year or two and earnings won't likely appreciate much for another year. Perhaps cost cutting can camouflage weak growth but we continue to believe stocks have risen too fast as the weakness in economic conditions in the next month or so will cause stocks to reverse direction until the summer.
As we evaluate the consumer tea leaves, the housing situation, and commercial real estate market, perhaps we can develop a stronger opinion on the timing of an economic bottom. It is likely not happening in 2009. The banks continue to take write-downs and hold many toxic assets. The public-private partnership has not been implemented and we have our doubts with its structure and its likely success. We believe some hedge funds will embrace the leveraged gamble offered by the government but there may not be broad enough appeal for buyers and sellers.
Global markets can sustain rallies when it is obvious that financial institutions are cleaned up and leverage has been reduced. There is too much leverage on the balance sheets of most countries, corporations, consumers, and real estate projects. A major cleansing process still needs to occur for the global economy to regain its strength to drive trade and stabilize currency markets. We continue to add to our gold position as we expect the above process to be long and painful.
It is a good thing that we try to take a longer term approach to investing. Stocks discount earnings and growth. The economy will be weak for a year or two and earnings won't likely appreciate much for another year. Perhaps cost cutting can camouflage weak growth but we continue to believe stocks have risen too fast as the weakness in economic conditions in the next month or so will cause stocks to reverse direction until the summer.
As we evaluate the consumer tea leaves, the housing situation, and commercial real estate market, perhaps we can develop a stronger opinion on the timing of an economic bottom. It is likely not happening in 2009. The banks continue to take write-downs and hold many toxic assets. The public-private partnership has not been implemented and we have our doubts with its structure and its likely success. We believe some hedge funds will embrace the leveraged gamble offered by the government but there may not be broad enough appeal for buyers and sellers.
Global markets can sustain rallies when it is obvious that financial institutions are cleaned up and leverage has been reduced. There is too much leverage on the balance sheets of most countries, corporations, consumers, and real estate projects. A major cleansing process still needs to occur for the global economy to regain its strength to drive trade and stabilize currency markets. We continue to add to our gold position as we expect the above process to be long and painful.
Wednesday, April 15, 2009
The Beige Book Saves The Day
The Federal Reserve Beige Book indicated that the economy is declining less rapidly in all regions around the country. Such positive news reversed the markets and pushed stocks into positive territory. The question is whether this phenomena is temporary or the beginning of better economic times to come. We could argue that tax rebates, stimulus spending, and a rising stock market have resulted in a temporary blip in the economy and the near future should not be forecast to have similar growth prospects.
Earnings season is well under way and not all the news is or will be good as we saw Burger King tumble with their weak report. The market feels toppy but stocks continue to grind higher. Bull markets climb walls of worry and we are certainly worried. On the other hand, there is plenty of hope coming from investors and hope is a poor excuse for investing. We remain concerned with the massive levels of debt in corporate America as well as the piles of debt around the world. The economy will not display strong growth any time this year no matter how much hope is driving investors. This is likely a bear rally but the market is sucking in more investors who believe the bull is back. Only time will tell but the risks seem way too high to jump in to the market hook line and sinker.
Earnings season is well under way and not all the news is or will be good as we saw Burger King tumble with their weak report. The market feels toppy but stocks continue to grind higher. Bull markets climb walls of worry and we are certainly worried. On the other hand, there is plenty of hope coming from investors and hope is a poor excuse for investing. We remain concerned with the massive levels of debt in corporate America as well as the piles of debt around the world. The economy will not display strong growth any time this year no matter how much hope is driving investors. This is likely a bear rally but the market is sucking in more investors who believe the bull is back. Only time will tell but the risks seem way too high to jump in to the market hook line and sinker.
Tuesday, April 14, 2009
Goldman Sets The Pace
Goldman Sachs reported better than expected earnings but more importantly it is the first financial firm to raise equity in the public markets. The $5 billion offering being issued this morning will be used to return TARP funds. If successful, Goldman will garner a competitive advantage in hiring the best and brightest who will want to migrate from other banks that will have compensation restrictions set by the U.S. government.
The markets have been strong for a month now as the bull has raged from its low levels in early March. We have been anticipating a pull back as earnings season could bring many negative surprises. Most analysts have reduced their expectations for earnings and unless companies project much weaker numbers for the rest of the year, stocks may not get back to the previous low. Boeing has already disappointed but GS and J&J beat expectations. Intel reports later today and their words of wisdom could drive the tech sector.
This morning retail sales numbers for March showed a disappointing 1.1% drop and investors will view that as another sign of continued weakness in the economy. We continue to expect a soft economy for the rest of the year but it appears that the rate of decline is moderating. Let's not forget the impending corporate bankruptcies, the consumer credit defaults, and the looming commercial real estate problems.
Our trip to the UK during Easter break gave us some insight to the European economy. Consumers are not hiding in their homes as plenty of shoppers filled the retail stores but for sale and for rent signs were everywhere on homes and commercial buildings. We conclude that the economy is not dead but struggling as it is in the U.S.
Have the lessons of the past not been learned? Barclays sold its iShares unit last week to a private equity firm. The bank has been looking to raise capital and improve its liquidity situation. The asset sale appeared to meet that goal but 75% of the sale price was financed by Barclays. In our opinion such a transaction is great for the buyer but only improves Barclays liquidity slightly while leaving the risk of the business on its books. The financial crisis was created with similar transactions. We are also quite surprised to see HBOS, a subsidiary of Lloyds Banking Group, offering home mortgages for 100% of the value of a home. This may be a method to keep customers current on their mortgages or to sell some foreclosed homes but it is not going to be the solution to fixing the housing problem. 90-100% mortgage financing led to the housing crisis so it hardly seems to be the method to use in cleansing the system.
The markets have been grasping on to all the positive tea leaves but all the news is not rosy and it won't be for awhile. Caution needs to be used and the bottoming process is a long way from complete. Hope may drive stocks but reality will keep the volatility high.
The markets have been strong for a month now as the bull has raged from its low levels in early March. We have been anticipating a pull back as earnings season could bring many negative surprises. Most analysts have reduced their expectations for earnings and unless companies project much weaker numbers for the rest of the year, stocks may not get back to the previous low. Boeing has already disappointed but GS and J&J beat expectations. Intel reports later today and their words of wisdom could drive the tech sector.
This morning retail sales numbers for March showed a disappointing 1.1% drop and investors will view that as another sign of continued weakness in the economy. We continue to expect a soft economy for the rest of the year but it appears that the rate of decline is moderating. Let's not forget the impending corporate bankruptcies, the consumer credit defaults, and the looming commercial real estate problems.
Our trip to the UK during Easter break gave us some insight to the European economy. Consumers are not hiding in their homes as plenty of shoppers filled the retail stores but for sale and for rent signs were everywhere on homes and commercial buildings. We conclude that the economy is not dead but struggling as it is in the U.S.
Have the lessons of the past not been learned? Barclays sold its iShares unit last week to a private equity firm. The bank has been looking to raise capital and improve its liquidity situation. The asset sale appeared to meet that goal but 75% of the sale price was financed by Barclays. In our opinion such a transaction is great for the buyer but only improves Barclays liquidity slightly while leaving the risk of the business on its books. The financial crisis was created with similar transactions. We are also quite surprised to see HBOS, a subsidiary of Lloyds Banking Group, offering home mortgages for 100% of the value of a home. This may be a method to keep customers current on their mortgages or to sell some foreclosed homes but it is not going to be the solution to fixing the housing problem. 90-100% mortgage financing led to the housing crisis so it hardly seems to be the method to use in cleansing the system.
The markets have been grasping on to all the positive tea leaves but all the news is not rosy and it won't be for awhile. Caution needs to be used and the bottoming process is a long way from complete. Hope may drive stocks but reality will keep the volatility high.
Monday, April 6, 2009
Earnings Season Is Here
This week we will be reporting from chilly Liverpool in the UK where the news of the day is the $18 billion equity offering by HSBC has helped the financials rally. This financing is probably a prelude to what will need to happen with many of the U.S. banks if the financial crisis is to subside. A strong European market was accompanied by rising Asian stocks even though North Korea launched its successful missile test.
Tomorrow, Alcoa kicks off the earnings season. We expect dismal earnings reports for the next few weeks which, as we have been expecting for the past few weeks, could derail the tremendous rally we just had. Friday, the resiliency of this bear rally was evident as the week employment report didn't deter investors as stocks still rose 1%. We don't think the rally can continue much longer unless companies start to tell investors that they see some light at the end of the tunnel.
We remain concerned with consumer credit, commercial real estate, housing, the Geithner plan to rid toxic assets and expect that this powerful rally will take a turn for the worse as companies report. Be cautious and tread lightly in this environment. We will be hedging the portfolio with puts starting today.
Tomorrow, Alcoa kicks off the earnings season. We expect dismal earnings reports for the next few weeks which, as we have been expecting for the past few weeks, could derail the tremendous rally we just had. Friday, the resiliency of this bear rally was evident as the week employment report didn't deter investors as stocks still rose 1%. We don't think the rally can continue much longer unless companies start to tell investors that they see some light at the end of the tunnel.
We remain concerned with consumer credit, commercial real estate, housing, the Geithner plan to rid toxic assets and expect that this powerful rally will take a turn for the worse as companies report. Be cautious and tread lightly in this environment. We will be hedging the portfolio with puts starting today.
Thursday, April 2, 2009
The Good News Keeps Rolling In
The markets clearly want to go higher. The good news came flying in yesterday as auto sales were only down 37% and manufacturing didn't quite decline as much as the month before. This is so encouraging to us that it looks like investors could drive stocks up another 10% or more.
We are being a little facetious as the auto and manufacturing tea leaves show some hope but we may get to a point where investors become too giddy. The economy may not be declining as much but it is unlikely to turn up in the second half of 2009. Many investors are casting hope on such expectations. The result could be an overextended bull and some unwise investment of the piles of cash on the sideline. Nobody wants to miss a big rally but one needs to proceed cautiously as many dangers still lie ahead.
We are being a little facetious as the auto and manufacturing tea leaves show some hope but we may get to a point where investors become too giddy. The economy may not be declining as much but it is unlikely to turn up in the second half of 2009. Many investors are casting hope on such expectations. The result could be an overextended bull and some unwise investment of the piles of cash on the sideline. Nobody wants to miss a big rally but one needs to proceed cautiously as many dangers still lie ahead.
Wednesday, April 1, 2009
It's A New Quarter
Stocks followed the plan yesterday and closed up to cap off a very strong month and a scramble by professional investors to dress up their portfolios for the end of the quarter. Now it is time for reality to set in. Social unrest seems to be rearing its ugly head as protests regarding lost jobs in France have created scenes. The demonstration in England is a focus as the G-20 meeting begins. The economic uncertainties around the world and the growing unemployment is putting huge strains on people and their families. Hopefully, the anxiety won't lead to chaos.
As for the markets, volatility will remain for awhile. ADP numbers show continued weakness in the jobs market and comments from CEO's in the next few weeks should set the stage for the outlook of our economy. The path to postiive returns won't be easy and the economic picture won't improve much for the rest of the year. Cash is king and we await the plethora of news regarding the auto manufacturers, housing, unemployment, G-20, mark-to-market accounting and corporate earnings. Stocks will follow the tea leaves.
As for the markets, volatility will remain for awhile. ADP numbers show continued weakness in the jobs market and comments from CEO's in the next few weeks should set the stage for the outlook of our economy. The path to postiive returns won't be easy and the economic picture won't improve much for the rest of the year. Cash is king and we await the plethora of news regarding the auto manufacturers, housing, unemployment, G-20, mark-to-market accounting and corporate earnings. Stocks will follow the tea leaves.
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