Alcoa reported weak earnings last night. The aluminum market is being significantly affected by the weak global economy and is expected to be in the doldrums for a while. Alcoa's management is retrenching accordingly to adapt to the soft market and will do what is necessary to maintain its dividend which they have paid for 60 years. After listening to the earnings call last night, it is clear that when the economy starts to bottom out, this company will be well positioned to take advantage of the new opportunities. Stocks were weak again yesterday as they have been for a few days now.
We expect to see many earnings reports which will disappoint investors but the overall credit markets should continue to improve. The leveraged loan and high yield markets took a breather yesterday and traded off a little but they have been on a good run. We could see some more weakness but their march upward should continue.
2009 has started off with lower oil prices, weaker economic news, global tension, and stronger credit markets. Investors will continue to remain skeptical of when the economy will bottom but it will. Housing prices are still declining and the financial sector is still weak but a new stimulus plan and a focused President could help the bottoming process. A year from now stocks will be higher but volatility remains in the short-term.
Tuesday, January 13, 2009
Sunday, January 11, 2009
The Recession Marches On
The markets were down over 4% this week and everybody seems surprised. The credit markets continue to improve but until loans and bonds move up another 15 or 20 points, it is unlikely we will get a sustained rally in stocks. The recession is going to be longer and deeper than most people think and the next few months will be the worst time for the economy.
The jobs report showed official unemployment stood at 7.2% but in reality it is much higher as many people who lost their jobs have given up looking for new ones. We expect the official number to rise above 10%. The consumer is not spending and manufacturing is coming to a screeching halt. Eventually the housing market will bottom but first prices will likely decline a little more so that combined with low mortgage rates, the housing stock will start to look very compelling. A bottom in housing and strong credit markets will be the beginning of an economic recovery.
One positive note this week is Citigroup. We have been saying for a long time that Citi still has many problems and the government rescue was structured to force Citigroup to merge with another entity or start to sell assets. It looks like the first phase in that process is happening as Morgan Stanley prepares to buy a majority of Smith Barney. Expect Citi to sell its asset management unit and a bunch of other non critical assets. Citibank is going to return to having a commercial bank emphasis with a much smaller footprint.
Stocks will head higher again but not before it is evident that the recession is going to end within 6 to 9 months. It is possible that 2009 remains weak and the recession lasts into 2010. We expect to see rallies in the market in the next six months that get tempered by the economic realities. Money can be made in the market but one needs to be smart and careful. 2009 will bring many corporate bankruptcies so avoid companies with big debt maturities.
Continue to buy large liquid companies and diversify amongst industries. Our suggested portfolio at the end of the year had fixed income ideas as well as gold and some special situations. Individuals can't always take advantage of the distressed opportunities in the credit markets so we rely on stocks where the managers focus on those areas. This is a tough market for any professional so be conservative as you invest and maintain plenty of cash as we march through uncertain times.
The jobs report showed official unemployment stood at 7.2% but in reality it is much higher as many people who lost their jobs have given up looking for new ones. We expect the official number to rise above 10%. The consumer is not spending and manufacturing is coming to a screeching halt. Eventually the housing market will bottom but first prices will likely decline a little more so that combined with low mortgage rates, the housing stock will start to look very compelling. A bottom in housing and strong credit markets will be the beginning of an economic recovery.
One positive note this week is Citigroup. We have been saying for a long time that Citi still has many problems and the government rescue was structured to force Citigroup to merge with another entity or start to sell assets. It looks like the first phase in that process is happening as Morgan Stanley prepares to buy a majority of Smith Barney. Expect Citi to sell its asset management unit and a bunch of other non critical assets. Citibank is going to return to having a commercial bank emphasis with a much smaller footprint.
Stocks will head higher again but not before it is evident that the recession is going to end within 6 to 9 months. It is possible that 2009 remains weak and the recession lasts into 2010. We expect to see rallies in the market in the next six months that get tempered by the economic realities. Money can be made in the market but one needs to be smart and careful. 2009 will bring many corporate bankruptcies so avoid companies with big debt maturities.
Continue to buy large liquid companies and diversify amongst industries. Our suggested portfolio at the end of the year had fixed income ideas as well as gold and some special situations. Individuals can't always take advantage of the distressed opportunities in the credit markets so we rely on stocks where the managers focus on those areas. This is a tough market for any professional so be conservative as you invest and maintain plenty of cash as we march through uncertain times.
Thursday, January 8, 2009
Retailers Report the Bloody Truth
Back in September we were expecting a very weak Christmas season for the retailers. Today many of the retailers reported very bleak same-store-sales for December led by a big disappointment from Walmart.
The stock market was quite weak yesterday and we can expect the same today. Reality is setting in as company's like Intel come out with bleak forecasts. The market is still in the bottoming process and given the recession is going to be long and deep stocks can't go straight up. President-Elect Obama is adding to the somber mood as he is starting to add his own dose of negative economic comments.
Consumers are weak, businesses are weak, financial institutions are weak, and thus the markets are weak. The only bright spot is the continued improvement in the credit markets. It is a long ride but in three or four years we will look back and realize that this is one of the greatest opportunities to create wealth. It won't be easy but prudent investing will be needed to navigate the trip.
The stock market was quite weak yesterday and we can expect the same today. Reality is setting in as company's like Intel come out with bleak forecasts. The market is still in the bottoming process and given the recession is going to be long and deep stocks can't go straight up. President-Elect Obama is adding to the somber mood as he is starting to add his own dose of negative economic comments.
Consumers are weak, businesses are weak, financial institutions are weak, and thus the markets are weak. The only bright spot is the continued improvement in the credit markets. It is a long ride but in three or four years we will look back and realize that this is one of the greatest opportunities to create wealth. It won't be easy but prudent investing will be needed to navigate the trip.
Wednesday, January 7, 2009
Markets Don't Go Straight Up
It's still "All About the Economy". The ADP employment report indicated that companies eliminated 693,000 jobs in December. This was about 200,000 more lost jobs than expected. As we have been saying, this recession will be longer and deeper. Alcoa and Time Warner also came out with weak business outlooks. This is a tough environment and the market will continue to meander its way through these difficult times.
Stocks were up about .75% yesterday on average volume. As we said yesterday, each day we still have fear for what is going to happen each day. The corporate bond and loan markets continue to do well but the stock markets still have hope in them. A bottom may have been hit in stocks but the ride will continue to be bumpy. Companies are now starting to report their quarterly earnings and everyday should bring new surprises. Don't be too aggressive but continue to read the tea leaves.
Stocks were up about .75% yesterday on average volume. As we said yesterday, each day we still have fear for what is going to happen each day. The corporate bond and loan markets continue to do well but the stock markets still have hope in them. A bottom may have been hit in stocks but the ride will continue to be bumpy. Companies are now starting to report their quarterly earnings and everyday should bring new surprises. Don't be too aggressive but continue to read the tea leaves.
Tuesday, January 6, 2009
Can Bernanke Drive the Stock Market?
Yesterday, the S&P was down about .5% and the DOW was off almost 1%. The advanced decline ratios were also weak but no new trend seemed to be evident. We have been discussing the need for corporate bonds and loans to continue their rally before the stock market can head much high and start a sustained bull market. Today, there is a rumor that the Federal Reserve is going to focus on buying unwanted loans and bonds to stimulate those markets. If successful, Mr. Bernanke will be the stock market's hero.
Oil prices continue to rise as does copper. Perhaps the Israeli conflict and the Russian dispute with the Ukraine created the impetus for such moves but perhaps a bottoming of the economy is also being seen by the market. We don't know what the truth is but the tea leaves must be watched. At year-end we listed some stocks that could do well over the next few years and lately we have been buying long-term calls on stocks that could perform well should the stock market surprise everyone this year and go up 25-40%. We think this is a possibility and so we want to add some big upside to the portfolio. We are focused on cyclicals that have dropped 80-90% which could rebound strongly if the economy starts to turn up in the next year or so.
Of course, we still remain fearful every day as to what the market will do. Even though we have seen some good returns in the last ten days, it is hard to get too excited. Therefore, as the market rises, we buy puts on the S&P with some of our profits to protect the portfolio from negative surprises.
Bull markets climb "walls of worry". Many investors are worried and the market is still climbing. Negative economic news and poor corporate earnings are announced every day but the stock markets seem to be absorbing them better. Have low interest rates, massive liquidity, and fiscal stimulus already started to change investor psychology? The VIX fear factor has been declining and the credit markets are improving. Perhaps we are in a new bull market already and in three months we can look back and be happy we participated in some of those gains. It is not time to gamble in the market but large liquid companies are still the proper recipe but we are now sprinkling in some good upside while protecting the downside.
Oil prices continue to rise as does copper. Perhaps the Israeli conflict and the Russian dispute with the Ukraine created the impetus for such moves but perhaps a bottoming of the economy is also being seen by the market. We don't know what the truth is but the tea leaves must be watched. At year-end we listed some stocks that could do well over the next few years and lately we have been buying long-term calls on stocks that could perform well should the stock market surprise everyone this year and go up 25-40%. We think this is a possibility and so we want to add some big upside to the portfolio. We are focused on cyclicals that have dropped 80-90% which could rebound strongly if the economy starts to turn up in the next year or so.
Of course, we still remain fearful every day as to what the market will do. Even though we have seen some good returns in the last ten days, it is hard to get too excited. Therefore, as the market rises, we buy puts on the S&P with some of our profits to protect the portfolio from negative surprises.
Bull markets climb "walls of worry". Many investors are worried and the market is still climbing. Negative economic news and poor corporate earnings are announced every day but the stock markets seem to be absorbing them better. Have low interest rates, massive liquidity, and fiscal stimulus already started to change investor psychology? The VIX fear factor has been declining and the credit markets are improving. Perhaps we are in a new bull market already and in three months we can look back and be happy we participated in some of those gains. It is not time to gamble in the market but large liquid companies are still the proper recipe but we are now sprinkling in some good upside while protecting the downside.
Monday, January 5, 2009
Apple of Your Day
The mystery about Steve Jobs' weight loss is now known. He has a hormone imbalance that is easily treatable and he is not dying nor stepping down as CEO of Apple. The markets can now breathe easier on this topic.
Last week, we had a New Years' rally. Stocks went up on light volume. When all the sellers were on vacation, the buyers were able to push up stocks. This week will determine the true test of its resiliency. There is a rumor of an Obama tax cut as part of the stimulus plan which would probably be welcome news. The economy is not getting better any time soon and will likely get worse in the next few months. The markets will continue to keep a close eye on the economic tea leaves and we may even get a real Obama rally but we anticipate even a strong rally will run into some headwinds until the accelerating economic decline slows down.
2009 will continue to see analysts downgrade their recommendations on stocks and companies will also report lower earnings than expected. Bankruptcies will be a weekly story, consumers will default on all types of loans, and Israeli type conflicts will abound. Expect the stock markets to be choppy with some strong rallies in between. The credit markets are starting to improve but until the corporate loan and bond markets move up dramatically, we are unlikely to see a new bull market in stocks.
Last week, we had a New Years' rally. Stocks went up on light volume. When all the sellers were on vacation, the buyers were able to push up stocks. This week will determine the true test of its resiliency. There is a rumor of an Obama tax cut as part of the stimulus plan which would probably be welcome news. The economy is not getting better any time soon and will likely get worse in the next few months. The markets will continue to keep a close eye on the economic tea leaves and we may even get a real Obama rally but we anticipate even a strong rally will run into some headwinds until the accelerating economic decline slows down.
2009 will continue to see analysts downgrade their recommendations on stocks and companies will also report lower earnings than expected. Bankruptcies will be a weekly story, consumers will default on all types of loans, and Israeli type conflicts will abound. Expect the stock markets to be choppy with some strong rallies in between. The credit markets are starting to improve but until the corporate loan and bond markets move up dramatically, we are unlikely to see a new bull market in stocks.
Thursday, January 1, 2009
2009: Here We Are
2008 ended on an up note. The economic data was weak and will continue to be weak but we can at least start the year with a clean slate. 2009 promises to be filled with many surprises, both good and bad. It is important to invest in strong liquid companies and try to prepare for the unknown. Risk management was clearly missing in 2008 but should be the key focus for investors, banks, investment banks, corporations, non-profit entities, and every ordinary citizen.
We don't know where the Black Swan will appear but it will. A week ago, we tried to highlight the good surprises and the bad surprises that might affect the markets in 2009. Invest smartly, diversify one's risk, and try to prepare for the unknown. A year from now oil could be at $80 and the stock market could be 40% higher but from now till then a major war could break out and cause instability in many markets. We don't know what is going to happen but it is important to be able to capture the upside with good surprises and minimize the damage when a negative event appears.
Let's be opportunistic as we start 2009 but be cautious as we meander through this difficult economy and uncertain stock market.
We don't know where the Black Swan will appear but it will. A week ago, we tried to highlight the good surprises and the bad surprises that might affect the markets in 2009. Invest smartly, diversify one's risk, and try to prepare for the unknown. A year from now oil could be at $80 and the stock market could be 40% higher but from now till then a major war could break out and cause instability in many markets. We don't know what is going to happen but it is important to be able to capture the upside with good surprises and minimize the damage when a negative event appears.
Let's be opportunistic as we start 2009 but be cautious as we meander through this difficult economy and uncertain stock market.
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