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.
Tuesday, March 10, 2009
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.
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