Is it Obama or McCain? A McCain victory might elevate the markets more as the promise of lower taxes might spur the economy along quicker. However, the relief of anybody taking over as President will also be a positive. Therefore, we should expect some kind of rally this week. In the end though it will still all be about the economy and any weak numbers may bring the S&P and the DOW lower.
Friday was the first time in October that the market had two positive days in a row. It is likely that more upward trends will entice other investors to part with their cash. However, the economy is bad and is likely to get worse over the next few quarters. Unemployment will rise and consumers and businesses will conserve cash. Countries all over the world are lowering rates and injecting cash into their financial systems as the global deleveraging process, which may take a while, is clearly in full force.
Oil has had a mini rally in the last week but softening demand should keep a lid on prices for a while. OPEC is praying for higher prices as their own economies seem to be suffering. Slumping oil is also a big drain for Russia and Venezuela. If the United States continues to be proactive in trying to stabilize its economy, it can once again become the global economic and military power it has been in the past. This will be a four or five year process but the dollar has proven to still be the currency of choice in a destabilizing environment.
The United States needs to aggressively develop alternative sources of fuel while also drilling for more oil. We need to become more energy self-sufficient and as the economy bottoms out in the next year or two, perhaps a consumption tax on oil would be one way to limit the demand for gasoline while funding new projects. This should be a key part of the next President's agenda.
Tomorrow could be another positive day in the market as investors continue to pick up bargains but as we have been saying, volatility will continue and as it becomes apparent that the recession is deeper and longer than expected, stock prices will begin to reflect those realities. Quality is key and everyone should take advantage of a once in a life time opportunity to create massive wealth. Five years from now, we will look back and realize how cheap many stocks are today. Let's not forget, high yield bonds and leveraged loans are also creating the same types of opportunities. Be conservative and be smart but don't miss the opportunity.
Sunday, November 2, 2008
Thursday, October 30, 2008
The Markets Seem To Like The Gloomy Economy
The Dow ended the day up 190 points while the S&P rose 24 points. It sure wasn't because of the stellar economic news. Afterall, GDP dropped .3%; consumer spending declined 3.1%, the first decline in 17 years and the biggest falloff in 28 years; and inflation-adjusted after tax income fell 8.7%. The other good economic news was initial jobless claims were steady at 479,000 while spending on durable goods plunged 14.1% and non-durable goods fell 64%, the lowest in 58 years. At this pace, the DOW will skyrocket another couple of thousand points.
Companies continued to report weaker expectations for the next quarter and dispalyed plenty of uncertainty in their business outlooks for next year. The fourth quarter promises to be much worse than the third quarter as layoffs seem to be picking up steam with American Express and Goldman Sachs both making cuts up to 10% of their workforces. This trend will continue right into the new year as spending is slowing by the consumer and the holiday season will be a disaster.
The real estate market continues to see a drop in home prices. Even The Hamptons, an affluent community on Long Island, is seeing 18% declines. As Wall Street bonuses are cut this year and people tally up their diminished net worths, spending will continue to fall. 2009 promises to bring on new focuses for financial institutions as the consumer default rates on credit cards, auto loans, student loans, and home equity loans start to ratchet up. We haven't even addressed the continued fallout from the credit default swap market, the weakening commercial real estate market, and the huge downsizing of the auto industry. The expectations for next year only seem to be gloomy.
At least interest rates are almost at zero. Once they reach that level, the Federal Reserve can turn their full attention to the impending inflation in the next few years but first they need to deal with the near-term deflation problem.
The economic news is horrific yet the markets have risen a lot this week. Markets always anticipate the turnaround in the economy and rise well before it bottoms. Are we now at that point? We still believe October 10th may have been the bottom of the market but we are likely having a bear market trap right now. Stocks are rising and could move up another 5-10% but they won't go straight up. When we listen to earnings calls it is obvious that most companies are retrenching. This will likely cause the economy to get much weaker and drag out the recession for a while. The stock market may be in a bottoming phase but this recent rally will at some point come back down to earth. Markets usually lore investors in before they shake them out. This weekend the papers will likely be talking about the next bull market. Nobody wants to miss the next big climb in stocks. People will start to buy again and just as this new bear rally peaks, everybody will feel good again. That is when it will once again be "All About The Economy".
The market will have a sustained rally at some point and we will have another bull market. It just isn't ready yet. If you need to chase the rally, continue to buy quality but be careful. The economy is going to be bumpy for a while and before the stock market can go on its next big run, it will need to come down first. This could be a a few month process and the ride could cause nausea so be cautious.
Companies continued to report weaker expectations for the next quarter and dispalyed plenty of uncertainty in their business outlooks for next year. The fourth quarter promises to be much worse than the third quarter as layoffs seem to be picking up steam with American Express and Goldman Sachs both making cuts up to 10% of their workforces. This trend will continue right into the new year as spending is slowing by the consumer and the holiday season will be a disaster.
The real estate market continues to see a drop in home prices. Even The Hamptons, an affluent community on Long Island, is seeing 18% declines. As Wall Street bonuses are cut this year and people tally up their diminished net worths, spending will continue to fall. 2009 promises to bring on new focuses for financial institutions as the consumer default rates on credit cards, auto loans, student loans, and home equity loans start to ratchet up. We haven't even addressed the continued fallout from the credit default swap market, the weakening commercial real estate market, and the huge downsizing of the auto industry. The expectations for next year only seem to be gloomy.
At least interest rates are almost at zero. Once they reach that level, the Federal Reserve can turn their full attention to the impending inflation in the next few years but first they need to deal with the near-term deflation problem.
The economic news is horrific yet the markets have risen a lot this week. Markets always anticipate the turnaround in the economy and rise well before it bottoms. Are we now at that point? We still believe October 10th may have been the bottom of the market but we are likely having a bear market trap right now. Stocks are rising and could move up another 5-10% but they won't go straight up. When we listen to earnings calls it is obvious that most companies are retrenching. This will likely cause the economy to get much weaker and drag out the recession for a while. The stock market may be in a bottoming phase but this recent rally will at some point come back down to earth. Markets usually lore investors in before they shake them out. This weekend the papers will likely be talking about the next bull market. Nobody wants to miss the next big climb in stocks. People will start to buy again and just as this new bear rally peaks, everybody will feel good again. That is when it will once again be "All About The Economy".
The market will have a sustained rally at some point and we will have another bull market. It just isn't ready yet. If you need to chase the rally, continue to buy quality but be careful. The economy is going to be bumpy for a while and before the stock market can go on its next big run, it will need to come down first. This could be a a few month process and the ride could cause nausea so be cautious.
Wednesday, October 29, 2008
Is The Bull Back?
The DOW soared 10% yesterday and most investors were feeling good. The impetus was likely expectations of a Federal Reserve interest rate cut today. The Yen, which has been gaining strength against all currencies, finally broke down which provided positive news on the economic front.
We wrote on Monday that investors should expect a rally in anticipation of the Fed's next move but it was hard to predict the skyrocketing move. It is unlikely the beginning of the new bull market. It was probably hope that lower rates will spur the economy, lots of short covering, and the inching closer to the end of earnings season.
Many more companies reported third quarter earnings yesterday and most companies are focused on the economic recession. USG, Masco, and Whirlpool all reported yesterday and on their calls they sounded alike. They are focused on containing production, improving working capital, minimizing capital expenditures, curtailing stock buybacks, improving liquidity, and reducing payrolls. Each of the companies also tried to assure investors that they had strong credit lines, cash, and plenty of flexibility to deal with any debt maturities. We are definitely in a recession and companies are hunkering down. Unfortunately, the conservative posture being taken by companies will act as an additional catalyst to slowing down the economy.
Fear is everywhere and the market is flying. We expect to see some other days like yesterday but it feels like it is too soon. Perhaps the market will go up a little again this morning but unless huge volume pushes it to the new heights, we think the market will start to drift down again after a rate cut. Lower Fed Funds are not going to improve the economy. Leverage needs to continue to work its way out, bankruptcies need to pick up steam, housing needs to hit bottom, and banks need to begin to lend again. The market will forecast these events well in advance of the economy bottoming but we still need to see some additional shakeout in the market.
As always, don't chase the ralleys. Buy quality and buy on weakness.
We wrote on Monday that investors should expect a rally in anticipation of the Fed's next move but it was hard to predict the skyrocketing move. It is unlikely the beginning of the new bull market. It was probably hope that lower rates will spur the economy, lots of short covering, and the inching closer to the end of earnings season.
Many more companies reported third quarter earnings yesterday and most companies are focused on the economic recession. USG, Masco, and Whirlpool all reported yesterday and on their calls they sounded alike. They are focused on containing production, improving working capital, minimizing capital expenditures, curtailing stock buybacks, improving liquidity, and reducing payrolls. Each of the companies also tried to assure investors that they had strong credit lines, cash, and plenty of flexibility to deal with any debt maturities. We are definitely in a recession and companies are hunkering down. Unfortunately, the conservative posture being taken by companies will act as an additional catalyst to slowing down the economy.
Fear is everywhere and the market is flying. We expect to see some other days like yesterday but it feels like it is too soon. Perhaps the market will go up a little again this morning but unless huge volume pushes it to the new heights, we think the market will start to drift down again after a rate cut. Lower Fed Funds are not going to improve the economy. Leverage needs to continue to work its way out, bankruptcies need to pick up steam, housing needs to hit bottom, and banks need to begin to lend again. The market will forecast these events well in advance of the economy bottoming but we still need to see some additional shakeout in the market.
As always, don't chase the ralleys. Buy quality and buy on weakness.
Tuesday, October 28, 2008
The Market Can Still Rise on Good News
Verizon brought some relief to the market as it reported very good earnings and its stock soared 10%. It looked like it would be enough to propel the rest of the market up but negative news from Loews Corp. and Morgan Stanley shook up the financial sector, again. General Motors is desperately seeking a loan from the government in order to pursue a merger with Chrysler. The concern about job losses in the auto industry will weigh heavily on the economy. A weak auto industry and a weak real estate environment will guarantee a long recession.
The market looked like it might rise for a day but swooned in the last hour as the S&P dropped 3.2% and the DOW slid 2.4%. The markets were also focused on how much the Fed will cut rates and there doesn't seem to be much doubt that they will.
The overseas markets didn't seem to take their cue from the U.S. Foreign markets have been taking a beating on depressed economies and a rising dollar. In fact, the dollar seemed to be rising against every currency except the Yen. The strong Yen helped to put a big damper on the Nikkei but last night the dollar finally rose against the Yen. The result was souring Asian markets. Lower rates in Europe and cheap valuations also became a powerful force to cause a rally in Europe.
Everything seems great again and the U.S. markets appear to be ready for a big rally. The stock market always rises before the economy turns positive but are we ready for that moment yet? You should expect volatility to continue and today happens to be starting with good volatility. Perhaps it is related to a potential cut in rates and strong overseas markets but at the end of the day "It's All About the Economy". The banking system needs to start to lend again, housing needs to bottom out, and corporate bankruptcies need to be flushed out of the system.
There were some positive Tea Leaves again yesterday as new homes sales for the month of September were positive and beat all estimates. Also, a couple of new acquisitons were announced as J&J acquired a wellness firm and CenturyTel bought Embarq, a telephone carrier. These may not be huge acquisitions but it adds to the consolidation we are seeing in the banking industry and it is just another positive event in our pursuit of growth in the economy.
Investors will certainly be confused today, at least this morning, as the market rises but discipline is key. Stay with strong companies and don't chase the rising market.
The market looked like it might rise for a day but swooned in the last hour as the S&P dropped 3.2% and the DOW slid 2.4%. The markets were also focused on how much the Fed will cut rates and there doesn't seem to be much doubt that they will.
The overseas markets didn't seem to take their cue from the U.S. Foreign markets have been taking a beating on depressed economies and a rising dollar. In fact, the dollar seemed to be rising against every currency except the Yen. The strong Yen helped to put a big damper on the Nikkei but last night the dollar finally rose against the Yen. The result was souring Asian markets. Lower rates in Europe and cheap valuations also became a powerful force to cause a rally in Europe.
Everything seems great again and the U.S. markets appear to be ready for a big rally. The stock market always rises before the economy turns positive but are we ready for that moment yet? You should expect volatility to continue and today happens to be starting with good volatility. Perhaps it is related to a potential cut in rates and strong overseas markets but at the end of the day "It's All About the Economy". The banking system needs to start to lend again, housing needs to bottom out, and corporate bankruptcies need to be flushed out of the system.
There were some positive Tea Leaves again yesterday as new homes sales for the month of September were positive and beat all estimates. Also, a couple of new acquisitons were announced as J&J acquired a wellness firm and CenturyTel bought Embarq, a telephone carrier. These may not be huge acquisitions but it adds to the consolidation we are seeing in the banking industry and it is just another positive event in our pursuit of growth in the economy.
Investors will certainly be confused today, at least this morning, as the market rises but discipline is key. Stay with strong companies and don't chase the rising market.
Sunday, October 26, 2008
Do You Have The Gold Bug?
The Federal Reserve has flooded the financial system with liquidity. This drastic production of dollars and the extraordinary growth of the Monetary Base should reduce the value of the dollar, create hyper inflation, and cause gold to escalate. I could see gold heading to $2000.
So why has gold been moving down. I think there are two reasons and both are short-term in nature. We have not seen any inflation yet. In fact, we are witnessing the beginning of a deflationary environment. The weak economy globally has resulted in most, if not all, commodities declining precipitously. Oil is leading the charge but copper is also falling like a rock. Lower commodity prices will deflate the cost of products that use them as inputs. A deflationary environment is likely to temporarily halt the inevitable rise in gold. Gold thrives on inflationary expectations.
Commodities is the first reason for gold's weakness and the strong dollar is the second. Typically, low interest rates and a weak economy lead to a weak dollar. In the current state of the global economy, the U.S. is in bad shape but most of the world is in worse condition. Hence, the U.S. looks like a place of stabilty to the rest of the world and global investors want to hold on to dollars. This has produced a major strengtheneing of the dollar in the past month. A strong dollar typically results in weaker gold prices.
These theories seems plausible for the short-term but there is no free lunch. The government can't keep printing money without consequences. Too much money must mean inflation is around the corner. The question is when that will occur. Today we see deflation and a strong dollar but those trends will change. Gold may not be moving up today but at some point, it will roar like a lion and be a great investment.
So why has gold been moving down. I think there are two reasons and both are short-term in nature. We have not seen any inflation yet. In fact, we are witnessing the beginning of a deflationary environment. The weak economy globally has resulted in most, if not all, commodities declining precipitously. Oil is leading the charge but copper is also falling like a rock. Lower commodity prices will deflate the cost of products that use them as inputs. A deflationary environment is likely to temporarily halt the inevitable rise in gold. Gold thrives on inflationary expectations.
Commodities is the first reason for gold's weakness and the strong dollar is the second. Typically, low interest rates and a weak economy lead to a weak dollar. In the current state of the global economy, the U.S. is in bad shape but most of the world is in worse condition. Hence, the U.S. looks like a place of stabilty to the rest of the world and global investors want to hold on to dollars. This has produced a major strengtheneing of the dollar in the past month. A strong dollar typically results in weaker gold prices.
These theories seems plausible for the short-term but there is no free lunch. The government can't keep printing money without consequences. Too much money must mean inflation is around the corner. The question is when that will occur. Today we see deflation and a strong dollar but those trends will change. Gold may not be moving up today but at some point, it will roar like a lion and be a great investment.
Can This Week Be Any Worse Than Last
Investors seem to be losing patience with the volatility in the markets and the losses that follow right behind. The market seems to swing hundreds of points up and down every day. Friday easily could have ended on a positive note but the fear of what might happen over the weekend brought many sellers into the market at the end of the day. The DOW and the S&P ended the day down around 3.5%
This week many more companies will report third quarter numbers. There will be some good reports and some bad ones but most likely the majority of the companies will forecast a bleak future. The market focus will continue to be "All About the Economy". There are high expectations that the Federal Reserve Bank will cut interest rates again. This may happen and we may get a rally in the stock market but we doubt it will have a long lasting effect.
Great companies such as Walmart, McDonald's, Google, DOW and Oracle have become cheap in this market but it doesn't mean they won't get cheaper. Fear is here and it probably will be around for a while. Many individuals with equity portfolios have lost 30%-50% this year. It is easy to say my broker is horrible and I don't know what to do. In these uncertain times, as we have been writing, one needs to have safe liquid assets to be ready to take advantage of the opportunities that will present themselves in the market. Most people don't want to recognize the losses they have. That is a bad strategy. Take the losses if you don't have high quality investments. The sale of losing positions creates a tax loss carry forward. Use the cash for safe fixed income liquid positions (i.e. Treasuries) or high quality stocks with few debt maturities in the next couple of years. This repositioning will maximize your opportunity to grow the portfolio and rid yourself of low quality stocks with much higher risk in an economy which is heading into a deep recession.
This week might be just as volatile as last. Friday, before the market opened, it looked like we were heading into the Abyss. The Dow could easily have dropped 1000 points but the heavy selling never appeared and the day was much smoother than expected. Any day now, we could have that calamity and one should not be surprised if it happens. The VIX fear index reached new heights again at the end of the week and until we get a huge wipe out in the market, we may not see a new positive trend. Buckle up and wait to see the excitement this week promises to bring.
This week many more companies will report third quarter numbers. There will be some good reports and some bad ones but most likely the majority of the companies will forecast a bleak future. The market focus will continue to be "All About the Economy". There are high expectations that the Federal Reserve Bank will cut interest rates again. This may happen and we may get a rally in the stock market but we doubt it will have a long lasting effect.
Great companies such as Walmart, McDonald's, Google, DOW and Oracle have become cheap in this market but it doesn't mean they won't get cheaper. Fear is here and it probably will be around for a while. Many individuals with equity portfolios have lost 30%-50% this year. It is easy to say my broker is horrible and I don't know what to do. In these uncertain times, as we have been writing, one needs to have safe liquid assets to be ready to take advantage of the opportunities that will present themselves in the market. Most people don't want to recognize the losses they have. That is a bad strategy. Take the losses if you don't have high quality investments. The sale of losing positions creates a tax loss carry forward. Use the cash for safe fixed income liquid positions (i.e. Treasuries) or high quality stocks with few debt maturities in the next couple of years. This repositioning will maximize your opportunity to grow the portfolio and rid yourself of low quality stocks with much higher risk in an economy which is heading into a deep recession.
This week might be just as volatile as last. Friday, before the market opened, it looked like we were heading into the Abyss. The Dow could easily have dropped 1000 points but the heavy selling never appeared and the day was much smoother than expected. Any day now, we could have that calamity and one should not be surprised if it happens. The VIX fear index reached new heights again at the end of the week and until we get a huge wipe out in the market, we may not see a new positive trend. Buckle up and wait to see the excitement this week promises to bring.
Thursday, October 23, 2008
More of the Same
Today the market was like a yo-yo. It went up then down then up then down and the S&P and DOW ended up. However, the Russel 2000 index of small stocks was down for the day. The concern by investors is likely that smaller less capitalized companies may have fewer resources to withstand a deep recession and limited capital raising opportunities. The volatility in the markets is certainly increasing investor stress and most people will be happy when Friday is over.
Many more companies reported earnings today with few upside surprises and many warnings of difficult times ahead. The sectors that seemed to have the most losers today were home building, gaming, airlines, auto parts and wireless. A weakening consumer will definitely hurt these industries.
The Asian markets are down 3-7% overnight and will likely set a negative tone for trading in the United States. Take a deep breadth. This is a long race. As stocks decline, the opportunity only gets better as long as you maintain liquidity and invest in high quality stocks.
Many more companies reported earnings today with few upside surprises and many warnings of difficult times ahead. The sectors that seemed to have the most losers today were home building, gaming, airlines, auto parts and wireless. A weakening consumer will definitely hurt these industries.
The Asian markets are down 3-7% overnight and will likely set a negative tone for trading in the United States. Take a deep breadth. This is a long race. As stocks decline, the opportunity only gets better as long as you maintain liquidity and invest in high quality stocks.
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