Stock Volatility Continues

Yesterday was another day where investors were bullish and today's futures point to another higher opening. The consumer confidence number has brought some new life into the market. Rising rates, higher commodity prices, and elevated gold prices doesn't seem to bother stock buyers.



We are pleased to see stocks go higher even though we remain very cautious. The bulls say rates are rising because the economy is getting stronger and higher commodity prices are a result of expected improving industrial activity.



We believe that interest rates are up because the government needs to raise trillions of dollars in the treasury market to fund the stimulus plan and all the programs implemented to avert a financial crisis. The Fed is printing money, the monetary base is growing, and the fear of inflation has been driving gold prices higher.



We like commodities for two reasons. Precious metals are appealing if one believes inflation is around the corner and some commodities like silver also would benefit with an improved economy. Farming related commodities could rise as farmers struggle to get enough bank credit to plant their crops. A lack of loans to the farming industry is likely to restrict crop production and thus cause prices to rise as the supply demand imbalance ensues.



As treasury prices decline, concern could grow with the U.S. dollar. A weak dollar is likely to push oil prices higher while also driving gold up. Rising energy prices could choke off the mild economic improvement we are seeing and then stock prices will reverse direction, quickly. A declining stock market is also likely to reverse consumer confidence.



We believe there was a chain reaction that has added to the bullish sentiment in the markets. Stocks took a dive through the beginning of March. The oversold condition led to a huge rally. Higher stock prices resulted in higher consumer confidence and higher consumer confidence led to even higher stock prices.



We are not convinced that this chain event will continue. Rising unemployment, weak corporate earnings, lower housing prices, and higher gas prices could lead to lower consumer confidence. Lower consumer confidence leads to reduced spending, minimal inventory replacement, declining corporate profits, and lower stock prices. If we add higher interest rates to the mix, misery will be ubiquitous and holding cash and gold will be the best investment strategy.

Should The Government Bailout The Auto Companies II?

On November 6, 2008 we wrote how the government should not give the auto companies a loan until they forced them into a prepackaged bankruptcy. It took over six months and some wasted taxpayer money but the government finally got it. The auto industry is about to be deleveraged and the legacy operational cost structures and benefit plans improved to give the United States car companies a fighting chance to compete.

We applaud the GM process as being fairer to creditors than the Chrysler case. Perhaps the government realized that strong arming creditors isn't the best way to approach debt investors as they did with Chrysler. We are not opining on whether everybody got their fair share in the proposed new GM but at least it is not totally unjust. The completion of the bankruptcy process for GM will take at least 2 to 3 months but hopefully when the company is restructured, it won't need anymore government financial assistance.

Nothing Like a Little Confidence

Consumer Confidence soared and so did the markets. Investors have been hoping for a turn in the economy and the glee from consumers is one data point moving in that direction. There are trillions of dollars waiting on the sidelines and whenever good news is announced hoards of cash seem to move into stocks. All markets were up more than 2.6% and everybody cheered for a day.

The global economy is still struggling and the financial industry is still fragile but we all hope the worst is behind us. Many problems are still ahead and the debt burden of the U.S. government will tax consumers for generations in the future. We still maintain caution as we ride the current wave.

How Will May End?

We continue to be worried about a big pull back in the markets. The rally has been pushed higher as the cash on the sidelines gets antsy and feels compelled to participate in the rising stock market. For every positive tea leaf, we still see negative news.

This weekend North Korea stirred the pot with the launch of a nuclear missile test. OPEC ministers are gathering to determine the fate of oil supplies this week. Finally, GM is likely to file for bankruptcy. None of these events will ease investor concerns. Furthermore, we remain concerned with the weak consumer and the pending collapse of commercial real estate. Stocks fell off a cliff in the beginning of March but now they have risen too far, too fast. If the upcoming economic news turns slightly negative, investors are likely to become scared and begin to sell stocks again. If a black swan in the form of political uncertainty in Venezuela, Russia, or North Korea arises, look out.

We are still in fragile times. The financial industry is desperately trying to heal itself by equitizing their balance sheets but the toxic assets still exist. Citigroup is not out of the woods and BankAmerica is not minting money. The global financial industry will take years to undue the sins of the past and many surprises will pop up. We believe it will be years until the world is normal again and until that light at the end of the tunnel shines, investing will remain difficult. It is easy to become bullish as stocks gallop higher but we believe economic times will remain difficult and corporate growth stagnant. Stocks discount future earningsbut the short term earnings boost is due to aggressive management cost cutting. Long term earnings growth depends upon the growth in sales. Unless the Asian export machine picks up and corporate lending is reinvigorated, we don't expect corporations to resume their growth.

We continue to raise cash and buy S&P puts but until enough tea leaves convince us that the economic turn is here to stay, we will be cautious investors in this volatile and risky environment.

What Are We Missing?

For the last few weeks we have been wondering why the market keeps rising in the face of a weakening economy. Investors have been assuming the economy is going to turn around in the second half of 2009 or at least by the beginning of 2010. We have our doubts.

Home Depot and Hewlett Packard don't see any improvement in the business environment. Our trading partners' economies are falling off a cliff. Mexico's GDP was down 21.5%, Germany's was down 14.4%, and Japan's dropped 15.2%. It will be hard to grow exports when the buyers of our goods are in dire economic shape.

Today the Fed released its April minutes and they expect a steeper recession and a slower recovery than their previous pronostications. With all this good news, what are we missing? The stock market has sucked in some of the cash burning a hole in investor's pockets. The short covering rally got us going and the mad dash to not miss the rally by investors with a plethora of cash kept it going. The rising market brought us rosy colored glasses about the economic prospects and stocks moved higher. When the disappointing news about the economy continues to flow in for the next few months stocks could retest the old lows. Buyer beware.

"Obama's Auto Plan Is Capitalism At Work" or Not

The WSJ.com has an article written by Scott Sperling titled "Obama's Auto Plan Is Capitalism at Work". We have been saying since November 6, 2008 that the government needs to force a prepackaged bankruptcy at the auto companies to improve the cost structures and to reduce the leverage before tossing away precious taxpayer money. The Obama administration did just that as Mr. Sperling articulated. We agree with most of his article except for how the banks were treated in the Chrysler situation. The strong arming of banks, especially those with TARP money, and the public lambasting of the money managers who were trying to get their fair share was not capitalism as we know it. Nobody would benefit in liquidation. Perhaps the banks would have received less than 29 cents on the dollar but the unions and their pension plan and health plans would have wound up with nothing. The government was right to force a restructuring where everyone took some pain but the unions who had subordinated claims to the banks didn't deserve a bigger piece of the pie than the banks. The conclusion can only mean Socialism defeated Capitalism.

Lowe's Drives the Markets Higher

Lowe's, the home improvement retail chain posted better than expected earnings. Although the numbers were still considerably lower than last year, the company's outlook was a little rosier than last quarter. We also got an uptick in the housing index which spurred investors to buy stocks. If the housing market is bottoming, the bull market must be on its way. We hope this is true and we hope our recent thoughts about the impending troubles ahead are wrong. This uncertainty keeps us still long some stocks but a little bounce in the economic data and corporate earnings which are declining less than previous quarters is nothing to get too excited about. Time will prove us right or wrong but we will continue to raise cash as the markets fly higher.