The Nvest Market Blog, our current thoughts on the Street

Weekly Market Summary

posted 11.17.2008 at 09:34 a.m. by steve

It was another frustrating week on Wall Street, as investors watched stocks flop around amid more bad news. Among the items worrying the markets was consumer-related news coming from retailers like Circuit City (declared bankruptcy) and Best Buy which gave unsettling forecasts about the holiday shopping season; the realization that the US auto industry may see a bankruptcy before year-end; a major change in the governments $700 billion Troubled Asset Relief Program (TARP); and an uncertain lame-duck session for our lawmakers in Washington as they debate support for the auto industry. The Dow finished the week down roughly 5%, while the S&P and Nasdaq gave up just over 6% and 7.5%, respectively.

About the only positive thing that could be said about the markets in the past week is that we may have seen another successful retest of the October lows. Thursday, investors watched the Dow surge 863 points off of its intraday low to conclude up almost 7% on strong volume. Regardless, we imagine that investors are still feeling extremely troubled by the heightened volatility occurring each week, and there appears to be no good news in sight. We, too, struggle to fight our emotions at this time.

Further, it seems as though investors are increasingly anxious about evolving details of the $700 billion TARP program. Treasury Secretary Henry Paulson indicated last week that the money would now not be used to purchase bad mortgage assets from banks and instead focus on improving liquidity for consumers. The rationale appears to be that while short term lending markets have improved some (as noted by continued decline in the London Inter-Bank Offered Rate, LIBOR), banks are still not lending to each other, businesses or consumers like we need them to. Consumer spending in the US represents over two-thirds of our economy; without that component, our economy will be extremely slow to recover. Paulson believes that directing the money in other ways, can more accurately target improvement for the consumer, and thus help the economy. Still, the rules of the game probably need to stop changing before a sustainable rally can take place.

It appears that our hypothesis of a U-shaped recovery (rather than a V or a W) continues to be most probable. In fact, some guess that we will continue to just bounce around near the October lows until the lame-duck session of Government has passed when President-elect Obama takes office due to the removal of uncertainty associated with the current administration. If that is in fact the case, it will continue to be a difficult time period for investors. However, recoveries coming out of a long U-shaped bottom have historically been very powerful. Remember, while the current period is extremely difficult to maintain a long-term focus, it is more critical than ever to try and keep your emotions at bay and make rational sound decisions. Please call us if you find yourself struggling through this trying time.

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Another Bumpy Ride - Weekly Market Summary

posted 11.10.2008 at 11:27 a.m. by steve

It was another eventful week for the markets, with volatility remaining at extremes. Ahead of the presidential election on Tuesday, the markets had their biggest election day rally ever, up over 4%. That jubilation was reversed following the election when investors resumed their focus on the weak economy, despite more stimulus and policy response across the globe. Wednesday and Thursday the stock market fell about 10% in the combined trading sessions. Friday, the market bounced back, paring the two big down days, with little regard for the unemployment report showing a worse than expected 6.5% rate. The major indices concluded the week down -4.21%, -3.89% and -4.27% on the Dow, S&P 500 and Nasdaq, respectively from where they began. The gyrations of the week are a perfect illustration of what has become the norm since the beginning of September. Since September 1, the Dow has moved up or down more than 300 points 22 times; that works out to almost one of every two trading days.

While none of the above sounds very encouraging, it is important to note that the two bad days last week came with very low trading volume. Low volume suggests that there was little conviction behind the down move. It does suggest that many investors are sitting on the sidelines, which is typical in the latter innings of bear markets. Additionally, the advance Friday occured amid very bad economic news. As we sit here today, the market is again up with predominately bad news. Goldman Sachs is predicting the biggest contraction in the fourth quarter since 1982, and an unemployment rate of 8.5% by the end of next year. What all of this increasingly suggests is that the market is in the process of forming a base. Unfortunately, volatility is probably going to be around a bit longer because from our lens, it is indeed going to be a difficult holiday season and the news coming from retailers and consumer confidence figures will be very weak. Lots of negative news will cause investors to have much difficulty forecasting, and that uncertainty translates to volatility.

Comments on Presidential Election: One question that we have been asked in recent conversation is what effect will the new President elect have on the markets? While President of the United States is arguably the most powerful position on earth, we generally hold the view that the clout of any president is greatest on day one of taking office, and that power only declines through the remainder of his term. This President, more so than others in recent memory will probably soon realize that much of the promises which were made during the campaign need to be significantly delayed or scrapped altogether given the current state of our economy. It would be a mistake to raise taxes on businesses, or anyone for that matter, during this difficult time. Without much ability to increase tax revenue, programs like universal healthcare, or increases in entitlement spending which require more spending are probably inappropriate given the already ballooning deficit being created by the recent government stimuli. Instead, what the markets will likely be reacting to is whom Obama selects for key posts like Treasury Secretary, rather than speculating at length which sectors are the winners and losers under his Presidency.

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October: Trick, or a Treat?

posted 11.03.2008 at 12:08 p.m. by steve

October 2008 will go down in the history books as one of the most chaotic investment climates ever. The final week of the month was encouraging, especially after the markets threatened to undercut the October 10 lows early in the week. Many of the stock mutual funds we hold in client accounts advanced over 12% last week, coming predominately from a strong last-hour rally on Tuesday. The month had two trading days in which the US stock indexes jumped double-digits!

Despite those two, large, one-day gains, and a positive concluding week to the month, October was terrible for investors. The Dow finished the month down about 10%. News was burdening as consumer confidence hit a 41-year low, unemployment projections are expected to go to the 8% level and home prices are off nearly 17% year over year. Without a doubt, we have slipped into an economic recession. It is also clear that the credit market seizure which occurred in late-September and early-October did hurt businesses and consumers alike. What is important to note is that we are still a far cry from a depression, which would be characterized by unemployment reaching levels near 25%! The economic data paints a very pessimistic view of the current environment and can lead one to think the worst about the markets going forward.

Currently, the market has priced in a LOT of bad news. Right now, the S&P 500 price-earnings (P/E) multiple is estimated to be around 9.5x assuming Wall Street analysts base-case earnings estimates, and just 12x using worst-case earnings estimates. In more simplistic terms, even under very pessimistic corporate earnings scenarios, the market is significantly undervalued from a historical perspective where the average P/E multiple has been between 15x and 18x.

In talking with clients and friends alike, we are constantly reminded how difficult it is for people to separate bad economic news from investment market valuation. The investment markets are a leading indicator. While we are of the belief that an immediate stock market recovery is probably not in the cards, the worst may be behind us (despite an economy which probably gets a bit weaker from here). The problems plaguing the markets and investor confidence post-Lehman Bros bankruptcy have improved significantly in recent weeks. The government continues to be responsive, further cutting rates last week from 1.5% to 1.0%. The policy response is working, as evidenced by the continued decline in the London Inter-Bank Offered Rate (LIBOR) to 2.86% from over 4.42% two weeks ago; it has declined 17 straight days. Short-term lending and credit availability is improving, which should help consumers and businesses greatly with time.

In sum, hang in there. The current market environment is challenging, but it does appear that brighter days for the markets may not be too far off.

P.S. Be on the watch for our Monthly Commentary to arrive in your inbox in the next day or so!

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Weekly Market Summary

posted 10.27.2008 at 10:37 a.m. by steve

The stock market concluded the week down near the lows established on October 10. We are not necessarily surprised about the ongoing test of those lows, but do remain concerned and frustrated as it seems the markets continue to be in the grips of fear. Despite some improvement and thawing of credit, most easily noted by the decline in short term lending rates such as LIBOR (has improved from 4.42% to 3.52% in the most recent week), stocks continue to be punished on worries about the global economy. While the economy is weak (and global picture likely to get much weaker), the improvement in metrics such as LIBOR suggests that the enormous government policy response to date is starting to have positive effects.

We are in the thick of earnings season, and companies have not been reporting much good news. To us, it is not surprising that earnings are weak. What is somewhat surprising is that the markets continue to be so badly punished, at least in the US where policy response has been so huge and our government has been proactive in addressing the situation. The US has been ahead of the curve when compared to foreign central banks and governments in addressing the problems. The markets are supposed to be a forward looking discount mechanism; to the extent that the market successfully predicts earnings (the rational reason behind the stock market decline over the last 12 months), prices should already reflect bad earnings to come. If investors are expecting weak corporate earnings announcements as we are, why are the huge drops continuing? What are some possible explanations?

We suspect that complex structures such as hedge funds and other highly leveraged institutional investors are being forced to liquidate holdings to meet shareholder redemptions, margin calls and capital requirements. There have also been rumors that a major hedge fund imploded in the recent week, which would have surely put unusual pressure on markets. Additionally, as more average investors succumb to their fears, they too sell their investments such as mutual funds, which then requires the funds to liquidate more holdings and satisfy redemptions.

With that, we would like to offer some food for thought and perhaps encouragement. Despite all of the selling that has occurred since September, there is an opportunistic, bold investor on the other side of the transaction. We suspect those investors realize nearly all assets are on sale, and that even if prices move lower in the short term (weeks or months), they will be a winner when prices recover. They, like Warren Buffett, believe that upside potential at these prices probably outweighs the risk to the downside.

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First Positive Week Since Lehman Collapse - Weekly Market Summary

posted 10.20.2008 at 11:49 a.m. by steve

The Dow had its best week in more than five years, ending up 4.75% (despite closing down 1.4% on Friday). The ride was indeed a wild one, but it was much welcomed after the week ending October 10 (the worst ever for the Dow). Last Monday started with the biggest one day point gain (936 points) for the Dow, a slight loss Tuesday followed by a shocking 733 point loss on Wednesday; another encouraging gain of nearly 5% came on Thursday.

Two weeks ago, in the thick of the selloff, it was clear that panic was ruling the markets. Investors were selling everything they could as pessimism was abundant, and virtually no one was optimistic. The markets had reached a point of irrational exasperation (opposite of Alan Greenspan term irrational exuberance). While we are clearly still in a bear market, perhaps the worst for the markets is behind us. As we discussed in our Talk Strategy meeting last Tuesday evening with clients, we do not believe that the stock market recovery will look like a V (an immediate bounce type recovery). The robust rally last Monday following the terrible decline on October 10 did not hold and was all but erased by midweek, perhaps confirming that a V recovery is not in the cards. Instead, we believe that the recovery will look more like a U in which the market establishes a low (the low on Friday, October 10 perhaps) and retests that low for a period of weeks, or even months at which time it will begin to meaningfully recover. It does seem like that is the pattern beginning to take shape.

Last week, the worry appeared to shift from fear of a market crash to the economy. While the global economy has almost certainly entered a recession, investors are now seeking signs to determine how severe the slowdown will be. While an economic slowdown is not much fun, it is almost encouraging to see the focus starting to shift back to fundamentals rather than irrational emotions. With volatility at extreme highs, it is evident that emotion and fear is still a huge factor for many investors. However, it does seem that some investors are encouraged and thinking opportunistically. In an editorial letter to the NY Times last week, Warren Buffett was quoted saying, Buy stocks, cash is trash! Be fearful when others are greedy, and be greedy when others are fearful. Admittedly, Mr. Buffett has the means to be very aggressive, but his logic echoes our own. Stocks are on sale! Even much of the corporate bond market is selling at a very steep discount. The opportunity for making money in the markets has not been this attractive in many years.

Given that none of us have the assets like Warren Buffet, we remain more cautious with client money. Were not quite ready to dive headfirst into this confusing market by deploying all our excess money market assets (cash) just yet. However, we are thinking strategically about the portfolios, and will probably begin nibbling in a new fund or two. Additionally, we will probably be shifting the chairs on the deck (rebalancing and adjusting existing allocations) in anticipation of the market recovery. We do believe that the economy will be weak for some time, but the market will move well ahead of an economic recovery. Additionally, we believe that the government policy response is beginning to work (short term borrowing rates, such as LIBOR, are beginning to fall which encourages banks to lend). As banks resume lending, the market should begin to price in better times ahead.

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Talk Strategy Slides Available

posted 10.15.2008 at 3:42 p.m. by steve

Slides from out October 14th Talk Strategy (town-hall) presentation are now available for download online. The file is 7.5 MB and takes a moment to download.

CLICK HERE

Download Abstract

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Seismic Swings - Weekly Market Summary

posted 10.13.2008 at 12:29 p.m. by steve

Last week was one of seismic swings, and if you feel like you just cant bear any more pain you are not alone. While some technical analysts suggest that we still havent seen a day of capitulation (a day where a solid low is created), we would be inclined to argue that after 8 straight sessions ending convincingly in the red, that the broad market indices should be getting close to finding a bottom. At the very least, the market is extremely oversold within a downtrend. We did get some feeling of hope going into the close on Friday, as the Dow rebounded by as much as 1000 points off of the lows. Despite the strong close (indexes finishing down only a little over a percentage point), last week goes down in history as THE WORST week for the NYSE (New York Stock Exchange) in 114 years! It was the worst weekly drop for the Dow since 1914 according to Bloomberg. The Dow, Nasdaq and S&P 500 finished the week down -18.2%, -15.3% and -18.2%, respectively.

The tone among clients has certainly changed in little over a week. When we chatted with most all clients at the end of September, the general sentiment from clients was Stay the course. We have to be getting close to the bottom, right? It almost made us proud of our clients apparent focus on the long-term. At the end of last week however, the comments had shifted to a state of disbelief and alarm. The media reports and affection for misery (helps their ratings) was getting overwhelming. Common remarks were, I just cant afford to lose anymore. I mean, this thing shows no signs of slowing down or turning the other way. Everything for the economy looks so bad. Our response has been, and continues to be, that investors will NOT be able to successfully time a bottom. The market will turn when things feel absolutely horrible.

History has proven time and again that the markets will turn when things feel the worst. We must admit that the past 2 weeks have been extremely difficult for us as well. We have found ourselves thinking at times that putting clients to cash may be best option; fear has crept into our minds as well. Days have felt like weeks, and weeks like months. But, we manage our emotions, knowing the history of the markets. We also know that the most opportunistic investors are looking to buy. There is a better chance to make money in the stock market today than a year ago. We also are cognizant that fear has the effect of shortening even the longest of time horizons for a worried investor.

Today, Columbus Day, the markets have started off much higher. We are optimistic that investors are realizing there are many great companies for sale out there, at bargain basement prices. Confidence is also perhaps being inspired by the notion that the various Government policy responses are going to help solve the financial crisis. Indeed, much has been done to help our financial system continue functioning, and early indications are that the measures will be successful in accomplishing their goal: to get banks the capital and liquidity they need to resume lending to each other and businesses again. Our economy does not function very efficiently without the ability for businesses and consumers to borrow money short-term. Early indications are that the measures will accomplish the goal, but government response has historically worked with a lag.

Keep in mind that for each person selling, there is a gutsy buyer on the other side of the transaction, licking his chops at the potential for future returns. Someone is buying at GREAT prices and discounts from even a month ago, despite sentiment being at negative extremes. Please call us if you have questions.

P.S. We are hosting a town hall style meeting tomorrow night, October 14 at 7:00pm at Wedgewood Golf & CC to share our outlook. Please feel free to attend.

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Crisis of Confidence - Weekly Market Summary

posted 10.06.2008 at 11:26 a.m. by steve

The rate of news coming from the markets has sped to the point of making the newspapers almost entirely irrelevant. News is changing faster than it can be printed. It has become clear that panic is currently governing the markets.

Last week we attempted to contact all clients by phone to see how they are holding up amid this market turmoil. Monday marked the largest single day percentage decline weve seen in years, and the largest absolute point drop for the Dow ever. The decline came as Congress failed to pass the $700 billion recovery plan (media has termed it the bailout plan, which it is not). Tuesday roared back with a strong advance, but the remainder of the week could not continue the positive trek. Friday, Congress managed to pass the recovery plan, but markets declined anyway. It seems as though the crisis is spreading overseas and that coordinated foreign government action will be necessary to make positive progress on this situation.

With the third quarter, and the horrid month of September now behind us, the remainder of the year appears highly uncertain. For the year through Friday, the S&P 500 is off just over 25%. On one hand, we have seen good and bad companies punished similarly throughout this crisis. That leads us to believe that there are some tremendous values out there which create much opportunity for the future. There are still quality companies out there. On the other hand, this financial crisis does appear to be different than those in recent past. The problems which created this mess are much more complex, and core to our economy. Housing has turned out to be a much more integral part of our country and the economy than even the most suspicious investors originally thought. In turn, it has caused banks to not only be cautious in their lending to potential homeowners, but suspicious of businesses and counterparties as well.

Given the above, it is clear that we are currently dealing with a crisis of confidence. We will admit that it is difficult to be confident about much of anything in this challenging environment. We understand where you are at: we have our personal savings invested in exactly the same funds and strategies as our clients and are feeling the pain of the past year with them. The only thing we can say with confidence right now is that time will heal this damage, and we remain focused on the long term.

If you find yourself with questions and worry, or know of others who feel alone during this time, please do not hesitate to reach out to us.

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Congress Must Act - Weekly Market Summary

posted 09.29.2008 at 11:15 a.m. by steve

Last week was a lousy one for the equity markets. When speaking of the bailout plan being debated in Congress, it seems as though we have a ticking time bomb with which each passing moment the equity markets are discounting a higher probability that a plan (first announced a week ago) will not be passed. Instead, what is occurring is more jockeying in Congress as we draw nearer to the election - no member of Congress wants to be held responsible for voting in favor of a plan that is not viewed favorably by his/her constituents. Everyone wants to get re-elected, making this a difficult and divisive issue in which to reach consensus. In the end, it is clear that this will have to be a bipartisan agreement as it is too big for one party to take most of the responsibility. It is our belief that some sort of bailout/buyout package will be agreed upon and look similar to what was first announced. Apparently, others agree. Last week, Warren Buffett agreed to make a $5 billion investment in Goldman Sachs. Heretofore, Buffett has avoided the financial sector, but in his statement this week regarding the decision, he indicated that the cash infusion was a vote of confidence in Goldman and a vote of confidence in Congress. The Buffett investment may signal a turning point.

One thing that investors agree upon, is that a bailout deal needs to be made fast to avoid significant damage to our economy. As we sit today, the credit markets are essentially frozen due to mounting uncertainty. The credit markets are essential for businesses who must fund daily operations with short-term borrowing. With the spigot of capital turned all but off, some businesses are idle in need of funding.

Today, the markets are again punishing equities on news that a bill has still not been signed. Early reports today suggest that the details of a plan are mostly agreed upon, and that the bill stands to make it to a vote early in the week. In our minds, the markets want something passed yesterday, but we are certainly on board with wanting Congress to get this thing right. As indicated in our market alert distributed on Friday, we do not view the proposed $700 billion plan to purchase illiquid assets from banks as being a bailout. Instead, we believe it could be very profitable to the Treasury and ultimately a zero-cost to taxpayers down the road. Care must also be taken so as not to reward executives of banking and financial firms who did not manage risk there should be no golden parachutes. Regardless, the plan feels more like a buyout, or asset purchase than a bailout. When a plan is agreed upon and the details are disclosed, the overall market should experience a rebound. However, it is likely that the initial rebound will fade as the economy has clearly weakened since we started the year and it will take some time to recover.

Tomorrow ends the third quarter, and we will begin our work to generate quarterly reports. The third quarter has not been an encouraging one to investors. Despite a slightly positive month in August on falling oil prices, the financial crisis seemingly came to a climax in September and sent markets into a state of panic. While headlines of bank failures may not be done, we are hopeful that with a government plan finalized, that the worst will be behind us for the banks and this crisis. We are additionally encouraged by the notion that the most recent government intervention appears to be more directly aimed at solving the problem: getting bad loans off the books of the banks.

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Mutating Financial Crisis

posted 09.26.2008 at 10:21 a.m. by bill

The financial crisis is mutating. It is not only pulling in all types of financial institutions (banks, brokerage firms, insurance companies, and Government Sponsored Entities (GSE)), but appears to be affecting some parts of the non-financial economy. The US economy has not to this point entered a recession, but the lack of money flow via borrowing from financial institutions will most likely cause the economy to slip into a mild recession. And, the recovery from a recession may be slow.

The mutating financial crisis, that has swallowed many high profile financial and brokerage firms, has required the Fed, Treasury and government to take drastic action. The US financial markets are going through the greatest peril in 60 or 80 years. As black as the current moment seems, the $700 billion bailout IS the action needed to remove toxic loans from financial institutions balance sheets and allow them to survive.

We are watching closely; we are monitoring closely; we are talking to many highly respected fund managers and strategists to gather current insights. We believe a terrible peril will be averted.

Please click here to read the full alert

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