The Nvest Market Blog, our current thoughts on the Street

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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