The Nvest Market Blog, our current thoughts on the Street

Week of Worry - Weekly Market Summary

posted 11.24.2008 at 09:39 a.m. by steve

Horrible. Frustrating. Exasperating.

Those words are the first three that come to my mind when reflecting back on the markets last week. Worries and bad news were pervasive as investors remained keenly focused on stalled bailout talks for the auto manufacturers; declining confidence in banking giant, Citigroup; and increasingly weak economic data on housing and the economy. Each of the major US stock market indexes undercut October lows, with the Dow closing on Thursday well below 8000 and the S&P touching 750. Those are values that havent been seen since the bear market lows in 2002. The markets did find some relief Friday, as the indexes surged higher roughly 6.5% on news that President elect Obama has selected current New York Fed Chairman, Timothy Geithner as the next Treasury Secretary (the post is currently held by Henry Paulson). It appears that investors were able to find some comfort in removing a critical piece of uncertainty about the upcoming Obama administration.

As we head into the holiday-shortened trading week, markets look to extend the Friday advance. It was announced earlier today that the government does have a plan for aiding Citigroup. It will inject $20 billion of capital into the banking giant and guarantee as much as $306 billion of toxic assets including residential mortgages, leveraged loans and collateralized debt obligations. It was also made clear that if needed, the arrangement will be extended to other financial institutions that pose a risk to the stability of the financial system.

While it is encouraging that the government is continuing to be proactive and sending markets the message that it will intervene, there is still much for investors to worry about. It is important however, to remember that the markets have already priced in a TON of yet to be revealed bad news. It has been said that the markets often overshoot fundamentals both up and down; it is extremely likely that at this point we have overshot even the potential bad news to the downside. Emotions, in particular panic, have irrationally punished all market sectors. While there is nothing to say that the market cannot continue to melt lower in the short term on continued panic selling, we believe that current prices present great opportunity for long-term investors. We do remain cautious however, as irrational behavior often persists longer than expected (which is how bubbles like housing or oil form). Further, we strongly believe that when the panic sellers and de-leveraging hedge funds are all but completely washed out, this market could catapult higher at such a rate that matches or surpasses the most robust times in market history.

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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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