The Nvest Market Blog, our current thoughts on the Street

Happy New Year!

posted 12.29.2008 at 12:27 p.m. by steve

There is little to be said of the markets during a holiday shortened week where trading volume was just a fraction of what is considered normal. With much of the country on vacation, new economic data and/or company announcements were also scarce. As such, there is little that can be taken from the decline of -0.7%, -1.7% and -2.2% on the Dow, S&P and Nasdaq, respectively.

Still, as we move through the remaining 3 trading days of 2008, there is A LOT that can be said of a year in which weeks seemed like months, and some months felt like entire years. Just think about the price of oil, which rose to around $150 per barrel in July and crashed to under $40 per barrel in just four months. Over the summer, we were spending $4-plus per gallon on gasoline! While that price change has been welcomed by consumers, confidence has not improved.

Year-to-date, the S&P 500 is down nearly -41% (that terrible number is what remains even after a rally of over +15% since late November)! That kind of value destruction is well outside the realm of a typical down-year and the risk tolerance of all investors was tested. Aggressive and conservative investors alike doubted their strategy and focus. News came at investors so quickly that it was like information overload. It is curious to ponder how much of the panic was created by the media. How would the declines experienced by investors in 2008 have been muted if not for the 24-hour news cycle and ever increasing availability of information via sources such as the internet? Think how much slower information traveled just 10 years ago. Arguably, panic was created around events such as the implosion of Lehman Bros. That event alone nearly caused a modern-day run on the banks as investors questioned even the safest of investments (including money market funds). As investors questioned those instruments, credit markets all but dried up, forcing aggressive deleveraging. Businesses were unable to rollover existing debt or access new and even existing lines of credit. Hedge funds were called to return borrowed funds, which forced massive selling pressure. As the liquidity of less favorable and/or more exotic investments deteriorated, funds were forced to sell what they could (often the best assets), rather than what they wanted to. That activity caused most stocks to be punished uniformly, and the benefits of diversification were became reduced.

About the only good thing that to say about 2008 is that it is almost over; and that client accounts fared the storm better than the broad market. Looking ahead, we believe that the damage done to the economy from frozen credit will take time to repair. The current bear market ranks up there among the worst declines ever in terms of magnitude, but is still short in terms of duration. The first half of 2009 may remain extremely trying for investors amid ongoing volatility. Yet, we do believe that the government continues to be proactive in pulling out all stops when dealing with the current predicament. As such, the economy may recover in quicker fashion than many expect. 2009 is a fresh start and we commend those that have made it through the past year maintaining a long-term focus. We wish you all the best in 2009! Happy New Year!

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Week Full of News Leaves Stocks Little Changed

posted 12.22.2008 at 11:03 a.m. by steve

Stocks finished last week slightly higher than they began. The Dow, S&P and Nasdaq advanced +0.3%, +0.9% and +1.5%, respectively. However, it was an eventful week in terms of news. At the beginning of the week, investors were still attempting to absorb news of the $50 billion Madoff Investment Securities ponzi scheme. Tuesday the US Federal Reserve announced that it would target a discount rate of 0.0%-0.25%, down from its recent level of 1.0%. The 75-100 basis point cut takes the target rate to its lowest level in the US ever! Accompanying the rate cut, the Fed released the statement that it intends to keep rates low for a long time. The bold nature of the rate cut suggests that the Fed is committed to fighting deflation with everything it has (inflation will be a big concern in the long-term). It was enough to send the markets higher on Tuesday by over 5% on the S&P and Nasdaq. We truly are living in unprecedented times.

In the final days of the week, the markets pared gains (to be expected after the type of euphoria that was experienced on Tuesday) on fresh news of weakening jobs and economic data. The markets did end on a slightly positive note Friday as GM and Chrysler were given a $17.4 billion lifeline after weeks of drama in Washington (Ford opted to forego government money as it is in better financial shape than the other two and is not on the brink of failure). While controversial in terms of whether the automakers deserve taxpayer assistance, or that the financial assistance will do anything other than delay an inevitable failure is currently being ignored in favor of keeping unemployment numbers from spiking if the Detroit companies were forced to bankruptcy. Higher unemployment would have negative effects on overall consumer confidence and the economy.

In the past few weeks, markets have generally behaved themselves as witnessed by a strong advance since November 20. That upswing has led many investors to question whether they should be in a rush to get back into the markets. While markets may sustain their gains through the end of the year and even continue to move higher, we still believe that investors need not be in a hurry to get cash reinvested. With the final two weeks of the year meaning lots of vacation time for investors and companies, there will not likely be much economic or corporate news to hurt the markets. Yet, we remain of the notion that when companies begin to report fourth quarter results at the start of 2009, those earnings will be very week and cause the markets to possibly retest lows established in November. Corporate earnings and economic data are likely to remain week for a while longer. Many respected economists believe that we will not see any meaningful economic recovery until 2010, meaning that a sustainable stock market recovery is still several months off. In any event, the markets continue to create areas of opportunity, and we look forward to the day when a new bull market begins!

Thanks for your continued support in 2008. We look forward to continuing our relationship with you in 2009! If we dont otherwise speak before then, have a Merry Christmas and a Happy New Year!!!

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Thoughts on Madoff Investment Securities, LLC

posted 12.18.2008 at 2:40 p.m. by steve

Trust. It is the foundation for which the entire world and capital markets function. It is the core of the investment management business that takes years to build. Without trust, the capital markets would cease to function. Yet, every few years we hear of a new and unique situation of fraud or deceit where the foundation of trust is shaken.

In response to the recent news surrounding Madoff Investment Securities, we have taken a moment to write a piece responding to questions circulating in client and investor minds. That entire piece can be found by clicking here: Thoughts on Madoff Investment Securities, LLC.

*Nvest Wealth Strategies has never used investments (funds or other investment vehicles) managed or associated with Madoff Investment Securities, LLC.

*Client accounts are held by a third-party custodian, Charles Schwab & Co.

*Due dilligence, initial and ongoing, is thorough for your peace of mind.

We value the trust you have placed in us, and continue working to earn that trust each and every day. Thank you for your continued support!

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Weekly Market Summary

posted 12.15.2008 at 11:16 a.m. by steve

Markets ended last week roughly where they began, despite continued bad economic news and no apparent agreement between the US automakers and government over a bailout. Drama over the automaker bailout dominated the headlines, while other weak data continued to surface including a continued drop in real GDP and a weakening trade picture. In a somewhat alarming development, T-bills were issued by the treasury at negative rates for the first time ever (treasuries did trade earlier this year in negative rate territory, but in the secondary market), signaling that the credit markets are still not functioning in normal fashion. On that note, there were also reports that the Fed is considering issuing its own debt for the first time ever. Such a move would signal that the powers of the Fed are expanding beyond what has ever been seen before and that the gloves are off in terms of fighting this crisis.

In recent months, we have seen markets decline in magnitude not often paralleled at other times in history. The result has been largely due to a quick deleveraging cycle which has occurred. Hedge funds which have been forced to unwind uses of leverage quickly have severely and negatively impacted the markets. A question of high importance is, what inning of hedge fund deleveraging are we currently in? By some estimates, this activity is getting close to being over as the hedge fund industry has seen its assets under management cut by more than half, and most funds require investors to have submitted redemption requests by now.

With that being said, there is still some selling pressure that may remain through the end of the year as many investors seek to offset capital gains (likely small) by tax-loss harvesting. As we have said before, we do not yet believe it is necessary to rush back into the market. We do believe that the market will retest the new low established in late-November, perhaps several more times. As we head for the conclusion to 2008, the markets will remain focused on developments with the auto sector, and be looking to the Fed meeting mid-week for another cut to the Fed funds rate. Additionally, OPEC is likely to cut oil production output in an attempt to stabilize oil prices. Investors are also sure to remain focused on the US consumer as we enter the final days before Christmas. Reports are starting to surface that holiday shopping may not be as weak as most analysts are expecting, which would be a good piece of encouragement.

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A Bumpy Start - Weekly Market Summary

posted 12.08.2008 at 12:36 p.m. by steve

The first week of December ended much better than it began. On Monday of last week, the Dow dropped 680 points (about 7.7%) while the S&P and Nasdaq fell slightly more. A correction could have been expected from a technical standpoint, as the stock market had the biggest week over week rebound during the week of Thanksgiving. However, the magnitude of the losses last Monday was surprising, as it seemed to me that the holiday shopping season was beginning better than most investors had expected. All told, the week managed to regain some of what it lost early, with strong advances coming on Tuesday, Wednesday and Friday. The S&P, Dow and Nasdaq concluded the week down just -2.3%, -2.2% and -1.7%, respectively.

While drops like the one which occurred at the beginning of last week are extremely disheartening, we have been encouraged that the market seems to be reacting less negatively to bad news reports. For example, the market actually finished extremely strong on Friday, despite news earlier in the day that employers had slashed over a half-million jobs during the month of November; those are the worst unemployment numbers in 34 years, and were far worse than what the market was expecting! It appears that the reason behind large market drops is shifting from being news-based to technicals-based. In other words, the markets seem to be trading in a range right now, and when the market believes that stocks have climbed too far too fast (such as during the week of Thanksgiving), traders are taking the opportunity to realize profit.

As we begin this second week of December, stocks are continuing to advance on optimism that some sort of rescue will be reached for the US auto industry, as well as fresh news that the Obama administration has big plans for government spending works (to come in the form of infrastructure improvements like building roads, sewers, communications, etc). Those two items should help mitigate the unemployment situation which, is quickly becoming the largest threat to a modestly quick economic recovery. Still, it is difficult to read into any move that the market makes given the light trading volume observed over the past two weeks. While news remains bad, it does feel like things may be sorting themselves out, or at least calming down. Liquidity is improving (as measured by major interest rates, including mortgages, coming down), and the chatter of fresh bank failures seems to be more muted for the time being. At this time of year, I think it could be beneficial for a lot more people to begin looking at the glass as half full; what a difference that could make!

Happy Holidays!

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A Week of Thanksgiving

posted 12.01.2008 at 10:44 a.m. by steve

The markets soared higher last week, giving investors some much needed relief going into the Thanksgiving holiday. In the 5 most recent trading days (markets were closed Thanksgiving day), the S&P, Dow and Nasdaq shot higher +19.1%, +16.9%, and +16.7%, respectively. The advances on Wednesday and Friday came with extremely light trading volume due to many traders and investors taking the opportunity to enjoy a long holiday weekend. Unfortunately, the strong advances of last week only helped to pare losses experienced in a difficult November, which left the S&P down another -7.5%. That decline is frustrating after considering the exasperating months of September and October.

While the markets have rallied in the past week, economic news has continued to be generally weaker than already negative expectations. It is likely that economic data through the close of the year will follow suit. However, it does appear that the US consumer may make this holiday shopping season a bit more interesting than the most bearish of expectations. Preliminary data from retailers for the historically profitable weekend suggests that spending was on par with previous years. If you were one of the brave souls venturing our into the madness on Friday morning, we imagine that you were greeted with long lines and robust activity in malls and other retailers. Most economists and retailers had been predicting a significant drop on the notion that consumers are going to cut back this year given the weak consumer confidence readings. In other words, do not write off the US consumer and his penchant to spend just yet. Retailers may fare better than expected this year.

While the Thanksgiving holiday gives some room for optimism, we remain somewhat more cautious on our outlook for the final month of 2008. While markets enter the month on a strong note, and consumers appear to be more willing to open up the wallet than previously expected, there will probably still be news that gives investors the spooks. Additionally, there are still too many investors that want out, and will take profits anytime the markets have a nice rally like last week. We do believe that the market will turn higher well in advance of a turn in the economy, but think there are too many headwinds for the markets (including tax-loss harvesting and hedge fund redemptions) in the remaining weeks of the 2008.

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